SUMMARY

The foreign exchange market is the mechanism by which a person of firm transfers

 purchasing power form one country to another, obtains or provides credit for international trade
transactions, and minimizes exposure to foreign exchange risk. A foreign exchange transaction is an
agreement between a buyer and a seller that a given amount of one currency is to be delivered at a
specified rate for some other currency. A foreign exchange rate is the price of a foreign currency. A
foreign exchange quotation

 or quote is a statement of willingness to buy or sell at an announced rate. The foreign exchange
market consists of two tiers: the interbank or wholesale market, and the client or retail market.
Participants include banks and nonbank foreign exchange dealers, individuals and firms conducting
commercial and investment transactions, speculators and arbitragers, central banks and treasuries, and
foreign exchange brokers. Transactions are effectuated either on a spot basis or on a forward or swap
basis. A spot

 transaction is for an (almost) immediate value date while a forward transaction is for a value date
somewhere in the future. Quotations can be classified either as European and American terms or as
direct and

 indirect quotes. In the real world, quotations include a bid-ask spread. A bid is the exchange rate in
one

 currency at which a dealer will buy another currency. An ask is the exchange rate at which a dealer
will sell the other currency. The spread is the difference between the bid price and the ask price. This
spread reflects the existence of commissions and transaction costs. A cross rate is an exchange rate
between two currencies, calculated from their common

 relationship with a third currency.

 Why the foreign Exchange Market is Unique?

 its huge trading volume representing the largest asset class in the world leading tohigh 6
liquidity; its geographical dispersion;
 its continuous operation: 24 hours a day except weekends, i.e. trading from 20:15 GMT
 on Sunday until 22:00 GMT Friday; the variety of factors that affect exchange rates;
 the low margins of relative profit compared with other markets of fixed income; and
 the use of leverage to enhance profit and loss margins and with respect to account size.
 As such, it has been referred to as the market closest to the ideal of perfect
 competition ,notwithstanding currency intervention by central banks. According to the
Bank for International Settlements, as of April 2010, average daily turn overin global foreign
exchange markets is estimated at $3.98 trillion, a growth of approximately 20% over the
$3.21 trillion daily volume as of April 2007. Some firms specializing on foreign exchange
market had put the average daily turnover in excess of US$4 trillion. The $3.98 trillion
break-down is as follows:
 $1.490 trillion in spot transactions $475 billion in outright forwards $1.765 trillion in
foreign exchange swaps
 7. 7 $43 billion currency swaps $207 billion in options and other product.
 ADVANTAGES AND DISADVANTAGES OF FOREIGN
EXCHANGE MARKET.

Advantages

The forex market is extremely liquid, hence its rapidly growing popularity. Currencies

 may be converted when bought or sold without causing too much movement in the price and
keeping losses to a minimum. As there is no central bank, trading can take place anywhere in the
world and operates on

 a 24-hour basis apart from weekends. An investor needs only small amounts of capital compared
with other investments. Forex

 trading is outstanding in this regard. It is an unregulated market, meaning that there is no trade
commission over seeing

 transactions and there are no restrictions on trade. In common with futures, forex is traded using a
“good faith deposit” rather than a loan.

 The interest rate spread is an attractive advantage.

Disadvantages

The major risk is that one counterparty fails to deliver the currency involved in a very

 large transaction. In theory at least, such a failure could bring ruin to the forex market asa whole.

Investors need a lot of capital to make good profits because the profit margins on small-scale 8
trades are very low.
 Various participants Of foreign Exchange Market:

Governments: Governments have requirements for foreign currency, such as paying staff
salaries and local bills for embassies abroad, or for arraigning a foreign currency credit line,
most often in dollars, for industrial or agricultural development in the third world, interest on
which ,as well as the capital sum, must periodically be paid. Foreign exchange rates concern
governments because changes affect the value of product and financial instruments, which
affects the health of a nation’s markets and financial systems.

Banks: There are different types of banks, all of which engage in the foreign exchange
market to greater or lesser extent. Some work to signal desired movement in the market
without causing overt change, while some aggressively manage their reserves by making
speculative risks. The vast majority, however, use their knowledge and expertise is assessing
market trends for speculative gain for their clients

Brokering Houses: These exist primarily to bring buyer and seller together at a mutually
agreed price. The broker is not allowed to take a position and must act purely as a liaison.
Brokers receive a commission from both sides of the transaction, which varies according to
currency handled. The use of human brokers has decreased due mostly to the rise of the
interbank electronic brokerage systems

International Monetary Market: The International Monetary Market (IMM) in Chicago

trades currencies for relatively small contract amounts for only four specific maturities a year.
Originally designed for the small investor, the IMM has grown since the early 1970s, and the
major banks, who once dismissed the IMM, have found that it pays to keep in touch with its
developments, as it is often a market leader

Retail Clients: This includes smaller companies, hedge funds, companies specializing in
investment services linked by foreign currency funds or equities, fixed income brokers, the
financing of aid programs by registered worldwide charities and private individuals. Retail
investors trade foreign exchange using highly leveraged margin accounts. The amount of
their trading in total volume and in individual trade amounts is dwarfed by the corporations
and inter bank markets.

Central Bank : External value of the domestic currency is controlled and assigned by central
bank of every county. Each country has a central or apex bank. For example In India Reserve
Bank of India is the central Bank

CONCLUSION

The foreign monetary exchange market is the biggest financial market in the world. Bigger than the
New York Stock Exchange and Futures Market combined. And with reduced "buy-in" limits now,
even small-time players can join the Forex trading marketplace. That doesn't mean everyone should
join, however. Buying an auto-trading program sold to you with the promise of making you millions
probably won't. In fact, it may cost you everything you own. The only way to win in Forex trading is
the good, old-fashioned way - hard work and as olid understanding of the market. One has to be clued
in to global developments, trends in world trade as well as economic indicators of different countries.
These include GDP growth, fiscal and monetary policies, inflows and outflows of the currency, local
stock market performance and interest rates. The currency derivatives market is highly leveraged. In
the stock futures market, a 20% margin gains a five-fold leverage. In forex futures, the margin
payable is just 3%, so the leverage is 33 times. This means that even a 1% change can wipe out a third
of the investment. However, the Indian currency markets are well-regulated and there is almost no
counter-party risk. Investors should start small and gradually invest more. One has to be clued in to
global developments, trends in world trade as well as economic indicators of different countries.
These include GDP growth, fiscal and monetary policies, inflows and outflows of the currency, local
stock market performance and interest rates.