The Foreign Exchange Market
The adoption of liberalization, privatization and globalization (LPG) models in the economic system in many countries of the world; there has been burgeoning increase in international transactions during the last four decades and growing interdependencies of the countries. The foreign exchange market is the market in which currencies are bought and sold against each other. It is the largest market in the world, over 1000 billion dollar were traded each day. The foreign exchange market is an over-the-counter (OTC) market. It has no centralized physical or electronic market place (like a stock exchange) with a central trade clearing mechanism where traders meet and exchange currencies. It is a world-wide network of inter-bank traders, consisting primarily of banks, connected by telephone lines and computer terminals and other electronic means of communication.
Why study foreign trade?
Almost all the countries in the world trade themselves in goods and services, borrow and lend, invest and accept investments with other countries for their betterment of the economy. Foreign trade enables to access the scarce materials and distribute them equally to all the nations. Trade among different nations is similar to that of domestic trade, but the currency system in the domestic trade is uniform and no difficulties involved. In case of foreign trade the currency system is different and assigning the value for each currency is highly different and difficult. Hence the study of foreign trade can remove the doubt and reduce the risk of business.
Market structure and participants
The foreign exchange market is bifurcated into two categories that are retail market and whole-sale market. Retail market is the market in which travelers and tourists exchange one currency for another in the form of currency notes or travellers' cheques. The turnover and transaction size is very small and the spread between buying and selling prices is large. The whole-sale or inter-bank market in which the transaction size is very large, the participants are big in size. This can be explained with the help of the chart.
In the retail market, travellers and tourists exchange one currency for another. The wholesale market comprises of large commercial banks, foreign exchange brokers, central banks, multi-national banks and individuals and small business units. The commercial banks are the major players and serve their retail clients, the bank customers in conducting foreign trade and making investments in foreign countries. The banks maintain inter-bank market in foreign exchange directly and through inter-bank specialized foreign exchange brokers. The foreign exchange brokers act as agents who facilitate trading between dealers. The brokers actively and constantly monitor exchange rates and they disseminate the currency quote to the others.
The central bank is another important player that often intervenes in the market to maintain the exchange rate of their currencies within the prescribed limit. The multi-national corporations participating in the forward market, they are using this as a hedge tool, the future cash flows are protected through forward transactions. MNCs use forward contracts to hedge their imports and exports. They can lock in the rate at which they obtain a currency needed to purchase imports. Finally the individual and small business houses using foreign exchange market to facilitate execution of commercial and investment activities.
Forms of forex market
There are two forms of foreign exchange market, that is, Spot market and Forward market. The most common type of foreign exchange transaction is for immediate exchange at the so called spot rate. The market where these transactions occur is known as the spot market. The forward market facilitates the trading of forward contracts on currencies. A forward contract is an agreement between a corporation and a commercial bank to exchange a specified amount of a currency at a specified exchange rate on a specified date in the future. When MNCs expect a future receipt of a foreign currency, they can set-up forward contracts to lock in the rate at which they can purchase or sell a foreign currency. The forward contracts period are ranged in the form of 30, 60, 90,180, and 360 days, although other periods are available. The forward rate may vary with the length of the forward period.
Exchange rate
The exchange rate systems can be classified according to the degree by which exchange rates are controlled by the government. The 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. It adjusts on a continual basis in response to demand and supply conditions for that currency.
Conclusion
Foreign exchange takes place when buyers find foreign markets cheaper to buy in and sellers find them more profitable to dispose of their products than the domestic market. Foreign exchange gives us to strengthen the business as well as the economy of the country.
Why study foreign trade?
Almost all the countries in the world trade themselves in goods and services, borrow and lend, invest and accept investments with other countries for their betterment of the economy. Foreign trade enables to access the scarce materials and distribute them equally to all the nations. Trade among different nations is similar to that of domestic trade, but the currency system in the domestic trade is uniform and no difficulties involved. In case of foreign trade the currency system is different and assigning the value for each currency is highly different and difficult. Hence the study of foreign trade can remove the doubt and reduce the risk of business.
Market structure and participants
The foreign exchange market is bifurcated into two categories that are retail market and whole-sale market. Retail market is the market in which travelers and tourists exchange one currency for another in the form of currency notes or travellers' cheques. The turnover and transaction size is very small and the spread between buying and selling prices is large. The whole-sale or inter-bank market in which the transaction size is very large, the participants are big in size. This can be explained with the help of the chart.
In the retail market, travellers and tourists exchange one currency for another. The wholesale market comprises of large commercial banks, foreign exchange brokers, central banks, multi-national banks and individuals and small business units. The commercial banks are the major players and serve their retail clients, the bank customers in conducting foreign trade and making investments in foreign countries. The banks maintain inter-bank market in foreign exchange directly and through inter-bank specialized foreign exchange brokers. The foreign exchange brokers act as agents who facilitate trading between dealers. The brokers actively and constantly monitor exchange rates and they disseminate the currency quote to the others.
The central bank is another important player that often intervenes in the market to maintain the exchange rate of their currencies within the prescribed limit. The multi-national corporations participating in the forward market, they are using this as a hedge tool, the future cash flows are protected through forward transactions. MNCs use forward contracts to hedge their imports and exports. They can lock in the rate at which they obtain a currency needed to purchase imports. Finally the individual and small business houses using foreign exchange market to facilitate execution of commercial and investment activities.
Forms of forex market
There are two forms of foreign exchange market, that is, Spot market and Forward market. The most common type of foreign exchange transaction is for immediate exchange at the so called spot rate. The market where these transactions occur is known as the spot market. The forward market facilitates the trading of forward contracts on currencies. A forward contract is an agreement between a corporation and a commercial bank to exchange a specified amount of a currency at a specified exchange rate on a specified date in the future. When MNCs expect a future receipt of a foreign currency, they can set-up forward contracts to lock in the rate at which they can purchase or sell a foreign currency. The forward contracts period are ranged in the form of 30, 60, 90,180, and 360 days, although other periods are available. The forward rate may vary with the length of the forward period.
Exchange rate
The exchange rate systems can be classified according to the degree by which exchange rates are controlled by the government. The 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. It adjusts on a continual basis in response to demand and supply conditions for that currency.
Conclusion
Foreign exchange takes place when buyers find foreign markets cheaper to buy in and sellers find them more profitable to dispose of their products than the domestic market. Foreign exchange gives us to strengthen the business as well as the economy of the country.
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