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Foreign Exchange Management

The document discusses the foreign exchange market, including that it is a global over-the-counter marketplace where currency exchange rates are determined. Participants can buy and sell currency pairs. The main functions of the market are facilitating currency conversion, providing instruments to manage risk, and allowing investors to speculate. Spot transactions involve immediate currency delivery while forward transactions specify future delivery dates.

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Vinit Mehta
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206 views11 pages

Foreign Exchange Management

The document discusses the foreign exchange market, including that it is a global over-the-counter marketplace where currency exchange rates are determined. Participants can buy and sell currency pairs. The main functions of the market are facilitating currency conversion, providing instruments to manage risk, and allowing investors to speculate. Spot transactions involve immediate currency delivery while forward transactions specify future delivery dates.

Uploaded by

Vinit Mehta
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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FO R E I G N E X C H A N G E M A NA G E M E N T

• Name –Vinit Naresh Mehta

• Class –TY BBA-IB

• Semester – 5th

• Roll No - 20

• Topic- Foreign Exchange Market


I N T RO D U C T I O N

• The foreign exchange market (also known as forex,


FX, or the currencies market) is an over-the-counter
(OTC) global marketplace that determines the
exchange rate for currencies around the world.
Participants in these markets can buy, sell, exchange,
and speculate on the relative exchange rates of various
currency pairs.

• Foreign exchange markets are made up of banks, forex


dealers, commercial companies, central banks,
investment management firms, hedge funds, retail
forex dealers, and investors.
F UN C T I O N S OF FO R E I G N E X C HA N G E M A R K E T

The main functions of the market are :

(1) To facilitate currency conversion.


(2) Provide instruments to manage foreign exchange risk (such as forward exchange).
(3) Allow investors to speculate in the market for profit.
(4) Transfer Function: The basic and the most obvious function of the foreign exchange market is to transfer the
funds or the foreign currencies from one country to another for settling their payments.
(5) Credit Function: The FOREX provides short-term credit to the importers in order to facilitate the smooth flow
of goods and services from various countries.
(6) Hedging Function: The third function of a foreign exchange market is to hedge the foreign exchange risks.
EXCHANGE RATES

An exchange rate is a rate at which one currency will be exchanged for another currency.

Most exchange rates are defined as floating and will rise or fall based on the supply and demand in the
market.

Some exchange rates are pegged or fixed to the value of a specific country’s currency.

• Exchange rate changes affect businesses by changing the cost of supplies that are purchased from a
different country, and by changing the demand for their products from overseas customers.
E X C H A N G E Q U O T A T I O NS

• A direct quote is an exchange rate quotation in the foreign exchange market. It quotes a fixed unit of a
foreign currency against a variable amount of the domestic currency. In other words, a direct quote
depicts the amount of foreign currency that can be bought for a certain unit of the domestic currency.

• An exchange rate is commonly quoted using an acronym for the national currency it represents. For
example, the acronym USD represents the U.S. dollar, while EUR represents the euro. To quote the
currency pair for the dollar and the euro, it would be EUR/USD.
S P O T A N D F O R WA R D T R A NS A C T I ON S

• With spot transactions, internationally traded currencies are bought


and sold for other currencies at the spot rate. Forward transactions, on
the other hand, are traded on a certain date in the future with the
relevant premiums and discounts for calculating the forward rate
being specified.

• A Spot trade, also known as a spot transaction, refers to the purchase


or sale of a foreign currency, financial instrument, or commodity for
instant delivery on a specified spot date.
MERCHANT RATES

• TT Selling Rate- The selling rate is used when the bank is sending INR out of the country, and into a
different currency. So for example, if you’re looking to make an outward remittance from India, and send
money from your INR account to someone with a bank account held in a different currency, you need to
know the selling rate (TTS).

• TT Buying Rate-The TTB rate is the rate at which a bank will convert foreign currency sent to India,
into INR. So this means that if a friend or family member sends you a remittance from abroad in foreign
currency, the chances are that the rate applied to credit you INR will be the TTB rate.
D I A G R A M FO R T T S E L LI N G R A T E & T T B U Y I N G R A T E
C O N T R A C T FE A T U R E S O F F OR E I G N E X C H A N G E C O N T R A C T

• Broadly speaking, forward contracts are contractual agreements between two parties to exchange a pair
of currencies at a specific time in the future. These transactions typically take place on a date after the
date that the spot contract settles and are used to protect the buyer from fluctuations in currency prices.

• A forward exchange contract (FEC) is an agreement between two parties to effect a currency
transaction, usually involving a currency pair not readily accessible on forex markets.

• FECs are traded OTC with customizable terms and conditions, many times referencing currencies that
are illiquid, blocked, or inconvertible.

• FECs are used as a hedge against risk as it protects both parties from unexpected or adverse movements
in the currencies’ future spot rates when FX trading is otherwise unavailable.
S WI F T P A Y M E N T S Y S T E M S

• The SWIFT messaging network is a component of the global payments system. SWIFT acts as a
carrier of the “messages containing the payment instructions between financial institutions involved in
a transaction”.

• SWIFT payments are payment transactions using the SWIFT international payment network. This
network is used to send or receive international electronic payments, which is why SWIFT payments
are sometimes referred to as international wire payments.

• How is SWIFT governed? SWIFT is a cooperative company under Belgian law and is owned and
controlled by its shareholders (financial institutions) representing approximately 2,400 Shareholders
from across the world.
CONCLUSION

The foreign exchange market is an over-the-counter global market where the buying and selling
of global currencies occur, determining their exchange rates. The exchange market is made up
of banks, forex dealers, commercial companies, central banks, investment management firms,
hedge funds, retail forex dealers, and investors that all trade currency pairs.

Bibliography and References:

• Foreign Exchange Market: How It Works, History, and Pros and Cons (investopedia.com)

• The Foreign Exchange Market - Definition, Types, Functions, Features, and FAQs (vedantu.co
m)

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