.
PRESENTED BY,
PRAJITHA.P.P 4th sem M.COM DCMS
FOREIGN EXCHANGE MARKETS, FOREIGN EXCHANGE TRADINGS, PARTICIPANTS, SWIFT.
Foreign Exchange Regulation Act ,1973(FERA) defines foreign exchange as foreign currency and includes all deposits ,credits and balance payable in any foreign currency and any drafts, traveler's cheques ,letters of credits and bills of exchange , expressed or drawn in Indian currency ,but payable in any foreign currency.
The foreign exchange market is a market where foreign currencies are bought and sold. The foreign exchange market is an over the counter market. It does not denote a particular place or floor where dealers assemble and transact foreign currencies. Rather , it consist of trading desks at major agencies dealing in foreign exchange throughout the world that are connected by telephone, telex etc.
Foreign exchange dealers are spread all over the globe, the time of transaction differs from one place to another depending upon the longitude of the place. The currencies are transacted in the foreign exchange markets are normally the strong ,stable and convertible currencies which are in great demand because of their strength stability and convertibility. The foreign exchange market is not a single physical place, rather it is defined as a market where the various national currencies are bought and sold.
The market where one currency is traded for another is called foreign exchange market. The foreign exchange transactions are derived from the transactions in the market for commodities , services or assets among the people of two nations. The foreign exchange market has two segments that are spot market and forward market.
a) SPOT MARKET : The market where the purchase and sale of currencies is contracted for spot delivery is called the spot market. Spot delivery means the delivery after two days the spot contract is closed. The term spot exchange refers to the class of foreign exchange transactions which requires immediate delivery or exchange of currencies on the spot . The rate of exchange effective for the spot transaction is known as the spot rate and the market for such transaction is known as the spot market.
(b) FORWARD MARKET :
The forward transaction is an agreement between two parties, requiring the delivery at some specified amount of foreign currency by one of the parties , at the price agreed upon in the contract. The rate of exchange applicable to the forward contract is called the forward exchange rate and the market for forward transactions is known as the forward market.
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Transfer of purchasing power: the primary function of a foreign exchange market is the transfer of purchasing power from one country to another and from one currency to another. Provision of credit: the credit function performed by foreign exchange market also plays a very important role in the growth of foreign trade, for international trade depends to a great extent on credit facilities. Provision of hedging facilities: hedging refers to covering of export risks, and it provides a mechanism to exporters and importers to guard themselves against losses arising from fluctuations in exchange rates.
(4) Minimising Risks : the foreign exchange market help the importers and exporters in the foreign trade to minimise their risks of trade. This is being done through the provision of hedging facilities. (5) Intermediary : foreign exchange market provides a convenient way of converting the currencies earned into currencies wanted of their respective countries. For this purpose, the market acts as an intermediary between buyers and sellers of foreign exchange.
1. Retail market The retail foreign exchange market is a secondary price maker where in travelers, tourists and people who are in need of foreign currency carry out small permitted transactions. 2. Wholesale market The wholesale foreign exchange market is also called the interbank market where in large transactions of foreign exchange are carried out. The dealers in this market are highly professional and are the primary price makers.
The exchange rate is simply the price of one currency in terms of another, and there are two methods of expressing it; (a) Domestic currency units per unit of foreign currency. (b) foreign currency units per unit of the domestic currency.
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Nominal exchange rate : the exchange rate that prevails at a given date is known as the nominal exchange rate. Real exchange rate : it is the nominal exchange rate adjusted for relative prices between the countries under consideration. Effective exchange rate : it is a measure of whether or not the currency is appreciating or depreciating against a weighted basket of foreign currencies.
A Quotation is the amount of a currency necessary to buy or sell a unit of another currency. When it is expressed in currency terms it is called out right rate. TYPES; (1) Direct and Indirect Quotes (a) Direct Quotes : the direct quote is a unit of foreign currency is quoted in terms of domestic currency. (b) Indirect Quote : a unit of domestic currency is expressed in terms of foreign currency.
(2) Interbank Quotation These are the foreign exchange quotations stated by and among the banks trading foreign exchange. Such quotations take the form of expressing the foreign currency price of one dollar or expressing dollar price of a unit of foreign currency. most of interbank quotations are stated in European terms. (3) Bid Quotation A quotation in one currency at which a dealer will buy another currency is known as bid quotation. Usually the bid price is lower than the offer price.
Eg ; A banks foreign exchange dealer will buy dollar at the bid price of say , Rs : 46/1 $. (4) Ask Quotation A quotation in one currency at which a dealer will sell another currency is known as Ask quotation. This is usually higher than the bid price.
The foreign exchange market is a world wide market and is made up primarily of commercial banks, foreign exchange brokers and other authorized agents trading in most of the currencies of the world. The participants in the foreign exchange markets are individuals, firms, banks, governments, and occasionally the international agencies. Thus there are two tiers in the foreign exchange market ;
(a) One tier involves the transaction between ultimate customers and the banks while the other tier consist of the transaction between banks. (b) The second tier of the market that accounts for the largest segment of the total foreign exchange transactions in the market. The participants may be grouped also according to their foreign exchange transactions as follows: 1 ) Non banking entities which simply exchange currencies to honour their obligations or to get the desired currency.
