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    The document discusses the foreign exchange market and how it allows individuals, firms, and banks to buy and sell foreign currencies. It explains that international trade and capital transactions require the transfer of purchasing power between currencies. Commercial banks act as intermediaries in the foreign exchange market, exchanging currencies for importers, exporters, tourists, and investors. The central bank acts as a lender of last resort to balance a nation's foreign exchange inflows and outflows.

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    67847bos54415-Cp9 (1) Export

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    The document discusses the foreign exchange market and how it allows individuals, firms, and banks to buy and sell foreign currencies. It explains that international trade and capital transactions require the transfer of purchasing power between currencies. Commercial banks act as intermediaries in the foreign exchange market, exchanging currencies for importers, exporters, tourists, and investors. The central bank acts as a lender of last resort to balance a nation's foreign exchange inflows and outflows.

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    The document discusses the foreign exchange market and how it allows individuals, firms, and banks to buy and sell foreign currencies. It explains that international trade and capital transactions require the transfer of purchasing power between currencies. Commercial banks act as intermediaries in the foreign exchange market, exchanging currencies for importers, exporters, tourists, and investors. The central bank acts as a lender of last resort to balance a nation's foreign exchange inflows and outflows.

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    © All Rights Reserved
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    8 views1 page

    67847bos54415-Cp9 (1) Export

    Uploaded by

    readorplaydigital
    The document discusses the foreign exchange market and how it allows individuals, firms, and banks to buy and sell foreign currencies. It explains that international trade and capital transactions require the transfer of purchasing power between currencies. Commercial banks act as intermediaries in the foreign exchange market, exchanging currencies for importers, exporters, tourists, and investors. The central bank acts as a lender of last resort to balance a nation's foreign exchange inflows and outflows.

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    FOREIGN EXCHANGE EXPOSURE AND RISK MANAGEMENT 79.

    17

    7. FOREIGN EXCHANGE MARKET


    The Foreign Exchange market is the market in which individuals, firms and banks buy and sell
    foreign currencies or foreign exchange. The purpose of the foreign exchange market is to permit
    transfers of purchasing power denominated in one currency to another i.e. to trade one currency
    for another. For example, a Japanese exporter sells automobiles to a US dealer for dollars, and a
    US manufacturer sells machine tools to Japanese company for yen. Ultimately, however, the US
    company will be interested in receiving dollars, whereas the Japanese exporter will want yen
    because it would be inconvenient for the individual buyers and sellers of foreign exchange to seek
    out one another, a foreign exchange market has developed to act as an intermediary.
    Transfer of purchasing power is necessary because international trade and capital transactions
    usually involve parties living in countries with different national currencies. Each party wants to
    trade and deal in his own currency but since the trade can be invoiced only in a single currency,
    the parties mutually agree on a currency beforehand. The currency agreed could also be any
    convenient third country currency such as the US dollar. For, if an Indian exporter sells machinery
    to a UK importer, the exporter could invoice in pound, rupees or any other convenient currency like
    the US dollar.
    But why do individuals, firms and banks want to exchange one national currency for another? The
    demand for foreign currencies arises when tourists visit another country and need to exchange
    their national currency for the currency of the country they are visiting or when a domestic firm
    wants to import from other nations or when an individual wants to invest abroad and so on. On the
    other hand, a nation's supply of foreign currencies arises from foreign tourist expenditures in the
    nation, from export earnings, from receiving foreign investments, and so on. For example, suppose
    a US firm exporting to the UK is paid in pounds sterling (the UK currency). The US exporter will
    exchange the pounds for dollars at a commercial bank. The commercial bank will then sell these
    pounds for dollars to a US resident who is going to visit the UK or to a United States firm that
    wants to import from the UK and pay in pounds, or to a US investor who wants to invest in the UK
    and needs the pounds to make the investment.
    Thus, a nation's commercial banks operate as clearing houses for the foreign exchange demanded
    and supplied in the course of foreign transactions by the nation's residents. Hence, four levels of
    transactor or participants can be identified in foreign exchange markets. At the first level, are
    tourists, importers, exporters, investors, etc. These are the immediate users and suppliers of
    foreign currencies. At the next or second level are the commercial banks which act as clearing
    houses between users and earners of foreign exchange. At the third level are foreign exchange
    brokers through whom the nation's commercial banks even out their foreign exchange inflows and
    outflows among themselves. Finally, at the fourth and highest level is the nation's central bank
    which acts as the lender or buyer of last resort when the nation's total foreign exchange earnings
    and expenditures are unequal. The central bank then either draws down its foreign exchange
    reserves or adds to them.

    © The Institute of Chartered Accountants of India

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