Foreign Exchange Dealer's Association of India (FEDAI)

Foreign Exchange Dealer's Association of India (FEDAI) was set up in 1958 as anassociation of banks dealing in foreign exchange in India (typically called AuthorizedDealers - ADs). It is a self-regulatory body and has been incorporated under Section 25of The Companies Act, 1956. Main activities include framing of rules governing theconduct of inter-bank foreign exchange business among banks vis-à-vis public andliaison with RBI for reforms and development of forex market.

Some of the functions of FEDAI are given below:

• Guidelines and Rules for Forex Business.
• Training of Bank Personnel in the areas of Foreign Exchange Business.
• Accreditation of Forex Brokers
• Advising/Assisting member banks in settling issues/matters in their dealings.
• Representing member banks on Government/Reserve Bank of India/OtherBodies.
• Announcing daily and periodical rates to member banks.

Vostro, Nostro and Loro accounts

Vostro Account: (Italian, from Latin, Voster; English, 'yours') 

Account held by a foreign bank in a domestic bank is called Vostro account. A Vostro is our account of your money, held by us. A Vostro account with a credit balance (i.e. a deposit) is a liability, and a vostro with a debit balance (a loan) is an asset.

For example Bank A(Barclays Bank of  UK) opening an account in Bank B(ICICI Bank of India), this is Vostro account for Bank B(ICICI Bank of India).

Nostro Account: (Italian, from Latin, Noster ; English, 'ours')

Account held by a particular domestic bank in a foreign bank is called Nostro account. A Nostro is our account of our money, held by you. A bank counts a Nostro account with a credit balance as a cash asset in its balance sheet.

Here in the above example given in Vostro account the same account is a Nostro account for Bank A(Barclays Bank of UK), or if Bank B(ICICI Bank of India) opens an account in Bank A(Barclays Bank of UK) then that account is a Nostro account for Bank B(ICICI Bank of India). Nostro accounts are usually in the currency of the foreign country. This allows for easy cash management because currency doesn't need to be converted.

Loro Account: (Italian, from Latin, Loro; English, 'theirs'). 

An account held by a domestic bank in itself on behalf of a foreign bank.The latter in turn would view this account as a Nostro account. A Loro is our account of their money, held by you. Loro account is a record of an account held by a second bank on behalf of a third party; i.e, my record of their account with you. In practice this is rarely used, the main exception being complex syndicated financing.
If any other bank for the purpose of a transaction refer to an account maintained by yet another bank in some other countries it is known as loro account.
An expression used, for example, by one bank when telling another bank to transfer money to the account of a third bank. In correspondent banking, an account held by one bank on behalf of another bank (the “customer bank”); the customer bank regards this account as its “Nostro account”. The Loro account is an account wherein a bank remits funds in foreign currency to another bank for credit to an account of a third bank.

Forex Transactions in the Spot market

A foreign exchange rate is the price of one currency in terms of another currency. In the institutional foreign exchange market, in which large institutions trade hundreds of millions of dollars, foreign exchange refers to bank deposits. When a bank trades foreign exchange with another bank, it is actually exchanging a bank deposit of one currency for a bank deposit of another currency. Transactions in the spot foreign exchange market simply depend on the needs of the buyer and willingness of the seller. Settlement in the spot market occurs in usually no more than two business days, but individual countries have their own payment and settlement systems.

Various FX Instruments and Strategies

Foreign exchange products traded in the market constitute of the traditional products and recently introduced products.

Spot:
A spot deal involves a direct exchange of one currency for another. The spot rate generally is the current market price, the benchmark price. A swap involves cash and not contracts, and also has the shortest time frame.

Outright Forwards:
An outright forward transaction, like a spot transaction, is also a straightforward single purchase of one currency for another. The only difference is that spot is settled, or delivered, on a value date no later than 2 business days after the deal date, while outright forward is settled on any pre-agreed date, three or more business days after the deal date.

Forex Swaps:
In the FX swap market, one currency is swapped for another for a period of time, and then swapped back, creating an exchange and re-exchange. A FX swap has two separate legs settling on two different value dates, even though it is arranged as a single transaction and is recorded in the turnover statistics as a single transaction. These are not contracts and are not traded through an exchange.

Currency Swaps:
A currency swap is structurally different from the FX swap. In a typical currency swap, counterparties will exchange equal initial principal amounts of two currencies at the spot exchange rate, exchange a stream of fixed or floating interest rate payments in their swapped currencies for the period of the swap,and then re-exchange the principal amount at maturity at the initial spot exchange rate. These are not contracts and are not traded through an exchange.

