The document discusses foreign exchange rates and the foreign exchange market. It provides definitions of key terms like exchange rate, spot rate, and forward rate. It describes the functions and key characteristics of the foreign exchange market, including that the daily global turnover is over $2 trillion and the US dollar is involved in 87% of transactions. It also outlines the different types of transactions that occur in the market and identifies the major participants, including banks, companies, speculators, central banks, and foreign exchange brokers.

1. Foreign exchange rate
A.VINOD
ITM,BATCH :7

2. Coverage
Foreign Exchange rate
Functions of F X market
Characteristics of F X market
Indian Foreign exchange system
Types of Transactions
Market Participants

3. Foreign exchange rate
An exchange rate (also known as the foreign-exchange rate, forex rate or
FX rate) between two currencies is the rate at which one currency will be
exchanged for another. It is also regarded as the value of one country’s
currency in terms of another currency.
FX rate can be spot rate as well as forward rate.
The spot exchange rate refers to the current exchange rate. The forward
exchange rate refers to an exchange rate that is quoted and traded today but
for delivery and payment on a specific future date.

4. The foreign exchange market is the mechanism by
which participants:
transfer purchasing power between countries;
obtain or provide credit for international trade
transactions, and
minimize exposure to the risks of exchange rate
changes.
Functions of FX Market

5. Characteristics of FX Market
 Largest of all financial markets with average daily
turnover of over $2 trillion!
 66% of all foreign exchange transactions involve cross-
border counterparties.
 Only ≈11% of daily spot transactions involve non-
financial customers.
 London is the largest FX market.
 US dollar involved in 87% of all transactions.

6. Increasing Turnover
Daily foreign exchange market turnover in billions of US dollars
(Bank for International Settlements Triennial Central Bank Survey 2008)

7. 7
A Spot transaction in the interbank
market is the purchase of foreign
exchange, with delivery and payment
between banks to take place, normally,
on the second following business day.
The date of settlement is referred to as
the value date.
Types of Transactions

8. 8
An outright forward transaction (usually called just
“forward”) requires delivery at a future value date of a
specified amount of one currency for a specified amount of
another currency.
The exchange rate is established at the time of the
agreement, but payment and delivery are not required
until maturity.
Forward exchange rates are usually quoted for value dates
of one, two, three, six and twelve months.
Buying Forward and Selling Forward describe the same
transaction (the only difference is the order in which
currencies are referenced.)
Types of Transactions

9. 9
A swap transaction in the interbank market is the
simultaneous purchase and sale of a given amount of
foreign exchange for two different value dates.
Both purchase and sale are conducted with the same
counterparty.
Some different types of swaps are:
spot against forward,
forward-forward,
nondeliverable forwards (NDF).
Types of Transactions

10. 10
The foreign exchange market consists of two tiers:
the interbank or wholesale market (multiples of $1M US or
equivalent in transaction size), and
the client or retail market (specific, smaller amounts).
Five broad categories of participants operate within these
two tiers: bank and nonbank foreign exchange dealers,
individuals and firms, speculators and arbitragers, central
banks and treasuries, and foreign exchange brokers.
Market Participants

11. 11
Banks and a few nonbank foreign exchange dealers operate in
both the interbank and client markets.
They profit from buying foreign exchange at a “bid” price and
reselling it at a slightly higher “offer” or “ask” price.
Dealers in the foreign exchange department of large
international banks often function as “market makers.”
These dealers stand willing at all times to buy and sell those
currencies in which they specialize and thus maintain an
“inventory” position in those currencies.
Market Participants

12. 12
Individuals (such as tourists) and firms (such as importers,
exporters ) conduct commercial and investment
transactions in the foreign exchange market.
Their use of the foreign exchange market is necessary but
nevertheless incidental to their underlying commercial or
investment purpose.
Some of the participants use the market to “hedge” their
foreign exchange risk.
Market Participants

13. 13
Speculators and arbitragers seek to profit from trading in
the market itself.
They operate in their own interest, without a need or
obligation to serve clients or ensure a continuous
market.
While dealers seek the bid/ask spread, speculators seek
all the profit from exchange rate changes and arbitragers
try to profit from simultaneous exchange rate differences
in different markets.
Market Participants

14. 14
Central banks and treasuries use the market to acquire or spend
their country’s foreign exchange reserves as well as to influence
the price at which their own currency is traded.
They may act to support the value of their own currency because
of policies adopted at the national level or because of
commitments entered into through membership in joint
agreements such as the European Monetary System.
The motive is not to earn a profit as such, but rather to influence
the foreign exchange value of their currency in a manner that will
benefit the interests of their citizens.
As willing loss takers, central banks and treasuries differ in motive
from all other market participants.
Market Participants

15. Indian foreign exchange system
India’s FX rate system was on the fixed rate model till the 90s,
when it was switched to floating rate model. Fixed FX rate is the
rate fixed by the central bank against major world currencies like
US dollar, Euro, GBP, etc. Like 1USD = Rs. 50. Floating FX rate
is the rate determined by market forces based on demand and
supply of a currency.