Foreign exchange

Foreign exchange (Forex or FX) converts one currency into another at a specific rate known as the foreign
exchange rate. The conversion rates for almost all currencies are constantly floating as supply and demand
market forces drive them. The most traded currencies in the world are the United States dollar, Euro,
Japanese yen, British pound, and Australian dollar. The US dollar remains the key currency, accounting
for over 87% of the total daily value traded.
Foreign exchange's primary purpose is to facilitate international trade and investment by enabling
businesses and individuals to convert one currency into another. For example, when a company based in
the United States imports goods from Japan, it needs to pay its Japanese suppliers in Japanese yen. To do
this, the company must convert its U.S. dollars into yen at the prevailing exchange rate.

Here are some fundamental aspects of foreign exchange:

Currency Pairs: In forex trading, currencies are traded in pairs. Each pair consists of a base currency and
a quote currency. For example, in the pair EUR/USD, the euro (EUR) is the base currency, and the US
dollar (USD) is the quote currency.
Major Currency Pairs: The most commonly traded currency pairs are known as significant pairs. These
pairs involve currencies of major economies and enjoy high liquidity and lower spreads. Examples include
EUR/USD, USD/JPY, GBP/USD, and USD/CHF.
Cross-Currency Pairs: Cross-currency pairs don't involve the US dollar. Instead, they consist of two
major currencies traded against each other. Examples include EUR/GBP, AUD/JPY, and GBP/JPY.
Currency Symbols: Currencies are represented by three-letter codes prescribed by the International
Organization for Standardization (ISO). For instance, USD stands for the US dollar, EUR for the euro,
GBP for the British pound, and JPY for the Japanese yen.
Exchange Rates: The exchange rate represents the price at which one currency can be exchanged for
another. Various factors, including interest rates, economic performance, geopolitical events, and market
sentiment influence exchange rates.
Market Participants: The forex market comprises various participants, including banks, financial
institutions, corporations, governments, speculators, and individual traders. These participants engage in
currency trading for multiple purposes, such as hedging, speculation, and international trade.
Liquidity: The forex market is highly liquid, meaning there's a high volume of trading activity and ample
opportunities to buy or sell currencies without significantly affecting prices. Liquidity ensures that traders
can enter and exit positions quickly and at competitive prices.
Currency Risk Management: Currency risk arises from fluctuations in exchange rates. Businesses and
investors use various strategies to manage currency risk, such as hedging with derivatives like forwards,
futures, options, and swaps.
Forex Trading Platforms: Forex traders can access real-time market data, charting tools, technical
analysis indicators, and order execution capabilities through online trading platforms provided by brokers.
Understanding these fundamentals is crucial for anyone interested in participating in the foreign exchange
market, whether as a trader, investor, or risk manager. It's essential to stay informed about economic
developments, geopolitical events, and market trends to make informed trading decisions in the forex
market.
 Foreign exchange management
Foreign exchange management refers to the process of managing and overseeing the conversion of one
currency into another and the associated risks associated with such transactions. This is particularly
relevant for businesses and individuals involved in international trade, investment, or travel, where dealing
with different currencies is common.
Critical aspects of foreign exchange management include:
1. Exchange Rate Management: Monitoring and analyzing exchange rates to make informed decisions
about when to buy or sell currencies. This involves understanding the factors influencing exchange rate
fluctuations, such as economic indicators, geopolitical events, and central bank policies.
2. Currency Hedging involves implementing strategies to mitigate the risks associated with currency
fluctuations. This may involve using financial instruments such as forward contracts, options, or futures
to lock in exchange rates and protect against adverse movements.
3. Transaction Processing: This involves handling the practical aspects of currency conversion, such as
executing trades, settling transactions, and managing foreign currency accounts.
4. Compliance and Regulation: Ensuring compliance with relevant laws, regulations, and reporting
requirements governing foreign exchange transactions. This includes adhering to anti-money laundering
(AML) and know-your-customer (KYC) rules and complying with tax laws related to foreign income and
currency transactions.
5. Risk Management: Identifying and assessing the various risks associated with foreign exchange
activities, including exchange rate risk, credit risk, liquidity risk, and operational risk, and developing and
implementing risk management policies and procedures to minimize exposure to these risks.
6. Financial Reporting and Analysis: Reporting and analyzing foreign exchange transactions and their
impact on financial performance. This involves accurately recording foreign currency transactions,
translating foreign currency balances into the reporting currency, and assessing the effect of exchange rate
fluctuations on financial statements.
Effective foreign exchange management is essential for businesses and individuals engaged in
international activities to optimize their currency-related transactions, minimize risks, and ensure
compliance with applicable regulations.

