UNDERSTANDING OF FOREX TREASURY OPERATIONS AND STUDY OF FUNDAMENTAL AND TECHNICAL ANALYSIS FOR GOLD MARKET

Submitted by

Rudra Prasad Banerjee (PGDMB13/043)

In partial fulfillment for the award of the

degree of

POST GRADUATE DIPLOMA IN MANAGEMENT

INSTITUTE FOR FINANCIAL MANAGEMENT

AND

RESEARCH 24, Kothari Road, Nungambakkam, Chennai - 600 034

(2012-14)

CERTIFICATE

This is to certify that this project report Understanding of forex treasury operations and study of fundamental and technical analysis for gold market is the bona fide work of

Mr. Rudra Prasad Banerjee who carried out the project work under my supervision.

(Signature)
Sanjeev Purkait

Dy. Chief Manager (Forex)

Oriental Bank of Commerce, Gurgaon

Date

ACKNOWLEDGEMENT I take pleasure in presenting my project work done with Oriental Bank of Commerce, Treasury Department Gurgaon during past few months. The training period was an enriching experience for me from professional as well as personal front getting an opportunity to familiarize myself with corporate working. I would like to express sincere gratitude to a few people without whom the project completion would not have been possible. I express my sincere thanks to my project guide Mr. Sanjeev Purkait Dy. Chief Manager, Forex Dealing, Oriental Bank of Commerce for not only for guiding me through my project, but also for being my motivator and mentor throughout the project period. He helped me with all the resources and information required for the project and provided me with the practical experience, which will be of immense help for me in my future. His guidance at every stage of the Project enabled me to successfully complete this project. I would like to extend my thanks to all the employees of the bank who supported me in carrying out my operation successfully and providing me vital information/ training during the course of the project. My sincere gratitude and thanks to my friends, who have been a constant driving force and an inspiration. I also thank Prof. Bobby Srinivasan at IFMR, for his help during the course of this project.

Signature Rudra Prasad Banerjee

TABLE OF CONTENTS

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Executive Summary List of Figures List of Tables Company Profile Objective PART I 1. 1.1. 1.2. 2. 2.1. 2.2. 2.3. 3. 3.1. 3.2. 4. 4.1. 4.2. 5. 5.1. 5.2. 5.3. Understanding of Forex Treasury Operations Forex Market Market Participants Quotes and tick size General Aspects of Forex Export Import Remittance Types of Accounts and Currencies Accounts Type Major Currencies and permitted Currency pairs Export-Import transactions Export transaction Import transaction Operation of Forex Treasury Front office operations Mid office operations Back Office operations 1 3 6 6 6 7 7 8 8 9 10 10 10 10 11 12 13

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PART II 1. 1.1. 1.2. 1.3. 1.3.1. 1.3.2. 1.3.3. 1.3.4. 1.3.5. 1.3.6. 1.4. 2. 3. 3.1. 3.1.1. 3.1.2. 3.1.3. 3.1.4. 3.1.5. 3.2. 3.3. 3.4. 3.5. 3.6.

Fundamental and Technical Analysis of Gold Market Introduction Evolution of Gold Gold Standard Indian Gold Market Size of Indian Gold Market Timeline of Gold in India Gold Certification in India Indian Standard on Gold and Gold Alloys Features of Indian Gold Market Ways of Trading Gold in India Major Trading Centers of Gold Methodology Fundamental Analysis of Gold Market Gold Supply and Demand Net Producer Hedging Net Central Bank Purchases Supply by Gold Mining Companies Physical Investment Demand Investment through ETF Dollar Exchange Rate Real Interest Rate Inflation Rate Impact of Crude oil prices Economic situation 17 17 19 21 21 21 22 23 23 23 25 26 27 27 32 33 34 36 37 40 41 42 44 46

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4. 4.1. 4.1.1 . 4.1.2 . 5. 5.1. 5.2. 5.3. 5.4. 5.5. 5.6. 6.

