DEFINITION OF FOREIGN EXCHANGE

Foreign Exchange: Money instruments used to make payments between countries. The Foreign exchange market is a large, growing and liquid financial market that operates 24 hours a day. It is not a market in the traditional sense because there is no central trading location or exchange". Most of the trading is conducted by telephone or through electronic trading networks. The primary market for currencies is the interbank market where banks, insurance companies, large corporations and other large financial institutions manage the risks associated with fluctuations in currency

PARTICIPANTS
Unlike a stock market the forex market is divided into levels of access . At the top is the interbank market , which is made up of largest commercial bank and securities . There are approximately five different types of entities that use the foreign exchange markets on a daily basis. Commercial banks are the leaders in this market and are the main source of currency transactions. Traditional users refer to entities that do business across national borders. Central banks are the official players in this market, and each country has a central bank to manage its money supply. Brokers work as go-betweens for banks, typically during large transactions. Lastly , traders and speculators work to take advantage of short-term trends in the market.

The other key market participants are 1) Banks 2) Commercial companies . 3) Central bank . 4) Hedge funds as speculators . 5) Investment Management firms . 6) Retail Forex brokers . 7) Non- Banks Forex companies . 8) Money transfer / Remittance companies .

TYPES / DEALING PRODUCTS Spot Market- These are the quickest transactions involving currency in foreign markets. These transactions involve immediate payment at the current exchange rate, which is also called the spot rate. Futures Market- As the name implies, these transactions involve future payment and future delivery at an agreed exchange rate, also called the future rate.

Forward Market- These transactions are identical to the Futures Market except for one important difference---the terms are negotiable between the two parties. This way, the terms can be negotiated and tailored to the needs of the participants. It allows for more flexibility. In many instances, this type of market involves a currency swap, where two entities swap currency for an agreed-upon amount of time, and then return the currency at the end of the contract.

FOREIGN EXCHANGE MARKET The Forex OTC market is by far the biggest and most popular financial market in the world, traded globally by a large number of individuals and organizations. In the OTC market, participants determine who they want to trade with depending on trading conditions, attractiveness of prices and reputation of the trading counterpart. The chart below shows global foreign exchange activity. The dollar is the most traded currency, being on one side of 86% of all.

The single most attractive aspect of the forex market is that it is practically impossible for any investor, group of investors or financial institutions to misuse it. It is such a large market, with money flowing through it daily in estimated trillions of dollars, that no single entity, however large, can gain a statistically significant control over the forex market. This means that it is completely free of any influences, beyond the true fundamental driving forces that move it. The implication here is that this market offers every investor the same opportunity, regardless of size or influence, making it a free and fair market place, possibly the only one in the world. This aspect is very attractive to small investors in particular, since they are often the ones to suffer the most from stock market scams and fraudulent activity.

STRUCTURE The world wide Forex Market is a 24 hour market , it is opened virtually 24 hour of a day in at least one of the financial markets of the world. London, Zurich, Frankfurt, Bahrain, New York, Los Angeles, Singapore, Hong Kong, Tokyo, Sidney, etc .

REGULATORS Without the permission of RBI no person can : 1. Deal in any foreign exchange or foreign security with any person other than an authorized person 2. Make any payment to or for the credit of any person resident outside India in any manner. 3. Receive otherwise through an authorized person, any payment by order or on behalf of any person resident outside India in any manner 4 Enter into any financial transaction in India as a consideration for or in association with acquisition or creation or transfer of a right to acquire, any asset outside India by any person.

The FERA was widely described as Draconian and Obnoxious law. Following the economic Liberalization ushered in 1991, some amendments to the FERA were affected in 1993. Foreign Exchange transactions were regulated in India by the Foreign Exchange Regulations Act (FERA) 1973. This Act also sought to regulate certain aspects of the conduct of business outside the country by Indian companies and in India by foreign Companies.

There was a lot demand for Substantial modification of FERA in the light of the ongoing economic liberalization and improving foreign exchange reserves position. Accordingly, a new Act, the Foreign Exchange Management Act (FEMA) 1999, replaced FERA. The FEMA, which came into force with effect from 01.06.2000, extends to the whole of India and also applies to branches, offices, and agencies outside India, owned or controlled by a person resident in India.

