Foreign exchange market
The market where one currency is traded for another is called foreign exchange market. It is non-localised market which exists in the network of information system and there is no particular place that can be called foreign exchange market. The foreign exchange transactions are derived from the transactions in the market for commodities, services or assets among the people of two nations. The trade in the currency is the consequence of the people’s wish to trade in underlying commodities, services or assets. To every international sale or purchase of commodities, services or assets there corresponds an international sale or purchase of currencies. In foreign exchange market, a party can never be the demander of one currency without being simultaneously a supplier of another. An Indian purchaser of “Toyota’, simultaneously supplies rupees for the demand for yen with which the Toyota is to be purchased.
Purpose and Organization
The foreign exchange market encompasses all transactions involving the exchange of different monetary units for each other. Its purpose is to facilitate transfer of purchasing power denominated in one currency into another,that is to trade one currency for another. It acts as an intermediary for individual buyers and sellers. The foreign exchange market links financial activities in different currencies.
The foreign exchange market is not a physical place. It is a network of banks dealers and brokers who are dispersed throughout the leading financial centers of the world. Currency transactions are channeled through the world-wide inter-bank or wholesale market in which banks trade with each other.
Twenty four hour a day currency trading follows the sun around the globe. Three major market segments are:
1.Australasia including trading centres of Sydney, Tokyo and Hong Kong, Singapore and Bahrain.
2.Europe including Zurich, Frankfurt, Paris, Brussels,Amsteerdam and London.
3.North America including New York, Montreal, Toronto, Chicago, San Francisco and Los Angeles.
Active trading takes place when the trading hours of the Australasia centres and the European centres overlap and when the European and North American centres overlap.