2. FOREIGN EXCHANGE
MEANING:
Foreign exchange is the conversion of one
country’s currency into another . Therefore, It is
the art and science of international monetary
exchange.
It is also known as Forex Market. The major
currency traded in this market is US$.
3. FOREIGN EXCHANGE MARKET
→ It is a market where traders buy and sell
currency or currencies.
→ Speculation plays a crucial role in this market
→ It is considered the largest financial market in
the world.
→ The major participants are the Commercial
Banks, Forex Brokers and other Monetary
Institutions.
→ Forex market also enable currency conversion
for international trade and investments.
4. FOREIGN EXCHANGE MARKET
The term Foreign exchange is categorised into :
Foreign currency
Exchange rate
Foreign exchange generally refers to foreign currency,
e.g. for India it is dollar, euro, yen, etc…
The other part of foreign exchange is exchange rate
which is the price of one currency in terms of the other
currency.
It is the international market for the free trade of
currencies. Traders place orders to buy one currency
with another currency.
5. FOREIGN EXCHANGE MARKET - FEATURES
→LIQUIDITY Forex market works with huge amounts of money and gives the
customers complete freedom to open or close their position of a different
volume at current price.
→POWER The main distinction of working on Forex market is that the player
has an opportunity to purchase and sale currency without having the full sum
of money needed for operation. To make a deal the player has to make initial
deposit (margin) after which he/she can make deals amount of which exceed
the invested money by many times. It is so called “LEVERAGE” to start the
operations one has to deposit a certain amount in the account to enjoy power.
→ROUND-THE-CLOCK TRADING ACCESS The ability to trade for 24 hours
a day
→GLOBALITY AND UBIQUITY Trading operation may be carried out from
any pat of the globe, where Internet-access is available.
→ABSENCE OF COMMISSION The Company does not withhold any
commission fee from trade operations conducted on Forex.
6. MAJOR PARTICIPANTS OF FOREIGN
EXCHANGE MARKET
INDIVIDUAL COMMERCIAL
BANKS
CENTRAL
BANKS
SPECULATORS
HEDGERS ARBITRAGERS BROKERS
7. INDIVIDUALS
Individuals consist of those people who
are ready to participate in trading activities
they may be in the form of group, or a
institution or a single person who wish to
have financial affairs in the foreign
exchange.
8. COMMERCIAL BANKS
Commercial banks are the back bone for the success of the
foreign exchange market
They serve as the medium of exchange between the
buyers and sellers
They buy securities behalf of the clients and built a
optimum portfolio for the present investment
It serves as link for making payments and receiving
advances
For this to make happen a bank should be nationalized
and registered with reserve bank of India or central bank
It should withstand with the legal policies which govern
the smooth functioning of the economy
It should scrupulously follow all the rules and
regulations which govern trading between the nations.
9. CENTRAL BANKS
Central Banks of all countries participate in the Forex
market to some extent. Most of the times, this
participation is official. Although many times Central
Banks do participate in the market by hidden means.
This is because every Central Bank has a target range
within which they would like to see their currency
fluctuate. If the currency falls out of the given range,
Central Banks conduct open market operations to bring
it back in range. Also, whenever the currency of a given
nation is under speculative attack, Central Banks
participate extensively in the market to defend their
currency.
10. SPECULATORS
Speculators are a class of traders that have no genuine
requirement for foreign currency. They only buy and
sell these currencies with the hope of making a profit
from it.
The number of speculators increases a lot when the
market sentiment is high and everyone seems to be
making money in the Forex markets.
Speculators usually do not maintain open positions
in any currency for a very long time. Their
positions are transient and are only meant to make
a short term profit.
11. HEDGERS
Hedgers are primary participants in the futures markets.
A hedger is any individual or firm that buys or sells the
actual physical commodity.
Many hedgers are producers, wholesalers, retailers or
manufacturers and they are affected by changes in
commodity prices, exchange rates, and interest rates.
Changes to any of these variables can impact a firm’s
bottom line when they bring goods to the market. To
minimize the effects of these changes hedgers will
utilize futures contracts. Unlike speculators who assume
market risk for profit, hedgers use the futures markets to
manage and offset risk.
12. ARBITRAGERS
Arbitrageurs are traders that take advantage of the price
discrepancy in different markets to make a profit.
Arbitrageurs serve an important function in the foreign
exchange market.
It is their operations that ensure that a market as large, as
decentralized and as diffused as the Forex market
functions efficiently and provides uniform price
quotations all over the world.
Whenever arbitrageurs find a price discrepancy in the
market, they start buying in one place and selling in
another till the discrepancy disappears.
13. BROKERS
Central Banks of all countries participate in the Forex
market to some extent. Most of the times, this
participation is official. Although many times Central
Banks do participate in the market by covert means.
This is because every Central Bank has a target range
within which they would like to see their currency
fluctuate.
If the currency falls out of the given range, Central
Banks conduct open market operations to bring it back
in range. Also, whenever the currency of a given nation
is under speculative attack, Central Banks participate
extensively in the market to defend their currency.