Risk Management in Foreign Exchange

Internship report on

“A PROJECT STUDY ON RISK MANAGEMENT IN FOREIGN EXCHANGE WITH

SPECIAL REFERENCE TO JAMMU AND KASHMIR BANK, SRINAGAR”

By

ISHFAQ GULL

4SH13MBA26

Submitted to

VISVESVARAYA TECHNOLOGICAL UNIVERSITY, BELGAUM

In partial fulfillment of the requirements for the award of the degree of

MASTER OF BUSINESS ADMINISTRATION

Under the guidance of

INTERNAL GUIDE EXTERNAL GUIDE

Prof. Lt.Cdr.P.K Suresh Kumar Mr. Irfan Ahmad Malik

Professor & H.O.D Relationship executive IT

SDIT Kenjar J & K Bank. Srinagar

Department of MBA

SHREE DEVI INSTITUTE OF TECHNOLOGY, MANGALORE

BATCH: 2013-2015

DECLARATION

I, Ishfaq Gull, hereby declare that the internship report entitled “A Project Study On Risk

Management In Foreign Exchange With Special Reference To Jammu And Kashmir Bank,

Srinagar” prepared by me under the guidance of Prof Lt Cdr Suresh Kumar, faculty of M.B.A

Department, Shree Devi Institute of Technology and external assistance by Mr.Irfan Ahmad

Malik, Relationship executive, Forex department, JK Bank Srinagar.

I also declare that this internship work is towards the partial fulfillment of the university

regulations for the award of degree of Master of Business Administration by Visvesvaraya

Technological University, Belgaum.

I have undergone a summer project for a period of Ten weeks. I further declare that this project

is based on the original study undertaken by me and has not been submitted for the award of any

degree/diploma from any other University /Institution.

Place : Mangalore Ishfaq Gull

Date : 4SH13MBA26

ACKNOWLEDMENT

I am elated to present my internship on “A Project Study On Risk Management In Foreign

Exchange With Special Reference To Jammu And Kashmir Bank, Srinagar”. I deem it a

privilege to acknowledgement to all those who have directly and indirectly helped me in the

preparation of this project report.

First and foremost, I express my grateful thanks and seeks blessing from almighty GOD, who is

and has been a constant support my life.

I would like to thank our principal Dr.Vijaya D.P Alva, for giving me an opportunity to carry

out this study.

I would like to thank our HOD of MBA department Prof. Lt. Cdr. Suresh Kumar, for giving

me an opportunity to carry out this study.

I would like to express my sincere gratitude to Prof. Lt. Cdr. Suresh Kumar, my esteemed

lecturer for her valuable guidance and encouragement during the preparation of this internship

report. I express my sincere thanks to her, as she has been continuously helping me in getting rid

of difficult situation.

My sincere thank to Mr. Irfan Ahmad Malik, Relationship executive JK Bank Srinagar who

has given their valuable guidance to carry on this internship. And also I thanks to staff members,

who have assisted me, provided information and supported throughout my internship.

I would like to thank my Parents who encouraged me throughout the making of this project

report and also my relatives, classmates, friends and well wishers for their moral support,

appreciation and sincere wishes.

TABLE OF CONTENTS

Executive summary

Chapter 1. Introduction…………………………………………………………………………………..1-5

Chapter 2. Industry and company profile…………………………………………………..........6-26

Chapter 3. Theoretical background of the study………………………………………………27-53

Chapter 4. Data analysis and interpretation……………………………………………….........54-63

Chapter 5. Summary of the findings, suggestions and conclusions ……………..….....64-67

Bibliography

Annexure

List of Tables

Table no. Particulars Page no

4.1 Table Showing Loans/Deposits ratio 56

4.2 Table Showing Quick Ratio 57

4.3 Table Showing Earning Per Share 59

4.4 Table Showing Return On Assets 60

4.5 Table Showing Return On Capital Employed 62

4.6 Table Showing Debt Equity Ratio 63

List of charts

Chart no. Particulars Page no

2.1 Chart showing structure of Indian banking industry 10

2.2 Chart showing brand identity of J&K Bank 13

2.3 Chart showing products/services of J&K Bank 15

2.4 Chart showing savings and deposits of J&K Bank 17

2.5 Chart showing businesses of J&K Bank 18

2.6 Chart showing Mc Kinsey’s 7S Frame Work 21

3.1 Chart showing Administration Of Foreign Exchange In India 34

3.2 Chart showing trade off between the value of firm and financial distress

46

4.1 Chart showing Loans /deposits ratio 56

4.2 Chart showing quick ratio 58

4.3 Chart showing earning per share 59

4.4 Chart showing return on assets 61

4.5 Chart showing return on capital employed 62

4.6 Chart showing Debt Equity Ratio 64

Executive summary

Forex being a department in J&K Bank has a very vast impact over the economy of the country.

It has helped the country to boost up its economy and keep its exporters to earn more and more

profits. J&K Bank have always been a helping hand by providing financial help to the exporters

by the help of which exporters were able to lesser the risk in their business. The work reported in

this project is concerned with various concepts of forex in order to analyze and to know more

about Markets. This project gives a detailed description of forex trading mechanism of J&K

bank. Only due to foreign exchange one country is able to do trade with other countries. Foreign

exchange also gave us a vast vision of market, currencies and the various bank accounts that are

used in dealing with various currencies.

Risk Management is, “any activity which identifies risks, and takes action to remove or control

‘negative results’ (deviations from the requirements).” Effective risk management strategies have

become increasingly necessary due to the dynamic nature of the business environment.

Globalization is resulting in new markets, new competitors, and new products. Technological

advances are dramatically accelerating the pace of business and the volatility of financial

markets. Unpredictable changes in interest rates, yield curve structures, exchange rates, and

commodity prices, exacerbated by the explosion in international expansion, have made the

financial environment riskier today than it ever was in the past. For this reason, boards of

directors, shareholders, and executive and tactical management need to be seriously concerned

that corporate risk management activities be adequately assessed, prioritized, driven by strategy,

controlled, and reported.

Chapter 1- Introduction

The Jammu & Kashmir Bank

Shree Devi Institute Of Techonology Page 1

INTRODUCTION

Forex trading is one of the most well-known investment options out there. The term "Forex"

stands for "foreign exchange." Mainly, investors engage in Foreign exchange trading by buying

and selling currencies from around the world. Prior to 1970s, exchange rates were based on a

fixed system called the Breton Woods System. During the 1970s, however, countries started

switching to the modern Forex market, which was characterized floating exchange rates

determined by different economic factors viz Inflation levels and trends, as well as government

budget deficits or surpluses. The economic growth and health of a country also affect the Forex

market. This is determined through reports of GDP (gross domestic product), retail sales,

employment levels, and other factors. Today, the foreign exchange market is one of the world's

most expansive, liquid, and active financial markets. Before you make any investment, read on to

learn about the basics of Forex trading.

Every company that has exposure to foreign exchange risk has to prudently manage & control its

exposure simultaneously with management of other risks. Forex risk implies the exposure of a

company to the possible impact of fluctuations in foreign exchange rates. The risk caused by

unfavorable fluctuations in exchange rates may result in a loss to the company. Generally,

Foreign exchange risk arises due to currency differences in a company’s assets & liabilities and

cash flow differences. These risks continue till the foreign exchange position is settled. This risk

arises because of foreign exchange trading, foreign currency cash transactions, investments in

foreign companies and investments denominated in foreign currencies. The quantum of risk is

derived out by multiplying the degree of exchange rate changes with the size and duration of the

foreign currency exposure. Globalized financial markets and development in exchange markets

have resulted into complex transnational exposure management. It is complex essentially

because of (a) the growing size and multiplicity of exposures which companies incur as they

grow globally and (b) the increasing volatility & fluctuations in exchange rates of the Forex

markets. Due to this complication, a logical balanced approach is required in view of formulating

company’s Forex risk management programme. The introduction point in such a programme

relates to decide the exactly sum of the assets which are under risk. At micro economic level,

transnational companies face varying degrees of business structural risks. Their need for



information relevant to exposure identification differs. Therefore, no single exposure system may

be appropriate for all companies. The appropriate system must be firm-specific. It must consider

the size of the company and its constituent units, the exposure objectives and strategy of the

company, its operating and organizational characteristics and personnel strength. There are four

basic features which should be included in all exposure management method:

(1) The information should be anticipatory.

