72533276 CAIIB Super Notes Bank Financial Management Module a International Banking Exchange Rates...

8/10/2019 72533276 CAIIB Super Notes Bank Financial Management Module a International Banking Exchange Rates and Forex Business

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CAIIB Super-Notes M S AhluwaliaSirf Business


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Exchange Rates and ForexBusinessModule A: International Banking


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CAIIB SUPER NOTESBank Financial Management: Exchange Rates and ForexBusiness


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CAIIB Super-Notes M S Ahluwalia Sirf Business

ContentsCoera!e"1.Foreign Exchange Denition and Markets

!.Factors Determining Exchange Rates

".Exchange Rate Mechanism

#.Foreign Exchange Dealing Room $%erations

&.RBI'FEDAI (uidelines


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F$REI() E*C+A)(E DEFI)I,I$) A)DMAR-E,1.


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Foreign Exchange/DenitionCon0ersion o currencies rom the currenc2 o in0oice to

the home currenc2 o the ex%orters generall2 re3uiredor cross 4order trade

A For Ex ,ransaction is a contract to exchange unds inone currenc2 or unds in another currenc2 at an agreed

rate and arranged 4asis.

All claims %a2a4le a4road5 6hether consisting undsheld in oreign currenc2 6ith 4anks a4road or 4ills5checks %a2a4le a4road.


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For Ex / FEMA DenitionForeign Exchange means oreign currenc2 andincludes:i7All de%osits5 credits and 4alances %a2a4le in oreign

currenc25 and an2 drats5 tra0eler8s che3ues5 letters o creditand 4ills o exchange5 ex%ressed or dra6n in Indian currenc2and %a2a4le in an2 oreign currenc25

ii7An2 instrument %a2a4le at the o%tion o the dra6ee orholder thereo or an2 other %art2 thereto5 either in Indiancurrenc2 or in oreign currenc25 or %artl2 in one and %artl2 inother.


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ForEx Market 9artici%antsCentral Banks

Commercial Banks

In0estment unds'4anks

ForEx 4rokers

Cor%orations

Indi0iduals


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Foreign Exchange MarketsCharacteristics:!# hour market

an o0er the counter market

a glo4al market 6ith no 4arriers'no s%ecic location

su%%orts large ca%ital and trade o6s

highl2 li3uid markets

high uctuations in currenc2 rates

settlements a;ected 42 time


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FAC,$R DE,ERMI)I)( E*C+A)(ERA,E!.


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Factors DeterminingExchange Rates


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E*C+A)(E RA,E MEC+A)IM".


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,2%es o ,ransactions

=Date on 6hich exchange o currencies actuall2 takes %lace


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>alue date


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For6ard Margins 9remiumand DiscountsFor6ard Rate ? %ot Rate @ 9remium or / Discount79remium: For6ard >alue o Currenc2 %ot >alue

Discount: %ot >alue o Currenc2 For6ard >alue

In a %erect market5 6ith no restriction on Finance and,rade5 the interest actor is the 4asic actor in arri0ing atthe or6ard rate

For6ard %rice o a currenc2 can 4e 6orked out on the4asis o:%ot %rice o the currencies in0ol0ed

,he interest rate di;erentials or the currencies

,he term5 i.e.5 the uture %eriod or 6hich the %rice is 6orked out


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,2%e o uotes

Internationall25 all currencies other than (B95 Euro5 AD and )D are3uoted as direct rates.


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Cross Rateshen rates or a %articular currenc2 %air are notdirectl2 a0aila4le

Ex:D'I)R Rate is #G.1H'11

(B9'D Rate is 1.&HHH'1H

(B9'I)R Rate 6ill 4e: #G.1H x 1.&HHH'#G.11 x 1.&H1H


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Fixed 0s. Floating RatesFixed Rate: $cial rate set 42 the monetar2authorities or one or more currencies

Floating Rate: >alue o the currenc2 decided 42su%%l2 and demand actors

,he oating rate s2stem is %re0alent in the 6orldmarket since 1GJ". India ado%ted the same in

1GG".


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Bid and $;ered RatesBid rate: Bu2ing Rate$;ered Rate: elling Rate


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,erminolog21 9er Mille: 1 %art in e0er2 thousand

>aluer Com%ensee %a2ments: here 0alue date is

same in 4oth centers

Ar4itrage:im%le'Direct Ar4itrage: Bet6een ! centers onl2

Com%ound',hree or more7 9oint Ar4itrage: here additionalcenters are in0ol0ed


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F$REI() E*C+A)(E DEAKI)( R$$M$9ERA,I$)#.


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Functions1.,o meet re3uirements o customers o other4ranches'di0isions to 4u2 or sell oreign currenc2.

!.Manage Foreign currenc2 assets and lia4ilities.

".Fund and manage )ostro accounts

#.ndertake %ro%rietar2 trading in currencies.


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" 9arts o a Dealing Room


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9ositions


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,erminolog2


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MaLor Risks associated 6ith ForExDealing $%erations


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RBI'FEDAI (IDEKI)E&.


