caiib gbm moda parti (2)

7/24/2019 Caiib Gbm Moda PartI (2)

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General BankManagement

(CAIIB)

International Banking(Module A) PART-I

Foreign ExchangeTanushree Mazudar! IIBF


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Contents of Module AExchange rates

Risk anageent and "asics o# deri$ati$es

%ocuentar& letters o# creditFacilities #or ex'orters and i'orters

orres'ondent "anking and RI accounts

RBI and exchange control in India! E*IMBank! E+


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Exchange rates International transaction in cash re,uires to

distinct 'urchases

.Purchase o# #oreign currenc&

. Purchase o# good/ser$ice ith the F Ter #oreign exchange is used to denote

#oreign currenc&

Foreign exchange arketexists to cater to thedeand #or #oreign currenc&/currencies


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Foreign Exchange Market0rganisational setting ithin hich

indi$iduals! go$ernents and "anks "u&

and sell #oreign currencies0nl& a sall #raction o# dail& transactions

in #oreign exchange in$ol$e trading o#

currenc&Most #oreign exchange transactions

in$ol$e trans#er o# "ank de'osits


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Definition of foreign exchange %e'osits! credits and "alances 'a&a"le in

#oreign currenc&

%ra#ts! tra$ellers1 che,ues! letter o# credit or "illo# exchange ex'ressed or dran in Indiancurrenc& "ut 'a&a"le in #oreign currenc&

%ra#ts! tra$ellers1 che,ues! 2/s! etc3 dran "&

"anks! institutions or 'ersons outside India "ut'a&a"le in Indian currenc&

The a"o$e de#inition is as 'er FEMA (4555)


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Exchange rate (1)%enotes the 'rice or the ratio or the $alue at

hich one currenc& is exchanged #oranother

Exchange rate is $er& d&naicThe #oreign exchange arket is round-the-

clock arket due to di##erent tie zones

Ma6or 'artici'ants- central "anks!coercial "anks! #orex "rokers!cor'orations! indi$iduals


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Factors affecting exchange rateMa6or "anks that act as arket-akers

ala&s gi$e to-a& ,uotes7 gi$es de'th

and $olue to the arketFundaental reasons

Technical reasons

8'eculation


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Fundamental reasonsBalance o# 'a&ents-9sur'lus-

9a''reciation

+roth rate o# the econo&-9 highergroth-9de'reciation o# currenc&

Fiscal 'olic&-9 #inancing o# #iscal de#icit

in#luences exchange rateMonetar& 'olic&-9loose onetar& 'olic&-9

de'reciation o# exchange rate


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echnical reasonsFreedo or restrictions on ca'ital

o$eents can a##ect exchange rates to

a large extentAong other #actors there are:

. ;uge trade sur'luses o# oil ex'ortingcountries

. a'ital o$ing #ro lo-&ielding currencies tohigh &ielding currencies (interest di##erential)


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!"eculation8el#-#ul#illing 'ro'hecies

.Antici'ation o# de'reciation o# a currenc& can

cause dealers to sell that currenc&8'eculation ser$es to 'ro$ide de'th and

li,uidit& to the #orex arket

Acts as a cushion as ell- contrariantraders exist in the arket


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#"es of exchange rate (1)Ready/cash- 8ettleent o# #unds on the

sae da& (date o# the deal)3

Tom- 8ettleent o# #unds takes 'lace onthe next orking da& o# the date o# thedeal

Spot- 8ettleent o# #unds takes 'lace onthe second orking da& #olloing thedate o# the deal


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#"es of exchange rate ($)Forard- %eli$er& takes 'lace on anyda&

a#ter the date o# the deal

In the #orex arket all rates that are ,uotedare generall& s'ot rates


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For%ard rate I# the #orard $alue o# a currenc& is higher than

the s'ot $alue the currenc& is said to "e at a'reiu

I# the a"o$e is re$ersed the currenc& is said to"e at a discount

The #orard 'reiu/discount is "ased oninterest rate di##erentials o# the to currencies

in$ol$ed %irect and indirect ,uotes o# exchange rate-

direct ,uote! local currenc& is $aria"le


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&uotes of Exchange 'ateross rates-To o"tain rates #or a

'articular currenc& 'air hen the& are

not a$aila"le directl&Bid and o##ered rates-In ?8%/IR

@53/4 the "ank is "idding #or ?8% at

Rs3 @53 and o##ering to sell ?8% at Rs3@534


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Exchange ArithmeticAll #oreign exchange calculations ha$e to "e

orked ith care and accurac& and se$eralrules ha$e to "e ke't in ind

hain rule-is used to attain co'arison orratio "eteen to ,uantities hich are linkedtogether through another or other ,uantities3

E,uation in the #or o# a chain is deri$ed3 Per cent and 'er ille-Per 4 units/'er 4

units


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Exam"le of a Chain 'ule (1)

Cuer&: I# e ha$e to reit French Francsto France #ro India ho do e go a"out

itD (


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Chain rule ($)

At hat rate can one "u& FRF against ru'eesD

;o an& Rs----- = FRF 4D

FRF H3G = ?8 4 ?8 4 = 43HG! there#ore!

