Foreign Exchange Market

Foreign Exchange Market

foreign exchange is the mechanism by which currency of one nation is converted into the currency of another nation.These conversion is done by the banks who deal with foreign exchange.They keep the stocks of one currency in the form of the balance of bank.It also refers to stock of other foreign assets.

In India, As per the Foreign Exchange management Act 1999 ,Foreign exchange means currency and it also includes the following:

  • Deposits,credits and balance payable in  any foreign currency
  • Draft,traveller’s cheque ,credits or bills of exchange expressed or drawn in  Indian currency but payable in any foreign currency.
  • draft, traveller’s cheque,credits or bills drawn outside the India but payable in Indian currency.

Nature of foreign Exchange:

  1. Volatile, affected by hedger and spectacular
  2. Affected by demand and supply,rate of interest.
  3. Affected by balance of payment , surplus, deficit .
  4. Affected by economic stability, inflation rate and fiscal policy of government.

Institutional Framework in India to develop FEM:

  • Foreign Exchange Regulation Act 1973 was replaced by modified Foreign exchange Management act ,1999.
  • Money and Security Market set up  RBI in 1999 expanded in 2004 to include FEM.

FERA was pre liberalization Act . Voilation of it’s any rule was a criminal offence while FEMA is post liberalization Act .Through FEMA govt liberalized FDI limit, FII Investment , Import -export policy,cross border M&A etc.

Regulation and operator:

At present more than 70 %  transaction in foreign exchange is taking place in interbank market.The market consist of 90 Authorized dealers (mostly banks ) who transact currency among themselves.Trading is regulated by Foreign Exchange Dealer Association of India (FEDAI).

Commercial Banks,Central Banks, corporates and Exchange brokers are major participants .

Foreign Exchange Turnover:

The average daily turnover ,which was in vicinity of US $3 billion in 1998-99 and grew to US $18 bilion dollar during 2005-2006 and grew to 48 billion dollar in 2007-08 with monthly turnover crossing 65 billion in Feb 2007.

Instrument of FEM:

Foreign Exchange Forward,Currency Future,Currency Swap,Currency Option

we can about these instrument from derivative market study

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