NATIONAL LAW INSTITUTE UNIVERSITY

BHOPAL

ECONOMICS-II

SEMESTER-III

FOREIGN EXCHANGE MARKET

SUBMITTED BY:- SUBMITTED TO:-

KUMKUM DHURVE PROF. ASHOK MITTAL

2020BALLB58
 ACKNOWLEDGEMENT
I would like to appreciate the amount of support and guidance given to me by my
ECONOMICS-II Teacher, PROFESSOR ASHOK MITTAL. This project has not been
completed without his immense support and guidance. From the selection of the topic to the end
of the conclusion, he has helped me to bring the nuances of the topic and highlight the core of the
issue. He has also helped me with the enhancement of my critical skills.
I am grateful to all those for whom I have had the privilege of collaborating on this and other
similar ventures. In specific, I would like to thank all my NATIONAL LAW INSTITUTE
UNIVERSITY seniors who help and guide me to make this project.

Kumkum Dhurve
2020BALLB58

_________________

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 DECLARATION

I, Kumkum Dhurve, D/o B.S. Dhurve, Roll Number 2020BALLB58, Enrollment Number A-
2231, do hereby declare that the Project titled FOREIGN EXCHANGE MARKET is an
outcome of my own independent research endeavor and has been carried out under the guidance
of PROFESSOR ASHOK MITTAL name of course teacher. Literature relied on by me for the
purpose of this project has been fully and completely acknowledged in the footnotes and
bibliography. The Project is not plagiarized and all reasonable steps have been taken to avoid
plagiarism. Similarity Index as per the Turnitin Report is____%. In case, my project is found to
be plagiarized, the course teacher shall have the full liberty to ask me to revise the Project. If I
fail to comply with the instructions of the teacher, my project may be referred to the Committee
Against Use of Unfair Means and I will comply with the decision of the said Committee.

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 TABLE OF CONTENT
ACKNOWLEDGEMENT………………………………………………………...……………II

