8/14/2019 What is Foreign Exchange Market

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Foreign Exchange: -

○ Foreign Exchange is the trade of one national currency and takes place "over the counter" and

centrally on an inter-bank system.○ It is the market in which currencies are traded.

○ Its involve normally transaction of strong, stable and convertible currencies

○ It operates round the clock 

Definition-

○ Foreign exchange is the mechanism by which the currency of one country gets converted into the

currency of another country.○ Foreign Exchange is a methods and instruments used to adjust the payment of debts between two

nations that employ different currency systems. A nation’s balance of payments has an importanteffect on the exchange rate of its currency.

The foreign-exchange market has two major segments:

1. Over-the-counter market (OTC) : - The OTC market is composed of banks, both composed of banks,

 both commercial banks like Bank of America and investment banks like Merrill Lynch, and other financial institutions, and it is where most of the foreign-exchange activity takes place.

2. Exchange-traded market: -The exchange-traded market is composed of securities exchanges, such as

the Chicago Mercantile exchange and the Philadelphia Stock Exchange, where certain types of 

foreign-exchange instruments, such as exchange-traded futures and options, are traded.

Features-○ Market where foreign currencies are traded

○ Round the clock market

○ Global market

○ Large volume of transactions

Functions of the Foreign Exchange Market: -The foreign exchange market serves two main functions.○ The first is to convert the currency of one country into the currency of another.

○ The second is to provide some insurance against foreign exchange risk, by which we mean the

adverse consequences of unpredictable changes in exchange rates.

 Need of Foreign Exchange:

1. Consumers generally come into the fray to foreign exchange when they travel one place to another.They either go to bank or a foreign exchange bureau to exchange one currency into another currency.

2. When there is some business which needs to operate from other countries too than this type of foreignexchange system comes into play.

3. Sometimes investors require currency exchange whenever they are doing any foreign investment or any

real state investment.

4. All banks i.e. Commercial and Investment Banks trade currencies as a service for their commercial banking, deposit and lending customers base.

Participants of the foreign exchange market: -

1. Commercial banks : - play an important role in exchange currency transactions. Other participants of the market have their accounts in the commercial banks which conduct necessary conversiontransitions. Banks fulfills the need of market in exchange of distributing and calling money, breakingwith it into new banks.

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2. Exchange markets: - do not have definite space and also do not have definite working hours. with thedevelopment of telecommunications most of the leading financial institutions of the world useservices of exchange markets directly and via mediators 24 hours a day.

3. Central banks : - control the currency exchange rate and regulate the interest investment rate in thenational currency. US Central bank , FED has the greatest influence in the foreign exchange market.

4. Firms which engaged in foreign exchange business : - have a stable demand of foreign currency andsupply. According to rule imposed they do not have direct access to the foreign exchange market.They conduct their business through commercial banks.

5. Investment funds : - These companies, represented by various international investments, Mutualfunds, insurance companies, and trusts, realize the policy of diversified management of portfolio of assets by placing there money in securities of the governments and corporations of differentcountries.

6. Broker companies : - bring together buyers and sellers of foreign currency and start a conversion process after dealing with them. According to rule, in the foreign exchange market there is no fee as a per cent on the sum of a transaction, or as a sum agreed in advance. A broker company, whichcontains sound information about the rates, is a place where the real exchange rate is formedaccording to closed deals.

7. Private persons : - realize a wide range of transactions in the area of foreign trade, tourism, pension,royalties etc. this is also the biggest group involved into such transactions.