FOREIGN EXCHANGE MARKET - CURRENCY DEALERS

The foreign exchange market is a market in which currencies are bought and sold against each other. In other words, foreign exchange market is the market where the currency of one country is exchanged for the currency of another country. It is the largest market in the world having daily turnover of over US $3.2 trillion. The market is an over the counter market. There is no single market place or an organised exchange (like a stock exchange) where traders meet and exchange currencies. The dealers sit in their dealing room of major commercial banks around the world and communicate with each other through telephones, computer terminals and SWIFT mechanism. The forex market is a wholesale market called the inter-bank market. Commercial banks are the market makers. Corporations use the foreign exchange market for a variety of purposes relating to their operation like payment for imports, conversion of export receipts, hedging of receivables and payables, payment of interest on foreign currency loans, placement of surplus funds etc.

Forex market operates at three levels. At the first level are the currency dealers or money changers who provide for encashment or travelers cheques and release of small amount of forex to travellers. The money changers quote the buying and selling rates for various currencies. An illustration of the quote is given below:

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Terms:

* T.C Buying - Rate at which Foreign Currency Travellers cheques’ deposited by the customer is converted into rupees

* T. C. Selling - Rate applicable when a customer buys Foreign Currency Travellers’ cheques from the bank.

The above rate indicate the amount of Indian Rupee that would be exchanged per foreign currency. The column "Cash Buying" indicates that the money-changers would be willing to buy the currency at the indicated rates. Rates under "Cash Selling" column indicate the amount of Indian Rupees that would be paid to these dealers for purchasing a unit of the currency. We note that there is substantial difference or spread between the buying and selling rates. These spreads are large because the dealers need to cover their operational costs on the transactions which are relatively small in volume. Secondly, the dealers are required to hold different currencies for servicing their customers. This involves opportunity or inventory cost plus risk premium for change in values. Hence the spread is large enough to cover these costs.

The following table shows the foreign exchange rates quotes from the internet. For example, if you want to buy Australian Dollar, a bank will sell one Australian Dollar for INR 38.685825.

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Indian Rupees, Wednesday, August 6th 2008, 23:37 IST
Picture Source: http://www.ratesfx.com/rates/rate-inr.html



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