IBP

F O R E I G N

E X C H A N G E

M A R K E T By Gurudeep

MBA- 1st yearSection B

What is on the track ?

• Introduction on Forex Market•Functions of Forex Market•Trading i.e Participants •Rate Determination•Currency convertabily

Who am I ?

•Exchange A < --- > B

• Foreign Exchange Market

•Exchange Rate

•Foreign exchange risk

The need of such market arises because of

• Tourism• Buying and Selling Goods Internationally• Invest across international boundaries

Functions of Forex Market

• 3 main functions are – to transfer the purchasing power between the

countries.– Converting currencies.– Reducing Forex Risk.

Trading – Participants in FEM

•All Scheduled Commercial Banks (Authorized Dealers only).•Reserve Bank of India (RBI).•Corporate Treasuries.•Public Sector/Government.•Inter Bank Brokerage Houses.•Resident Indians•Non Residents•Exchange Companies•Money Changers

Determination of Exchange Rate

• It is determined by the equilibrating interaction of buyers and sellers of currencies in the FOREX market: demand and supply determine exchange rates.– Demand for a currency for making payments for

foreign trade and capital flows.– Supply of a currency, during foreign trade.

Exchange Rate Equilibrium

e

D

DS

S

Quantity of Rupees

Value of Rupees

ERE can be determined by 2 methods

• SS for FE arises because – Country exports goods and services to other countries– Payment made by other countries– Inflows.

• DD for FE arises because – Imports and goods and services– Payment of one government to another for

settlement of transactions.– Outflows.

Currency Convertibility

• Companies receiving payment in foreign currencies need to convert these payments to their home currency.

• Companies paying foreign businesses for goods or services

• Companies investing spare cash for short terms in money market accounts

• Companies taking advantage of changing exchange rates

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