(2) The reporting frequency must be adequate.

(3) The information flow should be associated to the company.

(4) The rationale of the information systems.

Need and importance of the study

The world nations are progressively becoming more interrelated global trade and global

investment therefore results in cross country flow of world nations. Countries hold currencies of

the various other countries and that a market trade of Forex results. More appropriately, Forex

refers to claim to foreign money balances. Forex gives resident of one country a financial claim

on other country or countries. All deposits, credits and balances payable in foreign currency and

any drafts, travelers’ cheques, letters of credit and bills of exchange payable in foreign currency

constitute foreign exchange. Forex market is the market where money denominated in one

currency is purchased and sold against money denominated in another currency. Transactions in

currencies of countries, parties to these transactions, rates at which one currency is exchanged for

other or others, ramification in these rates, derivatives to the currencies and dealing in them and

related aspects constitute the Forex.

Foreign exchange transactions occur when a country imports goods and services, people of a

country take on visits to other counties, citizens of a country send money abroad for various

purpose, business units set up foreign subsidiaries and so on. In all these cases the nation

concerned purchases relevant and required foreign exchange, in exchange of its currency, or

draws from foreign exchange reserves built. In contrast, when resident of another country visits

the country, when the country exports goods and services to another country, when citizens of

the country settled in foreign nations remit money homewards, when firms, foreign citizens and



institutions invest in the country and when the country and its business community raises funds

from abroad, the country’s currency is purchased by others, giving foreign exchange, in

exchange. MNC’s operate in different countries and their operations involve multiple foreign

currencies. Their operations are affected by laws and the politics of the counties where they

operate. Thus, they face high degree of risk as compared to domestic firms. A matter of great

concern for the overseas firms is to analyze the implications of the variation in interest rates,

inflation rates and exchange rates on their decisions and minimize the Forex risk.

Objectives of the study

Primary Objective

To study and understand the foreign exchange.

To understand the risk management techniques

To study the risk involved in foreign exchange.

Secondary Objective

To identify the problems associated with pre shipment and post shipment advances

To examine the relationship between the inflow and outflow of foreign currencies at the

branch level.

Scope of the study

The study aims to provide an outlook on managing the risk that firms face because of fluctuating

exchange rates. Foreign exchange is an integral part of doing international business. Their role is

often accepted as necessity, while the importance of risk associated with uncertain future

exchange rates is dismissed.

Research methodology

The research is done on the basis of primary and secondary data.

Primary data

The primary data is collected through discussions with J&K Bank Forex department officials and

personal interviews with customers of foreign exchange.



Secondary data

The secondary data is collected through research papers, annual reports, magazines, text books

and websites.

Review of literature

The Six Forces of Forex - Scott Owens, (2004)

The Forex Report is a periodic publication that investigates advanced strategies for superior

trading performance in the foreign exchange markets. These Reports utilize advanced statistical

and econometric modeling techniques to Create new insight into the trading strategy of the

average trader. This paper explains SIX forces to understand Forex trading

Who trades Forex?

Why trade Forex?

Where should you Forex?

What should you trade?

When should you trade?

How should you trade?

Trading as a Business - Charlie Wright.(1998)

The author explains the basics of trading, Do's and Don'ts of trading. He further explains the

strategies to be used and the investor or trader psychology & also gives a brief summary about

hoe the market works and how one can trade effectively and utilize the resources( Time and

Money) efficiently.

FOREX SCALPING “Tiny Trades For Terrific Profits”- Robert Borowski (2005)_

In this eBook He explains the wildly profitable technique of “scalping” in the Forex markets. He

discusses a few variations of how to accomplish “scalps”. He discusses the pros and cons of this

style of trading, and how to be well on the way to success with these techniques.

Limitations

The study is confined just to the foreign exchange risk but not the total risk.

The time constraint was a limiting factor, as more in depth analysis could not be carried.



The analysis of this study is mainly done on the income statements.

This study is limited for the year 2013-2014.

It does not take into consideration all Indian companies foreign exchange risk.

The hedging techniques are studied only which the company adopted to minimize foreign

exchange risk.

Some of the information is confidential in nature that could not be divulged for the study.


Chapter 2-Industry and

company profile


Shree devi institute of technology Page 6

INDUSTRY PROFILE

A bank is a financial institution which deals with deposits and advances and other related

services. It receives money from those who want to save in form of deposits and it lends money

to those who need it. It is a financial institution which deals with other people’s money. A bank

may be a person, firm or a company. It gives safety to the deposits of its customers. It is a profit

seeking institution.

The Origin and Use of Banks

The Word ‘Bank’ is derived from the Italian word ‘Banko’ signifying a bench, which was

erected in the market place, where it was customary to exchange money. The Lombard Jews

were the first to practice this exchange business, the first bench having been started in Italy A.D.

808. Some authorities assert that the Lombard merchants started the business of money-dealing,

employing bills of exchange as remittances ,about the beginning of the thirteenth century.

About the middle of the 12th century it became evident, as the benefit of coined money was

progressively acknowledged, that there must be some controlling power, some corporation which

would undertake to keep the coins that were to bear the royal stamp up to a certain standard of

value, as independently of the ‘sweating’ which invention may place to the credit of the

ingenuity of the Lombard merchants all coins will, by wear or abrasion, become thinner, and

consequently less valuable; and it is of the last importance, not only for the credit of a country,

but for the easier regulation of commercial transactions, that the metallic currency be kept as

nearly as possible up to the legal standard. Much unnecessary trouble and annoyance has been

caused formerly by negligence in this respect. The gradual merging of the business of a

goldsmith into a bank appears to have been the way in which banking, as we now understand the

term, was introduced into England; and it was not until long after the establishment of banks in

other countries, for state purposes, the regulation of the coinage, etc. that any large or similar

institution was introduced into England. It is only within the last twenty years that printed

cheques have been in use in that establishment. First commercial bank was Bank of Venice

which was established in 1157 in Italy. One of the most famous Italian banks was the Medici

Bank, set up by Giovanni di Bicci de' Medici in 1397.



Fundamental Role and Evolution- Indian Banking

The reminisce of banking in India can be traced back to the 4th century BC in the 'Kautilya

Arthashastra', which contains references to creditors and lenders. It shows a reference to "Interest

on commodities loaned" (Prayog Pratyadanam) which was accounted as revenue of the state.

Lending activities were not entirely unknown in the medieval India and the concept such as

'priority of claims of creditors' and 'commodity lending' was established business practices.

However the real roots of commercial banking in India can be traced back to the early eighteenth

century.

The banking sector is meant to meet the financial needs of the economy. Too much of money can

cause inflation- too little can stifle economic growth and create problems of unemployment and

lost opportunity. Accordingly the apex banking institution, The Reserve Bank of India has a

basic function “- to regulate the issue of Bank Notes and keeping of reserves with a view to

securing monetary stability in India and generally to operate the currency and credit system of

the country to its advantage”.

Establishment of Reserve Bank of India (1935)

The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of

the RBI Act, 1934. It is at the centre of India’s financial system. Therefore, it is called the

Central Bank. It has a primary commitment to maintaining the nation’s monetary and financial

stability.

o RBI is banker to the Central Government, State Governments and Banks. Key functions

of RBI include:

o Monetary policy.

o Development of banking sector.

o Supervision of Banking companies, Non- banking Finance companies and Financial

Sector, Primary Dealers and Credit Information Bureaus.

o Regulations of money market, government securities market, foreign exchange market

and derivative linked to these markets.



o Management of foreign currency reserves of the country and its current and capital

account.

o Issue and management of currency

o Oversight of payment and settlement systems

o Research and statistics

RBI exercises its supervisory powers over banks under the Banking Companies Act, 1949, which

later became Banking Regulation Act, 1949.