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Categorisation o Authorised9ersons


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FEDAI (uidelines'Rules1.tandard transit %eriod or ex%ort 4ills

!.Cr2stallisation o 4ills in oreign currenc2 in case o dela2 inrealisation 6ithin H da2s

".ight 4ills or Im%ort KC 6ould cr2stallise on 1Hthda2 aterdate o recei%t

#.For6ard contracts to ha0e denite amounts and s%ecicdeli0er2 dates

&.Deli0er2 %eriod under o%tion contract shall not exceed onemonth

.All or6ard contracts to 4e automaticall2 cancelled on theJth6orking da2 ater maturit2 i not %icked u%


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J.All cancellation at Bank8s o%%osite ,, rates


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FEDAI (uidelines'RulesN.Interest O !P a4o0e the %rime rate o the currenc2 to 4echarged in e0ent o dela2 in %a2ment o inter4ank oreigncurrenc2 unds

G.Interest O !P a4o0e the )E MIB$R to 4e charged in e0ento dela2 in %a2ment o ru%ee settlement unds

1H.All currencies to 4e 3uoted as:9er unit o Foreign currenc2 ?I)R. Ex: Q1 ? Rs #&.J

Exce%t 9S5 Indonesian Ru%aih and -en2an chilling. ,o 4e 3uoted as1HH units o Foreign currenc2 ? I)R.FEDAI also %rescri4es code o conduct or F$RE* dealers5 as alsoguidelines 6ith regard to dealings 6ith orex 4rokers.


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RBI (uidelines(uidelines related to:$%en %ositions

(a%s

Borro6ing and Kending in Foreign currencies

Inter4ank dealings in India and o0erseas markets

+edging o 4ank8s o6n ex%osures as 6ell as that o itsresident and non/resident clients


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RBI (uidelines1.AD CA, 1 Banks allo6ed to o%en'close ru%ee accounts1.In names o o0erseas 4ranches or corres%ondents 6ithout %rior reerence toRBI

!.In names o exchange houses 6ith %rior reerence to RBI

!.AD CA, 1 Banks allo6ed to o%en'close oreign currenc2accounts a4road

".AD CA, 1 Banks can undertake in0estments in o0erseasmarkets in mone2 market instruments and'or de4t instruments5issued 42 oreign state5 maturit2 T 1 2r5 rated as %er guidelines

#.ur%lus unds in )ostro accounts can 4e used or1.(ranting Koans to resident constituents

!.Extending credit acilities to holl2 $6ned u4sidiaries'>s o Indian

com%anies a4road


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RBI (uidelines&.All 4orro6ings in )ostro accounts including ECB and ,em%.$0erdrat7 not adLusted 6ithin & da2s shall not exceed &HP otheir unim%aired ,ier 1 Ca%ital or D 1H million 6hiche0er ishigher

.Banks can allo6 4anks to 4ook For6ard Exchange contracts tohedge their exchange risk ex%osure/,he genuineness o the underl2ing documentar2 e0idence and ex%osuremust 4e ascertained

J.Banks can allo6 im%orters'ex%orters to 4ook F6d. Contract on

4asis o declaration o the ex%osure 6ith limit 4ased on %ast%erormance

N.ME customers ma2 4e allo6ed to 4ook or6ard contracts inalignment 6ith the credit acilities a0ailed 42 it rom the 4ank


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RBI (uidelinesG.Banks can allo6 resident indi0iduals to 4ook For6ardcontracts on deli0era4le 4asis 6ith tenors u% to 1 2ear u% to alimit o D Q 1HH5HHH.

1H.Banks can o;er other deri0ati0e contracts to residententities 6ho ha0e 4orro6ed oreign exchange in accordance6ith the %ro0isions o FEMA 1GGG

11.Banks can also o;er Foreign currenc2 Ru%ee 6a% toresident entities that ha0e a orex or ru%ee lia4ilit2 to hedgelong term ex%osure

1!.Banks can enter into cross currenc2 o%tions and oreigncurrenc2/ru%ee o%tions 6ith their customers on 4ack to 4ack4asis


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CAIIB Super-Notes M S Ahluwalia

Sirf Business Do 2ou ha0e

an2 3uestions or 3ueries

or some eed4ack togi0eU ust mark anemail to

su%er.msahlu6aliaO2ahoo.com
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,hank SouV


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For more u%er/)otes: Click +ereM Ahlu6alia5 amongst other things5is a 0isual artist5 4logger5 4logdesigner and o course an MBA andBanker rom )e6 Delhi5 India.

,o kno6 more a4out him 2ou ma2 0isit his4log/site: Estudiante De Ka >ida
http://sirfbusiness.blogspot.com/http://msahluwalia.blogspot.com/http://sirfbusiness.blogspot.com/http://sirfbusiness.blogspot.com/http://msahluwalia.blogspot.com/http://msahluwalia.blogspot.com/


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