Executive Summary
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The foreign exchange market does not have a physical market place called the foreign exchange market. It is a mechanism through which one country's currency can be exchange i.e. bought or sold for the currency of another country. The foreign exchange market does not have any geographic location. The market comprises of all foreign exchange traders who are connected to each other through out the world. They deal with each other through telephones, telexes and electronic systems. The foreign exchange market operates twenty four hours a day during the business week; the only time it is silent is after the New York market closes on Friday afternoon and before the Sydney market opens on Monday morning (which would be Sunday evening New York time).
In the aftermath of the Asian crisis, which curbed and restricted offshore trading in regional currencies, most derivatives markets in Asia are still in their infancy. Financial institutions trying to introduce or transplant products from mature markets to those that are lesser developed are meeting with limited success.
The RBI has ushered rupee derivatives trading into the country: it has formally allowed banks and corporate to hedge against interest rate risks through the use of interest rate swaps (IRS) and forward rate agreement (FRA). According to the guidelines issued by RBI there will be no restriction on the tenure and size of the IRS and FRA entered into by banks. The IRS will also allow corporate to hedge their interest rate risks and also to provide an opportunity to swap their old high cost loans with cheaper ones. With the new guidelines in place, commercial banks, primary institutions and financial institutions can now undertake IRS and FRA as a product of their own balance sheet management and market making