The largest commercial bank in the country is State Bank of India (SBI). Its origins can be traced

back to 1806, when Bank of Calcutta was constituted. It was re-named Bank of Bengal in 1809.

Bank of Bombay (created in 1840), Bank of Madras (created in 1843) and Bank of Bengal were

amalgamated in 1921 to form Imperial Bank of India. Until 1935, the Imperial Bank of India

performed the functions of Central Bank as well as Commercial Bank.

In 1955, State Bank of India was constituted to take over the Imperial Bank of India. Later, 8

states associated banks (State Bank of Jaipur, State Bank of Bikaner, State Bank of Patiala, State

Bank of Hyderabad, State Bank of Indore, State Bank of Mysore, State Bank of Travancore and

State Bank of Saurashtra) were brought under SBI.

RBI earlier owned the entire share capital of SBI. Later, when SBI went public, other investors

too became shareholders. A few years ago, the shares of SBI that were owned by RBI were

transferred to the Government of India.

SBI, its subsidiaries, and the 20 nationalised banks are usually referred to as public sector banks.

Other private sector banks were allowed to continue as private entities under RBI supervision.

These are commonly known as old private banks. Foreign banks that were operating in the

country were similarly allowed to continue as private entities.

In order to enhance banking services for the rural sector, a framework of Regional Rural Banks

came up in 1975. Ownership of these banks is split between three stake-holders. Central

Government (50%), concerned State Government (15%) and the bank which sponsors the RRB

(35%).



Another vehicle for local reach is the Co-operative Banks, which have been in existence for over

a century. They are registered under the Co-operative Societies Act, 1960 and regulated under

the Banking Regulations Act, 1949 and Banking Laws Act, 1956.

In line with the liberalization in the 1990s, private sector was permitted to promote new banks,

subject to obtaining banking license from RBI. These are commonly referred to as new private

banks.

At a socio-economic level, the test of a country’s banking system is how well it meets the needs

of the weaker and disadvantaged sections of society.

Nationalisation of Indian Banks

By the 1960s, the Indian banking industry has become an important tool to aid the development

of the Indian economy. Meanwhile, it has emerged as a large employer, and a debate has ensured

about the possibility to nationalise the banking industry. Indira Gandhi, the-then Prime Minister

of India expressed the purpose of the Government of India (GOI) in the annual conference of the

All India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalisation". The

paper was received with positive enthusiasm. Thereafter, her move was fast and sudden, and the

Government of India issued an ordinance and nationalised the 14 major commercial banks with

effect from the midnight of July 19, 1969. Jayaprakash Narayan, a national leader of India,

described the step as a "Masterstroke of political sagacity" Within two weeks of the issue of the

ordinance, the Parliament passed the Banking Companies (Acquisition and Transfer of

Undertaking) Bill, and it received the presidential approval on 9th

August, 1969.

A second step of nationalisation of six more commercial banks followed in 1980. The stated

reason for the nationalisation was to give the government more control of credit delivery. With

the second step of nationalisation, the Government of India controlled around 91% of the

banking business in India. Thereafter, in the year 1993, the government merged New Bank of

India with Punjab National Bank(PNB). It was the only merger between nationalised banks and

resulted in the fall of the number of nationalised banks from 20 to 19. After this, until the 1990s,

the nationalised banks grew at a pace of around 4%, closer to the average growth rate of the

Indian economy.As of now till 2014, total 26 Nationalised banks are working in India.



Structure Of Indian Banking Industry

Fig: 2.1

RESERVE BANK OF INDIA

SCHEDULED UNSCHEDULE

DD

COMMERCIAL COOPERATIVE

PRIVATE

PUBLIC

FOREIG

N

RRB

RURAL

URBAN



COMPANY PROFILE

The Jammu and Kashmir Bank was founded on 1 October 1938 under letters patent issued by

the Maharaja of Jammu and Kashmir, Hari Singh. The Maharaja invited eminent Kashmiri

investors to become founding directors and shareholders of the bank, the most notable of which

were Abdul Aziz Mantoo, Pesten Gee and the Bhaghat Family, all of whom acquired major

shareholdings. The bank commenced business on 4 July 1939, and was considered the first of its

nature and composition as a State owned bank in the country. The bank was established as a

semi-State Bank with participation in capital by State and the public under the control of State

Government. In 1971, the bank acquired the status of a scheduled bank and was declared as an

"A" Class bank by the Reserve Bank of India in 1976. The bank had to face serious problems at

the time of independence when out of its total of ten branches two branches of

muzaffarabad, Rawalakot and Mirpur fell to the other side of the line of control (now Pakistan-

administered Kashmir) along with cash and other assets. Following the extension of Central laws

to the state of Jammu & Kashmir, the bank was defined as a government company as per the

provisions of Indian companies act 1956. Mushtaq Ahmed is the new Chairman & CEO of

Jammu & Kashmir Bank. J&K Bank's Annual Report 2008-09 has won three awards at the

prestigious LACP 2009 Vision Awards – the world's largest award programme for Annual

Reports, organized by California-based League of American Communications Professionals

(LACP), USA. The LACP is a forum within the public relations industry that facilitates

discussion of best-in-class practices in public relations and recognizes exemplary communication

capabilities at a global level. The awards received include – Rank 73 on the top hundred list of

annual reports from around the world, Platinum Award in the Commercial Banks – Up to $10

billion annual revenue from the Asia Pacific Region and Silver Award for Most Creative Report

across all sectors from the Asia Pacific Region. Dr Haseeb Drabu was chairman and chief

executive of the bank for the period 2005 to 2010.

Jammu and Kashmir Bank Limited was incorporated on 1st October, 1938 and commenced its

business from 4th July, 1939 in Kashmir (India). The Bank was first in the country as a State

owned bank. According to the extended Central laws of the state, Jammu & Kashmir Bank was

defined as a govt. Company as per the provision of Indian companies’ act 1956. In the year 1971,

the Bank received the status of scheduled bank. It was declared as "A" Class Bank by RBI in



1976. Today the bank has more than 750 branches across the country and has recently become a

billion Dollar Company.

Profile

1. Incorporated in 1938 as a limited company.

2. Governed by the Companies Act and Banking Regulation Act of India.

3. Regulated by the Reserve Bank of India and SEBI.

4. Listed on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE)

5. 53 per cent owned by the Government of J&K.

6. Rated "P1+" by Standard and Poor- CRISIL connoting highest degree of safety.

7. Four decades of uninterrupted profitability and dividends.

Unique Characteristics: One of a Kind

1. Private sector Bank despite government holding 53 per cent of equity.

2. Sole banker and lender of last resort to the Government of J&K.

3. Plan and non -plan funds, taxes and non-tax revenues routed through the bank.

4. Salaries of Government officials disbursed by the Bank.

5. Only private sector bank designated as agent of RBI for banking.

6. Carries out banking business of the Central Government.

7. Collects taxes pertaining to Central Board of Direct Taxes in J&K.



Brand Identity

The new identity for J&K Bank is a visual representation of the Bank’s philosophy and business

strategy. The three colored squares represent the regions of Jammu, Kashmir and Ladakh. The

counter-form created by the interaction of the squares is a falcon with outstretched wings – a

symbol of power and empowerment.

Fig: 2.2

The synergy between the three regions propels the bank towards new horizons. Green signifies

growth and renewal, blue conveys stability and unity, and red represents energy and power. All

these attributes are integrated and assimilated in the white counter-form.



