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Foreign Exchange Market (Forex) is an inter-bank market that took shape in 1971 when global trade shifted from fixed exchange rates to floating rate regimes. Forex transactions are a set of transactions among forex market agents involving exchange of specified sums of money in a currency unit of any given nation for currency of another nation at an agreed rate as of any specified date. During exchange, the exchange rate of one currency to another currency is determined by supply and demand. Moreover, a corporate willing to hedge his currency exposure may also take appropriate positions in the market.
The Forex market is a worldwide decentralized over-the-counter financial market for the trading of currencies. The scope of transactions in the global currency market is constantly growing, with development of international trade and abolition of currency restrictions in many nations.
The Forex market is a 24-hour market that does not depend on certain business hours of foreign exchanges; trade takes place among banks located in different corners of the globe. Exchange rates are so flexible that significant changes happen quite frequently, which enables to make several transactions every day.
In India, forex trading is primarily an OTC Market, wherein trades are conducted between two known counterparties. There are two distinct segments of OTC foreign exchange market. One segment is called as “interbank” market and the other is called as “merchant” market. Interbank market is the market between banks where dealers quote prices at the same time for both buying and selling the currency. In majority of the “merchant” market, merchants are price takers and banks are price givers. Trades in OTC foreign exchange market are conducted either on Interbank Rate (for large value transactions), or at card rate. Forex trading is permitted in INR-related currency pairs viz. USDINR, GBPINR, JPYINR, EURINR.
In India, OTC market is open from 9:00 AM to 5:00 PM. However, for merchants the market is open from 9:00 AM to 4:30 PM and the last half hour is meant only for interbank dealings for banks to square off excess positions. The settlement in the OTC spot market happens by actual delivery of currency.
Trading in currency derivatives is also permitted in India. Apart of the above, RBI has permitted trading in three cross currency pairs, EUR-USD, GBP-USD and USD-JPY. Under the derivatives segment, a host of products can be traded such as forwards, swaps, options and futures. Currently, FX-Derivatives trading in India are conducted on dedicated platforms provided by NSE, BSE, MSEI, USE (United Stock Exchange) and CCIL. Also, CCIL provides separate platform for trading in forex swaps known as FX-Swap. With internationalization of trade, it has become increasingly prudent for businesses to hedge their exposure from any currency risk.
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