Foreign exchange transaction is when one currency is exchanged for another currency.
A FX or forex or foreign exchange transaction involves:
· Buying of one country’s currency by paying for it in another country’s currency
· Selling one country’s currency for payment to be received in another country’s currency
Why do we need FX market?
· To settle cost of imports
· To convert receipts for exports
· For travel purposes
· To invest in other countries
· To pay for services rendered by foreigners
Foreign Exchange Market
The market for foreign exchange is a continuous inter-bank market (24 hours) divided into different time zones.
Foreign Exchange Quotes
Foreign Exchange Terms
Spread
-Difference between buying and selling rate quoted by the trader.
Currency pair
-Quotes expressed in terms of pairs of currencies
· First currency is ‘base currency’ and
· Second currency is ‘counter-currency’ or ‘quote-currency’
-Quotes in terms of the bid price of base currency and ask price of base currency
For example:Euros/USD
Exchange Rate
-An exchange rate is defined as the amount of one currency that can be exchanged per unit of another currency
Example:
USD 1 = 42.25 INR, or 1INR = 0.0236 USD
Cross rates
-When direct quotes are not available, we arrive at exchange rates using rates.
Nostro account
-A bank’s cash account held with another bank:
· Your account with outside bank is called a Nostro account
Vostro account
-The account of another bank held with yourself:
· i.e. for the outside bank your account held with it. Therefore, if you open a savings account, it is like a Nostro account for you and Vostro account for the bank.
Dealers quote currency price as bid or offer. Bid refers to the rate at which they will buy the currency from the customers. Offer is the rate at which they will sell the foreign currency to their customers.
Hope you enjoy learning Foreign Exchange!
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