Vision, Mission & Quality Policy

Vision

“To catalyze economic transformation and capitalize on growth”.

Bank’s vision is to engender and catalyze economic transformation of Jammu and Kashmir

and capitalize from the growth induced financial prosperity thus engineered. The bank

aspires to make Jammu and Kashmir the most prosperous state in the country, by helping

create a new financial architecture for the J&K economy, at the center of which will be the

J&K Bank.

The Bank's vision is to be financially sound, profitable, growth and technology oriented,

committed to building and maximizing sustainable value for all its stakeholders. The Bank is

committed to achieve healthy growth in profitability and simultaneously to remain consistent

with the Bank's risk appetite and at the same time ensuring the highest levels of ethical

standards, professional integrity and regulatory compliance.

Mission :

“Our mission is two-fold: To provide the people of J&K international quality financial service

and solutions and to be a super-specialist bank in the rest of the country. The two together will

make us the most profitable bank in the country.”

Quality Policy:

The bank begun its much-delayed expansion plan in 2011-12, improved its earnings and kept the

asset quality stable in the first half of this financial year. Recently, it sold a part of its stake in

MetLife for a profit of Rs 140-150 crore. This has made the bank’s share attractive to investors,

market analysts said.

“At the current market price, J&K Bank is trading reasonably at 1.15x FY14 ABV. We believe

they deserve to get a better multiple, on the back of consistent performance on asset quality as

well as strong return ratios (ROA/ROE) over the last couple of years. Its superior provision

coverage ratio is icing on the cake and stands as one of the best in the industry (greater than 93

per cent, including technical write-offs), providing cushion to its future earnings, with any



unforeseen deterioration in asset quality, going forward,” said Saday Sinha, vice-president,

equity research, Kotak Securities.

Products of J&K Bank

Fig: 2.3

Home finance:-

Housing Loan Schemes

Educational Finance:-

Education Loan Scheme

Term Loan Scheme for B.ed / M.ed. courses

Bud shah Primary Education Finance

Automobile Finance:-

Car Loan Scheme

Car Loan For Used Cars

Commercial Vehicle Finance

LOANS

Home Finance Educational

Finance

Automobile

Finance

Commercial

loans

Specialized

Finance



Commercial Vehicle Finance(Used Vehicles)

Two Wheeler Finance

Other Finances:-

Consumer Loan

Consumption Loan

Personal Loan to Pensioners

Mortgage loan for Trade and Service Sector

Loans against Mortgage of Immovable Property

Fair Price Shop Scheme

Travel and Tourist taxi operators

Specialized Finance:-

Help Tourism (For Kashmir valley only)

All purpose Agri term Loan

Fruit Advances Scheme (Apple)

Zaffron Finance

Roshni Financing Scheme

Craft Development Finance

Dastkar Finance

Giri Finance Scheme

Khatamband Craftsmen Finance

Commercial Premises Finance

Laptop/PC Finance



Savings and deposits:-

Fig: 2.4

Saving Bank Deposits:-

Saving Bank Deposit Scheme

SB Ujala- No Frills Account

Term Bank Deposits:-

Millennium Deposits Scheme

Flexi Deposits Scheme

Fixed Deposits Scheme

Child Care Scheme

Cash Certificates

Super Earner Deposits Scheme

Recurring Deposits Scheme

Recurring Plus Account

Smart Saver Scheme

Depositors Pension Scheme

Saving and Deposits

Current

Accounts

Gift Cheque

Schemes

Value Added

Services

Term &

Deposits

Saving Bank

Deposits



Value Added Schemes:-

Tax Saver Term Deposit Scheme

Mehendi Deposit Certificate

Current Accounts:-

Platinum Account

Gold Account

Premium Plus Account

Premium Account

Basic Account

Other Business of J&K Bank

Fig: 2.5

Non Life Insurance MUTUAL FUND Life Insurance

Bajaj Allianz

General Insurance

Co. Ltd

MetLife India

Insurance

CARDS

Empowerment

Credit Card

Merchant

Acquiring (Point of

Sale Equipment)

Global Access

Card



Area of Operation

The Bank has its main market of operation in the state of Jammu and Kashmir. The

branch network of the bank is so dense that it has its branch every two kilometers.

The bank has also registered its presence in the main cities of India.

The bank is extensively supportive of small scale businesses and tourism in the state.

The bank constituted the J&K Bank Rural Self Employment Training Institutes

(JKBRSETI) Society, registered with Registrar of Society, Directorate of Industries and

Commerce (Kashmir), Srinagar for setting up JKBRSETIs in all the 12 lead districts of

the bank.

The bank constituted a trust under the title Jammu and Kashmir Bank Social Conscience

Trust to prevent heritage and to take eco-preservation initiative.

The Bank operates a Regional Rural bank under the name J&K Grameen Bank.

The Bank is also active in the field of corporate social responsibility like providing financial

assistance for medical aid, supporting sports and educational institution.

Infrastructure Facilities

Head Office

J&K bank has it’s headquarter in Srinagar. Due to extreme cold during the winters it

becomes necessary to provide heating facilities.

The four storied building has several facilities for its employees and other customers. The

building houses the office of chairman and other important personnel’s of the bank.

There is a cafeteria in the premises which serves the employees with quality food.

The Basement consists of parking facility.

There is a small park in the premises for employees.

The bank currently has 11 zonal office

1. Kashmir central.

2. Kashmir south.

3. Kashmir north



4. Ladakh

5. Jammu central.

6. Jammu west

7. Jammu north

8. Upper north Mohali

9. North Delhi

10. Mumbai

11. South Bangalore.

Besides J&K bank have RCC’s in Kashmir (Srinagar), Jammu, Delhi and Mumbai.

Branches

The bank has more than 750 branches all over the country, and 726 ATMs across the

country as on October 1, 2013.

The branches are fully computerized with latest technology.

All the CBS branches of the bank have been enabled for RTGS and NEFT facility.

Future Growth and Prospectus

Over the last several years RBI has undertaken wide-ranging financial sector reforms to

improve financial intermediation and maintain financial stability.

Over Rs. 30,800 Crore have been earmarked for the state under the prime minister’s

Reconstruction Program for the 11th

Five Year Plan.

In order to compete with other nationalized and private sector banks J&K is planning to

register its presence across India by opening its branches.

The Bank is adapting to new technologies effectively to provide faster and secure

banking services.

The bank is reviving its Human Resource policies to acquire the best talent from the

market in order to compete with other international banks in India.

Bank is emphasizing on its Small and Medium sector loans to promote growth in the

rural region of the state, including Tourism.



The Bank has also implemented Disaster Recovery Setup of a zero data loss by TCS.

The bank will continue its efforts to make every single process technology driven. All

business units will be migrated to CBS platform and more importantly, 0-Data Loss

system (3 ways DC/DR) will be setup by March 2012.

Other future IT initiatives include introduction of mobile banking, back-up solution

upgrade tape library for DC/DR, setting up of call centre, enhanced IT security through

oracle audit vault & video surveillance for 50 business units.

Mc Kinsey’s 7S Frame Work

The McKinsey 7S Framework is a management model developed by well-known business

consultants Waterman and Peters in the 1980s. This was a tactical vision for groups, to consist

of businesses, business units, and teams. The 7S are structure, strategy, systems, skills, style,

staff and shared values.

Fig: 2.6



The model is based on the premise that, for an organization to perform well, these seven

elements has to to be aligned and mutually reinforcing. Therefore, the model can be used to help

identify what needs to be realigned to improve performance, or to maintain alignment (and

performance) during other types of change.

Whatever the type of change – restructuring, new processes, organizational merger, new systems,

change of leadership, and so on – the model can be used to understand how the organizational

elements are interrelated, and so ensure that the wider impact of changes made in one area is

taken into consideration.

Strategy

To merge technology and business so as to deliver more products to more customers and

to control operating costs.