DECLARATION……….………………………………………………………………………III

TABLE OF CONTENTS………………………………………………………………………IV

INTRODUCTION……………………………………………………………………………….1

STATEMENT OF PROBLEM……………………………………...……………...…..………2

REVIEW OF LITERATURE...………………………………………………….……….…….2

HYPOTHESIS….………………………………………………………………………..………3

OBJECTIVE……………………………………………………………………………..………3

RESEARCH QUESTION……………...………………………………………………..………3

METHODOLOGY………...…………….…………………………….…………………....…...3

FOREIGN EXCHANGE MARKET…...………………………………………………………4

WHY THE FOREIGN EXCHANGE MARKET IS UNIQUE………………….……………5

ADVANTAGE OF FOREIGN EXCHANGE …………………………….………………...…6

DISADVANTAGE OF FOREIGN EXCHANGE ……………………………..…………...…6

MAIN PARTICIPANTS OF FOREIGN EXCHANGE MARKET...……………………...…6

FEATURES OF FOREIGN EXCHANGE MARKET..……...……………….………...……..7

FUNCTIONS OF FOREIGN EXCHANGE MARKET………...…………….………...……..7

SOME MAJOR FOREIGN EXCHANGE MARKETS ………..…………….………...……..8

TYPES OF FOREIGN EXCHANGE MARKET……………….…………….………...……..8

CONCLUSION AND SUGGESTIONS………………..……...……………….………...……..9

BIBLIOGRAPHY……………………...……………………...……………….………...……..10

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INTRODUCTION

Currency trading takes place in the foreign exchange market, which is a market where currencies
are purchased and traded. To distinguish it from a financial market where currencies are
borrowed and lent, it is necessary to define what a currency is. Two main pathways connect an
economy to the international economy: trade and finance. Trade is the most direct channel of
connection. India's economic policy reforms of 1991 aimed to globalize the country's economy,
which had previously been rather closed, by opening up both of these routes. The pace of change
in both commerce and the financial sector has been moderate, allowing the economy to acclimate
to the new circumstances. Although there were some restrictions, the trade route between India
and the rest of the world was significantly more open than the financial markets. Not only was
the financial sector closed to foreign investors, but the price of capital (interest rate) and the
value of the home currency (exchange rate) was also not determined by the market. The financial
markets underwent a double transformation throughout the 1990s: prices were permitted to be
determined by the market, and the domestic financial market was becoming more integrated with
international financial markets, respectively. Currency is without a doubt a necessary component
of a country, as it is the primary force that drives the global economic market. However, in order
for countries with disparate currencies to trade with one another, an exchange rate system
between their currencies is required; this system, formally referred to as foreign exchange
currency exchange, is necessary.1

In the early days, the currency exchange mechanism was purely based on the amount of gold
held in the country's vault. However, this approach is no longer appropriate in the modern era of
information, and as a result, the value of one's currency is determined solely by market forces.
Two distinct sorts of systems are used to establish the value of a currency exchange rate: floating
currency and pegged currency.2

_____________________
1
David Hudson, “Foreign Exchange Market(Forex, or FX, market)”, BRITANNIC, <
https://www.britannica.com/topic/foreign-exchange-market > accessed 9 Oct 2021
2
James Chen, “What is Foreign Exchange Market”, INVESTOPEDIA, <
https://www.investopedia.com/terms/f/foreign-exchange.asp > accessed 9 Oct 2021

1
In the early days, the currency exchange mechanism was purely based on the amount of gold
held in the country's vault. However, this approach is no longer appropriate in the modern era of
information, and as a result, the value of one's currency is determined solely by market forces.
Two distinct sorts of systems are used to establish the value of a currency exchange rate: floating
currency and pegged currency.

STATEMENT OF PURPOSE

Global politics and economics are two of the most important influences on forex rates, which can
be difficult to analyze and draw reliable conclusions from.

LITERATURE REVIEW

1. MACROECONOMICS THEORY AND POLICY BY H.L. AHUJA: Students will

learn about the most recent developments in macroeconomics analysis and policy from
this textbook. While discussing various macroeconomic theories and policies, it considers
the macroeconomic environment of developing economies, particularly the Indian
economy. Written in very understandable language. Describe in understbale manner
about the Foreign exchange market. The book covered all the topics of the Foreign
Exchange Market.
2. ADVANCED ECONOMICS BY DAVID ROME: As the main text and foundation
point for graduate-level macroeconomics courses, Romers Advanced Macroeconomics'
fifth edition helps students get their feet wet in the field of macroeconomics and
monetary economics research. Romer discusses the most important macroeconomic
theories in a clear and concise manner. In addition to theoretical analysis, examples of
empirical work are used to demonstrate how theories can be evaluated and implemented.
3. NCERT CLASS 12th: This is 12th class NCERT book. To understand the concept of
Foreign Exchange Market this book is very useful. This cover all the basics of the
Foreign Exchange Market.
4. ARTICLE: THE FOREIGN EXCHANGE MARKET BY DAVID HUDSON : This
article is written by David Hudson. The foreign exchange market is defined in this article
and Impacts on USA and on the internationally basis. Very useful to understand what is
the foreign exchange market.

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HYPOTHESIS

Exchange of one country's currency for another's the currency in the foreign exchange market
(forex, or FX).

OBJECTIVE QUESTIONS

1. To study the Foreign exchange market.

2. Analysis of major sides of the Foreign exchange market.
3. To analysis the features of the foreign exchange market.
4. To understand the functions of the foreign exchange market.

RESEARCH QUESTIONS

1. What is the Foreign exchange market?

2. Why the Foreign exchange market is unique?
3. What is the advantage of the foreign exchange market?
4. What is the disadvantage of the foreign exchange market?
5. Who are the main participants of the foreign exchange market?
6. How many types of foreign exchange markets?