Foreign exchange rate

Foreign exchange rate refers to the price at which one currency can be exchanged for another. It represents
the value of one currency in terms of another currency. Exchange rates are determined by the foreign
exchange market, where currencies are traded 24 hours a day, five days a week.
There are several types of exchange rates:
Spot Exchange Rate: The spot exchange rate is the current market rate at which currencies are traded for
immediate delivery or settlement. It represents the price at which one currency can be exchanged for
another at the present moment.
Forward Exchange Rate: Forward exchange rates are agreed upon today for exchanging currencies at a
specified future date. These rates are determined based on the spot exchange rate and adjusted for the
interest rate differentials between the two currencies over the specified period.
Real Exchange Rate: The real exchange rate adjusts the nominal exchange rate for differences in price
levels or inflation between two countries. It reflects the relative purchasing power of two currencies
regarding a basket of goods and services. A real exchange rate different from its equilibrium level can
indicate whether a currency is overvalued or undervalued.
Nominal Exchange Rate: The nominal exchange rate is the actual rate at which currencies are exchanged
in the foreign exchange market. It represents the relative value of one currency in terms of another without
adjusting for inflation or other factors affecting purchasing power.
Effective Exchange Rate: The effective exchange rate is a weighted average of a country's bilateral
exchange rates with its trading partners, adjusted for the relative importance of each trading partner. It
provides a broader measure of a country's currency value than a single bilateral exchange rate.
Fixed Exchange Rate: In a fixed exchange rate system, the value of a currency is fixed or pegged to the
value of another currency, a basket of currencies, or a commodity such as gold. Governments or central
banks actively intervene in the foreign exchange market to maintain the fixed rate.
Floating Exchange Rate: In a floating exchange rate system, exchange rates are determined by supply
and demand market forces without government intervention. The value of a currency fluctuates freely
based on economic fundamentals and market sentiment.

