FOREX MANAGEMENTDefinition:- “Foreign exchange means foreign currency and it includes:a) i) all deposits,credits and balances payable in

foreign currency.ii) The drafts,traveller’s cheque,letters of credit

and bills of exchange expressed or drawn in Indian currency but payable in any foreign currency.

b) All the instruments payable at the option of the drawee or the holder there of or any other party there to either in Indian currency or in foreign currency or partly in one and partly in other.” –Foreign Exchange Regulation Act.

FOREIGN EXCHANGE MARKETS“ Foreign exchange market is a market in which foreign currencies are bought and sold.”

“Foreign exchange market is a system facilitating mechanism through which one countries currencies can be exchanged for the currencies of another country.”

Nature of Foreign Exchange Market:-GLOBAL MARKETOVER THE COUNTER MARKETAROUND THE CLOCK MARKETBANKS ARE INVOLVED IN 95% CASES.1-2% transactions are for actual transaction rest for speculation.Money and near money instruments are denominated in foreign currency is foreign exchange.There is no physical transfer of money it is online.Foreign exchange is a system of private banks,financial banks,foreign exchange dealers and central banks through which individuals,business and government trade,foreign exchange or other nation’s currency.Exit in the network of information system.A party can never be a demander of one currency without being simultaneously a supplier of another.

PARTICIPANTSFOREIGN EXCHANGE MARKET IS A WORLD WIDE MARKET AND IS MADE UP OF:

1.Retail clients:made up of:BusinessesInternational investorsMultinational corporations.And the like who need foreign exchange.They do not directly purchase or sell foreign currencies themselves.They place buy/sell orders with the commercial banks.

2.Commercial banks:They carry out buy/sell orders from the retail clients and buy/sell currencies on their own account so as to alter(change) the structure of their assets and liabilities in different currencies.The banks deal either directly with the other banks or more usually through foreign exchange brokers.

3. Foreign exchange brokers:

Banks do not trade directly with one another, rather they offer to buy and sell currencies via foreign exchange brokers.these brokers collect buy and sell quotations from most of the banks for many currencies,so that by going through the broker the most favourable quotation is obtained quickly at very low costs.

Thus operating through such brokers is very advantageous. Each financial centre normally has handful of authorized brokers through which commercial banks conduct.

CENTRAL BANKSThese banks have been charged with responsibility of maintaining external value of the currency of the country.

Two functional aspect:

Demand/supply.

Floating/fixed exchange rate.In a fixed exchange rate system,the central bank takes necessary steps to maintain the rate. This it does by purchasing the foreign currencies when there is excess supply and sell the currencies when there is excess demand. Central bank thus acts as a buffer between the forces of demand and supply then intervention.In floating exchange rate system,the central has to show orderliness in the movement of exchange rates. This is achieved by central bank intervention.If floating exchange rate-------there are no controls-----European rate will be influenced forces of demand and supply-------on capital markets.If supply(foreign exchange)>demand(foreign exchange) during a particular period.

Foreign exchange supply in market through exporters.

Foreign exchange demand in market through importers.

During a particular period

If D>S( F.E.)----- RISE IN PRICE OF FOREIGN EXCHANGE-----IMPORTS WILL BE

COSTLY-------THUS CURTAILED-------PROVIDE PROTECTION TO DOMESTIC INDUSTRY---------------BUT IN SHORT RUN------DISTURBS THE ORDERLINESS OF FOREIGN MARKET OPERATIONS. Thus central banks would step in by selling foreign exchange and buying(absorbing) domestic currency.Demand(direct currency)+Supply(foreigncurrency)--------will maintain the price(foreign exchange) at desired level.Thus

“Intervention can be defined as buying or selling of foreign exchange by the central bank of a country with a view to maintain the price of a given currency against another currency.”

Speculators:- speculators seek to profit from changes in foreign exchange rates based upon their expectations. This class of participants, actively expose themselves to currency risk by buying and selling currencies in the forward market to profit from exchange rate fluctuations. The speculators keep their positions open. the participation of this class does not depend on their business transaction in other currencies, instead these are based on current prices in the forward markets and their expectations about the future spot rates(F.S.R.).

Arbitrators:-this class of participants seeks to earn risk-free profits by seeking advantage of differences in the prices of currencies,in interest rates among various countries. they use forward contract to hedge risk.

Hedgers:- many MNFs engage themselves in forward contract to protect the home currency values of F.C. denominated assets and liabilities on their balance sheet that are not to be realized over the life of contract.They also hedge receivables and payables.

Risk Quantum

•High riskSpeculator

•No riskArbitrator

•Low riskHedger

STRUCTUREExchange rate market has three segments:- Transactions between R.B.I. and authorized

dealers(Commercial banks). Transactions among authorized dealers. Transaction among authorized dealers and

customers(Retail segment).

Central Bank

R.B.I

Central bank

Customers

Central bank

SETTLEMENTS

•The same day.Cash•On the next working day(tommorow).Tom

•When the exchange of currencies takes place on the second day, working day after the date of deal is called spot rate.

Spot