Foreign exchange is the act of changing one country's currency into another country's currency for a variety of reasons, usually for tourism or for trading globally. For doing trade overseas, there is a need to transact with other countries in their own particular currency. The forex markets are the largest in terms of volume traded in the world and hence the most liquid market.
Forex for tourism purpose
Exchanging currency from foreign exchange outlets at airport is an expensive option as they charge a good amount of money as commission. Since you are left with no other choice, you cannot bargain either. It’s better to go for forex cards along with some cash in foreign currency which one can buy from the banks or from an RBI authorized money changer. You would always get a better rate on forex card than cash currency and it is safer too. Exchange rates would vary from vendor to vendor. One should compare the exchange rates offered by at least 3 vendors before buying.
Forex as a hedge
Commercial enterprises doing trade in foreign countries are at a risk due to fluctuating currency values when they have to buy or sell goods or services to another country. Hence, the foreign exchange markets provide a way to hedge the risk by fixing a rate with the bank at which the transaction will be concluded at some time in the future when an import/export payment of a firm is expected.
To accomplish this, a trader can buy or sell currencies in the forward or swap markets, at which time the bank will fix a rate for future so that the trader knows the exact exchange rate in order to mitigate his company's risk. To some extent, the futures market can also offer to hedge currency risk, depending on the size of the trade.
Foreign currency loans
Financing in foreign currency is used for a wide variety of purposes. A foreign currency loan can be availed for working capital purposes in Indian rupees or foreign currency. Exporters can avail foreign currency loan for working capital purposes as pre-shipment credit or post shipment credit in foreign currency. While using a foreign currency loan for working capital purposes, it is recommended that the businesses have a natural hedge or cover themselves from exchange risk.
Foreign currency loans can be used by importers to finance the importing of raw materials instead of rupee based loans. Availing foreign currency loan for importing raw material and exporting goods would ensure the business has a natural hedge, as foreign currency loans can also be repaid in foreign currency.
The companies importing machinery or other equipment's from foreign countries can avail loan in foreign currency for a period not exceeding 3 years. Importing capital goods backed by Letter of Credit denominated in foreign currency will ensure that the business enjoys very low rate of interest on the capital goods imported for a period of upto 3 years.
Foreign currency loan can be used to repay rupee term loan provided the duration of the foreign currency loan does not exceed the portion of the existing rupee loan which has not yet expired or 3 years, whichever is less. Replacing a rupee term loan with a foreign currency loan that is hedged can reduce the interest cost.
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1. Foreign exchange as the term says is an exchange of foreign currency. Exchange of one country’s currency against another country’s is done in the foreign exchange or forex market.