OFFSHORE CURRENCY MARKETS

ACKNOWLEDGEMENT
We would like to thank Oberoi Sir for giving us this topic. It helped us to gain hand full of knowledge about a new topic i.e Offshore market.

GROUP MEMBERS

NAME KAVERI JAIN RUPAL KELKAR KARISHMA LODHA

ROLL.NO 20 34

Introduction to Foreign Exchange Market!!!

A foreign exchange market is market in which currencies are bought and sold. It is to be distinguished from a financial market where currencies are borrowed and lent.

Foreign exchange market is the largest financial market in the world. It has its own special features with respect to the way it is organized, the participants in the market and the method by which the transaction is settled.

Some salient features of forex market Location. Size of the market. 24-hour market. Efficiency. Currencies traded. Flexibility in trading.

The foreign exchange market is the largest market in the world. Daily trading volumes often exceed US $100 billion which is more than 50 times the volume on the New York Stock Exchange. Main Participants

There are four main participants in foreign exchange market. They are retail customer, commercial banks, foreign exchange brokers and central banks.

Retail Customer

Commercial banks

Brokers

Commercial banks

Central banks

A. Retail customer: There are three types of retail customers. First, more than 80% of retail customers are actual demanders such as importers, exporters, travelers, etc. Second, some retail customers are arbitragers who seek arbitrage from any foreign currency trading. The last retail customers are speculators. They are looking for extra profits through foreign exchange trading. B. Banks: Commercial banks buy and sell foreign exchanges for their clients. In order to do these transactions, commercial banks should hold foreign exchange deposits with banks in foreign countries. C. Foreign Exchange Brokers: In the U.S., (some in New Zealand) banks utilizing the foreign exchange market usually do not transact directly with each other but rather transact by the use of foreign exchange brokers. The role of brokers is to arrange a transaction between two parties only. Brokers cannot own the foreign exchange involved. Hence, brokers are free from foreign exchange risks. D. Central Banks: If brokers are available, then central banks usually use brokers to intervene foreign exchange markets. If not, central banks directly contact commercial banks. When commercial banks run out of foreign currencies, central banks are supposed to supply demanded foreign currencies.

Introduction to offshore currency market!!!

Offshore is anything that is not onshore within the boundaries of where you presently live. In other words, any place outside your homeland is considered offshore. Every country is offshore to every other place. And each jurisdiction has its own ever-changing laws and political aspirations.

Offshore currency markets are those where a resident of a domestic country trades in a currency of foreign origin say for e.g. an Indian having a trading a/c in London and trades in GBP or USD or in any other currency other than Indian Rupee. With liberalization in the domestic regulations and globalization of financial markets abroad, an increasing number of Indian companies are raising funds in international financial markets. Typically the operations are in Eurocurrency markets, which provide larger access at competitive rates.

Eurocurrency market or offshore market as they are called is an international capital market which specializes in borrowing and lending of currencies outside the country of issue. Thus deposits in dollars with a bank in London are Eurodollars. Similarly, Japanese yen held by banks in London is euro yen; pound-sterling held by banks in the Germany is euro sterling, and so on. The main centers of Eurocurrency are London and a few other places in Europe. The

growth of the market has extended beyond these limits and includes a few centers of Asia too, such as Singapore and Hong Kong.

The offshore currency market is very big in size and the participants in this market are many so it makes this market more lucrative and attractive to the investors all around the world. Even though the market is growing but there are some problems attached to it as investors have some restrictions in maintaining the amount to be invested in other currencies and markets.

DEFINItION!!!
Euro-currency market can be defined as an international financial market which specializes in borrowing currencies from resident and non-resident, outside the country of issue of the currency. This market therefore consists of specific banking operation of accepting deposits and giving loan in non-resident currencies. Such deposits and loan are called Euro-bank. The location where Euro-bank undertake such transactions are called Euro-currency market. A special feature about the definition of market is the importance of the` location of the bank and not the `ownership of the bank or the deposit. This means that if the London Branch Citibank (an American entity) records a USD deposit then such a deposit holder or the bank is not critical.

