Foreign exchange market
Also called: Forex market · Topic: Balance of Payments and Exchange Rates · NCERT: Class 12, Ch 6 "Open Economy Macroeconomics"
Meaning
The foreign exchange (forex) market is the market where national currencies are traded for one another. It is world-wide, and its trading centres stay in constant contact with each other. The main participants are commercial banks, forex brokers, other authorised dealers (bodies allowed by the central bank to deal in forex) and monetary authorities such as RBI. The exchange rate is set in this market.
Example
An Indian importer buys dollars from its bank to pay a US supplier. At the same time, an IT exporter sells its dollar earnings. RBI may also buy or sell dollars to calm sharp swings in the rupee.
Don't confuse with
- Non-deliverable forward (NDF) market: this is an offshore market, for example in Singapore, where rupee contracts are settled in dollars and no rupees change hands.
Related concepts
- Foreign exchange
- Foreign exchange rate
- Demand for foreign exchange
- Supply of foreign exchange
- Flexible exchange rate
- Currency depreciation
- Currency appreciation
- Currency speculation
- Interest rate differential
- Interest rate parity