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Foreign Exchange and International Financial Markets


An International financial market is a place where MNC’s and international investors operate. The Foreign Exchange market is a subset of the international financial market where exchange rates are determined and the rate of exposure is managed. Additionally, business foreign exchange services and movements of capital are accommodated through this market.

foreign exchange
foreign exchange

Most countries in the world quote their trade purposes on European terms. The Foreign Exchange market has a number of places where currencies are traded at different rates. There are constant fluctuations in the exchange rates due to GDP growth, budget, interest rates and trade deficits.

Arbitrage Activities

Arbitrage affects the exchange market. There are mainly two types of arbitrage activities. They are arbitrage of goods and arbitrage of money. In arbitrage of goods, people will tend to buy the product on the market where the price of the product is low and resell it on a market where the price of the product is high.

In Arbitrage of money, money market banks and financial organizations profit from the small difference in the exchange rates.

Banks all around the world are involved in foreign exchange trading. The world relies on business foreign exchange. To meet the import and export needs, direct foreign investments currencies are traded every day in the FX market.

3 Forms of Foreign Exchange Transactions

Mainly there are three forms of foreign exchange transactions. They include spot transactions, forward transactions, and options. In the spot, transactions agreement should be signed between two parties, in which there are exchange rates at which the currencies should be traded.

In forwarding transactions, the currency will not change hands until an agreed future date. In option, the owner has the right to sell or buy any amount of currency at a certain price before the chosen or agreed date.

In the past 200 years, the government and the policymakers have been focusing on creating a fixed exchange rate system. Today’s exchange system is known as a Mixed Exchange Rate Regime which has three possible structures to determine the exchange rate. They are Floating Rate Regime, Managed Rate Regime and Pegged Rate Regime.

In Floating exchange rate regime, market forces are the ones who determine the relative value of the currency. All the major hard currencies operate under this system.

In managed rate regime the government manages the rate of currency with the help of reference currency or market basket.

In pegged exchange rate the government fixes the rate of its currency relative to reference currency. This system is mainly followed by small and developing countries. Pegged Regime may lead to problems.

A Look Back At The European Currencies That Once Were

euro currency
euro currency

The Euro arrived in Europe in 1999, which makes it just over 13 years old! Hard to believe really isn’t it? Chances are you can remember fondly going on family holidays to Spain or France and exchanging your home currency for something more exotic so it is pretty amazing to think that these currencies no longer exist except for in our memories.

In this post, I thought it would be fun to take a trip down memory lane and have a think about all of the currencies we left behind.

The Franc

This was the currency of France since 1360 and it was made decimal in 1795. It was also widely used in Andorra which did not actually have a currency of its own. Interestingly, after the second world war, France suffered high inflation and in 1960 it was replaced with a ‘new’ franc which was equal to 100 old francs.

Old 1 and 2 franc notes continued to circulate as 1 or 2 centimes in the new system. At the time of the Euro, it was approximately 6.5 Francs to the Euro.

Drachma

This was the currency of Greece before the Euro came in. The original ancient Drachma was in use as early as 1100BC making it one of the old currencies still in use up until 1999. The modern version of the Drachma was introduced in 1832 as a decimal currency (1 Drachma = 100 Lepta).

Once again, in 1944 the currency was reissued as new Drachma at a rate of 1 New to 50,000,000,000 primarily as a result of hyperinflation thanks to the war. When the Euro eventually took over 1 Euro was traded for 350 Drachma.

Peseta

This was the currency of Spain and perhaps one of the best known amongst holidaymakers in Europe. The currency was relatively new only have been introduced in 1869.

Originally the currency was decimal, being made up of 100 centimos, but the last time any coin under 1 Peseta was minted was 1980, since then the currency was simply in multiples of Pesetas. In 2002 Pesetas could be traded for Euros at a rate of 166 Pts to 1 Euro.

German Marks

The currency of Germany before the Euro was one of the most important currencies in the world after the USD. It was issued in 1948 and replaced the Reich mark although Germans simply called it the Mark (‘Deutschmark’ was how other countries referred to it).

The currency started life in 1873 as the Gold Mark and later became the Papiermark when the gold standard was abandoned (before the aforementioned Reich mark and then Deutschmark came into existence.)

So there you have it, 4 of the best-known currencies which no longer exist, although of course there have been talks of countries leaving the Euro and who knows, maybe one day soon you will once again be able to exchange your money for Spanish Pesetas when you go on your travels… Only time will tell.

Indians Guidelines to Trade in International Forex Market

Foreign exchange trading or currency trading is an activity that has taken the world by storm. It has emerged as a trading platform that was previously reserved for traditionally professional brokers or big banks and multinational companies, into a vast market that contains various big and small-time pros and novices.

The emergence of the online forex trading company and other online platforms have made it accessible even to a newbie sitting at home wanting to try their hand at this dynamic forex market, any time and from anywhere in the world they might be based.

If you are a resident of India, who wants to partake in international foreign exchange trading, there are certain legalities that you should know about.

Things you should keep in mind as a new investor in India interested in internal currency trading

  • Firstly, know that the Reserve Bank of India (RBI) does not support and cautions against foreign exchange trading for resident Indians who are looking to dabble in the forex market today. Such traders would be held liable for their actions under the RBI and there are legalities to consider.
  • As far as remittances from such trade deals are concerned, they have their own sets of rules and regulations as well. Legally a resident of India cannot collect or remit payments in the country of India from such transactions of international foreign exchange trading according to the Reserve Bank of India.
  • However, according to the Liberalized Remittance Scheme (LRS) individuals are allowed to open and hold foreign currency accounts in any other foreign country in order to claim and manage such remittances and also hold debt instruments, immovable property, shares and other such assets outside of the country, without needing prior approval of the Reserve Bank of India (RBI). Therefore such accounts can be used to carry out transactions and be used for payment and remittance activities under this liberalized remittance scheme.
  • Another option for investors given by the RBI is to use recognized exchanges to partake in currency derivative trade. Recognized platforms include the United States Stock Exchange (USE), NSE and MCX-SX.

However, most Indian residents prefer to opt to trade under the Liberalised Remittance Scheme and have now begun to start their journey in foreign exchange trading through online brokerages and trading platform.

There are many online forex trading companies nowadays that offer different kinds of accounts and trading options to new and seasoned traders.

You have to be aware of what kind of online forex trading companies you are dealing with, what schemes they offer, what their remittance regulations and policies are and the like.

Many new traders fall into the trap of shiny claims that promise huge returns and payouts, without properly investigating and researching the company they are working with and end up waiting forever for the payouts that never seem to appear and leverage way more than they can ever afford.

Since most of these online forex trading platforms do not come under the regulation of the RBI or any Indian legal body, you have to be cautious when investing your time and money.

Also whether you are a resident of India or happen to live elsewhere make sure you do the homework before you start any venture of this sort. Not only should you actually do research as to what forex trading entails but also the legal and other regulations in your home country.

Warren Paine

Warren is the senior mortgage loan officer who has worked in mortgages and loan industry since 1995. He study in Harvard and major in Finance with a Bsc. Honor Degree. He possesses a Paralegal Certificate as well.

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