1.0 Introduction
Foreign exchange transaction is the act of buying and selling of international currencies. The evolution of foreign exchange transaction in Nigeria up to its present state was influenced by a number of factors such as the changing pattern of international trade, institutional charges in the economy and structural shifts in production. Before the establishment of the central bank of Nigerian (CBN) in 1958 and enactment of the Exchange control Act of 1962, foreign exchange was earned by the private sector and held in balances abroad by commercial banks which acted as agents for local exports.
During this period, agricultural exports contributed the bulk of foreign exchange receipts. The fact that the Nigerian pound was tried to the British pound sterling at par, with easy convertibility, delayed the development of an active foreign exchange market. However, with the establishment of the CBN and the subsequent centralization of foreign exchange authority in the Bank, the need to develop a local foreign exchange market became paramount.
The increased exported of crude oil in the early 1970's, following the sharp rise in it's prices, enhanced official foreign exchange receipts. The foreign exchange market experience a boom during this period and the management of foreign exchange resources became necessary to ensure that storages did not arise. However, it was not until 1982 that comprehensive exchange controls were applied as a result of the foreign exchange crisis that set in that year. The increasing demand for foreign exchange at a time when the supply was shrinking encouraged the development of a flourishing parallel market for foreign exchange.
The foreign exchange market transaction was liberalized in 1995 with the Introduction of an Autonomous Foreign Exchange Market (AFEM) for the sale of foreign exchange to end-users by the CBN through selected authorized dealers at market-determined exchange. The Foreign Exchange Market was furtherly liberalized in October 1999 with the introduction of an Inter-bank Foreign Exchange Market (IFEM).
1.1 The Purpose of the Foreign Exchange Transaction
The purpose of the foreign exchange transaction market “FOREX” is to assist international trade and investment. The foreign exchange market allows business to convert one currency to another foreign currency. For example, it permits a U.S business to import European goods and pay Euros; even the business income is U.S dollars. Some experts, however, believe that the unchecked speculative movement of currencies by large financial institution such as hedge funds impedes the markets from collecting global current account Imbalances. This Cary trade may also lead to loss of competitiveness in some countries. Uniqueness of foreign exchange market includes the following;
- Trading volume results in market liquidity
- Geographical dispersion
- Continuous operation 24 hours a day except weekends
- The variety of factors that affect exchange rates
- The low margins of relative profit compared other markets of fixed income.
- The use of leverage to enhance profit margins with respect to account size
1.2 Structured of Foreign Exchange Transaction
The Nigerian foreign exchange market has witness tremendous changes. The second- tier Foreign Exchange Transaction Market (SFETM) was introduced in September 1986,the unified official market in 1987, the Autonomous foreign Exchange Market (AFEM) in 1995, and the inter-bank. Foreign Exchange Market (IFEM) in 1999.
Computerization of the order flow in financial markets began in the early 1970's. With some landmarks begin the introduction of the designated order turn around system (DOT) and later super DOT which routed orders electronically to the proper trading post to be executed manually, and the “opening automated reporting system” (OARS) which aided the specialist in determining the market cleaning opening prize.
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