Basics of foreign exchange markets


The foreign exchange market works as a medium to bring two parties together who wish to trade currencies at some agreeable rate

What is foreign exchange market?

The foreign exchange market or the currency exchange market is normally based on currency trading platforms, where different major currencies of the world are traded.

The foreign exchange market works as a medium to bring two parties together who wish to trade currencies at some agreeable rate. For instance: You can exchange one country’s currency for that of another simultaneously at some exchange rate. If you want to sell Indian rupee (INR) to buy the US dollar (USD), there must be someone else who wants to sell dollar for rupee at the same exchange rate.

Brief history

The foreign exchange market in India started in 1978, when the government allowed banks to trade foreign exchange with one another. And, today investors and traders around the world are looking to the foreign exchange market as a new speculation opportunity.

Market participants

Foreign exchange market attracts participants from around the world. Mainly banks (authorised dealers), commercial companies, central banks, investment management firms, retail foreign exchange traders, importers and exporters among others are market participants.

Though customers are major players in the foreign exchange market, for all practical purposes they depend upon banks and brokers.

FEDAI & CCIL

Trading is regulated by the Foreign Exchange Dealers Association of India (FEDAI), a self regulatory association of dealers. FEDAI plays a special role in the foreign exchange market for ensuring smooth and speedy growth of the foreign exchange market in all its aspects.

Since 2001, clearing and settlement functions in the foreign exchange market are largely carried out by the Clearing Corporation of India Ltd (CCIL).

Instruments traded

There are many currencies of the world get traded in foreign exchange market which provides great liquidity to investors around the globe. So, the trading is always done in pairs–Currency Pairs, one currency is bought and the other is sold. Together, they make up and that is known as the “exchange rate”.

Among the most traded currency pairs in India are: US dollar vs Indian rupee (USD/INR), Euro vs Indian rupee (EUR/INR), Great Britain Pound vs Indian rupee (GBP/INR).

The first currency of each currency pair is called the base currency, while second currency is referred as the counter or quote currency. Each currency pair is expressed in units of the counter currency needed to get one unit of the base currency.

Intervention in foreign exchange markets

As in any market essentially the demand and supply for a particular currency at any specific point in time determines its price (exchange rate) at that point. However, since the value of a country’s currency has significant bearing on its economy, foreign exchange markets frequently witness government intervention in one form or another, to maintain the value of a currency at or near its “desired” level.

Foreign exchange market is unique because of

  • Its huge trading volume representing the largest asset class in the world leading to high liquidity;
  • Its geographical dispersion;
  • Its continuous operation: 24 hours a day except weekends, i.e. trading from 20:15 GMT on Sunday until 22:00 GMT Friday;
  • The variety of factors that affect exchange rates


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