Foreign Exchange

The foreign exchange market is one in which currencies are bought and sold against each other. It is the largest market in the world. The conversion of currencies is done by banks who deal in foreign exchange. These banks maintain stocks of foreign currencies in the form of balances with banks abroad. For instance, Indian bank may maintain an account with bank of America, New York, in which dollar balances are held.
The foreign exchange market is an over the counter market. This means that there is no single physical or electronic market place or an organized exchange (like a stock exchange) with a central trade clearing mechanism where traders meet and exchange currencies. The market itself is actually a worldwide network of inter bank traders, consisting primarily of banks, connected by telephone lines and computers.
While a large part of inter bank trading takes place with electronic trading system such as Reuters Dealing 2000 and Electronic broking systems, banks and large commercial (i.e. Corporate) customers still use the telephone to negotiate prices and consummate the deal. After the transaction the resulting market bid/ask price is then fed into the computer terminals provided by official market reporting service companies.
• 24 hours market the markets are situated through out the different time zones of the globe in such a way that when one market is closing the other is beginning its operation.