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Submitted by:
Moses, Kiran, Indu, Jothika and Megha.

Meaning of foreign exchange:

The term Foreign exchange implies two things: a) foreign currency and b) exchange rate.
Foreign exchange generally refers to foreign currency. E.g. For India it is dollar, euro, yen
etc. Other part is exchange rate which is the price of one currency in terms of other currency.
Foreign exchange or forex or FX or currency market is a market for trading of currencies.
Traders place orders to buy one currency with another currency. Currency is a system of
money in general use in a particular country. It is a medium of exchange.

Foreign exchange market:

The market includes all aspects of buying, selling and exchanging currencies at current or
determined prices. By volume it is the largest financial market in the world. Over $4 trillion
dollars worth of money are traded each day. The main currency used for forex trading is the
US dollar. The main players of this market are international banks, commercial banks, forex
brokers, authorised dealers and other financial institutions. Besides transfer of funds,
speculation is an important dimension of forex market.


Characteristics of forex market:

Geographical dispersion
Continuous operation
Use of leverage
Worlds largest market
Extensive use of information technology
Traders can profit from both strong and weak economies
Placement of very short-term order is possible
Non regulated market
Brokerage commission are low or non-existent
Terms related to foreign exchange:
1. Foreign exchange reserves: holdings of other countries currencies.
2. Foreign exchange controls: controls or restrictions imposed by govt. on purchase or
sale of foreign currencies.
3. Foreign exchange risk: arises from the change in price of one currency against
4. International trade: the exchange of goods and services across national boundaries.
5. Bureau de change: a business whose customers exchange one currency for another.
6. Currency pair: the quotation of the relative value of a currency unit against the unit of
another currency in the foreign exchange market.
7. Digital currency exchanger: market makers which exchange flat currency for
electronic money.


Exchange rate:
Exchange rate is the price of the currency of a country can be exchanged for the number of
units of currency of another country.it is the rate at which one unit of currency of a country
can be exchanged for the number of units of currency of another country.
Factors influencing forex
National economic performance
Central bank policy
Interest rates
Trade balances
Political factors
Market sentiment
Unforeseen events
Types of forex
Fixed and floating exchange rates
Direct and indirect exchange rates
Buying and selling
Spot and forward
Option and futures
Non-Deliverable Forward(NDF)


Theories of forex:
Theories which determine the prices of forex rate considering inflation, interest rate and
elasticity of price etc.
a) long run theory
b) short run theory
c) interest rate parity theory
Risk involved with forex
1. Exposure to exchange rate movement
2. Any sale or purchase of foreign currency entails risk
3. It affects net asset or net liability position of the buyer/seller.

Exchange rates as on 22 July 2016


U.S DOLLARS 66.97 67.29
EURO 73.78 74.13
POUND STERLING 88.23 88.66
UAE DIRHAM 18.23 18.32
SAUDI RIYAL 17.89 17.94