Foreign Exchange Market

Foreign Exchange Market: Meaning Foreign exchange market is also known as FOREX. Domestic currency can be easily converted into international banknotes by the process of foreign exchange market. By enabling currency conversion, foreign exchange markets assist the investors. It is a mechanism where various national currencies are purchased and sold like any other commodity. For trading currencies forex is the decentralisation market throughout the world. The exchange rate is determined through the interaction of market forces dealing with supply and the major traders of forex or currency markets are banks, government, institutions and speculators. Hedging strategies are most used in foreign exchange market. Characteristics: Changing Wealth The ratios between the currencies of two countries are exchange rates in forex. If one currency loss its value in the market and at the same time the value of the another currency increases this causes the fluctuations in the exchange rate in foreign exchange market. For Example, over 20 years ago a single US dollar bought 360 Japanese Yen, whereas at present 1 US dollar buys 110 Japanese Yen; this explains that the Japanese Yen has risen in value, and the US dollar has decreased in value (relative to the Yen). This is said to be a shift in wealth, as a fixed amount of Japanese Yen can now purchase many more goods than two decades ago.

No Centralized Market The foreign exchange market does not have a centralized market like a stock exchange. Brokers in the foreign exchange market are not approved by a governing agency. Business network and operation market of foreign exchange takes place without any unification in transaction. Foreign exchange currency trading has been reformed into a non-formal and global network organization it consists of advanced information system. Trader of forex should not be a member of any organisation.

Circulation work Foreign exchange market has member from all the countries, each country has different geographical positions so forex operates all around the clock on working days (i.e.) Monday to Friday every week. Because the time in Australia is different than in European countries, this kind of 24 hours operation, free from any time is an ideal environment for investors. For instance, a trader may buy the Japanese Yen in the morning at the New York market, and in the night if the Japanese Yen rises in the Hong Kong market, the trader can sell in the Hong Kong market. more number of opportunities are available for the forex traders. In FOREX market most trading takes place in only a few currencies; the U.S. Dollar ($), European Currency Unit (), Japanese Yen (), British Pound Sterling (), Swiss Franc (Sf), Canadian Dollar (Can$), and to a lesser extent, the Australian and New Zealand Dollars. Financial Instruments of forex Spot Market Spot market involves the quickest transaction in the foreign exchange market. This involves immediate payment at the current exchange rate is called as spot rate. The spot market accounts for 1/3rd of all the currency exchange, trades in Federal Reserve that takes place within two days of the agreement. The traders open to the volatility of the currency market, which can raise or lower the price between the agreement and the trade. Futures Market These kind transactions involve future payment and future delivery at an agreed exchange rate. Future market contracts are standardized, it is non-negotiable and the elements of the agreement are set. It also takes the volatility of the currency market, specifically the spot market, out of the equation. This type of market is popular for Steady return on their investment that is done on large currency transactions. Forward Market the terms are negotiable between the two parties. The terms can be changes according to the needs of the participants. It allows for more flexibility. Two entities swap currency for an agreed amount of time, and then return the currency at the end of the contract. Swap Transactions In swap two parties are involves where they exchange the currencies for certain time and agree to reserve the transaction at a later date. Swap is the most commonly used forward

transaction. In swap transaction it is not traded through the exchange and there is no standardization. Until the transaction is completed the deposit is required to hold the position.

Functions of the Foreign Exchange Market Transfer of Purchasing Power Transfer of one country to another and from one national currency to another is called the transfer of purchasing power. International transactions normally involve different people from countries with different national currencies. Credit instruments and bank drafts are used to transfer the purchasing power this is one of the important function in forex. In forex the transaction can only be done in one currency.

Provision of credit for foreign trade The forex takes time to move the goods from a seller to buyer so the transaction must be financed. Foreign exchange market provides credit to the traders. Credit facility is need by exporters when the goods are transited. Goods some on the other need credit facility when this kind of special credit facility is used the forex exchange department is extended to finance the foreign trade Foreign Exchange Dealers Foreign exchange dealers, deal both with interbank and client market. The profit of the dealers is there buying at a bid price and sells it at a high price. Worldwide competitions among dealers narrows the spread between bid and ask and so contributes to making the foreign exchange market efficient in the same sense as securities markets. Dealers in the foreign exchange departments of large international banks often function as market makers. They stand willing to buy and sell those currencies in which they specialize by maintaining an inventory position in those currencies.