Determination of Rate of Exchange

The exchange rate is "the rate at which one country's currency may be converted into another." It may
fluctuate daily with the changing market forces of supply and demand of currencies from one country to
another. For these reasons, it is important to understand how exchange rates are determined when sending
or receiving money internationally.
Factors Affecting Exchange Rate
1. Inflation Rates
Changes in market inflation cause changes in currency exchange rates. A country with a lower inflation
rate than another will see an appreciation in the value of its currency. The prices of goods and services
increase at a slower rate when inflation is low. A country with a consistently lower inflation rate exhibits
a rising currency value, while a country with higher inflation typically sees depreciation in its currency
and is usually accompanied by higher interest rates
2. Interest Rates
How do interest rates affect exchange rates? Changes in interest rates affect currency value and dollar
exchange rate. Forex rates, interest rates, and inflation are all correlated. Increases in interest rates cause
a country's currency to appreciate because higher interest rates provide higher rates to lenders, thereby
attracting more foreign capital, which causes a rise in exchange rates
3. Country's Current Account / Balance of Payments
A country's current account reflects its balance of trade and earnings on foreign investment. It comprises
the total number of transactions, including exports, imports, debt, etc. A deficit in the current account
caused by spending more of its currency on importing products than it is earning through the sale of
exports causes depreciation. The balance of payments fluctuates with the exchange rate of its domestic
currency.
4. Government Debt
Government debt is public or national debt owned by the central government. A country with government
debt is less likely to acquire foreign capital, leading to inflation. If the market predicts government debt
within a particular country, foreign investors will sell their bonds in the open market. As a result, the
country's exchange rate value will decrease.
5. Terms of Trade
A trade deficit also can cause exchange rates to change. Related to current accounts and balance of
payments, the terms of trade are the ratio of export prices to import prices. A country's terms of trade
improve if its export prices rise at a greater rate than its import prices. This results in higher revenue,
which causes a higher demand for the country's currency and an increase in its value. This results in an
appreciation of the exchange rate.
6. Political Stability & Performance
A country's political state and economic performance can affect its currency strength. A country with less
risk of political turmoil is more attractive to foreign investors. As a result, it is drawing investment away
from other countries with more political and economic stability. An increase in foreign capital, in turn,
leads to an appreciation in the value of its domestic currency. A country with sound financial and trade
policy does not give any room for uncertainty in the value of its currency. But, a country prone to political
confusion may see a depreciation in exchange rates.
7. Recession
When a country experiences a recession, its interest rates are likely to fall, decreasing its chances of
acquiring foreign capital. As a result, its currency is weaker than other countries, lowering the exchange
rate.
8. Speculation
If a country's currency value is expected to rise, investors will demand more of that currency to make a
profit in the near future. As a result, the currency's value will rise due to increased demand. With this
increase in currency value comes a rise in the exchange rate.

Theories of Exchange Rate Determination

Several theories explain how exchange rates are determined in the foreign exchange market. These
theories provide different perspectives on the factors influencing exchange rate movements. Some of the
prominent theories include:
Purchasing Power Parity (PPP) Theory: According to PPP theory, exchange rates adjust to equalize
the prices of identical goods and services in different countries. There are two versions of PPP: absolute
PPP, which suggests that exchange rates should reflect the price levels of goods and services directly, and
relative PPP, which accounts for differences in inflation rates between countries. PPP theory implies that
changes in exchange rates are driven by differences in inflation rates over time.
Interest Rate Parity (IRP) Theory: IRP theory asserts that differences in interest rates between countries
are reflected in the forward exchange rates, which equalize the returns on comparable financial assets
denominated in different currencies. In other words, investors should not be able to make risk-free profits
by borrowing in one currency, converting it to another, investing at a higher interest rate, and then
converting back at the forward exchange rate. Deviations from interest rate parity could lead to arbitrage
opportunities.
Asset Market Model (or Portfolio Balance Approach): This model views exchange rate movements as
driven by the supply and demand for financial assets denominated in different currencies. It emphasizes
factors such as changes in relative interest rates, expectations about future exchange rate movements, and
investors' risk preferences. Central to this model is the concept of market equilibrium, where the demand
for a currency equals its supply.
Balance of Payments (BOP) Theory: BOP theory focuses on the relationship between a country's current
account balance (exports minus imports of goods and services) and its capital account balance (net inflows
and outflows of financial assets). According to BOP theory, exchange rates adjust to maintain equilibrium
in the balance of payments. For example, a country with a trade deficit may experience a depreciation of
its currency to make its exports cheaper and imports more expensive, thus improving its trade balance.
Monetary Approach to Exchange Rates: This approach emphasizes the role of monetary factors,
particularly money supply and demand, in determining exchange rates. It posits that changes in the money
supply, influenced by monetary policy actions such as changes in interest rates or open market operations,
lead to changes in exchange rates. The monetary approach suggests a long-run relationship between
money supplies and exchange rates, known as the monetary model.
These theories provide different perspectives on the complex process of exchange rate determination.
They are often used in conjunction with one another to analyze exchange rate movements in various
economic contexts. However, no single theory perfectly explains all exchange rate movements, as many
factors, including economic fundamentals, investor sentiment, geopolitical events, and market
psychology, influence exchange rates.

