|





‡ |


‡  


‡ 


 
 
‡ 
 
‡




  |





‡ This is over the counter market ( OTC ) i.e. there is no physical

market place to make the deals.

‡ Instead it is a net work of banks , brokers and dealers spread

across the various financial centers of the world .

‡ These players trade in different currency through telephones , faxes

, computers and other electronic networks like the SWIFT system
( Society for Worldwide Inter bank Financial Telecommunication) .

‡ These traders generally operate through a trading room .

‡ The deals are finalized orally with written communication

following later .
  



The main players in the foreign exchange market are :

‡ large commercial banks,
‡ forex brokers ,
‡ large corporations and
‡ the central banks .

The central banks enter the market to î




 

î
î
 

‡ Players in the Indian market include (a) ADs, mostly

banks who are authorized to deal in foreign exchange.
‡ Foreign exchange brokers who act as intermediaries.
‡ Customers ± individuals, corporates, who need foreign
exchange for their transactions.
‡ Though customers are major players in the foreign
exchange market, for all practical purposes they depend
upon ADs and brokers.
‡ Foreign Exchange Dealers¶ Association of India (FEDAI)
plays a special role in the foreign exchange market for
ensuring smooth and speedy growth of the foreign
exchange market in all its aspects.
 |



s defined in Section 2 of FEM , 1999 foreign exchange includes :

‡ all deposits ,credits , balance payable in any foreign currency ,
‡ any drafts , travelers` cheques , letter of credit and bills of exchange ,
‡ any instrument giving anyone the option of making it payable
either partly or fully in a foreign currency .

Here the term currency includes coins , bank notes , postal notes ,
postal orders and money orders .
M
 M
 
| 


‡ The major sources of supply of foreign exchange in the

Indian foreign exchange market are receipts on account
of exports and invisibles in the current account and
inflows in the capital account such as foreign direct
investment (FDI), portfolio investment, external
commercial borrowings (ECB) and non-resident
deposits.
‡ The demand for foreign exchange emanates from
imports and invisible payments in the current account,
amortization of ECB (including short-term trade credits)
and external aid, redemption of NRI deposits and
outflows on account of direct and portfolio investment.
‡   :
The large commercial banks which stand ready to buy and sell various
currencies at specific prices at all points of time .

‡
  :
The market in which the commercial banks deal with the customers
both individuals and corporate .

‡  ! "#$% &

The mkt. in which banks deal with each other

‡
'( %) :
The world wide forex mkt. is a 24 ± hour mkt. i.e. trading is going on
at least one of the forex market through out the day.
‡
) $%*+,
+-&
They are generally the commercial banks .They are permitted to deal
in all items classified as foreign exchange in FEM ,1999 . They
have to operate within the rules regulations and guidelines issued by
Foreign Exchange Dealers ssociation of India ( FEDI ) .

‡ %$. :
They can be either full ± fledged MC (can both buy and sell) or
restricted MC ( can only buy ) are allowed to deal only in notes ,
coins and travelers` cheque.

‡ |%./0$.%&
They do not actually buy and sell any currency . They do the work
of bringing the buyer and seller together .
 


 
 

n exchange rate quotation is the G




î î


 i.e. the price of one currency quoted in terms of 1unit of
the other currency .
For e.g. INR / USD : 46.40 / 1USD

‡
10)% &
The number of dollars expressed per unit of any other currency .
For e.g. USD 1.6689 / 1GBP

‡ )%2)% &
The number of units of any other currency expressed per dollar .
For e.g. INR 46.40 / 1USD
‡ +0 )% &
The quote where the exchange rate is expressed in terms of number of
units of the domestic currency per unit of foreign currency.

For e.g. INR46.40 / USD

‡ 0 )% &

The quote where the exchange rate is expressed in terms of number of
units of the foreign currency per unit of domestic currency .

For e.g. USD2.0525 / INR 100 .

‡ 0$ )% &

The quote given by a bank to its retail customers .

‡  )% &
The quote given by one bank to another bank .
 +3




‡ 
 &The rate at which a bank is ready to buy a currency .

‡

 &The rate at which a bank is ready to sell a currency.