METHODOLOGY

This project is largely based on the Doctrinal method. The study was collected from journals,
books, and publications on various websites.

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FOREIGN EXCHANGE MARKET

It is a global decentralized or OTC market for the trading of currencies known as the foreign
exchange market (Forex, FX, or currency market). Every currency's exchange rate is determined
by this market. Trading currencies at current or predetermined prices are included in this
category. It is the world's largest market in terms of trading volume, followed closely by the
credit market.3

3
Record Neil, Currency Overlap (Wiley Finance Series

The largest multinational banks are the primary participants in this sector. With the exception of
weekends, financial cities around the world serve as hubs for trading between a wide variety of
different customers and sellers. When trading currencies in pairs, the foreign exchange market
does not set a currency's absolute value but rather sets its relative worth by setting the market
price of one currency if paid for by another currency. X CAD, X CHF, X JPY, etc. is the value of
one US dollar.4

Through financial institutions, the foreign exchange market operates on multiple levels. Smaller
financial entities are known as "dealers" are used by banks to conduct large-scale foreign
currency trading transactions behind the scenes.5 The "interbank market" refers to the foreign
currency market, which is dominated by banks (although a few insurance companies and other
kinds of financial firms are involved). Hundreds of millions of dollars can be traded between
foreign exchange traders. There are few, if any, regulatory bodies in place for Forex because of
the sovereignty issue when dealing with two currencies.6

____________________
4
Akhilesh Ganti, “Foreign Exchange Market”, INVESTOPEDIA, <
https://www.investopedia.com/terms/forex/f/foreign-exchange-markets.asp > accessed 10 oct 2021
5
Michael Melvin and Stefan Norrbin, “The Foreign Exchange Market”,<
https://www.sciencedirect.com/science/article/pii/B9780128041062000010> accessed 10 Oct 2021
6
Morton Glantz and Robert Kissell, “FOREIGN EXCHANGE MARKET AND INTEREST RATE”, <
https://www.sciencedirect.com/science/article/pii/B978012401690300007X > accessed 11 Oct 2021

4
In order to facilitate international trade, the foreign exchange market provides currency
conversion. Allows US businesses to import items from EU member states and pay in Euros,
even though their income is in US dollars. This is an illustration of how it works. There are many
ways in which it can be used, including direct speculation on currency values and interest rate
differentials and carry trade speculation.

WHY THE FOREIGN EXCHANGE MARKET IS UNIQUE

 It's the world's largest asset class, which means it has a high level of liquidity.
 It's a matter of geographic separation.
 There are no interruptions in its operation: Except on weekends, the market is open
twenty-four hours a day, from Sunday at 20:15 GMT to Friday at 22:00 GMT. wide
range of variables influencing the value of the dollar.
 The low relative profit margins compared to other fixed income markets. increase in
profit and loss margins through the use of leverage, regardless of the size of the account.
 As a result, despite the fact that central banks intervene in currency markets, it has been
dubbed the market closest to the ideal of perfect competition. By the end of April 2010,
the Bank for International Settlements projected that the daily average volume of global
foreign exchange markets was $3.98 trillion, up from $3.21 trillion in April 2007
according to the bank. The average daily turnover in the foreign exchange market was
estimated to be in excess of $4 trillion by certain firms.
 National currencies can be traded in the foreign exchange market (commonly known as
FX or forex), which is a worldwide marketplace.
 Forex is used by investors for a variety of purposes, including hedging against foreign
currency and interest rate risk, speculation on geopolitical events, and portfolio
diversification.
 Financial institutions, such as commercial banks, central banks, money managers, and
hedge funds, are the primary players in this sector.
 Forex markets are used by multinational organizations to protect themselves against the
risk of currency fluctuations when conducting international business. As a percentage of
total forex volume, retail traders account for only a tiny fraction of all trading activity.