Technical Analysis Theory Indicators Leading Indicators Lagging Indicators Technical Analysis Moving Averages Bollinger Bands Moving Averages Convergence/Divergence (MACD) Relative Strength Index (RSI) Stochastic Oscillator Inference from fundamental and Technical Analysis Conclusion References

49 50 50 51 54 54 56 58 61 63 67 68 69

EXECUTIVE SUMMARY Forex treasury is a key component of banking industry. Foreign exchange transactions play a crucial role in the dealing room of the bank as they deals with large amounts of it for the purpose of aiding its customers and for making profits for itself. There are several functions that the trading desk performs. The scenario at Oriental Bank of Commerce is that the dealing room mainly caters to all its clients who need to exchange foreign currency and who need foreign currency to carry out their business. Post the deal is done from the dealing room the settlement and accounting of the particular deal is handled by the back office. Apart from that the exporters and importers who do business on a large scale and provide the bank with opportunity to earn money based on the margin that exists in the market. Hence export-import businesses are major customers of the bank when it comes to forex and the money that it earns is of course borne with risks as this business requires lot of documents and lot of transactions. The second part of the project deals with the Study fundamental and Technical analysis for Gold market. In the last 6000 years a little over 125000 tonnes of gold has been mined. Indians have a huge fascination for gold. This is evident in the fact that India is the largest consumer as well as importer of gold in the world. India consumes about 900 MT of gold which accounts to about 20% consumption of gold globally. More than 50% of this is used for making gold jewelry. The Fundamental analysis is based on the factors directly impacting the global gold prices like Supply and demand of gold, Dollar exchange rate, Country specific Real interest rate, Countries interest rate, crude oil prices and economic situations (trade balance, CAD etc.). Apart from that there are various sub factors like net central banks purchases, investment through ETF, Dehedging of gold etc. Analysis based on these factors is performed to check the relation with gold prices and determine the expected future trend. Technical analysis is purely based on the price movements to determine predict the future trend. In this project the analysis is done on the basis of technical indicators and oscillators like Moving Averages, Bollinger Bands, MACD (Moving Average convergence/divergence), RSI oscillator and Stochastic Oscillators. Initial stage of project consisted of rigorous learning and understanding basics of technical analysis, theory on which it is built and how effective it is, and how far it can be applied practically. Once the theoretical foundation was established the oscillator values were calculated and trend for last one years data is analyzed based on these oscillator values and gold prices.

LIST OF FIGURES
Figure 1 : Gold Producers in 2012....................................................................................................28 Figure 2: Gold Consumers in 2012...................................................................................................28 Figure 3: Detailed Gold Demand......................................................................................................30

Figure 4: Relation between Net Producer Hedging and gold prices for 2011 and 2012....................32
Figure 5: Central Bank Net Purchases...............................................................................................33

Figure 6: Global gold production including and excluding China...................................................34 Figure 7: Detailed Gold supply for 2011 and 2012 (in percentage).................................................35
Figure 8: Last 5 years detailed supply description for gold.................................................................35 Figure 9: Total physical investment demand......................................................................................36 Figure 10: Jewellery demand in India and China...............................................................................36 Figure 11: Investment through ETF..................................................................................................38

Figure 12: Relationship between Net change in total investment, ETF and coin demand.................38
Figure 13: Q-o-Q investment demand through ETF...........................................................................39

Figure 14: Q4 investment through ETF for year 2012 and 2013......................................................39 Figure 15: Correlation between Gold prices and USD index...........................................................40 Figure 16: Correlation between Gold prices and Indias Real Interest Rate.....................................41 Figure 17: Correlation between gold prices and Indias Inflation rate..............................................43
Figure 18: Indias inflation rate trend for last 4 months......................................................................44

Figure 19: Correlation between Gold prices and Crude oil Prices...................................................45

Figure 20: Indias Trade balance Trend.............................................................................................46 Figure 21: Indias net gold import as a % of GDP..............................................................................47

Figure 22: Indias CAD (US $ billion) and CAD as % of GDP.......................................................47

Figure 23: Daily Gold price candle stick pattern................................................................................54

Figure 24: Moving Averages for last one year gold prices...............................................................55
Figure 25: Bollinger bands for last one year gold prices.....................................................................57 Figure 26: EMA for 26 days and 12 days..........................................................................................58
Figure 27: MACD for gold................................................................................................................59

Figure 28: Last one year Closing Stock prices for gold and corresponding MACD.........................60
Figure 29: Gold Closing prices and 14-days RSI...............................................................................62 Figure 30: Gold price pattern...........................................................................................................64

Figure 31: 14-days stochastic oscillator (Fast, Slow and Full).........................................................65

Figure 32: 30-day slow stochastic oscillator......................................................................................66