2) Non banking entities such as traders that use the foreign exchange market for the purpose of hedging their foreign exchange exposure on account of changes in the exchange rate. 3) Banks which exchange currencies on behalf of their customers. In such cases , their profit is limited to the amount of spread between the bid and the ask rates. 4) Arbitrageurs who change currencies because of varying rates of exchange in different markets. The varying rates are the source of their profit. 5) Speculators who buy or sell currencies when they expect movement in the exchange rate in a particular direction.
Main participants
The main participants in the foreign exchange market can be categorized as follows: (a) Retail clients : these are made up of businesses, international investors, multinational corporations and the like who need foreign exchange for the purpose of operating their businesses. (b) Commercial banks : the commercial banks carryout buy or sell orders from their retail clients and buy or sell currencies on their own account, so as to alter the structure of their assets and liabilities in different currencies. (c) Foreign exchange brokers : often banks do not trade directly with one another, rather they offer to buy and sell currencies via foreign exchange brokers.
operating through such brokers is advantageous because they collect buy and sell quotations for most currencies from many banks, so that the most favorable quotation is obtained quickly and at very low cost. one disadvantage of dealing through a broker is that a small brokerage fee is payable which is not incurred in a straight bank to bank deal. d) Central banks : central banks frequently intervene to buy and sell their currencies in a bid to influence the rate at which their currency is traded.
a) Traders : traders are spot and forward markets to eliminate the risk of loss of value of export or import orders that are denominated in foreign currencies. b) Arbitrageurs : this class of participants seek to earn risk free profits by seeking advantage of differences in prices of currencies in interest rates among countries. c) Hedgers : many multinational firm engage themselves in forward contract to protect the home currency values of foreign currency denominated assets and liabilities on their balance sheet that are not to be realized over the life of the contract.
d) Speculators : the class of participants, actively expose themselves to currency risk by buying and selling currencies in the forward market to profit from the exchange rate fluctuation. The speculators keep their positions open. e) Banks : the banks participate in the foreign exchange market for various reasons. When the banks keep their positions open, they are speculating and become speculators. The banks also appear as hedgers when they hedge their positions. f) Government : the participation of the government in the foreign exchange markets for stabilizing the exchange rates is very important activity because these activities infuse confidence in the functioning of foreign exchange markets.
one of the important implications deriving from the close communication of buyers and sellers in the foreign exchange market is that there is almost instantaneous arbitrage across currencies and financial centres. Arbitrage is the exploitation of price differentials for riskless guaranteed profits. Types of arbitrage are the following :
Financial centre arbitrage : This type of arbitrage ensures that the dollar pound exchange rate quoted in New York will be the same as that quoted in London and other financial centre's. Cross currency arbitrage : Buying currency in one market and selling different markets at a different rates is called Cross currency arbitrage
INTRODUCTION : Foreign exchange trading is typically done through a broker or market maker. As a foreign exchange trader can choose a currency pair that expect to change in value and place a trade accordingly. Orders can be placed with just a few clicks and the broker then passes the order along to a partner in the inter bank market to fill the position.
Trade between two or more nations is called foreign exchange trade or international trade. This involves the exchange of goods and services between the citizens of two nations. When the citizens of one nation exchange goods and services with the citizens of another nations is called foreign trade. The foreign trade is also known as external trade. The foreign exchange transactions are classified under three categories as import trade, export trade and entrepot trade .
The aim of foreign trade is to increase production and to raise the slandered of living of the people. There is a need of foreign trade due to the following reasons : 1) Uneven Distribution of Natural Resources 2) Division of Labour and Specialization 3) Differences in Economic Growth Rate
One of the basic concepts will have to comprehend in order to understand foreign exchange currency trading is that the currency trading is always conducted in pairs as currencies are quoted in pairs themselves. A currency pair is a quote that lists one currency abbreviation as first and the another currency abbreviation as second, the first abbreviation is the base currency where the second abbreviation is the counter or quote currency.
Foreign exchange trading strategy that are available for free by the books as they are the sole views of the innovator or the writer and they might not be able to be comprehended correctly or they might not be able to implement as they were initially thought of from their author. The goal of trader should be able to build up and shape their own strategy that will allow to maintain flexibility to learn, improve and sustain both losses and profits.
The foreign exchange trading rates are the prices for which the global foreign exchange market has been shaped based on political, financial and supply and demand law pressures to present rates at which traders of world currencies are willing to give up certain amount of currencies for a certain amount of a different currencies. some of unique features of its are : a)Extended trading b) Increased profit opportunities c) Analyzing major currencies d) Guidance and support
SWIFT means Society for Worldwide Interbank Financial Telecommunication. It operates a worldwide financial messaging network which exchanges messages between banks and other financial institutions. SWIFT also markets software and services to financial institutions, much of it for use on the SWIFT net network, and ISO 9362 bank identifier codes (BICs) are popularly known as SWIFT 'codes.
