FOREX

MEANING: The foreign exchange market is a market where foreign currencies are bought and sold.

Ex:if an Indian importer imports goods from USA and has to make payments in US dollars.

• The purpose of FOREX is to help international trade and investment.

• A FOREX market helps business convert one currency to another.

• In a typical foreign exchange transaction a party purchases a quantity of one currency by paying a quantity of another currency.

• The foreign exchange market started forming during the 1970s.

• The FOREX is unique because of:- - Its trading volumes - The extremely liquidity of the market - Its geographical dispersion - Its long trading hours ,24hours a day - The low margins of profit compared with

other market or fixed income. but profits can be high due to very large trading volumes.

Trading Characteristics• It is called as the over counter market (OTC)• There is no single unified foreign exchange

market• There are rather a number of interconnected

marketplaces ,where different currency instruments are traded.

• The main trading centers are in London, New york,Tokyo,Hongkong,Singapore,but banks throughout the world participate.

Cont……….• There is little or no “inside information” in the

foreign exchange market.• Exchange rates fluctuations are usually caused

by actual monetary flows as well as by expectations of change in monetary flows caused by changes in GDP growth, Inflation, interest rates, budget and trade deficits or surpluses and other macro-economic conditions.

Cont……

• Major news is released publicly, often on scheduled dates , so that many people have access to the same news at the same time.

Market size and Liquidity

• Presently, the FOREX is one of the largest and liquid financial markets in the world.

• Traders include large banks, currency speculators, corporations, governments and other financial institutions.

• The average daily volume in the global foreign exchange and related market is continuously growing.

Cont………..

• Daily turnover was reported to be over US$ 3.2 trillion in Apr.2007 by the bank for international settlements.

• Of the daily global turnover ,trading in London accounted for 34.1% of the total. London by far the global center for foreign exchange.

• In second and third places respectively, trading in Newyork 16.6% and Tokyo 6.0%

Major participants…

The participants in the foreign exchange market are:-

• Individuals• Firm• Banks• Governments• International Agencies

Cont……

• There are two tier system in the foreign exchange market.

• One involves the transactions between the ultimate customer and bank.

• Other consists of the transaction between the banks

Structure of the FOREX• The foreign exchange market in india consists of

three tier system• The first consists of transactions between RBI and

the Authorized Dealers(ADs)• Second tier is the inter bank market in which the

Ads deal with each other• Third tier consists of transactions between Ads

and their corporate customers• The daily turnover in the Indian foreign exchange

market is currently estimated to be between USD 1.5 – 3 billion.

Cont……..

• The most important center is Mumbai.• Other active centers are Delhi, Kolkata,

Chennai, Cochin and Bangalore

Trade currency mechanics

• The main actors in the forex market are the primary market makers who trade on their own account and make a two-way bid offer market.

• They deal actively and continuously with each other and with their clients, central banks and sometimes with currency brokers.

• The ISO has developed three letter codes for all currencies which abbreviate the name of the country as well as currency.

For Example:-• USD• GBP• JPY• CAD• EUR• CHF• AUD• SEK

• NLG• BEF• FRF• ESP• INR• DEM• ITL• SAR