Foreign Exchange Market Basics

Foreign Exchange Market

The foreign exchange market is not like the one we encounter in our every day lives, sometimes with a morbid fear of losing the battle for balancing our personal budgets. Foreign exchange market, like those for money, are markets in the abstract sense. In these markets buyers and sellers need not meet face to face not at least in these days of high-tech communications, internet, fax, telephone and the fast vanishing wire service – with instant round the clock monitoring services like SWIFT, Reuters, Knight Ridder and Tele rate.

It is not that the foreign exchange market has become completely impersonal. In the early stage of the evolution of foreign exchange market there emerged meeting places know as ‘bourse’ to conduct dealings in foreign exchange. In the seventeenth century, traders, bankers and money changers developed the practice of settling cross border debts at the fairs held in important commercial centres. Bills of exchange were an important medium for settlement of payments in these fairs. A French trader, for instance, could buy at the Milan fair a sterling bill for, say pound 10,000.00 drawn on London to pay his debt to a British exporter from whom he has bought or intends to buy some merchandise. An analogy of this practice is also seen in some country even today. For instance, buy what is known some countries as ‘hundi’ to transfer money to other countries for a variety of reasons. A hundi, in reality has all the characteristics of a real bill of exchange but, because of exchange control and money laundering, its use for transfer of fund to and from abroad is illegal.

Today foreign exchange market can be described as the over the counter (OTC) market. There is no specified place for the participant to meet and execute the deals. It is an informal arrangement among the participants who are in touch with each other through telephone, telex, SWIFT, Internet and other means of communications. The term foreign exchange market actually refers to the wholesale segment of the market where dealings take place between banks and financial institutions or the fund managers. The retail segment refers to the dealings that take place between banks and their customers.

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