Primary dealers quote two-way prices and are willing to deal either side, i.e. they buy and sell the base currency up to conventional amounts at those prices. However, in interbank markets this is a matter of mutual accommodation. A dealer will be shown a two-way quote only if he / she extends the privilege to fellow dealers when they call for a quote. Communications between dealers tend to be very terse. A typical spot transaction would be dealt as follows: BANK A : “ Bank A calling. Your price on mark — dollar please.” BANK B : “ Forty forty eight.” BANK A : “ Ten dollars mine at forty eight.” Bank A dealer identifies and asks himself for B’s DEM/USD. Bank A is dealing at 1.4540/1.4548. The first of these, 1.4540, is bank B’s price for buying USD against DEM or its bid for USD; it will pay DEM Continue reading
Forex Investments
Factors Affecting the Forex Market
The exchange value of a currency, or the rate of exchange, fluctuates with changes in demand and supply. The factors which affect the demand for and the supply of a currency are many and varied. There are some factors which operate in the short period and have influence on day-to-day- fluctuations in rates of exchange. The commercial and financial relationship between trading countries is now extensive and payments on various accounts fall, due for early settlement. These payments constitute the short-term demand and supply in regard to currencies. There are, however, changes in currency and credit conditions and political and industrial conditions which have their influence on exchange rates only in the long period. The factors affecting Forex market may be summarized thus: Short Term Factors Affecting the Forex Market 1. Commercial Factors One of the important factors influencing the demand for and supply of currencies is trade in merchandise, Continue reading
Forex transactions in interbank markets
The exchange rates quoted by banks to their customer are based on the rates prevalent in the interbank market. The big banks in the market are known as market makers, as they are willing to buy or sell foreign currencies at the rates quoted by them up to any extent. Depending buy or sell foreign currencies at the rates quoted by them up to any extent. Depending upon its resources, a bank may be a market maker in one or few major currencies. When a banker approaches the market maker, it would not reveal its intention to buy or sell the currency. This is done in order to get a fair price from the market maker. Two Way Quotations Typically, the quotation in the interbank market is a two — way quotation. It means the rate quoted by the market maker will indicate two prices. One at which it is Continue reading
Spot and Forward Foreign Exchange Rates
There are two types of foreign exchange rates, namely the spot rate and forward rates ruling in the foreign exchange market. The spot rate of exchange refers to the rate or price in terms of home currency payable for spot delivery of a specified type of foreign exchange. The forward rate of exchange refers to the price at which a transaction will be consummated at some specified time in future. In modern times the system of forward rate of foreign exchange has assumed great importance in affecting the international capital movements and foreign exchange banks play an important role in this respect by matching the purchases and sales of forward exchange on the part of would be importers and would be exporters respectively. The system of forward foreign exchange rate has actually been developed to minimize risks resulting from the possibility of fluctuations over time in the spot exchange rate Continue reading
Use of Forex Futures
Forex futures are futures markets where the underlying commodity is a foreign currency. Foreign currency futures are essentially the same as all other futures markets (index and commodity futures markets), and are traded in exactly the same way. Forex futures markets trade futures contracts that reflect the exchange rates of two currencies. For example, the most popular currency futures market is the EUR futures market, which is based upon the Euro to US Dollar exchange rate. Hedging with Forex Futures Tenders make use of the market for forex futures/foreign currency futures in order to hedge their foreign exchange risk. For instance suppose a US importer importing goods from India for 1 million Rupees and he needs this amount for making payment to the exporter. He will purchase Rupee at a future settlement date. By holding a futures contact, the importer does not have to worry about any change in Continue reading
History of Forex Market in India
Until the early seventies, given the fixed rate regime, the foreign exchange market was perceived as a mechanism merely to put through merchant transactions. With the collapse of the Breton Woods agreement and the floatation of major currencies, the conduct of exchange rate policy posed a great challenge to central banks as currency fluctuations opened up tremendous opportunities for market players to trade in currency volatilities in a borderless market. The market in Indian, however, remained insulated as exchange rate controls inhibited capital movements and the banks were required to undertake cover operations and maintain a square position at all times. Slowly a demand began to build up that banks in India be permitted to trade in FOREX. In response to this demand the RBI, as a first step, permitted banks to undertake intra-day trade in FOREX in 1978. As a consequence, the stipulation of maintaining square or near square Continue reading