FRF H3G = ?8 4 = Rs3 43HG

;ence! FRF 4 = 43HG/H3G 0r FRF 4 = Rs3 H3H


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For%ard 'ate (1)

Jalue date: It is custoar&! in #oreign exchangearket! to ,uote a rate to do the deal "utexchange the currencies not on the sae da&

"ut generall& a#terards3 Forard rate: ;as to co'onents

. 8'ot rate

. Forard 'oints or #orard di##erentials

Forard rate is the rate hen the $alue o# thedeal is #ixed "e&ond the s'ot date i3e3 "e&ondthe second orking da& a#ter the deal


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For%ard 'ate ($)

Forard transactions are necessar& in the#oreign exchange arket as the& ser$e nu"ero# 'ur'oses like:

. 0ne can hedge or co$er an existing #uture #inancial!coercial or trade related exchange risk

. These t&'es o# deals! in co"ination ith s'ot deals!are used #or one& arket o'erations through Ksa'1

transactions. Taking a $ie o# the arket! these can "e used #or

s'eculation


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For%ard rate ()


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For%ard rate ()

Base currenc& is the currenc& hich is "eing"ought and sold and the other currenc& isincidental3

Forards are ,uoted as #ollos. 8'ot/4 onth 4/4. 8'ot/ onths @G/@. 8'ot/ @ onths G@/GH

I# #orard di##erentials are in the ascendingorder (4st#igure is loer than the nd) the "asecurrenc& is at 'reiu


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Foreign exchange transactions

(1)

Ar"itrage: Is an o'eration "& hich one canake risk #ree 'ro#it "& undertaking

o##setting transactions3. an "e in interest rates: "orro in one centre andlend in another

. an "e in exchange rates: Bu& a currenc& in one

arket and sell in anotherAr"itrage kee's exchange rates uni#or in

all arkets


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Foreign Exchange ransactions

($)

Merchant rates: Cuotes o##ered to erchants(i'orters! ex'orters) "& "anks3

Inter-"ank rates: The rates ,uoted "& "anks #or

dealing in the inter-"ank arket3 Merchant ,uotations: In India all erchant

,uotations #or #oreign currencies shall "e in soan& ru'ees #or one unit o# #oreign currenc&exce't #or Na'anese Oen! Italian 2ira andBelgian Franc (Rs/4 units o# the currenc&)

All ,uotes are in #our decial 'lacesith thelast to digits in the ulti'le o# G


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Modes of remittances (1)

Telegra'hic Trans#ers(TT) o# #unds are done#ro one centre to another "& a& o# instructionsthrough telex! telegra or 8


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Modes of 'emittances ($)

%eand dra#t (%%):A %% is an order in ritingon the corres'ondent "ank/"ranch a"road to'a& the "ene#iciar& the su entioned therein3

Fedai 'rescri"ed t&'es o# rates o# erchanttransactions:

. TT ("u&ing)- clean inard reittances

. Bill ("u&ing)- 'urchase/discount o# ex'ort "ills. TT (selling) clean outard reittances

. Bill (selling) reittance #or i'ort "ills


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'BI*FEDAI Guidelines (1)

RBI has issuedAuthorised %ealers(A%)licences to "anks! all India #inancial

institutions and a #e co-o'erati$e "anksto undertake #oreign exchangetransactions in India

It has also issued Mone& hangerlicences to a large nu"er o# esta"lished#irs! co'anies! hotels! sho's! etc3


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'BI*FEDAI Guidelines ($)

Mone& changers hel' #acilitate encashent o##oreign currencies o# #oreign tourists

Entities authorised to "u& and sell #oreigncurrenc& notes! coins and tra$ellers1 che,uesare called #ull #ledged one& changers

Those authorised onl& to "u& are called

restricted one& changers


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'BI*FEDAI Guidelines ()

FE%AI (Foreign Exchange %ealers1 Associationo# India) is a non-'ro#it aking "od& #ored in45G ith the a''ro$al o# RBI

Its e"ers are authorised dealers and it'rescri"es guidelines and rules o# the gae #orarket o'erations! erchant rates! ,uotations!deli$er& dates! holida&s! interest on de#aults!etc3

FE%AI also ad$ises RBI on arket relatedissues and su''leents RBI on strengtheningthe arket

caiib gbm moda parti (2)

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