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‡ Largest and most liquid financial market.

‡ Worldwide decentralized OTC financial

market for trading currencies.

‡ Primary purpose is to assist international trade

and investments.

‡ Trading takes place between two dealers

through the internet or over the telephone.
‡ London, NY and Tokyo are the biggest Forex
centers.

‡ Deutsche Bank is single largest trading entity

in International Forex markets.

‡ US$ is the most heavily traded currency.

‡ Heavily traded currency pairs: EUR/UDS,

GBP/USD and USD/JPY.

‡ Average daily turnover is US$ 3.98 trillion!

‡ The Forex market is divided into two levels
viz. Wholesale and Retail level.

‡ So all participants cannot operate in all

segments.

‡ Segments are subject to different categories of

exchange rates.

‡ At wholesale level interbank rates are used

where as at retail level merchant rates.

‡ Modern foreign exchange market began

forming during the 1970s.
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‡ These are 3 letter codes given by ISO 4217 to
denote currencies worldwide.

‡ These are also used in airline tickets and

international rail tickets.

‡ First 2 letters are the country code as per ISO

3166-1.

‡ The last letter is the initial of the currency

itself.
‡ For e.g. Japan¶s currency code is JPY.

In this µJP¶ is Japan's code and µY¶ for

Yen.
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‡ Many exchange rate regimes over the past 10

decades.

‡ Exchange rate regimes are agreements ,

treaties, practices which govern setting of
exchange rates between countries.

1. Gold Standard: 1880-1914, 1918-1939.

‡ It implied a system of fixed exchange rate.

‡ Gold Specie Standard and Gold Bullion was a
part of Gold Standard.

2. Bretton Wood system: 1944-1971

3. Flexible Exchange Rate System: 1978 till date.

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‡ Highest trading volume.

‡ High liquidity.

‡ All transactions routed through banking

system.

‡ Operates 24 hours a day except on weekends.

‡ No physical existence.
‡ Gains and loses measured in µpips¶.

‡ Settlements done through µnostro¶ and

µvostro¶ accounts in banks.

‡ No commission involved in Forex trading,

only a low transaction cost involved.

‡ This is the only market known to man that is

not subject to price manipulation.

‡ Operates on a very low profit margins.

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‡ Spot deal
‡ Market order
‡ Entry orders
‡ Stop-loss order
‡ Bid
‡ Offer
‡ Spread
‡ Pip
‡ Lot
‡ Margin
‡ Trend
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‡ 2 levels viz.
- µInterbank transactions¶ and
- µMerchant transactions¶.

‡ Exchange rate at which interbank transaction

takes place is known as µInterbank Rate¶ or
simply µMarket Rate¶.

‡ Exchange rate at which merchant transaction

takes place is known as µMerchant Rate¶.
‡ Function is to provide rates for various
transactions put through at branch level with
customers.

‡ Rates provided by bank to customers are called

Merchant Rates.

‡ Merchant rates can be subdivided as:

Merchant Rates

Card Rates Ready Rates

 


 







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‡ Consists of treasury operations in a
commercial bank or a financial institution.

‡ All banks have departments devoted to

treasury management or operations.

‡ In a bank, treasury operations are divided into

four activities:
1. Call money Operations
2. Securities Operations
3. Commodity Operations
4. Forex Operations
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‡ Comprise functions of a service branch to meet

the needs of other branches/divisions to
buy/sell foreign currency.

‡ Manned by specially trained personnel called

µdealers or traders¶.

‡ Acts as a profit centre for the bank/financial

institution.
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‡ Structure of dealing room operations in a
commercial bank has 3 compartments.
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‡ Manned by dealers who represent the bank in

all market operations at both the levels.

‡ Function as the µface¶ of the bank.

‡ All dealing operations takes place here.

   
‡ Deals with risk management functions.

‡ Every transaction is recorded in a µDeal Slip¶.

‡ Each µDeal Slip¶ is processed to ensure

adherence to all risk control limits as specified.

‡ There are about 12 control limits.

‡ Mid Office provides a constant flow of

information to the dealer.
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‡ Represents administrative hub of all dealing
operations.

Takes care of :
‡ Processing deals,

‡ Maintaining accounts for nostro accounts

reconciliation,

‡ Recovering overdue interest etc.