Factors Affecting Fluctuations of Foreign Exchange

Fluctuations in foreign exchange rates are influenced by various factors, including economic, financial,
political, and psychological factors. Here are some of the key factors that affect fluctuations in foreign
exchange rates:

Interest Rates: Central bank interest rate decisions play a significant role in influencing exchange rate
movements. Higher interest rates tend to attract foreign capital inflows, increasing demand for the
currency and causing it to appreciate. Conversely, lower interest rates can lead to capital outflows,
decreasing demand for the currency and causing it to depreciate.
Inflation Rates: Countries with lower inflation rates generally have stronger currencies, as their
purchasing power remains relatively stable compared to countries with higher inflation rates. Investors
are more likely to seek currencies from countries with low inflation to preserve the value of their
investments.
Economic Indicators: Economic indicators such as GDP growth, employment figures, industrial
production, and trade balances can impact exchange rates. Economic solid performance can lead to
currency appreciation, while weak economic data may cause depreciation.
Political Stability and Economic Policy: Political stability and the implementation of sound economic
policies can contribute to currency stability and investor confidence. Uncertainty or instability in politics
or economic policy can lead to currency depreciation as investors seek safer alternatives.
Current Account Balance: The current account balance, which reflects a country's trade balance, net
income from abroad, and net transfers, can influence exchange rates. Countries with trade surpluses tend
to have stronger currencies, while those with trade deficits may experience currency depreciation.
Market Sentiment and Speculation: Market sentiment and speculative trading can drive short-term
fluctuations in exchange rates. Traders and investors may buy or sell currencies based on their expectations
of future movements, independent of underlying economic fundamentals.
Central Bank Interventions: Central banks occasionally intervene in the foreign exchange market to
stabilize their currencies or achieve specific policy objectives. They may buy or sell their currency to
influence its value relative to other currencies.
Global Events and Geopolitical Risks: Geopolitical events such as conflicts, natural disasters, and
changes in international relations can affect exchange rates by influencing investor risk appetite and
market sentiment.
Market Liquidity and Trading Volume: Market liquidity and trading volume can influence exchange
rate movements. Thinly traded currencies may experience greater volatility, especially during heightened
uncertainty or market stress.
Speculative Attacks and Currency Crises: Speculative attacks or currency crises can lead to sharp and
sudden fluctuations in exchange rates, often triggered by factors such as unsustainable fiscal or monetary
policies, external debt burdens, or loss of investor confidence.
These factors interact in complex ways to determine exchange rate movements, and understanding them
is essential for businesses, investors, and policymakers involved in international trade, investment, and
finance.
 Effects of exchange rate fluctuations