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ADVANTAGE OF FOREIGN EXCHANGE

 For this reason, Forex trading is becoming increasingly popular, as currencies can be
exchanged without causing much price movement and keeping losses low.
 As there is no central bank, the market is open 24 hours a day, seven days a week except
for weekends.
 When compared to other investments, Forex trading requires only a small amount of
capital, making it an excellent choice for those who don't have a large amount of money
to invest.
 A 'good faith deposit' rather than a loan will be used in future Forex trading. The spread
in interest rates is a valuable asset.

DISADVANTAGE OF FOREIGN EXCHANGE

 If a contemporary fails to deliver the currency involved in a large transaction, there is a

significant risk.
 The profit margins for small-scale traders are extremely low, so investors need a large
amount of capital to make money.

MAIN PARTICIPANTS OF FOREIGN EXCHANGE MARKET

1. COMMERCIAL BANKS ON MARKET MAKERS: Most commercial banks take

over the role of supporting the country's economy by keeping the country's foreign
currency in reserve for the future. They also make short sales of foreign currency from
time to time to meet the payment needs of businesses (agree to sell or actually sell the
foreign currency without any real capacity to sell through or borrow the required
currency from others).
2. FOREIGN EXCHANGE BROKERS: FE brokers, unlike market makers, do not buy or
sell foreign currency on their own account. They act as a go-between, bridging the gap
between two parties in order to meet their individual objectives. Brokerage charges are
the only fees they receive because they serve as a conduit between buyers and sellers of
foreign currency.

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 3. CENTRAL BANKS: An intervention by the Reserve Bank of India (RBI) in the foreign
exchange markets helps to maintain price stability for currency conversions, which in
turn helps to maintain the balance of payments, domestic money supply, interest rates,
and inflation of a country.
4. CORPORATES AND ENTREPRENEURS: The FE market is dominated by
corporations, which use it to pay for imports of goods, commodities, and services in
foreign currency. Exports necessitate the conversion of foreign currency into domestic
currency, so they must do the opposite. Transactions in global financial markets, such as
loan disbursement, repayment, receipt, and payment of annual charges, etc. necessitate
the need for conversion.

FEATURES OF FOREIGN EXCHANGE MARKET

1. HIGH LIQUIDITY: When it comes to liquid financial markets, the forex market is the
most accessible. In this case, currencies from around the world are traded. In this market,
traders can buy or sell currencies at any time they choose.
2. MARKET TRANSPARENCY: This market has a lot of clarity. All market data and
information is available to traders in the foreign exchange market. The real-time portfolio
will allow you to keep track of currency fluctuations in different countries.
3. DYNAMIC MARKET: The foreign exchange market is an ever-changing market. Every
second and every hour, currency values fluctuate in these markets.
4. OPERATES 24 HOURS: Traders in the foreign exchange market operate around the
clock. This gives traders the ability to trade at any given time.

FUNCTIONS OF FOREIGN EXCHANGE MARKET

Following are the main functions of the foreign exchange market:-

1. TRANSFER FUNCTION: The primary function of the foreign exchange market is to

facilitate the transfer of funds or foreign currencies from one country to another for the
purpose of settling payments. In essence, the market acts as a currency exchange.

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 2. CREDIT FUNCTION: In order to facilitate the flow of goods and services from
different countries, the FOREX provides short-term credit to importers Foreign purchases
can be financed with the importer's own credit.
3. HEDGING FUNCTION: Hedging is an important third role of a foreign exchange
market. The parties in the foreign exchange market are often concerned about the
fluctuation in the exchange rates, which is the price of one currency concerning another.
This could either benefit or harm the party involved.