The majority of international interbank messages use the SWIFT network. SWIFT linked more than 9000 financial institutions in 209 countries and territories, who were exchanging an average of over 15 million messages per day. SWIFT is a cooperative society under Belgian law and it is owned by its member financial institutions. SWIFT has offices around the world. SWIFT had quarters designed by Ricardo Bofill Taller de Architectura are located in La Hulpe, Belgium, near Brussels.
It was founded in Brussels in 1973, supported by 239 banks in 15 countries. It started to establish common standards for financial transactions and shared data processing system and world wide communication network designed by Logica. Fundamental operating procedures, rules for liabilities etc, were established in 1975 and the first message was sent in 1977.
SWIFT has become the industry standard for syntax in financial messages. Messages formatted to SWIFT standards can be read by, and processed by, many well known financial processing systems, whether or not the message actually traveled over the SWIFT network. SWIFT operates with international organisation for defining standards for message format and content. SWIFT is also Registration Authority for the following ISO standards;
ISO 9362 : 1994 Banking Banking communication messages, Bank identifier codes. ISO 10383 : 2003 Securities and related financial instruments for exchanges and market identification. ISO 1361 : 2003 IBAN Registry. ISO 15022 : 1999 Securities scheme for messages (Data field Dictionary)(replaces ISO 7775). ISO 20022 : 2004 and ISO 20022, 2007 financial services Universal Financial Industry Message Scheme.
The SWIFT secure messaging network is run from two redundant data centers, one in the United States and one in the Netherlands. These centers share information in near real time. In case of a failure in one of the data centers, the other is able to handle the traffic of the complete network. Currently SWIFT has opened a third data center in Switzerland, which started operating in 2009.
since then data from European SWIFT members will no longer be mirrored to the US data center, also called Distributed Architecture will partition messaging into two zones, the European messaging zone and the Trans. Atlantic messaging zone European zone messages are stored in the Netherlands and in a part of the Switzerland operating center, Trans Atlantic zone messages are stored in the US and in a part of the Switzerland operating center that is segregated from the European zone messages.
SWIFT moved to its current IP Network infrastructure , known as SWIFT Net, from 2001 to 2005 , provide a total replacement of the previous x.25 infrastructure(x.25 is an ITU-T standard protocol suite for packet switched Wide Area Network Communication) International Telecommunication Union. The process involved the development of new protocols that facilitate efficient messaging, using existing and new messages standards. The communication protocol can be broken down into Inter Act, File Act.
SWIFT provides a centralised store and Forward mechanism, with some transaction management. For bank A to send a message to bank B with a copy or authorization with institution C, it formats the message according to standard, and securely sends it to SWIFT. SWIFT guarantees its secure and reliable delivery to B after the appropriate action by C. SWIFT guarantees are based primarily on high redundancy of hardware, software and people
During 2007 and 2008, the entire SWIFT Network migrated its infrastructure to a new protocol called SWIFT phase 2. The main difference between phase 2 and the former arrangement in that phase 2 requires bank connecting to the network to use a Relationship Management Application(RMA) instead of the former Bilateral Key Exchange(BKE) system.
According to SWIFT s public information database on the subject, RMA software should eventually prove more secure and easier to keep up to date; however, converting to the RMA system also meant that thousands of banks around the world had to up date their international payments system in order to comply with the new standards . RMA completely replaced BKE since 1 January 2009.
SWIFT SERVICES Securities : Debt securities, Equity securities. Treasury : A government department related to finance and taxation. A place where currency or precious items are kept. Derivatives : it is a contract between two parties that specifies conditions under which payments or pay offs, are to be made between the parties. Trade services and payments Cash management.
SWIFT also offer a secure person to person messaging service, SWIFT Net Mail , which went live on 16 may 2007. SWIFT clients can configure their existing e mail infrastructure to pass e mail messages through the highly secure and reliable SWIFT Net Mail is intended for the secure transfer of sensitive business documents, and is designed to replace existing telex and courier services,
as well as the transmission of security sensitivity data over the open intent. Eight financial institutions including HSBC, First Rand Bank, Clear Stream, DnB, NOR, Need Bank, Standard Bank of South Africa and Bear Stearns, as well SWIFT piloted the service.
The foreign exchange market is a market where foreign currencies are bought and sold. It is an over the counter market. It operates round the market. The participants are the real customers , such as the individuals and the firms who have to actually exchange one currency for another. Trade between two or more nations are called foreign exchange trade. The SWIFT is a communication pertaining to international financial transactions are handled mainly by a large network.
Keith Pilbeam- International Finance, second edition. V. Sharan- International Financial Management 3rd edition, Prentice Hall India pvt ltd , New Delhi P.G.Apte -International Financial Management ,3rd edition Tata Mc Graw Hill publishing company ltd , New Delhi. A.K.Seth- International Financial Management Galgotia Publishing company, New Delhi. Dr.S.Guruswamy - Financial Markets and Institutions 3rd edition Tata Mc Graw Hill Education pvt ltd, New Delhi. WWW.Google.com