Exchange rate fluctuations can significantly affect various aspects of the economy, businesses, and
individuals.
1. Impact on International Trade: Exchange rate fluctuations can affect the competitiveness of
exports and imports. A domestic currency depreciation can make exports cheaper for foreign
buyers, potentially increasing export volumes and boosting economic growth. Conversely, a
strengthening domestic currency can make imports more affordable but may reduce export
competitiveness.
2. Inflation and Purchasing Power: Exchange rate movements can influence inflation by affecting
the prices of imported goods and services. A domestic currency depreciation can lead to higher
import prices, contributing to inflationary pressures. Conversely, a strengthening domestic
currency can lower import prices and help mitigate inflation.
3. Cost of Borrowing and Investment: Exchange rate fluctuations can impact the cost of borrowing
and investment for businesses and individuals. Changes in exchange rates affect the relative
attractiveness of investing in different countries and the cost of servicing foreign currency-
denominated debt.
4. Profits and Revenues for Multinational Corporations: Multinational corporations operating in
multiple countries face exchange rate risk. Fluctuations in exchange rates can affect the translation
of foreign earnings into the reporting currency, impacting profits and revenues.
5. Tourism and Travel: Exchange rate movements can influence international tourism and travel
patterns. A depreciation of the domestic currency can make it more expensive for residents to
travel abroad but may attract more foreign tourists due to cheaper prices. Conversely, a
strengthening domestic currency can make outbound travel more affordable for residents but may
deter foreign tourists.
6. Foreign Direct Investment (FDI) and Capital Flows: Exchange rate fluctuations can impact
foreign direct investment (FDI) and capital flows. Investors may seek opportunities in countries
with relatively stable currencies or favorable exchange rate expectations. Exchange rate
movements can also affect the valuation of cross-border investments and assets.
7. Government Finances: Exchange rate fluctuations can affect government finances through their
impact on trade balances, tax revenues, and debt servicing costs. Domestic currency depreciation
may improve the trade balance by boosting exports but could increase the cost of servicing foreign
currency-denominated debt.
8. Consumer and Business Confidence: Exchange rate volatility can influence consumer and
business confidence. Sharp or unpredictable fluctuations in exchange rates may create uncertainty
and reduce confidence, leading to cautious spending and investment behavior.
9. Central Bank Policy: Exchange rate movements can influence central bank policy decisions,
particularly in countries with inflation-targeting regimes. Central banks may adjust interest rates
or intervene in the foreign exchange market to manage exchange rate volatility and achieve
monetary policy objectives.
Overall, exchange rate fluctuations can have far-reaching effects on economic activity, financial markets,
and individual well-being, highlighting the importance of managing exchange rate risk and understanding
the drivers of currency movements.
 Foreign exchange documentation

Foreign exchange documentation and operations involve the processes and paperwork associated with
conducting currency transactions in the global marketplace. These activities are essential for businesses,
financial institutions, and individuals engaged in international trade, investment, or travel. Here's an
overview of foreign exchange documentation and operations:
Know Your Customer (KYC) Documentation: To comply with regulatory requirements, individuals
and businesses must provide identification and other KYC documentation before engaging in foreign
exchange transactions. This may include passports, driver's licenses, proof of address, and business
registration documents.
Transaction Confirmation: Once a foreign exchange transaction is agreed upon between parties, a
confirmation document is often issued to confirm the transaction details, including the currencies
involved, the exchange rate, the amount, and the settlement date.
Foreign Exchange Contracts: Foreign exchange transactions are often governed by contracts or
agreements that specify the terms and conditions of the transaction, including the rights and obligations
of the parties involved. CoStandardoreign exchange contracts include spot contracts, forward contracts,
options, and swaps.
Trade Documentation: In international trade, documentation related to foreign exchange transactions
may include commercial invoices, bills of lading, export/import licenses, and customs declarations. These
documents are necessary for clearing goods through customs and facilitating payment for international
transactions.
Payment Instructions: Payment instructions provide details on transferring funds between parties in a
foreign exchange transaction. This may involve specifying the currency, amount, beneficiary bank account
details, and required reference information.
Regulatory Compliance: Foreign exchange operations are subject to regulatory requirements and
compliance obligations imposed by national authorities and international organizations. These regulations
prevent money laundering, terrorist financing, and other illicit activities. Compliance may involve
reporting currency transactions above certain thresholds and implementing robust anti-money laundering
(AML) and know-your-customer (KYC) procedures.
Risk Management: Effective risk management is crucial in foreign exchange operations to mitigate the
risks associated with currency fluctuations, credit risk, liquidity risk, and operational risk. This may
involve hedging strategies, setting risk limits, and implementing internal controls and procedures.
Record-Keeping and Reporting: Accurate record-keeping and reporting are essential for documenting
foreign exchange transactions, maintaining audit trails, and complying with regulatory requirements. This
includes keeping records of transaction details, confirmation documents, payment instructions, and
compliance documentation.
 Foreign accounts of banks