OTC FX Currency Options:
A FX or currency option contract gives the buyer the right, but not the obligation, to buy (or sell) a specified amount of one currency for another at a specified price on a specified date.

Exchange Traded Futures:
A FX futures contract is an agreement between two parties to buy or sell a particular currency at a particular price on a particular future date, as specified in a standardized contract common to all participants in that currency futures exchange. This instrument is a characteristic of the US exchanges. The average contract length is roughly 3 months. Exchange Traded Currency Options:
Exchange-traded currency options, like exchange-traded futures, utilize standardized contracts-with respect to the amount of the underlying currency, the exercise price, and the expiration date.

Short dated forex options:
These are a type of OTC Forex currency options with maturity up to 90 days.

Source Exotic options:
Types of options which have specific features, such as special expiry conditions. Forex Bonds:
These are bonds issued by a financial institution against a particular foreign currency. It is mainly used in Inter-bank market.

Forward Contract:
Forward Contract is a contract with customer/another Bank for an exchange transaction to be put through at some future date at an agreed exchange rate (import and export of goods).

Hedging:
Hedging involves offsetting the price risk in cash market positions, by taking an equal, yet an opposite position in futures market. In long hedge, buying futures contracts helps shield against possible increasing prices of commodities. On the other hand, short hedge shields against declining prices of commodities.

Participants in Foreign Exchange Market

Institutional foreign exchange market participants include:

• Dealers
• Brokers
• Central banks
• Financial and corporate institutions

Foreign exchange is traded over-the-counter (OTC). It is operating worldwide, roundthe-
clock. A number of foreign exchange instruments, called Derivatives are traded on
exchanges. For traders, forex trading provides an alternative to stock market trading.

Dealers:

Dealers are financial institutions that buy and sell foreign exchange on behalf of their
clients, or even for themselves. Dealers act as one of the counterparties in a transaction,
committing their own capital. The dealer makes profit by finding another party and
closing out its position at a better price. Some dealers are market makers as they bid
and offer prices for one or more currencies and is ready to make a two-sided market for
its clients. In return for this service, the market maker seeks to earn a profit on the
difference between the bid and ask prices. (Bid price is the highest price any buyer is
willing to pay for a given currency at a given time. Offer price is the price at which
currency may be sold in the market. Ask price is the price that the dealer is willing to
pay from the seller of the currency). Foreign Exchange Dealer's Association of India (FEDAI) is an association of banks which deals in foreign exchange.

Broker:
A broker in the OTC FX (Over the Counter Forex) market serves as an intermediary
between two counterparties. The broker tries to unite a buyer and seller and earn a fee
for this service. Brokers do not take positions themselves or commit their own capital as
dealers do.
There are a large number of traders who fall under this category, which is essentially
small in amounts, but large in volume. They offer standard services, 24-hour online
currency trading, 100 to 1 leverage, commission free trading etc.

Electronic Brokerage System (EBS):
EBS is widely used for standardized transactions in the spot market (A market in which
transaction takes place on the spot and delivery immediately thereafter), especially
smaller trades involving the most common currency pairs. With electronic systems,
traders can see, on their computer screens, all bid and offer rates being offered by
acceptable counterparties. If a trader sees a bid or offer rate for an amount that it
accepts, the trader can then match the order and make the deal electronically. Back
office operations confirm the trade and generate the appropriate paperwork for both
parties to conclude the transaction.

Components of Foreign Exchange Market

The main methods of trading FX are direct inter-bank trading, voice brokers and electronic broking systems.

The main components of the forex market are:

• Trade rate
• Counterparty
• Currencies
• Exchange rate
• Amounts
• Value date

Components of Foreign Exchange Market

The main methods of trading FX are direct inter-bank trading, voice brokers and
electronic broking systems. The main components of the forex market are:

• Trade rate


• Counterparty


• Currencies


• Exchange rate


• Amounts


• Value date

Advantages of Forex Market

• 24-hour market: The Forex market is open 24-hours and five days a week. It
  gives facility to the trader to customize trading schedule in different
  geographical areas.
• Liquidity: Forex market operates huge volumes of money, which provides the
  traders with complete freedom to open or close their positions, regardless of
  contract size.
• Leverage: It decreases the size of initial deposit required. If a person deposits Rs
  100000 in his account, he can trade up to the maximum limit of Rs20000000
  (using leverage 200:1).
• Easy access: With technology advances such as Internet and trading platforms,
  the market has become easily accessible to investors in different geographical
  areas.
• Hedging foreign currency risk: One can protect revenues from foreign
  currency transactions by hedging against exposure to adverse rate movements.
• Short selling: Unlike the stock market, there is no restriction on short selling in
  the currency market. Regardless of the market movement and trader being long
  or short, he has ample opportunities in the currency markets. Both on raising as
  well as in falling markets, the trader has equal access to trade.

