Foreign Exchange Market Foreign Exchange Market MechanismMechanism

Foreign Exchange Market Foreign Exchange Market MechanismMechanism

Harwinder singhHarwinder singh

MBA- 1MBA- 1stst

Sem 2Sem 2ndnd

Harwinder singhHarwinder singh

MBA- 1MBA- 1stst

Sem 2Sem 2ndnd

As per Foreign Exchange Act, (Section 2), 1947.As per Foreign Exchange Act, (Section 2), 1947.

"Foreign Currency""Foreign Currency" means any currency other means any currency other than Indian currency;than Indian currency;

"Foreign Exchange""Foreign Exchange" means includes any means includes any instrument drawn, accepted, made or issued under instrument drawn, accepted, made or issued under clause (8) of section 17 of the Banking Regulation clause (8) of section 17 of the Banking Regulation Act, 1956, all deposits, credits and balance payable Act, 1956, all deposits, credits and balance payable in any foreign currency, and any drafts, traveler’s in any foreign currency, and any drafts, traveler’s cheques, letters of credit and bills of exchange, cheques, letters of credit and bills of exchange, expressed or drawn in Indian currency but payable expressed or drawn in Indian currency but payable in any foreign currency;in any foreign currency;

Foreign Currency and Foreign ExchangeForeign Currency and Foreign Exchange

33

INTRODUTIONINTRODUTION The foreign exchange market is a global, worldwide-The foreign exchange market is a global, worldwide-

decentralized financial market for trading currencies. decentralized financial market for trading currencies. Financial centers around the world function as anchors Financial centers around the world function as anchors of trading between a wide range of different types of of trading between a wide range of different types of buyers and sellers around the clock, with the exception buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines of weekends. The foreign exchange market determines the relative values of different currencies. The foreign the relative values of different currencies. The foreign exchange market assists international trade and exchange market assists international trade and investment by enabling currency conversion. For investment by enabling currency conversion. For example, it permits a business in the United States to example, it permits a business in the United States to import goods from the European Union member states import goods from the European Union member states especially Euro zone members and pay Euros, even especially Euro zone members and pay Euros, even though its income is in United States dollars.though its income is in United States dollars.

44

Foreign Exchange MarketForeign Exchange Market Foreign exchange market refers to the Foreign exchange market refers to the

market in which participants are able to buy, market in which participants are able to buy, sell, exchange and speculate on currencies. sell, exchange and speculate on currencies. Foreign exchange markets are made up of Foreign exchange markets are made up of banks, commercial companies, central banks, banks, commercial companies, central banks, investment management firms, hedge funds, investment management firms, hedge funds, and retail foreign exchange brokers and and retail foreign exchange brokers and investors. The foreign exchange market is investors. The foreign exchange market is considered to be the largest financial market considered to be the largest financial market in the world. in the world.

55

FEATURES OF FOREIGN EXCHANGE FEATURES OF FOREIGN EXCHANGE MARKETMARKET

LOCATION- foreign exchange market is described as LOCATION- foreign exchange market is described as an OTC ( over the counter ) market as there is no an OTC ( over the counter ) market as there is no physical place where the participants meet to physical place where the participants meet to execute the deals. It is more an informal execute the deals. It is more an informal arrangement among the banks and brokers arrangement among the banks and brokers operating in a financial centre purchasing and selling operating in a financial centre purchasing and selling currencies, connected to each other by tele-currencies, connected to each other by tele-communications like telex, telephone and internet. communications like telex, telephone and internet. The leading foreign exchange market in India is The leading foreign exchange market in India is Mumbai. Calcutta, Chennai and Delhi are other Mumbai. Calcutta, Chennai and Delhi are other centre's accounting for bulk of the exchange dealings centre's accounting for bulk of the exchange dealings in India. in India.

66

SIZE OF MARKETSIZE OF MARKET Foreign exchange market is the largest financial Foreign exchange market is the largest financial

market with daily turnover of over USD 3.21 market with daily turnover of over USD 3.21 trillion. The largest foreign exchange market is trillion. The largest foreign exchange market is London, followed by New York, Tokyo, Zurich and London, followed by New York, Tokyo, Zurich and Frankfurt.Frankfurt.

77

24 HOURS MARKET24 HOURS MARKET The markets are situated throughout the different The markets are situated throughout the different

time zones of the globe in such a way that when time zones of the globe in such a way that when one market is closing the other is beginning its one market is closing the other is beginning its operations. Thus at any point of time one market operations. Thus at any point of time one market is closing the other is open.is closing the other is open.

88

PHYSICAL MARKETSPHYSICAL MARKETS In few centre’s like Paris and Brussels, Foreign In few centre’s like Paris and Brussels, Foreign

exchange business takes place at a fixed place, exchange business takes place at a fixed place, such as the local stock exchange buildings. At such as the local stock exchange buildings. At these physical markets, the banks meet and in these physical markets, the banks meet and in the presence of the representative of central the presence of the representative of central bank and on the basis of bargains.bank and on the basis of bargains.

Exchange Rate is the price of one country's Exchange Rate is the price of one country's currency expressed in another country's currency expressed in another country's currency. In other words, the rate at which currency. In other words, the rate at which one currency can be exchanged for one currency can be exchanged for another. another. e.g. Rs. 50 per one USDe.g. Rs. 50 per one USD

Major currencies of the WorldMajor currencies of the World

USDUSDEUROEUROYENYENPOUND STERLINGPOUND STERLING

What is an Exchange Rate ?

What is a Foreign Exchange What is a Foreign Exchange Transaction ?Transaction ?

Any financial transaction that involves more Any financial transaction that involves more than one currency is a foreign exchange than one currency is a foreign exchange transaction.transaction.

Most important characteristic of a foreign Most important characteristic of a foreign exchange transaction is that it involves exchange transaction is that it involves Foreign Exchange Risk.Foreign Exchange Risk.

PARTICIPANTS IN THE FOREIGN PARTICIPANTS IN THE FOREIGN EXCHANGE MARKETEXCHANGE MARKET

All Scheduled Commercial Banks All Scheduled Commercial Banks (Authorized Dealers only).(Authorized Dealers only).

Reserve Bank of India (RBI).Reserve Bank of India (RBI). Corporate Treasuries.Corporate Treasuries. Public Sector/Government.Public Sector/Government. Inter Bank Brokerage Houses.Inter Bank Brokerage Houses. Resident IndiansResident Indians Non ResidentsNon Residents Exchange CompaniesExchange Companies Money ChangersMoney Changers

Components of a Standard Components of a Standard

FX TransactionFX Transaction Base CurrencyBase Currency (USD/INR)(USD/INR) ‘‘Dealt’ or ‘Variable’ CurrencyDealt’ or ‘Variable’ Currency Exchange RateExchange Rate AmountAmount Deal Date Deal Date Value DateValue Date Settlement InstructionsSettlement Instructions

Foreign exchange transactions are settled through Foreign exchange transactions are settled through NostroNostro and and VostroVostro accounts. accounts.

NostroNostro: our account with banks abroad. Reserve : our account with banks abroad. Reserve Bank of India (RBI) maintains various Nostro Bank of India (RBI) maintains various Nostro accounts in a number of countries.accounts in a number of countries.

VostroVostro: their account with us. Many multilateral : their account with us. Many multilateral agencies (e.g. IMF, World Bank) maintain their agencies (e.g. IMF, World Bank) maintain their Nostro accounts at Reserve Bank of India (RBI). Nostro accounts at Reserve Bank of India (RBI).

1414

Thank YouThank You