LIST OF TABLES
Table 1: Risk and tools......................................................................................................................13

Table 2: Last 5 years Supply and Demand of Gold.............................................................................31

Table 3: Correlation coefficient on last 12 years Indias Real Interest rate and Gold prices.............42 Table 4: Correlation Coefficient on last 12 years Gold prices and Indias Inflation rate...................43
Table 5: Indias Quarterly CAD as a % of GDP.................................................................................48

COMPANY PROFILE Oriental Bank of Commerce India was established in the year 1943 on 19th February in Lahore. After partition, Oriental Bank of Commerce shifted its Registered Office from Lahore to Amritsar paying every rupee to its departing customers. It has a very rich heritage and has experienced a lot of ups and down during its 70 years of operation. During 1970-1976, bank suffered severely and even considered closing down but was revived due to the efforts made by the then employees and leaders. OBC got nationalized in the year 1980 and within a decade turned out to be the most efficient and best performing bank of India. The National Institute of Bank Management (NIBM), rated OBC Bank as "Customer Friendly" Bank. On 14 August 2004, Global Trust Bank Limited (GTB) was amalgamated into OBC. GTB was a leading private sector bank in India that was associated with various financial discrepancies leading to a moratorium being imposed by RBI shortly before being merged into OBC. Currently its Business Mix is around 3.06 Lac Crore and it enjoys a customer base of more than 1.80 Crore across India making it the seventh largest Public Sector Bank in India. It has around 2000 branches across 31 states of India and is amongst the biggest Public Sector bank with an ATM base of 1452 and a card base of 36.41 Lac. OBC has made a foray into International arena with the opening of its first Representative Office at Dubai which extends assistance to NRIs and PIOs about business opportunities in India as well as market the products offered in the foreign market. OBC is one of the few Public Sector banks which routes its 100 percent business through a robust and state of the art Core Banking Solution. It has shown its commitment towards data security by coming up with three way data center setup to ensure zero data loss in case of any disaster. It offers a one stop solution in Banking and provides a gamut of services including Deposits, Loans, Internet Banking, Insurance, Depository services, NRI Services and Financial Inclusion. The Bank has reoriented their lending strategy through Large & Mid Corporates and establishment of new wings viz., Rural Development and Retail & Priority Sector.

The Bank has launched people's participation in the planning process at grass root level essentially to tackle the maladies of poverty. The Grameen Projects venture aims to alleviate poverty plus identify the reasons responsible for the failure or success. OBC is implementing a GRAMEEN PROJECT in Dehradun District (UP) and Hanumangarh District (Rajasthan). Formulated on the pattern of the Bangladesh Grameen Bank, the Scheme has a unique feature of disbursing small loans ranging from Rs. 75 (~US $1.5) onwards. The beneficiaries of the Grameen Project are mostly women. The Bank is engaged in providing training to rural folk in using locally available raw material to produce pickles, jams etc. This has provided self-employment and augmented income levels thus reforming lives of rural folk and encouraging cottage industries in rural areas The Bank has successfully rolled out its Financial Inclusion Plan in 569 allotted villages with population more than 2000 through different models i.e. Branch (23 Villages), Mobile Branch (54 Villages), and Business Corresponding Model (492 Villages). The bank has opened a total number of 4,38,314 No-Frill/ Other savings accounts and issued 1,59,207 Bio-metric cards for extending IT enabled banking services in 569 FIP allotted villages. The bank enjoys to its utmost credit the lowest staff cost and highest productivity in the Indian Banking Industry. Mission and Vision Statement Mission: Provide quality, innovative services with state-of-the-art technology in line with customer expectations. Enhance employees professional skills and strengthen cohesiveness. Create wealth for customers and other stakeholders. Vision: "To be a customer friendly premier bank committed to enhancing stakeholders value.

OBJECTIVE 1. UNDERSTANDING OF FOREX TREASURY OPERATIONS. Understanding the forex market and banks forex treasury operation. 2. STUDY OF FUNDAMENTAL AND TECHNICAL ANALYSIS OF GOLD PRICES. To perform an in-depth analysis of the commodity-gold in order to assist OBC in advising clients interested in investing in gold, in a better and more informed manner.