INR / USD : 40.40 / 40.60 i.e. bid / ask

INR / USD : 40.40 / 60 , 60 represents the last two digits

of the ask rate, the rest being common with
the bid rate

INR / USD : 40 / 60 , this is used in the inter bank market

where the dealers would be aware of the
prevailing rate .
  &

‡ These last two digits are known as 
.

‡ The quote is always from banker's point of view .

‡ The bid rate is always lower than the ask rate .

‡ The difference between the bid rate and the ask rate is called the
4
2.

‡ The single rate mentioned is often the arithmetic average of the bid
and the ask rate.
 
 

For every quote (/B) between two currencies , there exists an

inverse quote (B/) .
For e.g. for a )%"+ quote there exists a USD ")% quote .

Implied Inverse Quote / Synthetic Inverse Rate :

If quote (/B) is given to us we can easily calculate quote (B/) :

Quote (B/) = [ 1/ (/B) ask ] / [1 / (/B) bid ]

 

 &

1 The quote for INR / USD : 45 / 47 , what will be its inverse quote ?

2 Rian Ltd has calculated a synthetic quote for CD/USD ,

which is 1.2176/82 .Calculate the prevailing rate of USD/CD.
1 Inverse Quote i.e. USD / INR :
= 1/ (Rs./$) ask / 1/ (Rs./$) bid
= 1/47 / 1 /45
= 0.0213 / 0.0222
 % &
1. Synthetic inverse quote is always different from actual inverse
quote because of the transaction cost .
2. Transaction cost is the lump some payment required to be made to
the dealer , from whom the currency is bought or sold , as his fee or
commission .

! .&
rbitrage is the process of buying and selling the same asset at the
same time , to profit from price discrepancies within a market or
across different markets.

|
! .&
When the arbitrage does not involve commitment of capital or any
assumption of risk it is called Risk Free rbitrage.
 M |

M
  M

Foreign exchange transactions can be classified on the basis of the

time between entering into a transaction and its settlement .

‡ ) .$ "$"
0 %&

When the exchange of currency takes place on the date of the deal .

‡  , %1%%5-0 %&

When the exchange of currency takes place on the next working day .

‡  0 %&
When the transaction will be settled after 2 business days from the
date of the contract .
‡ 
 |
#

+0 %&
 contract where the parties to the transaction agree to buy or sell a
currency at a 2 16) )  at a 2 0)20 .This
future date may be any date beyond 2 business days . The price and
the terms of delivery and payment are fixed at the time of entering
into the contract .

‡ #
0 %&
 transaction whereby 2 currencies are exchanged by the parties
involved , only to be exchanged back later .

‡  currency swap is a 0%1! %%6 two transactions - %2% 

%6%5 ± with exchange of currencies taking place at a pre-
determined exchange rate .
 | 




‡ | | 
‡ | 
 

M
‡ | 
 

  
‡   
   
‡   
 M
ILLUSTRTION : (Two Point Risk Free rbitrage )

$7)%  %8!6%1!5%
+"
&9:9';"9:9'<=  $1 1! 
%1!%66. $6%%5.7)% 
"+&;9"
;':
 $! .%22% ) >
Implied inverse rate of INR/USD :
= 1/ [USD / INR ask ] / 1/ [USD / INR bid ]
= 1 / 9:9'< / 1 / 9:9';
= 37.037 / 40

Yes the arbitrage opportunity exists in the forex market.

The arbitrager should buy USD in the New York market
and sell the same in the Bombay market.
 Suppose the arbitrager has surplus funds of Rs. 10 lac.

Buy dollars in New York :

= INR 10,00,000 @ USD 0.025 / INR
= USD 25, 000

Sell USD 25,000 in Bombay :

=USD 25,000 @ INR 50 / USD
= INR 12.50 lac

Even if the arbitrager incurs some expense still he will

make of INR 2.50 lac .( INR12.50 ± INR10 lac)
.
 Three Point Arbitrage
Suppose the bid rate in:
New York : $1.9810/Pound
London: DM 3.1650/Pound
Frankfurt: $0.6250/DM
Sol: The arbitrager will exchange the dollar, say
$1000 for DM in Frankfurt to get DM 1600.He
will convert DM 1600 for pound sterling in
London to get pound 505.63.Finally he will sell
pound 505.63 for dollars in New York to get
$1001.46.i.e a gain of 1.46$ per 1000$.