STRUCTURE OF FOREIGN EXCHANGE MARKET

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The major participants in the foreign exchange markets are commercial banks;

foreign exchange brokers and other authorized dealers, and the monetary authorities.


It is necessary to understand that the commercial banks operate at retail level for individual exporters and corporations as well as at wholesale levels in the inter – bank market.


The foreign exchange brokers involve either individual brokers or corporations. Bank dealers often use brokers to stay anonymous since the identity of banks can influence short – term quotes.


The monetary authorities mainly involve the central banks of various countries, which intervene in order to maintain or influence the exchange rate of their currencies within a certain range and also to execute the orders of the government.



It is important to recognize that, although the participants themselves may be based within the individual countries, and countries may have their own trading centers, the market itself is world – wide.


The trading centers are in close and continuous contact with one another, and participants will deal in more than one market.



Primarily, exchange markets function through telephone and telex. Also, it is important to note that currencies with limited convertibility play a minor role in the exchange market.


Besides this, only a small number of countries have established their full convertibility of their currencies for full transactions.


The foreign exchange market in India consists of 3 segments or tires. The first consists of transactions between the RBI and the authorized dealers.


The latter are mostly commercial banks. The second segment is the interbank market in which the AD’s deal with each other. And the third segment consists of transactions between AD’s and their corporate customers.



The retail market in currency notes and travelers cheques caters to tourists. In the retail segment in addition to the AD’s there are moneychangers, who are allowed to deal in foreign currencies.


The Indian market started acquiring some depth and features of well functioning market e.g. active market makers prepared to quote two-way rates only around 1985. Even then 2 - way forward quotes were generally not available.


In the interbank market, forward quotes were even in the form of near – term swaps mainly for AD’s to adjust their positions in various currencies.



Apart from the AD’s currency brokers engage in the business of matching sellers with buyers. In the interbank market collecting a commission from both.


FEDAI rules required that deals between AD’s in the same market centers must be effected through accredited brokers.
 
It was an illuminating concepts.But sometimes it create problems and that's why foreign exchange market requires a fix. Here are some functions of foreign market exchange.

functions of a foreign exchange market:

1. Transfer Function:

This is used to felicitate and covert one currency into another.


2. Credit Function:

Another function is to provide credit, both national and international, to enhance foreign trade.

3. Hedging Function:

A third function is to hedge foreign exchange risks. Hedging in simple term means to avoid foreign exchange risk.
 
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