To develop new products and services that meets the needs and wants of targeted

customers and address inefficiencies in the Indian financial sector.

To boost the visibility in the market and improve the market share in the banking and

financial services.

High quality of customer service.

To continue to expand products and services that reduces our cost of funds.

To focus on high earnings growth low volatility.

Systems

Under systems comes the procedures and processes to do the work, information systems,

performance appraisal system, financial systems etc.

MIS: Entire computerized credit portfolio covered.

Archival Database: For maintenance of historical records of branches rolled over to CBS.

Disaster Recovery Setup: Implementation of a Zero Data Loss DR system by TCS.

Structure

The structure of the organization depicts the flow of work. It satisfies the interrelations among

departments. The organizational structure of J&K bank is quite good which allows smooth

functioning of work throughout the organization.



Skills

Skills specify the capabilities of personnel or of the organization as a whole. Banking industry

requires excellent analytical decision making skills. J&K Bank in this regard engages its staff

members in the training programs. The bank has tie up with two training institutions where

training for the organizational personnel takes place after every six months.

Staff

At J&K Bank, we recognize staff as an area of core competence, and seek to pursue, nurture and

retain the best talent. The ultimate aim of staff function is to build and manage a motivated pool

of professionals by growing internal resources.

Introduction of IT based “RAAHAT” – an employee grievance redressal mechanism as a

part of Corporate Governance.

More than 3650 officials have been trained/retrained in various fields.

Various benefit schemes like DA/Pension, 30 % increase in yearly medical aid,

Reimbursement of newspaper and telephone bills enhancement of loan limits.

The Staff strength is around 7267 employees with a plan of adding 1000 new employees

in the year 2011-12.

Style

Being a government undertaking J&K bank follows democratic style of leadership.

To guarantee smooth functioning of organization regular Board meetings are conducted

in which participation is encouraged right from the bottom level to the chairman.

Employees are consulted frequently for their suggestions and feedbacks, and adequate

steps are taken to embrace the suggestions.

Shared Value

Being a Financial Institution ethical and moral values are emphasized in the organization.

Most of the employees are from the J&K region which results in a homogenous culture in

all its branches.

Employees are expected to preserve secrecy and embrace fair work practices.



Achievements and Awards

Annual Report 2008-09 of J&K Bank has won three awards at the prestigious LACP

2009 Vision Awards – the world’s largest award programme for Annual Reports,

organized by California-based League of American Communications Professionals

(LACP), USA.

The LACP is a forum within the public relations industry that facilitates discussion of

best-in-class practices in public relations and recognizes exemplary communication

capabilities at a global level. The awards received include – Rank 73 on the top hundred

list of annual reports from around the world, Platinum Award in the Commercial Banks –

Up to $10billon annual revenue from the Asia Pacific Region and Silver Award for Most

Creative Report across all sectors from the Asia Pacific Region.

J&K bank received the BANKING TECHNOLOGY 2009 Award presented by IBA &

TFCI on 28th

Jan 2010.

The Bank was awarded with “ASIAN BANKING AWARD” 2005 for its development

project financing programme in recognition of contributing significantly to the

development of tourism industry of the J&K state. The Bank was awarded with the

ASIAN BANKING AWARD for the second consecutive year.

The J&K Bank has bagged the prestigious Financial Express Best Banks Award in the

‘Old Private Sector Banks’ category “for scaling up its business and strengthening the

balance for the year ending March 2011.”

J&K bank emerged as the ‘Best Bank’ in the ‘Old Private Sector Bank’ category at the

CNBC. TV18 India’s Best Bank and Financial Institution Awards 2012-13.

The Sunday Standard FINWIZ Best Bankers Award 2012-13

J&K Bank’s sustained focus on all the areas of banking during the past two years enabled

it to win four national awards at ‘The Sunday Standard FINWIZ Best Bankers Award’.

Conferred Best Banker in Financial Inclusion and Customer Friendliness award

Runner-up for the ‘Best Banker in priority Sector Growth and Agricultural Credit’

J&k Bank’s Chairman & CEO Mushtaq Ahmad were rated as the top ranked CEO

for being ‘accomplished in all aspects of banking’.



SWOT ANALYSIS

Strength:

Main strength of J&K Bank is its monopoly in the state of J&K. The bank has almost

negligible competitors with respect to their market capture in the state.

The bank has very strong market share in the state, with almost one branch at just 2kms

of distance.

The bank has successfully created very strong brand image in the hearts and minds of

people of J&K, which is their main market. People have also great faith in the bank that

they can’t think of any other bank before it.

J&K Bank is the highly growing bank which offers the widest range of financial

products.

J&K Bank offers 3 in 1 account which shows its growing.

It is one of the India’s largest Banks and has a national wide network 750 branches.

It also provides every type of credit creation towards every field.

J&K Bank pays a great attention towards rural development.

J&K bank is also known as Billionaire Company nowadays celebrating its 75th

years of

service.

Weakness:

Lack of promotional activity: The J&K Bank has targeted new customers and has

penetrated the market extensively. However, the customer relation has been a grey area

on account of growing customer disenchantment and required constant promotional

campaigns to ensure customer patronage. Hence, the level of brand awareness and

improvement has to be ameliorated to build customer patronage.

Lack of training and facilities: The Company did not hitherto provide any training to the

customers for operation of accounts. Online Trading being a new service in the field of

banking requires pertinent training as to the mode of operation, customized facilities etc.

Higher brokerage rates: The brokerage charged by the company, especially on the

delivery transactions is very high in comparison to the competitor.



Opportunities:

Increasing users of Internet: As per research India is adding millions of internet users

every year. This provides a huge opportunity to J&K Bank to tap such users.

Increase in the number of investors entering the stock market: Recently due to the

surge in IPO’S and increased income of people in India has led to more people taking

interest in stock market which is a huge opportunity for J&K Bank

Tax saving online: ICICIdirect.com offers many products like tax saving Bond and

Mutual funds. People today are keen on tax saving and for the same they can invest in

these products online. Thus this brings in a huge potential market for J&K Bank.

Providing true service: ICICIdirect.com reduces paper work, reduces hassles like the

brokers and following the investment along with this it assures safety and security.

Thus J&K Bank is potentially one of the most revolutionary products which will find

increased usage in this modern world.

Threats:

Fear of safety: People in India are very averting to giving out their credit card numbers or

buying and selling shares. This mentality possesses a significant trend because J&K Bank

in its essence is a portal for online trading in securities.

Emergence of other players: New players like Yes Bank and HDFC have entered the

market offering two in one (2 in 1) accounts and can in future grow into offering 3 in1

accounts.

Fluctuations in the securities Market: Stock market scams, increase in oil prices, terrorist

attracts etc. because huge fluctuations in security market which dissuades investors who

opt for liquidity or gold.


CHAPTER 3-

THEORETICAL

BACKGROUND OF THE

STUDY


Shree Devi Institute of Technology Page 27

Definition of International Trade

International trade means trade between the residents of two different countries. Every country

functions as an autonomous state with its own set of laws and currency. The differentiation in the

nationality of the export and the import presents certain unusual problems in the conduct of

international trade and settlement of the transactions arising there from.

Importance among such problems are:

a) Every country has its own monetary system.

b) Limits set by countries on import and export of goods.

c) Restrictions imposed by nations on payments from and into their countries.

d) Difference in legal system..

The national monetary units pose difficulties in the resolution of international transactions.

The exporter would like to get the payment in the currency of its own country. For example,

if Malaysian exporters export machinery to India, Indian rupee will not serve their purpose

because Indian rupee cannot be used as currency in Malaysia. Thus the exporter needs to pay

in the currency of importer’s country. So the need arises for conversion of one country’s

currency with another.