SOME MAJOR FOREIGN EXCHANGE MARKETS:

 SPOT MARKETS
 FORWARD MARKETS
 FUTURE MARKETS
 OPTION MARKETS
 SWAPS MARKETS

TYPES OF FOREIGN EXCHANGE MARKET

1. SPOT MARKETS: This is where the fastest currency exchange takes place. The buyers
and sellers of currency in this foreign exchange market can expect immediate payment at
the current exchange rate. Almost a third of all currency exchange is done on the spot
market, which settles transactions within a few days.
2. FORWARD MARKETS: Traders in the forward market can be two companies,
individuals, or government nodal organizations. In a futures market, a buyer and seller
agree on a price and quantity for a future transaction.
3. FUTURE MARKETS: The futures markets offer solutions to a number of issues that
have been plaguing the forward markets. Similar to forwarding markets, futures markets
are based on the same principles.
4. OPTION MARKETS: It is possible for an investor to buy or sell an underlying
instrument (such as a stock, ETF, or index) at a predetermined price over a predetermined
period of time with an option contract. There is a lot of 'options trading' in this type of
market.

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 5. SWAPS MARKETS: It is a type of derivative contract in which the cash flows or
liabilities of two financial instruments are exchanged. In most swaps, these payments are
based on the principal amount of the transaction.

CONCLUSION & SUGGESTIONS

Foreign exchange trading is the practice of exchanging one currency for another. Bank deposits
and bank transfers of deposits in foreign currencies are the specific forms of money traded. Large
commercial banks in financial hubs like New York or London, which trade deposits denominated
in foreign currencies, are commonly referred to as the foreign exchange market. The "spot
market," which is the buying and selling of foreign exchange to be delivered on the spot rather
than paying at a later date, is covered in detail in this chapter, which gives a broad overview of
foreign exchange trading. Currency arbitrage and short- and long-term movements in exchange
rates are some of the more important topics covered in this course. The discussion of broad
concepts is illustrated with specific examples. Additional information on exchange rate indexes
and the world's best currency dealers is provided in two appendices. Banks, forex dealers,
commercial companies, central banks, investment management, hedge funds, retail forex dealers,
and investors make up these foreign exchange markets. We'll go into greater depth about the
'Foreign Exchange Market' in the section that follows. There are trillions of dollars being traded
every day in the FOREX market. Speculators and hedgers can find an instrument and leverage
that fit their needs in the spot market, futures markets, or options markets. The FOREX markets
offer a wide range of options for dealing with currency fluctuations, from complex speculative
strategies to everyday hedging techniques. Despite the fact that foreign exchange can be difficult
to grasp, it is now more important than ever to have a basic understanding of it. If we continue to
shrink our globe, we will face an ever-increasing risk of having to deal with currency risk, which
will have a direct impact on our world. It is imperative that we be able to assess and respond to
the impact of currency fluctuations on our personal and business decisions, as well as
government policies (both financial and otherwise). If we're going to have to do business in the
foreign exchange markets, it's becoming more and more likely.

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BIBLIOGRAPHY

BOOKS:

1. Macroeconomics Theory and Policy by H.L. Ahuja

2. Advanced Economics by David Rome
3. NCERT Class 12th

OTHER SOURCES:

1. https://www.oreilly.com/library/view/foreign-exchange
a/9781118046210/weit_9781118046210_oeb_c15_r1.html
2. https://backup.pondiuni.edu.in/storage/dde/downloads/ibiv_forex.pdf
3. https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/77577.pdf
4. https://www.researchgate.net/publication/
234109516_The_Indian_Foreign_Exchange_Market_and_the_Equilibrium_Real_Exchan
ge_Rate_of_the_Rupee
5. https://www.slideshare.net/dhwaniiii/final-project-of-foreign-exchange-market
6. http://www.cuhimachal.ac.in/news/2019050818352485.pdf
7. https://web.worldbank.org/archive/website01021/WEB/IMAGES/FOREX_RI.PDF
8. https://ies.princeton.edu/pdf/S20.pdf
9. https://unctad.org/system/files/official-document/osgdp20114_en.pdf
10. https://www.bauer.uh.edu/rsusmel/7386/ln1.pdf
11. http://iegindia.org/upload/publication/Workpap/wp250.pdf
12. https://unctad.org/system/files/official-document/osgdp20114_en.pdf

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