SEMINAR ON FOREIGN EXCHANGE

MARKET MECHANISM

Sub to – Dr Shavina Goyal Sub by – Amarveer Kaur

MBA 1st C
18421147
 Foreign exchange market
It is a market where currencies of one country is traded for
currency of another country. The foreign exchange is a money
of foreign country in the form of bank notes, drafts, and
cheques .
“It is an over the counter market which means that there is
no physical place where currencies are traded.”
History of foreign exchange
Foreign exchange market can be viewed as a series of
solutions that allowed countries to issue their own currency
and to conduct their own monetary policy while also allowing
international trade to be conducted by providing a means of
exchanging one currency for another according to the
exchange rate between them which was either agreed upon
or set by market.
Features of foreign exchange market
• Volatile affected by hedger, arbitrager and speculator
• Affected by demand and supply
• Affected by rate of interest
• Affected by balance of payment deficit and surplus
• Affected by inflation rate
• Spot and forward rates are different
• Affected by the economic stability of the country
• Affected by fiscal policy of the government
• Affected by the political conditions of the country
• It can be quoted directly or indirectly
Concept of exchange rate or ways of quoting
exchange rate

Quoting exchange
rate

Direct quote Indirect quote

(Rs. Per dollar is (Dollar per rupee
69.22) is 0.014)
Types of foreign exchange market

Types

Spot market Forward market

Structure of foreign exchange market
Foreign exchange
market

Retail Wholesale

Interbank Direct

Forward Spot Derivative

Non
Merchandise
merchandise
Foreign exchange rate regime
It refers to the set of policies, agreements, mechanism and
roots for determination of exchange rate at given point of
time. It includes :

Fixed exchange rate system

Flexible exchange rate system

Fixed exchange rate system : It provides greater
certainty for exporters and importers. It includes :
• Currency board system
• Dollarization
• Target zone
• Currency basket
Flexible exchange rate system : Flexible exchange rate
changes frequently and are determined by trading in forex
market. It includes:

• Free float
• Managed float
Foreign exchange control system in India
• Foreign Exchange Regulation Act (FERA) , 1973 was replaced
by the market friendly Foreign Exchange Management Act
(FEMA) , 1999.
• Money and Securities market set up by the Reserve bank in
1999 was expanded in 2004 to include foreign exchange
markets.
Foreign exchange market participants

• Central banks
• Commercial banks
• Foreign exchange brokers
• Non-banking entities
IMF and its relation to foreign exchange
market
• The international monetary fund and the foreign exchange
market are linked in the global marketplace. A related
concept of the IMF is the FOREX which aims to manage and
oversee the trading of foreign exchange of major currencies.
• The IMF aims to promote monetary cooperation, stabilize
foreign exchange rates, facilitate international business ,
reduce poverty and extend assistance to members having
balance of payment difficulties. And the FOREX aims to
manage and oversee the trading of foreign exchange of
major currencies.
Microeconomics and foreign exchange market
There are some factors affecting the foreign exchange market:

• Inflation rates
• Interest rates
• Balance of payment position
• Government debt
• Terms of trade
• Political stability and performance
• Recession
• Speculation
Conclusion
Thank you