This document provides an overview of foreign exchange markets. It defines key terms like exchange rates, foreign exchange transactions, and components of an FX transaction. The major participants in the FX market are commercial banks, central banks, corporations, governments, and individuals. On the demand side are importers, students studying abroad, debt payments; and on supply side are exporters, FDI, capital receipts. The Reserve Bank of India regulates the interbank market and manages exchange rates to maintain stability. Major traded currencies are USD, Euro, Yen, and Pound Sterling. Foreign exchange risk arises from currency fluctuations during transactions.

1. FOREIGN EXCHANGE
MARKET
By Madhab Aryan Naik

2. 6
FOREIGN EXCHANGE
MARKETS
 The market where the commodity traded is
Currencies.
 Price of each currency is determined in term
of other currencies.

3. Exchange Rate is the price of one country's
currency expressed in another country's
currency. In other words, the rate at which one
currency can be exchanged for another.
e.g. Rs. 81.74 per one USD
Major currencies of the World
USD
EURO
YEN
POUND STERLING
WHAT IS AN EXCHANGE
RATE ?

4. WHAT IS A FOREIGN EXCHANGE
TRANSACTION ?
 Any financial transaction that involves more
than one currency is a foreign exchange
transaction.
 Most important characteristic of a foreign
exchange transaction is that it involves
Foreign Exchange Risk.

5. PARTICIPANTS IN THE FOREIGN
EXCHANGE MARKET
 All Scheduled Commercial Banks
(Authorized Dealers only).
 Reserve Bank of India (RBI).
 Corporate Treasuries.
 Public Sector/Government.
 Inter Bank Brokerage Houses.
 Resident Indians
 Non Residents
 Exchange Companies
 Money Changers

6. COMPONENTS OF A STANDARD FX
TRANSACTION
 Base Currency (USD/INR)
 ‘Variable’ Currency
 Exchange Rate
 Amount
 Deal Date

7. Price maker Vs. Price Taker
 The bank quoting the price is ‘price
maker’ or ‘market maker’.
 The bank asking for the price or ‘quote’
is the ‘price taker’ or ‘user’.

8. DEMAND SIDE OF FX MARKET
– importers – buying foreign exchange to
finance their imports.
– A host of regulations governing imports into
India.
– Out ward remittances for debt servicing.

9. DEMAND SIDE OF FX MARKET
– Remittances on account of education abroad.
– Remittances on account medical treatment.
– Repatriation of profit of foreign controlled
companies and ‘freight collection’ etc.
– Disinvestment

10. – Exports – regulations governing export
receipts.
– Home remittances.
– Foreign Direct Investment.
– Capital receipts.
SUPPLY SIDE OF FX MARKET

11. FOREIGN EXCHANGE RISK
Exposure to exchange rate movement.
1. Any sale or purchase of foreign currency
entails foreign exchange risk.
2. Foreign exchange transaction affects the net
asset or net liability position of the buyer/seller.
3. Carrying net assets or net liability position in
any currency gives rise to exchange risk.

12. Foreign Exchange Markets
Role of Reserve Bank of
India (RBI) and linkages
with economy

13. RBI’s Role in the Forex Market
 To manage the exchange rate mechanism.
 Regulate inter-bank forex transactions and
monitor the foreign exchange risk of the banks.
 Keep the exchange rate stable.
 Manage and maintain country's foreign
exchange reserves.

14. FOREIGN EXCHANGE MARKET
TURNOVER BY COUNTERPARTY

15. FOREIGN EXCHANGE MARKET TURNOVER BY
CURRENCY AND CURRENCY PAIRS

16. THANK
YOU