CHAPTER 3 FUNCTIONAL OVERVIEW OF INTERNATIONAL BANKING

FOREIGN EXCHANGE MARKET

Market generally indicates a geographical location preferred for trading which facilitates
trade by providing means of settlement and resolution of disputes.
It may be defined as meetings or systematic communication by telephone , telex or other
electronic means between foreign exchange dealers , brokers and banks for the purpose of
transacting foreign exchanges.i.e foreign currencies.
STRUCTURE OF FOREIGN EXCHANGE MARKET
It may be classified into two layers:
Wholesale market
Retail market
1. Wholesale market :- The wholesale market is also called interbank market. The size of
transactions in this market is very large. Dealers are highly professionals and are primary
price makers. The main participants are Commercial banks, Business corporations and
Central banks. Multinational banks are mainly responsible for determining exchange rate.
is again divided into two i.e
Giant Transactions Layer
Other Transactions Layer
GIANT TRANSACTIONS LAYER
Very large giant commercial banks of the world deal in foreign exchange for their
customers as well as for themselves.
They buy and sell different currencies and also stock these currencies with an expectation
to sell it at a future date to make profits.
Thus commercial banks may be said to carry inventories of the currencies these giant
banks usually transact directly with each other ,i.e.they generally would not use any
broker.
To buy or sell currency with a motive to make a profit at a future date with the reverse
transaction called as taking position in the currency.
Hence these commercial banks are called as market makers.
OTHER TRANSACTIONS LAYER
Other Transaction Layer slightly smaller commercial bank transact in a similar fashion as
giant commercial Bank.
It is a smaller exposure to foreign currency compare to giant transaction layer.
Most of the business entities take positions in the foreign exchange market according to
their business activities ie Export,imports,capital investment.

INTERNATIONAL BANKING AND FINANCE

 Some giant entities also take position purely to make profit out of foreign exchange
activity.
As majority of the deals in wholesale market is between the banks, it is called as
Interbank market.
Role Of Brokers
Commercial Banks are the major player in the market
1. Generally used by the brokers to seek the information about the market efficiently.
2. This bank deal with each other as well as giant bank.
3. Brokers are not market makers they act as middle man between the two market makers.
4. Brokers provide the information to market making banks about prices at which they are
firm buyers and sellers in a pair of currencies.
2. Retail Market:
Retail market is the market in which the travelers and tourists exchange one currency for
another in the form of currency notes or travelers cheques. Total turnover and transactions
size is very small.
STRUCTURE OF FOREIGN EXCHANGE MARKET IN INDIA
It may be broadly said to have three segments or layers.
First Layer:- Consists of the central bank RBI and Authorized Dealer(ADs).Ads are
mostly commercial banks and Financial Institution such as IDBI,ICICI ..etc.
Second Layer:- is the interbank segment in which Ads deal with each other.
Third Layer:- is in which Ads deal with their corporate customer.
In retail market in addition to Ads there are moneychangers who are allowed to deal
in foreign currencies .
Fully fledged money changers are allowed to deal in foreign currencies.

INTERNATIONAL BANKING AND FINANCE