Foreign

-Features

Exchange

In
Foreign
exchange
market
international currencies are traded
It is a market where banks,
companies,
exporters,
importers,
central banks of different countries buy
and sell foreign currency
Foreign exchange rates are quoted in
pairs
of
currencies
USD/INR,
GBP/INR.
Foreign currency transactions are
channeled through the world wide
interbank market

Market

Foreign Exchange Market Place of

operation
No physical place
Over the counter market- mainly over telephone
Forex market is an 24 hr, 365 days market uses
GMT to refer trading hours at different locations.
Day opens at Tokyo and Sydney
Day closes at los angels trading

Foreign
Exchange
-Participants
Bank and non bank
foreign exchange dealers
Foreign
exchange
brokers
Hedgers,
speculators,
and arbitrageurs
Central banks

firms
conducting
commercial
or
investment transactions

Market

Exchange Rate Settlement Mechanism

Cash transaction = Same day
Tom transaction = Next day
Spot transaction = 2 days
Forward transaction = Beyond spot date.
Different rates quoted n Foreign Exchange
Market
Interbank market rate also called Base rate
Merchant Rate 1.TT rates and 2. Bills rates

Foreign
Exchange
-settlement

Market

In an interbank Forex all transactions are done

electronically through SWIFT
SWIFT Society for World wide Interbank Financial
Telecommunication
It connects more than 8000 banks and financial
institutions operating in more than 200 countries
SWIFT provides a standardized messaging service to
these members and provides some kind of legitimacy
to the transactions

Foreign
Exchange
= Mechanism
INR 60.2450/2460

1USD
Bank would sell USD = INR 60.2460 (offer rate)
Bank would buy USD = INR 60.2450 (bid rate)
Offer rate- bid rate = Transaction cost + Profit
We cannot know whether the player is a buyer or
seller.
Direct Quote
Gives amount of the currency of that
country per unit of a foreign currency
INR 62.00 per USD
Indirect Quote
Number of units of a foreign currency
stated in home currency
USD 1.8560 per 100 INR

Rate

Spot Rate Quotations

European Terms
Quotes are given as number of units of a
currency per USD
EUR 0.7720 per USD, INR 61.75 per USD
American Terms
Quotes are given as number of USD per unit
of a currency
USD 1.6545 per GBP

Inter Bank Trading

Monday, Feb 5, 10.45 a. m
Bank A: Bank A calling. DLR - CHF 25
please
Bank B : Forty- Forty five
Bank A : Mine
Bank B :Ok I sell you USD 25 million against
CHF at 1.0545 value Feb. 7, UBS Geneva for
my CHF
Bank A : CITI Bank, NYK for my dollars.
Thanks and Bye.

Monday, Feb 5, 10.45 a. m

Bank A: Bank A calling. DLR - CHF 25
please[Bank A dealer is asking for Swiss Franc versus USD quote.
She specifies the deal size as it is more than the market lot of 10
million]

Bank B : Forty- Forty five

[Bank B is specifying two

way price knowing the caller is a Forex dealer as the full

quotation may be 1.0540/1.0545. Bank B will pay CHF 1.0540 its
bid rate when it buys USD and want to be paid CHF 1.0545 its
ask rate when it sells USD]

Bank A : Mine

[ I buy specified quantity at your specified

price, if she wished to sell USD, she might have told Yours]

Bank B :Ok I sell you USD 25 million against

CHF at 1.0545 value Feb. 7, UBS Geneva for
my CHF

Foreign
Exchange
Market

Market makers and market takers

Markets where currencies of different
countries are bought and sold
Market makers - who command in the
market
Market takers - who accept the price of the
market
They both change position continuously

Currency Pairs
SWIFT codes 3 letters are used
USD/CHF US dollar to Swiss Franc
USD/INR US dollar to Indian Rupee
First currency is the base currency
Second currency is the quoted currency
Bid and Offer Price
USD/CHF spot : 1.1550/1.1560

International Financial Management

Bloomberg Terminal

Mohanama

MBA2013, August 2014

Sample screen from Reuters EUR/INR

Forex traded currencies

Foreign
Exchange
-Instruments
Spot
Trades

Immediate purchase
and sale of foreign
currency
Outright forwards
Parties agree to buy
and
sell
foreign
currency at a future
specified time
FX Swaps - Parties
agree to Swap receipts
and payment
of
foreign currency over a
specified period
Currency Derivatives
Currency Swaps, FX
options.

Market

Applicability of TT rates
TT buying rate and selling rate
Inward remittances /outward remittances
TT, money transfers, Demand draft
Conversion proceeds of instruments
Import document received directly by the
importer.
Applicability of Bills rate
Bill buying rate
purchase/discount/negotiation of export bills
Bill Selling rate Transaction involving
remittance for import bills.

Why different rates are followed

for the same currency?....
Rates given by market makers depends upon
different factors
Position
Need
View
Sometimes who is the person trading
For better business interests market makers
always quote prevailing market rates.

Foreign
-Liquidity

Exchange

Market

In Foreign exchange market largest and

liquid financial market in the world
Liquidity is reflected by number of market
makers and number of trades
Participants in Forex market are large
commercial banks, currency speculators,
corporations,
governments,
financial
institutions, exporters and importers.

Factors affecting Foreign Exchange rate

Balance of Payment Exports- importscurrent account payment and receipts
Fiscal Policy
Interest rate
Money supply
Central bank intervention
Speculation
Expectation and traders behaviors