PART I
UNDERSTANDING OF FOREX TREASURY OPERATIONS

UNDERSTANDING OF FOREX TREASURY OPERATIONS AND STUDY OF FUNDAMENTAL AND TECHNICAL ANALYSIS FOR GOLD MARKET

1. FOREX MARKET The Forex trading history started in 1875 with the birth of the gold standard monetary. Prior to 1875, countries primarily used gold and silver as a form of international payment. Payment using gold and silver were hampered by their devaluation according to external factors such as an increase in the discovery of new deposits, which would lead to a change in supply and demand. This factor would change the Forex trading history forever. The aim of the implementation of the gold standard was to guarantee any currency, to set amount of gold. Currency was now backed by gold, measured in ounces. Countries needed large gold reserves to back the demand for currency. The price difference of an ounce of gold between two different currencies now became the foreign exchange rate for those two currencies. This History of Forex was changed by the birth of an international standard by which foreign exchange could take place between countries. The gold standard monetary broke down during the start of the First World War Political turmoil with Germany forced the larger European powers to focus on military projects. This financial drain on Europe gave way to a lack of gold to back the excess printing of currency and would determine a new change in the FX trading history. The abolishment of the gold standard monetary system left a void in the method of foreign exchange, and changed the path of Forex history. This matter was a concern to the Allied countries and a convention were held at Bretton Woods, New Hampshire, in July 1944, to solve this problem. This convention led to the inception of the Bretton Woods monetary system. This new Bretton Woods monetary system defined the new Forex market history: A new method of obtaining a fixed foreign exchange rate. The gold standard to be replaced with the US Dollar as the ultimate exchange currency. The US Dollar to be the only currency backed by gold. The inception of three international authorities to guard over all foreign transactions. The Bretton Woods monetary system only lasted about 25 years and failed primarily on the basis of making the US Dollar the only currency to be backed by gold. The U.S announced the end of the exchange of gold for US Dollars by foreign banks on 15 August 1971.
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The foreign exchange market (forex, FX, or currency market) is a global, worldwide decentralized over-the-counter financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of different currencies. The primary purpose of the foreign exchange is to assist international trade and investment, by allowing businesses to convert one currency to another currency. For example, it permits a US business to import British goods and pay Pound Sterling, even though the business's income is in US dollars. It also supports speculation, and facilitates the carry trade, in which investors borrow low-yielding currencies and lend (invest in) high-yielding currencies, and which (it has been claimed) may lead to loss of competitiveness in some countries. In a typical foreign exchange transaction, a party purchases a quantity of one currency by paying a quantity of another currency. The modern foreign exchange market began forming during the 1970s when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system. The forex market is referred to as the market closest to the ideal of because of its huge trading volume, leading to high liquidity; its geographical dispersion; its continuous operation: 24 hours a day except weekends, i.e. trading from 20:15 GMT on Sunday until 22:00 GMT Friday; the variety of factors that affect exchange rates; the low margins of relative profit compared with other markets of fixed income; and the use of leverage to enhance profit margins with respect to account size. perfect competition,

notwithstanding currency intervention by central banks. The foreign exchange market is unique

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UNDERSTANDING OF FOREX TREASURY OPERATIONS AND STUDY OF FUNDAMENTAL AND TECHNICAL ANALYSIS FOR GOLD MARKET

1.1. MARKET PARTICIPANTS Unlike a stock market, the foreign exchange market is divided into levels of access. At the top is the inter-bank market, which is made up of the largest commercial banks and securities dealers. Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are razor sharp and not known to players outside the inner circle. The difference between the bid and ask prices widens (for example from 0-1 pip to 1-2 pips for a currencies such as the EUR) as you go down the levels of access. This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the foreign exchange market are determined by the size of the "line" (the amount of money with which they are trading). The top-tier interbank market accounts for 53% of all transactions. After that there are usually smaller banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail FX market makers. According to Galati and Melvin, Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in FX markets in particular, since the early 2000s. (2004) In addition, he notes, Hedge funds have grown markedly over the 20012004 period in terms of both number and overall size. Central banks also participate in the foreign exchange market to align currencies to their economic needs. Banks: The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the bank's own account. Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for large fees. Today, however, much of this business has moved on to more efficient electronic systems. The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago. Commercial companies: An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often
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UNDERSTANDING OF FOREX TREASURY OPERATIONS AND STUDY OF FUNDAMENTAL AND TECHNICAL ANALYSIS FOR GOLD MARKET

trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.
Central banks: National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.

