currency


The adoption of liberalization, privatization and globalization (LPG) models in the economical system in many countries of the world; there has been burgeoning increase in external transactions during the last four decades and turning interdependencies of the countries. The strange exchange market is the market in which currencies are bought and sold against each other. It is the large market in the world, over 1000 billion dollar were traded each day. The strange exchange market is an over-the-counter (OTC) market. It has no centralized forcible or electronic market place (like a stock exchange) with a cardinal trade clearing mechanism where traders encounter and exchange currencies. It is a world-broad network of inter-bank traders, dwelling chiefly of banks, connected by telephone lines and computer terminals and other electronic means of communication.

Why study strange trade?

Almost all the countries in the world trade themselves in goods and services, borrow and impart, put and acknowledge investments with other countries for their betterment of the economy. Foreign trade enables to access the scarce materials and administer them equally to all the nations. Trade among unlike nations is alike to that of domesticated trade, but the currency system in the domesticated trade is uniform and no difficulties involved. In case of strange trade the currency system is unlike and assigning the value for each currency is highly unlike and hard. Hence the study of strange trade can take the doubt and trim the risk of business.

Market structure and participants

The foreign exchange market is bifurcated into two categories that are retail market and whole-sale market.  Retail market is the market in which travelers and tourists exchange one currency for another in the form of currency notes or travellers’ cheques. The turnover and transaction size is very small and the spread between buying and selling prices is large. The whole-sale or inter-bank market in which the transaction size is very large, the participants are big in size. This can be explained with the help of the chart.

In the retail market, travellers and tourists exchange one currency for another. The wholesale market comprises of large commercial banks, foreign exchange brokers, central banks, multi-national banks and individuals and small business units. The commercial banks are the major players and serve their retail clients, the bank customers in conducting foreign trade and making investments in foreign countries. The banks maintain inter-bank market in foreign exchange directly and through inter-bank specialized foreign exchange brokers. The foreign exchange brokers act as agents who facilitate trading between dealers. The brokers actively and constantly monitor exchange rates and they disseminate the currency quote to the others.

The central bank is another important player that often intervenes in the market to maintain the exchange rate of their currencies within the prescribed limit. The multi-national corporations participating in the forward market, they are using this as a hedge tool, the future cash flows are protected through forward transactions. MNCs use forward contracts to hedge their imports and exports. They can lock in the rate at which they obtain a currency needed to purchase imports. Finally the individual and small business houses using foreign exchange market to facilitate execution of commercial and investment activities.

Forms of forex market

There are two forms of strange exchange market, that is, Spot market and Forward market. The most mutual type of strange exchange transaction is for contiguous exchange at the so named spot rate. The market where these transactions happen is known as the spot market. The forwards market facilitates the trading of forwards contracts on currencies. A forwards contract is an agreement between a corporation and a commercial bank to exchange a stipulated amount of a currency at a stipulated exchange rate on a stipulated date in the future. When MNCs anticipate a future receipt of a strange currency, they can put-up forwards contracts to lock in the rate at which they can purchase or clear a strange currency. The forwards contracts period are ranged in the form of 30, 60, 90,180, and 360 days, although other periods are uncommitted. The forwards rate may change with the length of the forwards period.

Exchange rate

The exchange rate systems can be classified according to the degree by which exchange rates are controlled by the government. The fixed exchange rate system, exchange rates are either held constant or allowed to fluctuate only within the prescribed boundaries stipulated by the central bank. Floating exchange rate system, the exchange rates are determined by market forces without intervention by governments. It adjusts on a continual basis in response to demand and supply conditions for that currency.

Conclusion

Foreign exchange takes place when buyers find foreign markets cheaper to buy in and sellers find them more profitable to dispose of their products than the domestic market. Foreign exchange gives us to strengthen the business as well as the economy of the country.