ORIGIN!!!
The concept of Euro-currency transaction started in

Europe. Over a period of time, this financial activity has spread to different location in the world and is now referred to as the off-shore market. (the term `Euro used as a prefix indicates an `offshore transaction) The foreign currency deposits while need for developing such a market came from the desire to disguise ownership of continuing to have claim on such deposits. Therefore this market provides an environment where asset and liabilities in the from of deposits and credits can be created outside the regulatory supervision of the monetary authority pertaining to a currency. Thus, a deposit in USD created out side USA become a Euro-dollar deposit; a deposit in GBP created outside UK would be called Euro-sterling deposit, etc.

Evolution of offshore currency markets!!!

The foundation of modern euro currency was laid in 1949. The new Chinese Communist government apprehended that their $ earnings would be blocked by the U.S.A, to overcome the threat, it began to disguise its $ earnings by placing them with a Russian owned bank in Paris. Following the outbreak of the Korean war in 1950, the USA blocked Pekings identifiable $ balances in the USA. Fearing similar action against their holdings, the Russian banks in Paris and London began disguising their balances by placing them with banks in Western Europe instead of directly depositing them in New York. Thus the Western Banks had claims on $ balances in the USA and the communist depositors had similar claims on the Western Banks. Another contributing factor was the decision taken by the British government in late 1957 to impose a ban on new overseas loans, denominated in sterling to finance trade between countries outside the sterling area. During the same period, exchange control restrictions were relaxed throughout Western Europe, affording commercial banks the freedom to conduct foreign exchange business and to accept deposits in foreign currencies. The situation was utilized by the London banks to offer their restricted nonsterling area clients the alternative of financing in $.

The real impetus for the growth of Euro$ came from certain developments in the USA itself. Regulation Q of the Federal Reserve act provided mandatory ceilings on interest rates that could be paid in bank deposits. Under the regulations, no interest was payable on bank deposits of less than 30 days duration, while interest rates for longer terms were governed by strict ceilings. Thus the interest rates payable on $ deposits in the USA was restricted, while no such restriction was there for deposits outside the USA. By offering higher interest rates than those prevailing in the USA, banks operating outside the USA were able to attract substantial $ deposits from non US residents. The higher interest also resulted in transfer of some of $ balances kept by foreign investors in New York to outside the USA. Initially, these deposits were placed with banks in London, as they had a ready use of these funds in foreign exchange business and lending to nonsterling areas. Thus London gained prominence as a financial centre for Euro currency. Another regulation that encouraged flow of funds from the USA to European centers was regulation M of the Federal Reserve act. This regulation required the banks to maintain certain % as reserves against deposits. Except for a brief period, this regulation was not applied to deposits of European branches of US banks. This resulted in the cost of operations lower in Europe as compared to that in the USA. A part of the economy in operations could be passed on the customers in the form of higher rates of interest on deposits at the European centers. The absence of regulations encouraged some US banks to move some of their

depositors a/cs, including those of Americans, to the European markets. All the factors thus far mentioned encouraged the flow of funds into the Eurocurrency markets. Certain other factors ensured its sustenance by creating adequate demand for the funds thus generated. One such factor was the controls and restrictions on borrowing funds in the US fro reinvestment abroad, begun as a voluntary restraint programme in 1965 and made mandatory in 1968. As a result of the restrictions, the borrowers were driven to seek loans outside the US market and naturally resorted to the Eurocurrency markets. This was how the offshore or the Eurocurrency market came into existence.

Advantages of offshore currency markEts!!!

1.Access to stable financial markets:It provides access to politically and economically stable jurisdiction. The people investing in these markets are investing where there money is safe and away from the restrictions of the domestic currency markets. 2. Government regulation is less:Those investing in the offshore market are free from stiff government regulations and restrictions as they are not bound by the domestic government rules they tend to invest more and create liquidity in the markets which results in more and more investors attracting towards the markets. 3.Helps borrowing and lending of currencies:The major advantage of these markets is that it helps in the exchange of currencies at a global level and facilitating export, imports and all such transactions requiring foreign currencies it also act as a major borrower and lender of foreign currencies.