Features of Forex Market

There are some main characteristics of the foreign exchange market. These include:

• The geographical spread: The forex market is spread across the world, and
  is functional 24 hours a day
• Main function: The market’s main function is the mechanism by which
  participant transferring purchasing power between the countries, obtains
  or provides credit for international trade and minimizes exchange rate risk
  and determines exchange rate between currencies.
• Market participants: The key market participants are-
  § Banks
  § Commercial Companies
  § Central Banks
  § Hedge Funds
  § Retail Forex Brokers
• Types of transaction: The key transactions are spot, forward and swaps
• Liquidity is very high in forex market because the market operates in high
  money supply conditions. It gives freedom in opening and closing position
  in current market quotation.

Foreign Exchange (Forex) Market

Forex or foreign exchange market is one where currencies of different countries are
exchanged. It simply deals with exchanging of currencies of one country with those of
other countries. It involves cross border selling and buying of currencies and movement
of funds. Forex market is the world’s largest financial market and is also one of the most
volatile.
Foreign Exchange transactions take place between two countries on account of
(a) Imports/Exports of goods
(b) Trade in services viz. IT, Insurance, Shipping, Banking, and Consultancy etc.
(c) Remittances from other countries
(d) International travel
(e) Foreign aid, gifts etc.
(f) Repayment of foreign loans

From the bank’s point of view, foreign exchange transactions take place as:

• Sales: Bank gives foreign Currency and customer gives rupees
• Purchases: Bank pays rupees and Customer gives foreign currency

Foreign Exchange processes consist of remittance, other bills collection, traveler's
check, foreign currency, and Visa card transactions and supports stock management
and specialized process function related to these businesses.
There are nine major centers of foreign exchange trading. These are based in, London,
New York, Zurich, Frankfurt, Tokyo, Hong Kong, Singapore, Paris and Sydney.

World’s largest forex market is in UK. DEUTSCHE BANK is the largest trader
of foreign exchange.

Few Terms(FX)

European Currency Quotation
An indirect quotation in the foreign exchange markets whereby the value of a foreign currency is stated as a per-unit measure of the U.S. dollar. This type of quotation shows how much foreign currency it takes to purchase one U.S. dollar.

European Monetary System - EMS
A 1979 arrangement between several European countries to link their currencies in an attempt to stabilize the exchange rate. This system was succeeded by the European Monetary Union (EMU), an institution of the European Union (EU), which established a common currency called the euro. The European Monetary System originated in an attempt to stabilize inflation and stop large exchange-rate fluctuations between European countries. Then in June 1998, the European Central Bank was established and, in Jan 1999, a unified currency, the euro, was born and came to be used by most EU member countries. As of 2005, Britain, Denmark and Sweden were the only original EU members that had not adopted the euro.

European Central Bank - ECB
The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed in Germany in June 1998 and works with the other national banks of each of the EU members to formulate monetary policy that helps maintain price stability in the European Union. The European Central Bank has been responsible for the monetary policy of the European Union since January 1, 1999, when the euro currency was adopted by the EU members. The responsibilities of the ECB are to formulate monetary policy, conduct foreign exchange, hold currency reserves and authorize the issuance of bank notes, among many other things.

Euro LIBOR
London Interbank Offer Rate denominated in euros. This is the interest rate that banks offer each other for large short-term loans in euros. The rate is fixed once a day by a small group of large London banks but fluctuates throughout the day. This market makes it easier for banks to maintain liquidity requirements because they are able to quickly borrow from other banks that have surpluses The Euro LIBOR is based on the average lending rates of 16 banks. These bank rates are available to the public through the British Bankers' Association. Euro LIBOR exists mainly for continuity purposes in swap contracts dating back to pre-euro times and is not very commonly used.