Types of foreign exchange transactions Spot Transactions

Spot transaction means immediate delivery of foreign exchange currency. Purchase of foreign exchange with delivery and the payment between the banks takes place the next working day. Value date is the date of settlement. Spot transaction is the important and the only single type of transaction.

Outright Forward Transactions The value date is established at the time of agreement, but the payment and delivery takes place at the future date. The delivery of the goods takes places in the future value date with the certain amount of one currency with another currency this kind of transaction is called as the forward transaction. Forward exchange rates are e normally quoted for value dates of one, two, three, six, and twelve months. Outright forward transactions only account for about 9 % of all foreign exchange Transactions. Swap Transactions Purchase and sale of a given amount of foreign exchange for two different value dates. spot against forward is the most common type of swap transaction. Where the dealer buys a currency in the spot market and simultaneously sells the same amount back to the same back in the forward market. Swap transactions account for about 48 % of all foreign exchange transactions. Participants of forex Central Bank External value of the domestic currency is controlled and assigned by central bank of every county. Each country has a central or apex bank. For example In India Reserve Bank of India is the central Bank.

Participants
Central bank Commercial Bank Exchange Brokers Speculators Overseas Forex market

Commercial Bank Commercial banks are the one which has the most number of branches. With its wide branch network the Commercial banks buy the foreign exchange and sell it to the importers. These banks are the most active among the market players and also provide services like converting currency from one to another. Exchange Brokers Services of brokers are used to some extent, Forex market has some practices and tradition depending on this the residing in other countries are utilised. Local brokers can conduct Forex transactions as per the rules and regulations of the Forex governing body of their respective country. Overseas Forex market: The Forex market operates all around the clock and the market day initiates with Tokyo and followed by Bahrain Singapore, India, Frankfurt, Paris, London, New York, and Sydney before things are back with Tokyo the next day. Speculators:

In order to make profit on the account of favourable exchange rate, speculators buy foreign currency if it is expected to appreciate and sell foreign currency if it is expected to depreciate. They follow the practice of delaying covering exposures and not offering a cover till the time cash flow is materialized. Types of Foreign Exchange Rates: Floating Rates Floating rates is one of the primary reasons for fluctuation of currency in foreign exchange market. This is one of the most important commonly and main type of exchange rate. Under this market force all the economies of developed countries allow there currency to flow freely. When the value of the currency becomes low it makes the imports more and the exports are cheaper, so the countries domestic goods and services are demanded more in foreign buyers. The country can withstand the fluctuation only if the economy is strong. When the countrys economy is able to meet the demand then it can adjust between the foreign trade and domestic trade automatically. Fixed Rates Fixed exchange rates are used to attract the foreign investments and to promote foreign trade. This type of rates is used only by small developed countries. By Fixed exchange rates the country assures the investors for the stable and constant value of investment in the country. A monetary policy of the country becomes ineffective. In this type the exchange rates the imports become expensive. The exchange value of the currency does not move. This normally reduces the countrys currency against foreign currencies. Pegged Rates This rate is between the floating rate and the fixed rate. Pegged rates appropriate more for developed country. A country allows its currency to fluctuation to some extend for a adjusted central value. Pegged allow some adjustments and stability. No artificial rates are found in fixed and floating exchange rates. Pegged can fix the economic problem by itself and provide growth opportunity also. When a fixed value is not maintains by the country it cant follow the fixed exchange rate. Conclusion

Thus foreign exchange market helps us to know the financial position of the country in the global market. Thus i conclude say foreign exchange is one of the important aspects to measure the financial situation.

Reference http://www.ehow.com/list_6804540_types-foreign-exchange-rates.html http://www.theforexguide.net/article-forex-market-characteristics.go http://www.cmsfx.com/en/forex-education/online-forex-course/chapter-1-forexbasics/introduction-to-forex-exchange/operation http://forextradingabc.blogspot.com/feeds/posts/default?orderby=updated

http://www.iitk.ac.in/infocell/announce/convention/papers/Marketing,%20Finance%20and%20Inte rnational%20Strategy-07-Anuradha%20Sivakumar%20Runa%20Sarkar.pdf