Foreign Exchange Market Meaning and features The Foreign

Foreign Exchange Market

Meaning and features • The Foreign exchange market is a market were currencies of different countries are bought and sold against each other • Jeff Madura “explained that foreign exchange market allows currencies to be exchanged in order to facilitate international trade or financial transactions” • Commonly known as FOREX a worldwide network

Features • Geographical location : no particular place • Over the counter Market • Participants of the Market • • Retail traders Central banks Corporate Commercial banks • Instruments of trade: are the currencies • Size of the market: largest market in the world • Round the clock market: it works on 24/7 model

Function of foreign exchange market

Spot market • The spot market is the market were immediate sale and purchase of forex takes place, it is called spot market or current market • The currencies are traded in form of bank deposits and transferred from seller account to buyer account, with instructions in form of electronic messages • Spot delivery is made after two business days the transaction is closed • The conversion rate for immediate exchange is called spot rate

Forward market • The forward market forex covers transactions which occur at a future date • The exchange rate under forward market are determined in the present date but for a delivery on future date may be sixty or ninty days • The forward price usually either it is higher or lower than the spot price • If its higher than known as forward price at premium • If lower than known as forward price at discount

Exchange rate • The exchange rate is the value of one nations currency versus the currency of another nation • Rate at which one unit of currency of a country can be exchanged for the number of units of currency of another country

Types of exchange rate • Fixed exchange rate • Flexible exchange rate

Thanks