Bank foreign accounts refer to accounts held by a bank in a foreign country denominated in a foreign
currency. Banks establish these accounts to facilitate financial activities, including international trade,
investment, and currency exchange.
Types of Foreign Accounts:
 Correspondent Accounts: Banks maintain correspondent accounts with foreign banks to facilitate
international fund transfers, currency exchange, and other banking services.
 Nostro Accounts: The foreign currency accounts maintained by authorized dealers in foreign
exchange with foreign banks/correspondents are called NOSTRO accounts. All foreign exchange
transactions are routed through NOSTRO accounts. It means our account with you. Suppose AB
Bank, Bangladesh, maintains a dollar account with HSBC, New York, USA. This dollar account
is the NOSTRO account of AB Bank, Bangladesh.
 Vostro Accounts: The current account of foreign banks with their correspondents in the latter’s
currency is called a VOSTRO account. It means “your account with us”. Suppose HSBC, New
York, USA, maintains a taka account with AB Bank, Bangladesh. This account is the VOSTRO
account of AB Bank, Bangladesh,
 Loro Accounts: Current accounts that banks maintain with banks abroad on behalf of their clients.
It means “their account with you,” i.e., a third-party relationship. Suppose AB Bank, Bangladesh,
has an account with HSBC, New York, USA, and Padma Bank, Bangladesh, likes to refer to this
account while corresponding with HSBC, New York, USA.
Exchange Control:
Exchange control refers to regulations imposed by governments or central banks to manage the flow of
currencies in and out of a country. These regulations are designed to stabilize the domestic currency,
manage foreign exchange reserves, control capital flows, and support economic policies. Exchange
controls can have both positive and negative impacts on an economy. They can help prevent currency
crises, protect domestic industries, and maintain macroeconomic stability. However, they can also create
inefficiencies, hinder international trade and investment, and lead to black markets for foreign exchange.

Methods of Exchange Control:

Exchange control refers to regulations imposed by governments or central banks to manage the flow of
currencies in and out of a country. These regulations are designed to stabilize the domestic currency,
manage foreign exchange reserves, control capital flows, and support economic policies. Exchange
controls can take various forms, including:
1. Foreign Exchange Restrictions: Governments may restrict converting domestic currency into
foreign currency and vice versa. This can include limits on the amount of currency that individuals
or businesses can buy or sell and requirements for approval from authorities for certain
transactions.
2. Capital Controls: Capital controls restrict the movement of funds across borders. They can
include limits on the transfer of funds abroad, restrictions on foreign investment, and regulations
on the repatriation of profits earned by foreign investors.
3. Exchange Rate Controls: Governments may fix the exchange rate of their currency relative to
other currencies or manage it within a specific range by buying and selling currencies in the foreign
exchange market. This is often done to maintain stability in the currency's value and support trade
competitiveness.
 4. Reserve Requirements: Central banks may require banks to hold a certain percentage of their
deposits in reserve, including foreign currency reserves. This helps ensure that banks have
sufficient liquidity to meet foreign exchange obligations.
Exchange controls can have both positive and negative impacts on an economy. They can help prevent
currency crises, protect domestic industries, and maintain macroeconomic stability. However, they can
also create inefficiencies, hinder international trade and investment, and lead to black markets for foreign
exchange.
In recent decades, many countries have relaxed their exchange control regimes to promote capital mobility
and attract foreign investment. However, some countries maintain strict exchange controls, particularly
during economic instability or crisis. Compliance with exchange control regulations is essential for
individuals and businesses operating in countries with such controls.