Foreign exchange: Foreign exchange is the method by which the currency of one nation gets

converted into the currency of another nation. The exchange is done by banks who deal in

Forex. These banks keep stock of foreign currencies in the form of balances with banks

abroad. For example, Indian Bank may keep an account with Bank of America, New York, in

which dollars are held. In the earlier example, if Indian importers pay the equivalent rupee to

Indian bank, it will arrange to pay American exporter at New York in dollar from the dollar

balances held by it with Bank of America.

Exchange rate: Exchange rate is the rate at which one currency is converted into another

currency is the rate of exchange between the currencies .The rate of exchange for a currency

is known from the quotation in the foreign exchange market.



For example, if Indian bank exchanged us for Indian rupee at Rs.62 a dollar, the exchange

rate between the two currencies can be expressed as

1$ = Rs.62

The banks working at a financial center, and dealing in Forex, represents the foreign

exchange market. The rates in the foreign exchange market are determined by the dealings of

the forces of demand and supply of the commodity dealt, viz., Foreign exchange. The rates

keep on changing frequently as well as violently because of the fundamental and transitory

factors that affects the demand and supply.

Advantages of Forex.

1) Simple to understand –Forex is simple to understand as we deal with just a pair of

currencies.

2) Low Minimum Investment - The Forex market requires less investment to start trading

than most other markets. The initial outlay could go very low, depending on the leverage

offered by the broker. This is a great benefit since Forex traders are able to keep their risk

investment to the minimum level. Mini and Micro trading accounts are also offered by

the online Forex brokers with low minimum deposit.

3) 24 Hour Market – Different countries have different time horizons that make it possible

for the Forex market to operate 24*7. Since the Forex market is worldwide, trading is

uninterrupted as long as there is a market open somewhere in the world. Trading starts

when the markets open in Australia on Sunday evening, and ends after markets close in

New York on Friday.

4) High Liquidity - Liquidity is the capacity of an asset to be transformed into cash quickly

and without any price discount. In Forex high liquidity means that we can shift large

amounts of money into and out of foreign currency with negligible price movement.

5) Low Transaction Cost -The transaction cost in the Forex is low because it is built into

the price and is called the spread. Spread is the difference between the buying and the

selling price.



6) Leverage - Forex Brokers permit traders to trade the market with leverage. It is the

ability to trade more money on the market than what is truly in the trader's account. For

example, If you have to trade at 50:1 leverage, you can trade $50 on the market for every

$1 that was in your account. This means you can control a trade of $50,000 using only

$1000 of capital.

7) Profit Potential out of Rising and Falling Prices - The Forex market has no limitations

for directional trading. This means, if you think a currency pair is going to appreciate in

value; you can purchase it, or go long. Similarly, if you feel it could lessen in value you

can sell it, or go short.

8) Foreign exchange is the largest financial market in the world –on a daily basis Forex

market has a volume of over $4 trillion. Such a huge amount of a daily volume allows for

outstanding price stability in most market conditions. This means you possibly will never

have to worry about losses as you would when trading stocks or commodities. The price

you observe quoted on your trading screen is the price you get.

9) Price movements are highly expected in the Forex market - Due to its very

speculative character Forex price movements have a tendency to over shoot and then

correct back to the mean. This means there are a number of cyclical patterns that are

easily identifiable to the trader who is trained in price action analysis. Forex currency

pairs usually spend more time in very strong up or down trends than other markets; this is

also a huge benefit because it is by and large much easier to trade a strongly trending

market than a hectic and consolidating market.

10) No constraints on the type or number of transactions - The futures market at times

will have what is called a “limit up” or a “limit down” day, this refers to when the price

moves beyond a fixed daily level, traders are constrained from entering new positions and

are only permitted to exit existing positions if they want to do so. This is intended to

control volatility, but because the futures market for currencies follows the spot Forex

market the next day at the futures open their sometimes will be huge “gaps” or areas

where the price has adjusted over night to match the current spot Forex price.



Some of the essential factors which affect exchange rates are:

1. Inflation

2. Money supply

3. Balance of payments

4. Interest rates

5. National income

6. Resource discoveries

7. Political factors

8. Capital movements

Inflation: inflation in the country would enlarge the domestic prices of the commodities. With

increase in prizes exports may decrease because the price may not be competitive. With the

dwindle in export the demand for the currency would also decline; this in turn would outcome in

the decline of external value of the currency. It should be noted that it is the comparative rate of

inflation in the two counties that grounds changes in the exchange rates.

Money supply: An increase in money supply in the country will influence the exchange rates

though causing inflation in the country. It can also influence the exchange rate directly.

Balance of payment: It represents the demand for and supply of foreign exchange which

eventually determine the value of the currency. Exporters from the country require the currency

of the country in the Forex market. These exporters would offer the foreign currency in exchange

of the local currency. on the other hand, imports into the country will increase the flow of

currency of the country in the forex market. When the Balance of Payment of a country is

constantly at deficit, it implies that demand for the currency of the country is slighter than the

supply. Therefore, its value declines in the market. If the Balance of payment is surplus,

constantly, it shows the demand for the currency is more than its supply and hence the currency

gains in value.

Interest rates: The interest rate influences the short-term movement of capital to a great extent.

When the interest rate rises at a center, it attracts short term funds from other centers. This would



boost the demand for the currency at the center and hence its value. Rising of interest rate may

be adopted by a country due to money circumstances or as a deliberate attempt to attract foreign

investment.

National income: An increase in national income results in increase in the income of the

residents of the country. Increment in the income increases the demand for goods in the country.

If there is an excessive production capacity in the country, this would lead to increase in

production. There is also a change for growth in exports. Where the production does not increase

in consideration with income rises, it leads to increased imports and supply of the currency of

the country in the foreign exchange market. The outcome is similar to that of inflation viz., and

decline in the value of the currency. Thus an increase in national income will guide to an

increase in investment or in the consumption, and hence, its effect on the exchange rate will

change.

Resource discoveries: The country’s currency gains in value when the country is competent to

discover key resources.

Capital Movements: There are a lot of factors that influence movement of capital from one

country to another. The offer of higher interest in a country may lead to short-term movement of

capital; there will be a flow of short-term funds into the country. If interest rate in a country rises

due to increase in bank rate or otherwise the exchange rate of the country will also rise. Reserves

will happen in case of drop in interest rates.

Bright investment climate and political stability may push portfolio investment in the country.

This leads to upward trend in the rate and higher demand for the currency. Poor economic

position may mean repatriation of the investments leading to decreased demand and low

exchange value for the currency of the country.

External Borrowings and assistance also leads to Movement of capital. Extensive external

borrowings will increase the supply of foreign exchange in the market. This will have a positive

effect on the exchange rate of the currency of the country. When a repatriation of principal and

interest starts the rate may be badly affected.

Other factors include political factors and Speculation, Technical and Market factors,

Psychological factors.



ADMINISTRATION FRAME WORK FOR FOREIGN EXCHANGE IN INDIA

The Central Government has been empowered under Section (46 ) of the Foreign Exchange

Management Act to make rules to carry out the provisions of the Act. Likewise, Section 47

empowers the Reserve Bank to formulate regulations to carry out the provisions of the Act and

the rules made there under.

The Foreign Contribution (Regulation) Act, 1976 is to control the acceptance and utilization of

foreign contribution/ payment or foreign hospitality by certain persons or associations, with a

scrutiny to ensuring that political associations, Parliamentary institutions and academic and other

voluntary organizations as well as individuals working in the important areas of national life may

function in a manner consistent with the values of a sovereign democratic republic.

Basically it is an act to ensure that the integrity of Indian institutions and persons is maintained

and that they are not unduly influenced by foreign donations to the prejudice of India’s interests.

The Foreign Exchange Management Act (FEMA) is a law to replace the draconian Foreign

Exchange Regulation Act, 1973. Any offense under FERA was a criminal offense liable to

imprisonment; Whereas FEMA seeks to make offenses relating to foreign exchange civil

offenses. Unlike other laws where everything is permitted unless specifically prohibited, under

FERA nothing was permitted unless specifically permitted. Hence the tenor and tone of the Act

was very drastic. It provided for imprisonment of even a very minor offense. Under FERA, a

person is presumed innocent unless he is proven guilty. With liberalization, a need was felt to

remove the drastic measure of FERA and replace them by a set of liberal foreign exchange

management regulations. Therefore FEMA was enacted to replace FERA.