Forex Fixing: Forex fixing is the daily monetary exchange rate fixed by the national bank of each country. The idea is that central banks use the fixing time and exchange rate to evaluate behavior of their currency. Fixing exchange rates reflects the real value of equilibrium in the forex market. Banks, dealers and online foreign exchange traders use fixing rates as a trend indicator. Hedge funds as speculators: About 70% to 90% of the foreign exchange transactions are speculative. In other words, the person or institution that bought or sold the currency has no plan to actually take delivery of the currency in the end; rather, they were solely speculating on the movement of that particular currency. Hedge funds have gained a reputation for aggressive currency speculation since 1996. They control billions of dollars of equity and may borrow billions more, and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds' favor. Investment management firms: Investment management firms (who typically manage large accounts on behalf of customers such as pension funds and endowments) use the foreign exchange market to facilitate transactions in foreign securities. For example, an investment manager bearing an international equity portfolio needs to purchase and sell several pairs of foreign currencies to pay for foreign securities purchases.

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UNDERSTANDING OF FOREX TREASURY OPERATIONS AND STUDY OF FUNDAMENTAL AND TECHNICAL ANALYSIS FOR GOLD MARKET

Some investment management firms also have more speculative specialist currency overlay operations, which manage clients' currency exposures with the aim of generating profits as well as limiting risk. Whilst the number of this type of specialist firms is quite small, many have a large value of assets under management (AUM), and hence can generate large trades. Retail foreign exchange traders: There are two main types of retail FX brokers offering the opportunity for speculative currency trading: brokers and dealers or market makers. Brokers serve as an agent of the customer in the broader FX market, by seeking the best price in the market for a retail order and dealing on behalf of the retail customer. They charge a commission or mark-up in addition to the price obtained in the market. Dealers or market makers, by contrast, typically act as principal in the transaction versus the retail customer, and quote a price they are willing to deal at. The customer then has the choice whether or not to trade at that price. Non-bank foreign exchange companies: Non-bank foreign exchange companies offer currency exchange and international payments to private individuals and companies. These are also known as foreign exchange brokers but are distinct in that they do not offer speculative trading but rather currency exchange with payments (i.e., there is usually a physical delivery of currency to a bank account). It is estimated that in the UK, 14% of currency transfers/payments are made via Foreign Exchange Companies.These companies' selling point is usually that they will offer better exchange rates or cheaper payments than the customer's bank. These companies differ from Money Transfer/Remittance Companies in that they generally offer higher-value services. Money transfer/remittance companies: Money transfer companies/remittance companies

perform high-volume low-value transfers generally by economic migrants back to their home country. In 2007, the Aite Group estimated that there were $369 billion of remittances (an increase of 8% on the previous year). The four largest markets (India, China, Mexico and the Philippines) receive $95 billion. The largest and best known provider is Western Union with 345,000 agents globally followed by UAE exchange.

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UNDERSTANDING OF FOREX TREASURY OPERATIONS AND STUDY OF FUNDAMENTAL AND TECHNICAL ANALYSIS FOR GOLD MARKET

1.2. QUOTES AND TICK SIZE Generally Quotes are of two types: Direct Quotes and Indirect Quotes. In currency markets, the rates are generally quoted in terms of USD. The price of a currency in terms of another currency is called quote. A quote where USD is the base currency is referred to as a direct quote (e.g. 1
USD INR 54.86366) while a quote where USD is referred to as the terms currency is an

indirect quote (e.g. 1 INR = 0.018227 USD). USD is the most widely traded currency and is often used as the vehicle currency. Use of vehicle currency helps the market in reduction in number of quotes at any point of time, since exchange rate between any two currencies can be determined through the USD quote for those currencies. This is possible since a quote for any currency against the USD is readily available. Any quote not against the USD is referred to as cross since the rate is calculated via the USD. Tick size refers to the minimum price differential at which traders can enter bids and offers and Tick value refers to the amount of money that is made or lost in a contract with each price movement. 2. GENERAL ASPECTS OF FOREX The aspects of forex can be categorized into: Export Import Remittance 2.1. EXPORT There are basically three types of payment mechanisms by the importer to the exporter. Advance payment: When a buyers credit is doubtful or the political or economic environment in the buyers country is unstable, seller may demand advance payment, which will be to his advantage. Without any assurance for supply of goods, blocking his capital prior to receipt of goods or services the buyer will be at a disadvantageous position in this type of transaction

