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FOREIGN EXCHANGE

MARKET

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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 .

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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 tosmoothen outfluctuations in the exchange rates .

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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 .

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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.

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EXCHANGE RATE QUOTATIONS

An exchange rate quotation is theprice of a currency stated

in terms of anotheri.e. the price of one currency quoted

in terms of 1unit of the other currency .

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

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TYPES OF TRANSACTIONS

Foreign exchange transactions can be classified on the basis of thetime 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 thedate of the contract .

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