Forex Broker
Firms that provide currency traders with access to a trading platform that allows them to buy and sell foreign currencies. A currency trading broker, also known as a retail forex broker, or forex broker, handles a very small portion of the volume of the overall foreign exchange market. Currency traders use these brokers to access the 24-hour currency market. It is valuable to do some research to find out whether a broker has a good reputation and has the functionality that you are looking for. Most major forex brokers will allow prospective clients to use a practice account so that they can get a good understanding of what the system is like. It is a wise idea to test out as many platforms as possible before deciding on which broker to use.

Miscellaneous Terms

Trade Finance
The science that describes the management of money, banking, credit, investments and assets for international trade transactions.
Companies involved with trade finance include importers and exporters, financiers, insurers and other service providers.

Forex Scalping
A trading strategy used by forex traders to buy a currency pair and then to hold it for a short period of time in an attempt to make a profit. A forex scalper looks to make a large number of trades and earn a small profit each time. Forex scalping generally involves large amounts of leverage so that a small change in a currency equals a respectable profit. Forex scalping system strategies can be manual or automated. A manual system involves a trader sitting at the computer screen, looking for signals and interpreting whether to buy or sell. In an automated trading system, the trader "teaches" the software what signals to look for and how to interpret them. It is thought that automated trading takes human psychology out of trading, which is important in forex scalping because the fast-paced environment can be hard for traders to stomach.

Trading Desk
A desk where transactions for buying and selling securities occur. Trading desks can be found in most organizations (banks, finance companies, etc.) involved in trading investment instruments such as equities, fixed-income securities, futures, commodities and foreign exchange. A trading desk provides traders with access to instantaneous trade executions. Also known as "dealing desk".

White Candlestick
A point on a candle stick chart representing a day in which the underlying price has moved up. Candlesticks will have a body and usually two wicks on each end. The bottom of the white body represents the opening price and the top of the body represents the closing price. The top and bottom tips of each wick are the day's highest and lowest price respectively. Also known as an “open candlestick.”
Candlestick charts are primarily used by technical traders because of how quick a day's price movement is conveyed. There are many formations which can be used as a buy, sell or hold indicator. Red/black candlesticks represent a downward movement for the day, which are opposite of white candle sticks. Most charting software will allow you to change the colors of these candles. Even though white is the common color for this type of candlestick, any color can and is used by traders.

Universal Banking
Banking that includes investment services in addition to services related to savings and loans. This is more common in European countries because there are generally more restrictions in North America as to what services financial institutions can offer.

Banking Department(FX)

A state-specific regulatory body that oversees the operations of financial institutions within its jurisdiction. The primary responsibility of the banking department is to ensure that the financial system is accessible, stable and safe for all consumers.
The state banking department is where many consumers go to file a complaint against a financial institution that is within the banking department's jurisdiction. (Not all banks operating in a state fall within that state's jurisdiction.)
Types of financial institutions that fall under the supervision of the banking department include commercial banks, credit unions, money transmitters and nonbank mortgage lenders.

Forex Analysis

An examination of the changes in the forex market that are used by a trader to determine whether to buy or sell a currency pair at any one time. Forex analysis could be technical in nature, using charting tools, or fundamental, using economic indicators and/or news-based events.
Forex analysis can be either manual or automated. A manual system involves a trader sitting at the computer screen, analyzing signals and interpreting whether to buy or sell. In automated trading analysis, the trader teaches the software what signals to look for and how to interpret them. It is thought that automated analysis takes the element of human psychology out of trading.

Forex Forecasting Software

An analytical tool used to help currency traders with forex trading analysis through charts and indicators. Forex forecasting software provides charts of currency pairs that display price changes over time as well as indicator overlays including moving averages, which aid analysts and traders in determining appropriate and profitable entry and exit points for their forex trades. As with charting software used for trading other securities, forex charting software is used primarily by technical analysts to forecast future price movements.

There is a wide range of forex charting software used for currency forecasting, which varies in appearance and functionality. Users should look for several things in forex charting software, including:

• Is it free, or if there is a nominal charge? What additional features are made available?
• What technical indicators are available?
• Is the software Windows, Macintosh (Mac) or internet (Java or HTML) based?
• Can you trade from the charts?
• Is historical data made available through the software?
• Is the graphical user interface (GUI) pleasing to look at?
• Is the GUI conducive to monitoring a lot of information at once?

Most forex brokers allow you to open a demo account prior to funding a full account or mini account. This allows users to try out each broker's software during a trial period and determine which software best suits their needs.