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    Foreign Exchange Market: Prepared by Ms - Navneet Kaur Bhatia

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    The document discusses the foreign exchange market. It describes the foreign exchange market as the largest financial market in the world that facilitates the trading of national currencies. The key participants in the foreign exchange market are commercial banks, corporations, central banks, and authorized dealers. Trading occurs globally 24 hours a day and involves the buying and selling of currencies through spot transactions, forwards, and derivatives.

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    Foreign Exchange Market: Prepared by Ms - Navneet Kaur Bhatia

    Uploaded by

    prernagadia
    826 views12 pages
    The document discusses the foreign exchange market. It describes the foreign exchange market as the largest financial market in the world that facilitates the trading of national currencies. The key participants in the foreign exchange market are commercial banks, corporations, central banks, and authorized dealers. Trading occurs globally 24 hours a day and involves the buying and selling of currencies through spot transactions, forwards, and derivatives.

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    The document discusses the foreign exchange market. It describes the foreign exchange market as the largest financial market in the world that facilitates the trading of national currencies. The key participants in the foreign exchange market are commercial banks, corporations, central banks, and authorized dealers. Trading occurs globally 24 hours a day and involves the buying and selling of currencies through spot transactions, forwards, and derivatives.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    826 views12 pages

    Foreign Exchange Market: Prepared by Ms - Navneet Kaur Bhatia

    Uploaded by

    prernagadia
    The document discusses the foreign exchange market. It describes the foreign exchange market as the largest financial market in the world that facilitates the trading of national currencies. The key participants in the foreign exchange market are commercial banks, corporations, central banks, and authorized dealers. Trading occurs globally 24 hours a day and involves the buying and selling of currencies through spot transactions, forwards, and derivatives.

    Copyright:

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    Download as ppt, pdf, or txt
    of 12

    FOREIGN EXCHANGE

    MARKET
    Prepared By
    Ms.Navneet Kaur Bhatia
    FOREIGN EXCHANGE

    • Foreign exchange is the mechanism by which the


    currency of one country gets converted into the
    currency of another country.

    • Foreign exchange rate is simply the ratio of a unit


    of currency of one country to a unit of currency of
    another country at the time of sell or buy
    transaction.
    Introduction
    • FEM is the largest financial market in the world.
    • Leading centers are London, NewYork, Paris,
    Zurich, Tokyo, Milan and Frankfurt.
    • Trading in FEM is usually done 24 hours.
    • It includes coins, notes and bank deposits
    and also a variety of highly liquid claims
    denominated in foreign currency.
    • It operates on very narrow spread.
    Characteristics of FEM
    • FEM is described as an OTC market.
    • Largest financial market in the world.
    • 24 hours market.
    • Operating throughout different time zones of the
    globe.
    • In India, it is open for the time banks are open for
    their regular business.
    • It is very efficient market having highly developed
    communications network.
    Participants of FEM
    • Corporates
    • Commercial banks
    • Exchange brokers; and
    • Central banks
    • Authorized Dealers
    • Exchange Brokers
    Structure of FEM

    Retail Wholesale

    Bank & Central


    Money Changer Inter-bank
    Bank

    Direct Indirect

    Spot Forwards Derivatives

    Merchandise Non-merchandise
    Trading
    • Trading is generally done by telephone or telex
    machine. Foreign exchange traders in each bank
    usually operate out of a separate foreign exchange
    trading room.
    • Spot
    • Forward
    • Other derivatives
    Banks earn spread and brokers earn
    commission through FEM operations
    Different terms used in FEM
    • Foreign Exchange Reserves (FER)
    FER is the surplus money or capital that a country parks or
    maintains in the foreign country in form of currency, bond
    and other kind of securities.
    • Transaction Costs
    • The bid-ask spread-that is, the spread between bids and
    asks rates for a currency is based on the breadth and depth
    of the market for that currency as well as in the currency
    volatility.
    • Devaluation
    • Depreciation
    Exchange Rate System

    • The exchange rate systems can be classified according to


    the degree by which exchange rates are controlled by the
    government.
    • Fixed exchange rate system- exchange rates are either
    held constant or allowed to fluctuate only within the
    prescribed boundaries stipulated by the central bank.
    • Floating exchange rate system- the exchange rates are
    determined by market forces without intervention by
    governments.
    Arbitrage
    It is the exploitation of price differentials for risk less
    guaranteed' profits.
    Buying low in one market and selling high in the other market

    • Financial Centre Arbitrage - This type of arbitrage ensures that the


    dollar pound exchange rate quoted in New York will be the same as
    that quoted in London and other financial centres.
    • If the exchange rate is $1.61/£1 in New York but only $1.59/£1 in
    London, it would be profitable for banks to buy pounds in London and
    simultaneously sell them in New York and make a guaranteed 2 cents
    on every pound bought and sold.
    • The act of buying pounds in London will lead to depreciation of the
    dollar in London, while selling pounds in New York will lead to an
    appreciation of dollar in New York. Such a process continues until the
    quoted in the two centers coincides at say $1.60/£1.
    Current Trends

    • Foreign exchange reserves stood at USD 279.6 billion in


    April 2010 from USD 251.7 billion April 2009. This
    increase is subject to the recent surge in the foreign
    investments inflows.
    • USD: US Dollar EUR: Euro
    • GBP: British Pound IEP: Irish Pound (Punt)
    • JPY: Japanese Yen CHF: Swiss Franc
    • CAD: Canadian Dollar AUD: Australian Dollar
    • DEM: Deutschemark SEK: Swedish Kroner
    • NLG: Dutch Guilder BEF: Belgian Franc
    • FRF: French Franc DKK: Danish Kroner
    • ESP: Spanish Peseta ITL: Italian Lira
    • INR: Indian Rupee SAR: Saudi Riyal

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