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UNDERSTANDING OF FOREX TREASURY OPERATIONS AND STUDY OF FUNDAMENTAL AND TECHNICAL ANALYSIS FOR GOLD MARKET

Open account: By an arrangement between the buyer and the seller, manufactured goods will be delivered to the buyer directly or to his order and the buyer will pay at the end of the agreed period. This type of trading requires a high degree of trust between the buyer and the seller and it will be more advantageous to the buyer. Bills on collection basis: It is an arrangement by which the seller after shipping the goods submits the documents to his bank as agent for collection. Documents are presented to the buyer through the correspondent bank of the sellers bank, which will be released upon buyers payment of the amount specified. Documentary Credits (Letters of credit) : It is the most convenient methods of settling payments in International trade. It provides complete financial security to the Seller of goods. The seller may not know the credit worthiness of the buyer and the prevailing regulations in the country of the buyer. But once the letter of credit is established by the buyers bank on behalf of the buyer in favour of the seller and the seller submits the set of required documents to the opening bank or to the nominated bank, seller is assured of payment. Buyer also gets the advantage of his bankers assistance in closely scrutinizing the documents and only after receiving the relevant documentary evidence from the seller by the banker nominated in the credit, the nominated banker releases payment. To start off with the export business the exporter needs to get an IEC known as Import export code from the DGFT (Director General of foreign trade). 2.2. IMPORT In case of imports the exact opposite can be viewed in terms of the transactions and the procedures used. However the exporter adds foreign currency to the reserves of the country and the importer depletes the foreign currency in the reserves. 2.3. REMITTANCE The bank provides facilities for Indians outside India, NRIs to operate accounts in India and this is a way in which the bank gets its foreign exchange. There are different types of accounts that the bank offers.
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NRE Account: This is a type of account opened in India by an NRI who intends to transfer funds from abroad to India. The funds are immediately converted to INR and the account is maintained in INR. In an NRE account repatriation of deposited funds is possible. Residents of the country are not allowed to open an NRE account. Also local INR cant be deposited in this account. NRO Account: The NRO account on the other hand is an account where in local INR funds can be deposited in the account, but the funds in the account cant be repatriated to a foreign country. There will no facility of an international debit card for this account. FCNR Account: FCNR stand for foreign currency Non Resident Bank Account. This is a unique account in the sense that the account is maintained in foreign currency and it is a fixed deposit account savings or current account is not possible. As the NRI can maintain his account in the foreign currency, the risk for fluctuations in currency conversion is eliminated and investors can earn a fixed interest rate on his FCNR deposits, which is usually more than the country in which he is residing. 4. TYPES OF ACCOUNTS AND CURRENCIES
There are basically three types of accounts when it comes to foreign currency accounts.

3.1. ACCOUNTS TYPES Nostro account: Nostro accounts are usually in the currency of the foreign country. This allows for easy cash management because currency doesn't need to be converted. It is an account that a bank holds with a foreign bank. Nostro is derived from the latin term "ours". Vostro account: Vostro account is maintained by bank in our local currency i.e. INR in India for the benefit of foreign bank which intends to maintain an account in INR for its convenience. Vostro is latin for yours. Loro account: Loro account is your account with them. It is an account of another bank held with a different bank in another country.

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UNDERSTANDING OF FOREX TREASURY OPERATIONS AND STUDY OF FUNDAMENTAL AND TECHNICAL ANALYSIS FOR GOLD MARKET

3.2. MAJOR CURRENCIES AND PERMITTED CURRENCY PAIRS Oriental Bank of Commerce basically deals with eleven major currencies: 1. AUD : Australian Dollar 2. CAD : Canadian Dollar 3. CHF : Swiss Franc 4. DKK : Danish krone 5. EUR : Euro 6. GBP : British Pound Sterling 7. HKD : Hong Kong Dollar 8. JPY : Japanese Yen 9. SEK : Swedish Krona 10. SGD : Singapore Dollar 11. USD : US Dollar The above accounts come into picture when there is an export transaction at the local branch in India. Oriental Bank of Commerce uses its Nostro account to receive payments in various foreign currencies and converts the foreign currencies using forwards and futures to hedge the exchange rate risk. The bank is an intermediary in an export or purchase transaction as well as in an import or sale transaction. The bank basically accepts or provides foreign currency to help an importer or exporter conduct his trade. USD/ INR, GBP/USD, EUR/USD, USD/ JPY, AUD/ USD, USD/CHF. USD/INR Swap is permitted for trading activity in addition to above trading pairs to take the advantage of movements in premium/discounts in the forwards. USD/INR Swap is simultaneous buying and selling the currency in two different maturity bucket and the difference in price is arrived based on the prevalent premium/discount. This is an Over the Counter financial instrument, used by almost all the banks for Gap Management, generation and deployment of fund as well as hedging tool.

