The Maastricht Treaty institutes an European System of Central Bank (ESCB) with
supra-national institution, called European Central Bank (ECB). It is the only ECB,
which will be authorized to issue bank notes in the European Union; it will exercise full
control on the circulation of currencies, participating in ECU and progressively replace
ancient currencies of the EU, ECU will then, become a veritable currency, i.e., a real
operational currency.
- Foreign Exchange Market
The foreign exchange market is the market where the currency of one country is
exchanged for that of another country and where the rate of exchange is determined. The
genesis of Foreign Exchange (FE) market can be traced to the need for foreign currencies
arising from:
- International trade;
- Foreign investment; and
- Lending to and borrowing from foreigners.
In order to maintain an equilibrium in the FE market, demand for foreign currency (or the
supply of home currency) should equal supply of foreign currency (or the demand for
home currency). In operational terms, the demand for all supply of home currency
should be equal. In the event of a disequilibrium situation, the monetary authority of the
concerned country normally intervenes/steps in to bring out the desired balance by:
- Variation in the exchange rate ; or
- Changes in official reserves; or
- Both.
Foreign exchange rates are quoted either for immediate delivery (spot rate) or for
delivery on a future date (forward rate). In practice, delivery in spot market is made two
days later.
A FE quotation is the price of a currency expressed in the units of another currency. The
quotation can be either direct or indirect. It is direct when quoted as “so many units of
local currency per unit of foreign currency”. For example, Rs.35 = US $ 1, is a direct
quotation for US dollars in India.
On the other hand, an indirect quotation is the one where exchange rate is given in terms
of variable units of foreign currency as equivalent to a fixed number of units of home
currency. For example, in India, US $ 2.857 = Rs.100 is an indirect quotation.
All quotations in India use the direct method of quotation.
A dealer usually quotes a two-way price for a given currency – the price at which he is
buying (bid price) and the price at which he is selling (offer or ask price) the currency. In
either case, the currency for which the bid or ask price is given is the unit of the item
priced.