Foreign exchange means claims on another country held in the form of the currency or interest bearing bonds of that country i.e. converting one national currency into another country's national currency. As per Foreign Exchange Regulation Act, 1973, foreign exchange means foreign currency and includes:.
• All deposits, credits and balances payable in any foreign currency, and drafts, traveler's cheque, letters of credit and bills of exchange, expressed or drawn in Indian currency but payable in any currency.
• Any instrument payable, at the option of the drawee or any other party thereto, either in Indian currency or in foreign currency or partly in one and partly in other.
Foreign exchange market means a market in which transactions are conducted to effect the transfer of the currency of one country into that of another. The bulk of the foreign exchange (forex) market is "over the counter" (OTC), as there is no physical place where the participants meet to execute the deals. It is more an informal arrangement among the participants for purchasing or selling currencies, connected to each other by telecommunications like telex, telephone and a satellite communication network. In India banks are also connected to the SWIFT (Society for Worldwide Interbank Financial Telecommunication) network.
The largest forex market of the world is London, followed by New York, Tokyo, Zurich and Frankfurt. (India's position search). In most markets US dollar is the vehicle currency i.e. the currency used to denominate international transactions. This is despite the fact that with currencies like EURO, Yen and Deutsche Mark gaining larger share, the share of US dollar in the total turnover is shrinking.
PARTICIPANTS OF THE FOREX MARKET.
The participants of the forex market can be classified under five broad categories:.
• Corporates who wish to exchange currencies to meet or hedge contractual commitments (arising out of, for example, contracts of import or export of goods in foreign countries involving foreign currencies).