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UNDERSTANDING OF FOREX TREASURY OPERATIONS AND STUDY OF FUNDAMENTAL AND TECHNICAL ANALYSIS FOR GOLD MARKET

4. EXPORT- IMPORT TRANSACTIONS 4.1. EXPORT TRANSACTION In an export transaction the exporter gets paid in foreign currency i.e. USD, EUR, AUD, JPY etc. The exporter needs money in the local currency or he needs to convert the payment that he would receive in USD into INR. The procedure for transaction followed is: The exporter first draws a bill of exchange on the importers bank for an amount as per negotiated price. OBC then discounts the amount (branch sends reporting request to head office for rate) by subtracting the commission which is basically the profit of the bank. Accepts and pay the exporter the requisite amount in INR. 4.3. IMPORT TRANSACTION In an import transaction the importer who is in India has to pay in foreign currency, say USD for an import of goods. The import transaction is also called a sale transaction, because there will be a sale of USD by OBC to the importer. The bank receives documents which are Bill of exchange, bill of lading. The bank accepts the Bill of exchange and takes the liability of paying the foreign bank at a later date. The bank will have USD funds in the Nostro account with say Bank of America. So the bank sells the USD at the spot rate plus a commission on every dollar. This commission is the profit for the bank in this transaction. The total commission is the profit made. 5. OPERATION OF FOREX TREASURY The Forex treasury consists of following three departments, as various functions have been segregated into three departments:

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RUDRA PRASAD BANERJEE

UNDERSTANDING OF FOREX TREASURY OPERATIONS AND STUDY OF FUNDAMENTAL AND TECHNICAL ANALYSIS FOR GOLD MARKET

Front Office [Function of Dealing Room] Mid Office [Risk Management, Accounting Policies and Management Information System] Back Office [Settlement, Reconciliation and Accounting ] 5.2. FRONT OFFICE OPERATIONS The Front office/ Dealing Room is bifurcated into Merchant Desk and Trading Desk. Merchant Desk: Merchant Desk is headed by a Chief Dealer whose job is to co-ordinate, advice, monitor and guide the dealers on issues relating to the dealing room operations and adherence to various limits prescribed. Dealers have to operate in the interbank market according to the guidelines laid down by the Management. Ideally dealers may confer before work starts, on the trend in the overnight markets in the light of banks own business and arrive at the tentative conclusions valid for the day. Chief Dealer has to continuously monitor the market developments and keep the head informed of any major developments. Chief Dealer will also monitor the exceeding of various limits and advice the dealers promptly to adhere to the various limits sanctioned. The main duties of Merchant desk of Dealing room are: o o Card Rate calculation and communicating to branches Noting the reporting from B' category branches. For reporting, bank has assigned various codes to different order type like 14-A is assigned to inward remittance, 5 is assigned to clean sales etc. Depending on the codes the corresponding operations were performed. o Covering currency positions in the Inter- bank market. Bank is required to follow the limits given by RBI for every currency, so it is very important to cover their position in the Inter-bank Market. o Covering maturity mismatches/funding Nostro accounts o Interbank placement of Deposits/Borrowings. o Advisory services with reference to Forex Market o Placing of Overnight orders on behalf of customers.

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RUDRA PRASAD BANERJEE

UNDERSTANDING OF FOREX TREASURY OPERATIONS AND STUDY OF FUNDAMENTAL AND TECHNICAL ANALYSIS FOR GOLD MARKET

Trading Desk/Proprietary Trading: Proprietary trading occurs when bank/firm trades any financial instrument, with its own money as opposed to its customers' money, so as to make a profit for itself. Trading Desk undertakes proprietary trading positions in Spot Transactions, Swap Transactions and Exchange traded Currency Future and Options. The trading is undertaken is two ways: o o Directly through the Trading Interface provided by various Banks and institutions like Barclays, RBS, Bloomberg etc. With the help of various brokers.