FEMA extends to the whole of India. It applies to all Branches, offences and agencies outside

India owned or controlled by a person resident in India and also to any contravention there under

committed outside India by any person to whom this Act applies.

Authorized persons:

The Reserve Bank has the power to manage foreign exchange in India, it is recognized that it

cannot do so by itself. Forex is received or required by a large number of exports and imports in

the country spread over a huge geographical area. It would be impossible for the reserve Bank to



deal with them individually. Therefore, provisions has been made in the Act, enabling the

Reserve Bank to authority any person to be known as authority person to deal in the foreign

exchange or foreign securities, as an authorized dealer, money changer or off- shore banking unit

or any other manner as it deems fit.

Authorized dealers:

Authorised dealers are the banks, financial institutions and other institutions authorised by the

RBI to deal in foreign exchange.An authorised dealer should follow with the directions and

instructions of RBI given from time to time.

Section 10 of FEMA requires the authorised dealers to obtain declarations and informations from

the customers as to ensure that the provisions of the Act are not violated. RBI has advised the

authoritied dealers to keep on record an information /documentation on the basis of which the

transaction was undertaken for verification by RBI. Authorised dealers are to devise their own

formats for these. RBI has classified authorised dealers into three categories:

Category I:

A major portion of actual dealing in foreign exchange from the customers is dealt with

by such of the banks in India which have been authorised by the RBI to deal in foreign

exchange. These banks are know as Authorised Dealers- Category I. They are

authorised to carry out all types of transactions as permitted by RBI.

Category II:

They comprise of upgraded full fledged money changers, cooperative banks, regional

rural banks and others. They can purchase foreign exchange and sell foreign exchange for

private and business visits abroad undertaken by residents, which is the function

performed by a full fledged money changers.

Category III:

They comprise of selected financial and other institutions. They are pemitted to carry out

transactions incidential to the foreign exchange activities undertaken by them.



ADMINISTRATION OF FOREIGN EXCHANGE IN INDIA

Fig: 3.1

FOREIGN EXCHANGE MANAGEMENT ACT

CENTRAL GOVERNMENT

RESERVE BANK OF INDIA

AUTHORISED PERSONS

FEDAI

AUTHORISED

MONEY CHANGERS

AUTHORISED

DEALERS

CATEGORY

II

CATEGORY

I

CATEGORY

III

FULL RESTRICTED



FOREIGN EXCHANGE DEALER’S ASSOCIATION OF INDIA (FEDAI).

In 1958, FEDAI was establishing as an association of all authorized dealers in India. The main

functions of FEDAI are:

To set up rules for the conduct of foreign exchange business in India. These rules envelop

various aspects like charges for foreign exchange transactions, hours of business,

quotation of rates to customer, interbank dealings, etc. All authorized dealers have given

undertaking to the Reserve Bank to abide these rules.

To coordinate with RBI in Proper administration of exchange control.

To direct information likely to be of interest to its members.

Thus, FEDAI provides a fundamental link in the administrative set-up of foreign exchange in

India.

Authorized Money Changers

To provide services for encashment of foreign currency for tourists, etc., Reserve Bank has

granted limited licenses to some established firms, hotels and other organizations permitting

them to deal in foreign currency notes, coins and travelers’ cheques subject to directions issued

to them from time to time. These organizations & firms are called ‘Authorized Money

Changers’. An authorized money changer may be a restricted money changer or a full-fledged

money changer. A full-fledged money changer is allowed to carry out both purchase and sale

transactions with the public. A restricted money changer is authorized only to purchase foreign

currency notes, traveler’s cheques & coins subject to the condition that all such collections are

surrendered by him in turn to authorized dealer in foreign exchange. The current view of the

Reserve Bank is to authorize more establishments as authorized money changers in order to

make possible easy conversion facilities.

The Foreign Exchange Market

The Forex market is the market where in which currencies are purchased and sold against each

other. It is the one of the biggest market in the world. It is to be notable from a financial market

where currencies are borrowed and lent.



Forex market facilitates the conversion of one currency to another for a number of purposes like

trade, payment for services, project developments, and speculation etc. Since the number of

participants in the market has improved over the years have become greatly competitive and

efficient. With development in trade between countries, there was a pressing need to have some

methods to facilitate easy conversion of currencies. This has been made possible by the Forex

markets.

Considering international trade, importing goods would be preferred by a country for which it

does not have a competitive advantage, while exporting goods for which it has a competitive

advantage over others. Thus trade between countries is important for common good but nations

are alienated by distance, which that there is a lot of time between placing an order and its actual

delivery. The supplier would not be willing to wait until actual delivery for receiving payments.

Therefore, credit is essential at every stage of the transaction. The much needed conversion of

the currency and credit servicing is facilitated by the foreign exchange market. The exchange

rates are also subject to wide fluctuations. Forex market is not accurately a place and that there is

no physical meeting but meeting is affected over phone or by mail.

Foreign Exchange Transactions

Foreign exchange transactions that take place in foreign exchange markets can be broadly

classified into Merchant transactions and interbank transactions. The Forex transactions that take

place among banks are known as interbank transactions and the rates quoted are called as

interbank rates. Similarly, The Forex transactions that take place between a bank and its

customers are called as’ Merchant transactions’ and the rates quoted are called as merchant rates.

Merchant transactions take place when an exporter approaches his bank to convert his sale

proceeds(foreign currency) to home currency or when an importer approaches his bank to

convert domestic currency into foreign currency to reimburse his dues on import or when a

resident approaches his bank to exchange foreign currency received by him into home currency

or vice-versa. The banks make profit from the foreign currency by purchasing the the same from

the customers and sells it in the interbank market at a higher rate. Similarly, the bank buys the

foreign currency from the interbank, loads its margin and sells it to the customers and therefore

makes profit.



Modes of Foreign Exchange Remittances

Foreign exchange transactions involve inflow and outflow of foreign currency depending upon

the nature of transactions. A purchase transaction means inflow of foreign exchange while a sale

transaction results in outflow of foreign exchange. The former is called as inward remittance and

the latter is called as outward remittance. Remittance can takes place through a number of

modes. Some of them are:

Demand draft

Mail transfer

Telegraphic transfer

Personal cheques

Types of buying rates:

TT buying rate

Bill buying rate

TT buying rate: It is the rate applied when the transaction does not involve any delay in the

conversion of the foreign exchange by the bank. In other words, the Nostro A/c of the bank

would already have been credited. The rate is calculated by deducting the exchange margin from

the interbank buying rate as determined by the bank.

Bill buying rate: It is the rate to be applied when foreign bill is bought. When a bill is bought,

the rupee equal of the bill values is paid to the exporter instantly. However, the bank will realize

the proceeds after the bill is presented at the overseas center.

Types of selling rates:

TT selling rates

Bill selling rates

TT Selling rate: The sale transactions which don’t handle documents are put through at TT

selling rates.

Bill Selling rates: It is the rate applied for all sale transactions with public which involve

handling of documents by the bank.



Inter Bank transactions: The exchange rates quoted by banks to the customer are based on the

rates prevalent in the Inter Bank market. The big banks in the market are called as market makers

because they are willing to sell or pay foreign currencies at the rates quoted by them up to any

extent. Depending upon its resources, a bank may be a market in one or few major currencies.

When a banker approaches the market maker, it would not reveal its intention to buy or sell the

currency. This is done in order to get a fair price from the market maker.

