FOREIGN EXCHANGE MARKET

THE FOREIGN EXCHANGE MARKET • This is over the counter market ( OTC ) i.e. there is no physical market place to make the deals.

• Instead it is a net work of banks , brokers and dealers spread across the various financial centers of the world .

• These players trade in different currency through telephones , faxes , computers and other electronic networks like the SWIFT system ( Society for Worldwide Inter bank Financial Telecommunication) .

• These traders generally operate through a trading room .

• The deals are finalized orally with written communication following later .

THE PLAYERS

The main players in the foreign exchange market are :• large commercial banks, • forex brokers , • large corporations and • the central banks .

The central banks enter the market to smoothen out fluctuations in the exchange rates .

FOREIGN EXCHANGE

As defined in Section 2 of FEMA , 1999 foreign exchange includes :

• all deposits ,credits , balance payable in any foreign currency ,

• any drafts , travelers` cheques , letter of credit and bills of exchange ,

• any instrument giving anyone the option of making it payable either partly or fully in a foreign currency .

Here the term currency includes coins , bank notes , postal notes ,

postal orders and money orders .

• Market Makers :

The large commercial banks which stand ready to buy and sell various currencies at specific prices at all points of time .

• Retail Market :

The market in which the commercial banks deal with the customers both individuals and corporate .

• Inter bank Market / Wholesale Market:

The mkt. in which banks deal with each other

• A 24 Hour Market :

The world wide forex mkt. is a 24 – hour mkt. i.e. trading is going on at least one of the forex market through out the day.

EXCHANGE RATE QUOTATIONS

An exchange rate quotation is the price of a currency stated

in terms of another i.e. the price of one currency quoted

in terms of 1unit of the other currency .

For e.g. Rs. / $ : 46.40 / 46.65

TYPES OF TRANSACTIONS

Foreign exchange transactions can be classified on the basis of the time between entering into a transaction and its settlement .

• Outright / Cash / Ready Transaction : When the exchange of currency takes place on the date of the deal .

• TOM ( tomorrow ) Transaction : When the exchange of currency takes place on the next working day .

• SPOT Transaction : When the transaction will be settled after 2 business days from the

date of the contract .