4.Provides investors with more investment avenues:Offshore finance is one of the few industries, along with tourism, that geographically remote island nations can competitively engage in. It can help developing countries source investment and create growth in their economies, and can help redistribute world finance from the developed to the developing world. It also provides investors with investments avenues they never thought they may invest in like junk bonds, ADRs etc. 5.Makes the domestic currency more open in the market:These markets provide the global platform to the local currency and encourage trades in the currency of the domestic country.

6.Enables companies to go global money wise :Offshore markets helps the domestic companies to trek the international market for their need for finance and all other need of business funding let it be for working capital, expansion or for acquiring any firm etc, it gives the companies an extra avenue to chalk out their finances

Disadvantages of offshore currENcy markEts!!!

1.Domestic currency is fully convertible:Once the domestic currency is

trading in the offshore market it has to be fully convertible then only it can be traded so this opens a gap where the currency risk comes fully convertible currency can be traded and can bring insecurity in the minds of the domestic investors as it can turn up or down any time.

2.Speculation in the domestic currency increases:The offshore currency market

trades many currencies so at a time the investor can trade in n no of currencies as more and more trades are done the volatility in the currencies increases and the speculations in the market increase leading to some degree of market making for a particular currency.

Types of offshore currency markets!!!

The offshore currency market is a big market and the people investing in it are in huge numbers but the market consist of 2 main types:

1) Spot Market 2) Future Market

Spot Market: Spot currency trading represents the most widely used foreign currency instrument. The spot foreign exchange market basic characteristics contributing to its popularity are:

High volatility

Volatility represents the degree of price fluctuation of a particular currency for a specific time period. This means that a particular currency pair may change its price with as many as 150 - 250 pips for as little as several seconds. This might represent a great opportunity for quick profits and yet, quick losses as well.

High liquidity In a spot deal, the bilateral contract between two parties exchanging currencies is based on a predetermined exchange rate within two business days of the contract date. The only

exception to the 2-day rule is the Canadian dollar since the spot delivery is done in the next business day. Those are the characteristics lead to minimization of the credit risk on the spot market.

Forward Market: It is the market where by an agreed amount of foreign currencies are bought and sold for a specified future delivery at a predetermined rate of exchange. The basic characteristics of the forex forward market are: 1.Decentralization This allows traders form all over the world to enter into different deals either by using the services of a broker or on one-on-one basis. 2.No standard regarding the settlement dates The settlement dates that are established on the forward market can range from 3 days to 3 years. Currency swaps are rarely longer than a year but in principle no technical restrictions exist to execute such a deal. The only requirement is that the date is a valid business day for the currencies that are part of the deal.

cONcEPt OF OFFsHOrE BaNkING!!!

Non-resident banks in an offshore financial centre, conducting euro-currency (offshore) transaction are said to be undertaking offshore banking activities. Bank branches operating at such center are called Off-shore banking units (OBUs). Offshore banking is thus an extension of the Euro-currency concept used in offshore centers. This concept has been introduced in India through Special Economic Zones (SEZS). Branches of Indian banks operating through SEZs are permitted to undertake activity in non-resident currencies. Effectively , such branches will operate as minimum star-up capital of USD 10 million and their balance-sheet are constructed distinct from the parent bank. A special Economic Zone (SEZ) is an area within a country that is treated as foreign territory for the purpose of the tariffs and duties. The units located in a SEZ do not have to pay customs duties on good they import or local levies on goods bought from the rest of the country. SEZ,s have more liberal laws in relation to labour, foreign investment etc. than the rest of the country . the objective is to create a legal environment to boost export. The concept of Special Economic zone (SEZs) was introduced in the third revision to the Export-import Policy 1997-2002. Offshore Banking started in India from 2002. Branches of bank in India located at special economic Zone are accorded the status of `Offshore Banking Units.

Hence we would like to conclude that the contemporary international offshore market place is becoming increasingly more competitive with each passing year. The market is also expanding day by day and the reason behind its expansion is that it provides its investors with better investment avenues, it helps exchange of currencies at global level and government regulation is also very less which add a feather in the cap of Offshore currency market.