Foreign exchange reserves

Foreign exchange reserves (also called Forex reserves or FX reserves) in a strict sense are only the foreign currency deposits and bonds held by central banksand monetary authorities. However, the term in popular usage commonly includes foreign exchange and gold, SDRs and IMF reserve positions. This broader figure is more readily available, but it is more accurately termed official international reserves or international reserves. These are assets of the central bank held in different reserve currencies, mostly the US dollar, and to a lesser extent the euro, the UK pound, and the Japanese yen, and used to back its liabilities, e.g. the local currency issued, and the various bank reserves deposited with the central bank, by the government or financial institutions

CAPITAL ACOUNT TRANSACTION

1. Transfer or issue of any foreign security by a person resident in India; 2. Transfer or issue of any security by a person resident outside India.

3. Transfer or issue of any security or foreign security by any branch, office or agency in India of a person resident outside India.
4. Any borrowing or lending in foreign exchange in whatever form or whatever name called. 5. Any borrowing or lending in rupees in whatever form or by whatever name called between a person resident in India and a person resident outside India. 6. Deposits between persons resident in India and persons resident outside India.

Exchange Control Rules & Regulations (Export of Goods)

Foreign Exchange Management Rules,2000. (Current Account Transactions) Foreign Exchange Management Regulations, 2000, (Export of Goods & services) Foreign Exchange Management (Manner of Receipt & Payment).

Manner of Realization of Export Proceeds Manner of Receipt of Foreign Exchange: By way of debit (transfer of funds from) to the Asian clearing Union dollar account in India of a bank of the member country in which the importer is the resident. OR By way of credit to the Asian Clearing Union dollar account of the authorized dealer maintained with the correspondent bank in the member country.

An Exporter can receive payment in any one of the following ways. In the form of a bank draft, Cheque, Pay order, foreign currency notes, travelers cheques, from a buyer during his visit to India, provided the exporter surrenders the foreign exchange so received to his bank within the prescribed period or, by way of debit to the account maintained by the buyer with an authorized dealer in India or an authorized bank in India In rupees from credit card servicing bank in India against the charge slip signed by the buyer through credit card or, From a rupee account held in the name of an exchange house with an authorized dealer if the amount does not exceed two lakh rupees per export transaction or, By the credit arrangement entered into by the EXIM Bank with a financial institution in a foreign state.

The dollar remains reserve currency of choice. The IMF estimates that 64% of the worlds official foreign-exchange reserves are held in dollar-denominated assets. The euro, the second most widely held international reserve currency, lags well behind, followed by the British pound and Japanese yen. These currencies official reserve rankings parallel their status in international commerce more generally. This correlation should be of no surprise. Why hold a currency that no one uses? According to a 2007 BIS survey, roughly 88% of daily foreign exchange trades involve dollars. Again, the euro is a distant second, with the British Pound and Japanese Yen trailing.

Exchange Rate: The price of 1 currency viewed in terms of another currency, is called exchange rate between the 2 currencies. e.g.: Re/$ 48.76 means Rs. 48.76 = 1 USD Direct Quote in Forex market: 'X' units of the domestic currency equals 1 unit of foreign currency. e.g.: Rs. 48.76 per USD, is a Direct Quote for USD in India Indirect Quote in Forex market: Here, the value of the domestic currency in terms of foreign currency is shown. e.g.: Re 1 = 0.02 USD

Currency is a huge contributor to the total return of any international investment; so, naturally, falling foreign currency against the investors currency hurts its performance in the same way falling US Dollar benefits its return. For this reason, many investors have included foreign investments in their portfolio, recognizing its importance to the glob al economy. As shown in the graph, the Euro has recently plunged against the Dollar similar to the way it did in the 4th quarter of 2008 when the Dollar was globally relied on as a safety currency during the September credit crisis. In the years before, the Euro steadily rose against the Dollar. This recent Euro downturn has been caused by Greece's and other struggling Euro Countries economies under the Euro Currency, unlike in 2008.

Relevant Forex Terms

Nostro Vostro accounts. Letter of Credit. Usance Bill. Purchasing Power Parity. Interest Rate Parity. Risk of Foreign

Exchange.

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