Foreign Exchange Market

The foreign exchange market often referred to as Forex or FX, is a decentralized global marketplace where the values and exchange rates of different currencies are determined. This market, primarily operating over the counter (OTC), serves as a hub for various participants, including banks, forex dealers, commercial entities, central banks, investment management firms, hedge funds, retail forex dealers, and investors.

Example of Forex Market Use

1. Import-Export Scenario:

   • An Indian company imports machinery from Germany costing €100,000.

   • The company buys euros in the Forex market, paying in USD/EUR or INR/EUR as per the current exchange rate.

2. Investment/Trading Scenario:

   • A trader expects USD to strengthen against INR.

   • Buys USD/INR at 83.50 and sells later at 84.00 → earns profit.

3. Central Bank Intervention:

   • RBI may buy or sell USD in the Forex market to stabilize INR value against other currencies.