Professional Documents
Culture Documents
International Banking
(Module A) ± PART-I
Foreign Exchange
Tanushree Mazumdar, IIBF
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þ Exchange rates
þ Risk management and basics of
derivatives
þ Documentary letters of credit
þ Facilities for exporters and importers
þ Correspondent banking and NRI
accounts
þ RBI and exchange control in India, EXIM
Bank, ECGC
Exchaa
þ International transaction in cash requires two
distinct purchases
Purchase of foreign currency
Purchase of good/service with the FC
þ Term foreign exchange is used to denote
foreign currency
þ Foreign exchange market exists to cater to the
demand for foreign currency/currencies
ë Exchaa
þ èrganisational setting within which
individuals, governments and banks buy
and sell foreign currencies
þ ènly a small fraction of daily transactions
in foreign exchange involve trading of
currency
þ Most foreign exchange transactions
involve transfer of bank deposits
xcha
þ Deposits, credits and balances payable in
foreign currency
þ Drafts, travellers¶ cheques, letter of credit or bill
of exchange expressed or drawn in Indian
currency but payable in foreign currency
þ Drafts, travellers¶ cheques, L/Cs, etc. drawn by
banks, institutions or persons outside India but
payable in Indian currency
þ The above definition is as per FEMA (1999)
Exchaa
þ Denotes the price or the ratio or the
value at which one currency is
exchanged for another
þ Exchange rate is very dynamic
þ The foreign exchange market is round-
the-clock market due to different time
zones
þ Major participants- central banks,
commercial banks, forex brokers,
corporations, individuals
ëac ac xchaa
þ Major banks that act as market-makers
always give two-way quotes; gives depth
and volume to the market
þ Fundamental reasons
þ Technical reasons
þ Speculation
ëamaa
þ Balance of payments->surplus-
>appreciation
þ Growth rate of the economy-> higher
growth->depreciation of currency
þ Fiscal policy-> financing of fiscal deficit
influences exchange rate
þ Monetary policy->loose monetary policy-
> depreciation of exchange rate
jch caa
þ Freedom or restrictions on capital
movements can affect exchange rates to
a large extent
þ Among other factors there are:
Huge trade surpluses of oil exporting
countries
Capital moving from low-yielding currencies to
high yielding currencies (interest differential)
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þ Self-fulfilling prophecies
Anticipation of depreciation of a currency can
cause dealers to sell that currency
þ Speculation serves to provide depth and
liquidity to the forex market
þ Acts as a cushion as well- contrarian
traders exist in the market
j xchaa
þ O - Settlement of funds on the
same day (date of the deal).
þ j - Settlement of funds takes place on
the next working day of the date of the
deal
þ - Settlement of funds takes place on
the second working day following the
date of the deal
j xchaa
þ Forward- Delivery takes place on V
day after the date of the deal
þ In the forex market all rates that are
quoted are generally spot rates
þ When delivery takes place beyond the
spot date then it is a forward transaction
and the forward rate is applicable
þ Forward rate = Spot rate + Premium (-
discount)
ë aa
þ If the forward value of a currency is higher than
the spot value the currency is said to be at a
premium
þ If the above is reversed the currency is said to
be at a discount
þ The forward premium/discount is based on
interest rate differentials of the two currencies
involved
þ Direct and indirect quotes of exchange rate-
direct quote, local currency is variable
M Exchaa
þ Cross rates- To obtain rates for a
particular currency pair when they are
not available directly
þ Bid and offered rates- In USD/INR
39.40/41 the bank is bidding for USD at
Rs. 39.40 and offering to sell USD at Rs.
39.41
Excha hm c
þ All foreign exchange calculations have to be
worked with care and accuracy and several
rules have to be kept in mind
þ Chain rule- is used to attain comparison or
ratio between two quantities which are linked
together through another or other quantities.
Equation in the form of a chain is derived.
þ Per cent and per mille- Per 100 units/per 1000
units
Exam auha
þ Muery: If we have to remit French Francs
to France from India how do we go about
it? (We have to arrive at cross rates
between FRF and INR.)
þ Mumbai interbank market:
US $ 1 = Rs. 41.2550/2650
þ London Market
US $ 1 = FRF 6.0500/6.0550
uha
þ At what rate can one buy FRF against rupees?
þ How many Rs----- = FRF 1?
þ FRF 6.0500 = US $ 1
þ US $ 1 = 41.2650, therefore,
þ FRF 6.0500 = US $ 1 = Rs. 41.2650
þ Hence, FRF 1 = 41.2650/6.0500
þ èr FRF 1 = Rs. 6.8206
ë aa
þ Xalue date: It is customary, in foreign
exchange market, to quote a rate to do the
deal but exchange the currencies not on the
same day but generally afterwards.
þ Forward rate: Has two components
Spot rate
Forward points or forward differentials