Trading desk also needs to maintain gap limits and they should try not to breach any limit. After any buy/sell deal is done. CCIL (Clearing Corporation of India) the central counter party matches the deal between the two parties. 5.2. MID OFFICE OPERATIONS The Primary function of the mid office is to protect the Bank from all risks and also to ensure that exposures taken are within the acceptable levels of the Bank. The role of Mid Office is to ensure that the operations at Front and Back offices are carried out as per the guidelines of RBI, FEDAI, Head Office and other regulatory agencies. The main duties of the Mid Office are: Changes in Accounting Policy Risk Management Facilitation of Inspection & Audit work Feedback to Top Management [MIS] VaR reports generation & back testing of VaR Monitoring of Country risk Preparation of Notes to the Board, Top Management. Submission of various statements as required by RBI and Head Office

Various limits are fixed to manage the risk; the mid office monitors the risk and alert front office if any limit is passed. The table shows the various risks and risk management tools to monitor the risk.

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RUDRA PRASAD BANERJEE

UNDERSTANDING OF FOREX TREASURY OPERATIONS AND STUDY OF FUNDAMENTAL AND TECHNICAL ANALYSIS FOR GOLD MARKET
Table 1: Risk and tools

Type of risk

Risk management tool Day light limit, Overnight limit, VAR, Aggregate Gap limit and Individual Gap limit, Cut loss limits

Exchange risk

Credit risk Liquidity risk Interest rate risk

Counter party limits Aggregate Gap limit and Individual Gap limit Aggregate Gap limit and Individual Gap limit

5.3. BACK OFFICE OPERATIONS Back office consists of various departments viz. settlement, position, reconciliation, treasury, FCY deposits, Vostro Accounts and daybook departments. Following up of all deals are the primary responsibility of the Back Office.
Settlement Department:

Rate scan reports are prepared atleast thrice a day, [viz, at opening hours, afternoon and closing hours] and deals at wide variance with the on-going market rates are enquired into Verification authorization. of Data Entry of all interbank transactions & their

o o o

Verification of Broker Notes and Brokerage Payments Confirmation of Interbank Deals and merchant forward contracts with branch

o Pickup of matured interbank transactions. Forex and Rupee o settlement o Effecting Transfer between Nostro Accounts as advised by Dealing Room. o Maintenance of relevant vouchers/registers o Sending Swift messages to effect the inter bank settlements. o o Forwar utilize Cancelle Processing f d contracts d or d collection/payment of swap charges, exchange difference.

and

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RUDRA PRASAD BANERJEE

UNDERSTANDING OF FOREX TREASURY OPERATIONS AND STUDY OF FUNDAMENTAL AND TECHNICAL ANALYSIS FOR GOLD MARKET

o o o

Discrepancies noticed are rectified on the same day Advising Nostro debits/credits to branches Monitoring of Nostro Accounts.

Position Department:

o Processing of early realization of export suspense for collection of charges, premium o o Applying of debit/credits in the Nostro accounts. Maintenance of parallel balances of the FCNR [B], EEFC, RFC & other FCY deposits funds. o Maintenance of documents pertaining to transaction in FCY deposits like opening, closing, renewal and transactions like debits and credits being executed at the branches. o o Submission of MIS related to FCNR [B] deposits. Confirmation of FCNR [B] and other deposit balances with the branches on a quarterly basis. It maintains the sources / utilizations of forex funds of the IIB. The sources will be in the form of FCNR (B), EEFC, RFC, RFC (B), Borrowings, Swaps and Foreign Currency Interest Suspense account. Utilizations will be in the form of Investments with banks abroad, PCFC, FCBRD, FCL, etc. The department also monitors the overnight investments placed out of these funds. Sending payment messages to the correspondent banks via SWIFT for effecting the sourcing and Repayment of borrowing and payment and placement of investments. o Posting FCBRD interest, FCBRD Refund Interest, PCFC /FCTL interest o Borrowings To meet the Foreign Currency export credit to our constituents over and above our own funds the Bank may avail Line of
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Foreign Currency Deposits Department: of the bank for effective control over the movements of

Treasury Department (Foreign Currency source and deployment): o o o o o

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