Exchange Control in Bangladesh

Exchange control in Bangladesh refers to the regulations and policies implemented by the government
and the central bank (Bangladesh Bank) to manage and control the flow of foreign exchange in and out of
the country. These controls aim to maintain stability in the foreign exchange market, preserve the country's
foreign exchange reserves, and promote economic stability and development. Here are some critical
aspects of exchange control in Bangladesh:
1. Foreign Exchange Regulation Act (FERA): The Foreign Exchange Regulation Act is
Bangladesh's primary legislation governing exchange control. It empowers the Bangladesh Bank
to regulate foreign exchange transactions, including currency conversion, remittances, and foreign
investment.
2. Authorized Dealers: Exchange control regulations designate certain financial institutions as
authorized dealers. These authorized dealers are licensed by the Bangladesh Bank to conduct
foreign exchange transactions on behalf of individuals and businesses. These authorized dealers
include commercial banks and other financial institutions.
3. Capital and Current Account Transactions: Exchange control regulations in Bangladesh
distinguish between capital account transactions (e.g., foreign investment, repatriation of capital)
and current account transactions (e.g., trade in goods and services, remittances). Different rules
and procedures may apply to these types of transactions.
4. Foreign Investment Regulations: Bangladesh has regulations governing foreign direct
investment (FDI) and portfolio investment. Foreign investors must comply with these regulations,
including obtaining approval from relevant authorities and adhering to sector-specific guidelines.
5. Exchange Rate Management: The Bangladesh Bank intervenes in the foreign exchange market
to manage the exchange rate and prevent excessive volatility. It may buy or sell foreign currency
to influence the exchange rate and maintain stability.
6. Export and Import Controls: Exchange control regulations may include measures to promote
exports and regulate imports. For example, export-oriented industries may be eligible for specific
incentives or preferential exchange rates, while imports of certain goods may be subject to
restrictions or licensing requirements.
7. Remittance Regulations: Bangladesh has regulations governing inward and outward remittances.
These regulations may include limits on how many remittances individuals can send or receive,
documentation requirements, and procedures for converting foreign currency into local currency.
8. Anti-Money Laundering and Terrorism Financing: Exchange control regulations also aim to
prevent money laundering, terrorist financing, and other illicit activities. Financial institutions
 must implement know-your-customer (KYC) procedures and report suspicious transactions to
regulatory authorities.
Overall, exchange control regulations in Bangladesh are designed to balance the objectives of promoting
international trade and investment while safeguarding the country's economic stability and security. The
Bangladesh Bank periodically reviews and updates these regulations to adapt to changing economic
conditions and international developments.

Foreign Exchange Market in Bangladesh

The foreign exchange market in Bangladesh plays a crucial role in the country's economy, facilitating
international trade, investment, and remittance flows. Here are some key points about the foreign exchange
market in Bangladesh:
1. Regulation: The foreign exchange market in Bangladesh is regulated by the Bangladesh Bank,
the country's central bank. The Bangladesh Bank formulates and implements policies to manage
the exchange rate and ensure stability in the foreign exchange market.
2. Exchange Rate System: Bangladesh has a managed floating exchange rate system, where the
exchange rate is determined by market forces with interventions from the central bank when
necessary to maintain stability. The Bangladesh Bank regularly announces reference exchange
rates against major currencies.
3. Market Participants: The foreign exchange market includes commercial banks, authorized
dealers, exporters, importers, multinational corporations, and individuals engaged in international
trade and investment activities.
4. Foreign Exchange Reserves: Bangladesh maintains foreign exchange reserves to support its
currency's stability and meet external obligations. The reserves are primarily held in major
currencies such as the US dollar, euro, British pound, and Japanese yen.
5. Role in Trade and Investment: The foreign exchange market facilitates international trade by
providing importers and exporters the necessary currency exchange services. It also supports
foreign direct investment (FDI) inflows and outflows by facilitating currency conversions and
repatriation of profits.
6. Remittances: Bangladesh receives a significant amount of remittances from its citizens working
abroad, particularly in the Middle East, North America, Europe, and East Asia. The foreign
exchange market is crucial in converting these remittances into local currency, supporting the
economy and households.
7. Challenges and Risks: Like any other foreign exchange market, Bangladesh's market faces
challenges and risks such as exchange rate volatility, speculative activities, capital flight, and
external shocks. The central bank implements various measures to mitigate these risks and ensure
market stability.
Overall, the foreign exchange market in Bangladesh is an integral part of the country's economic
infrastructure, facilitating international transactions, supporting economic growth, and managing external
risks. The Bangladesh Bank plays a central role in regulating and overseeing the functioning of this market
to ensure its smooth operation and stability.