Two way quotations

Normally, the quotation in the Inter Bank market is a two- way quotation. It means the rate

quoted by the market maker will indicate two prices, one which it is willing to sell the foreign

currency and the other at which it is willing to buy the foreign currency. For instance. Karnataka

bank may quote its rate for US dollars as under.

USD 1= Rs.62.15255/1650

More often, the rate would be quoted as 1525/1650, since the players in the market are expected

to know the ‘big number’ i.e., Rs.62. in the above quotation, once rate is Rs.62.1525 per US

dollar and the other rate is Rs.62.1650 per US dollar.

Direct quotation

It is obvious that the quotation bank will buy dollars at Rs.62.1525 and sell dollars at

Rs.62.1650. if once dollar bought and sold, the bank makes a profit of 0.0125. In a Forex

quotation, the foreign currency is the commodity that is being bought and sold. The exchange

quotation that gives the price for the foreign currency in terms of the domestic currency is called

as direct quotation. In a Direct quotation, the quoting bank will follow the rule: “buy low” &

“sell high”.

Indirect quotation

There is one more way of quoting in the Forex market. The Karnataka bank quotes the rate for

US dollar as:

Rs.100=USD 1.6086/6095

This type of quotation which gives the quality of foreign currency per unit of domestic currency

is known as indirect quotation. In this case, the quoting bank will receive USD 1.6095 per



Rs.100 while buying dollars and give away USD 1.6086 per Rs.100 while selling dollars In other

words, “Buy high, sell low” is applied.

This buying rate is also known as the ‘bid’ rate and the selling rate as the ‘offer’ rate. The

difference between these rates is the gross profit for the bank and known as the ‘Spread’.

Spot and forward transactions

The transactions in the Inter Bank market May place for settlement-

1. On the same day

2. Two days later

3. Some days late; say after a month

When the agreement to buy and sell is agreed upon and executed on the same date, the

transaction is called as cash or ready transaction. It is also called as value today. The transaction

where the exchange of currencies takes place after the date of contract is called as the Spot

Transaction. For example, if the contract is made on Tuesday, the delivery should take place on

Thursday. If Thursday is a holiday, the delivery will take place on the next day, i.e., Friday.

Payment of rupee is also made on the same day the foreign exchange is received.

The transaction in which the exchange of currencies takes place at a particular future date,

following to the spot rate, is called as a forward transaction. It can be for delivery one month or

two months or three months, etc. A forward contract for delivery one month implies the currency

exchange will take place after 1 month from the date of contract. A forwards contract for

delivery 2 months implies the currency exchange will take place after 2 months and so on.

Spot and Forwards rates

Spot rate of exchange is the rate for instant delivery of foreign exchange. It is prevailing at a

specific point of time. In a forward rate, the quoted is for delivery at a future date, which is

generally 30 days, 60 days, 90 days or 180 days later. The forward rate may be at discount or

premium to the spot rate, Premium rate, i.e., forward rate is greater than the spot rate, implies

that foreign currency will appreciate its value in the future. It may be due to increasing demand

for goods and services of the country of that currency. The percentage of annualized discount or

premium in a forward quote, in relation to the spot rate, is computed by the following.



Forward Premium = Forward rate-spot rate * 12

If the spot rate is higher than the forward rate, there is forward discount and if the forward rate

higher than the spot rate there is forward premium rate.

Forward margin/Swap points

Forward rates are derived from spot rates, and are function of the spot rates and forward

premium or discount of the currency, being quoted.

Forward rate = spot rate + premium (or – discount).

Forward rate may be the same as the spot rate for the currency. Then it is said to be ‘at par’ with

the spot rate. But this happens rarely. To, simplify, if the forward value of the currency is higher

than the spot value, then the currency is said to be at a premium. The variation between the

forward rate and the spot rate is called as the ‘Forward margin’ or ‘Swap Points’. The forward

margin may be at a premium or at discount. If the forward margin is at premium, the foreign

currency will be costlier (higher) under forward rate than under the spot rate. If the forward

margin is at discount, the foreign currency will be cheaper for forward delivery than for spot

delivery. Under direct quotation, premium is added to the spot rate to arrive at the forward rate.

This is done for both purchase and sale transactions. Discount is deducted from spot rate to

arrive at the forward rates.

Other rates

Buying rate and selling rate are those rates at which a dealer in Foreign exchange is willing to

buy the Forex and sell the Forex. In theory, there should not be difference in these rates. But in

practices, the selling rate is higher than the buying rate. The Foreign exchange dealer, pays less

rupees while buying the Forex, but gets more when he sells the Foreign exchange. After

adjusting for operating expenses, the dealer books a profit through the ‘buy and sell’ rates

differences.

The transaction in exchange market consists of purchase and sale of currencies between dealers

and customers and between dealers and dealers. The dealers buy Forex in the form of bills, drafts

from foreign banks, enables the customers to receive payments from abroad. The resulting



accumulated currency balances with Forex dealers are disposed of by selling instruments to

customers who need Foreign exchange to make payment to foreigners. The selling price for a

currency quoted by a bank (dealer) is slightly higher than the purchase price to give the bank

small profit in the business. Each dealer gives a two-way quote in Forex.

Single Rate refers to the practices of adopting rate between the two currencies. A rate for

exports, other for imports, and other for transaction with preferred area, etc, if adopted by a

country, that situation is known as multiple rates.

Fixed rate refers to the rate which is fixed in terms of gold or is pegged to another currency

which has a fixed value in terms of gold. Flexible rate makes the exchange rate to remain fixed

over a short period, but allows the same to vary in the long term in scrutiny of the changes and

shifts in another as conditioned by the free of market forces. The rate is allowed to freely float at

all times.

Current rate: Current rate of exchange between two currencies fluctuates very frequently or

even minute to minute, because of changes in demand and supply. But these movements take

place around a rate which may be called the ‘normal rate’ or the par of exchange or the true rate.

International payments are made by different instruments, which differ in their time to maturity.

Slight rates applicable in the case of bill instrument with attending delay in maturity and

possible loss of instrument in transit, are lower than most other rates. Similarly, there are other

clusters of rates, such as, one month’s rate, 3month’s rate. Longer the duration, lower the price

(of the foreign currency in terms of domestic).The exchange rate between two given currencies

may be obtained from the rates of these two currencies in terms of a third currency. The resulting

rate is called the Cross rate.

Arbitrage in the Forex market refers to buying a foreign currency in a market where it is selling

cheaper and selling the same in a market where it is bought higher. It involves no risk as rates are

known in advance. Moreover, there is no investment required, as the purchase of one currency is

financed by the sale of other currency. Arbitrageurs gain in the process of arbitraging.



Introduction to the Foreign Exchange Risk Management

Risk:

Risk can b defined as the degree or probability of loss. The term Risk thus suggests about

uncertainty and unpredictability of the events which may affect the business or people at large.

Risk is the possibility that the actual result will deviate from the expected levels of result. The

greater the level of deviation and greater the probability of its occurrence, the greater is the risk.

A business has to take steps to reduce the risk by adopting suitable techniques or policies. Risk

management focuses on identifying and implementing these technique or policies, lest the

business should be left exposed to uncertain outcomes.

Risk management:

Risk management is a process to identify loss exposure faced by an organization and to select the

most appropriate technique to minimize such exposures. Risk management tools measure the

potential loss and potential gain. It enables us to stay with varying degree of certainty and

confidence levels, that our potential loss will not exceed a certain amount if we adopt a particular

strategy. Risk management enables us to tackle uncertainty head on, acknowledge its existence,

try to measure its extent and finally controls it.

Risk management makes sense for two reasons. First, a business entity generally wishes to

reduce risks to acceptable levels. Second, a business entity is by and large keen on avoiding

particular kind of risks, for it may be too great for the business to bear. For each situation where

one wishes to avoid a risk- a loss by fire, for example- three is, perhaps, a counter party who may

be willing such risk. For risk reduction, a business entity can adopt the following methods.

Hedging:

Hedging is a technique that enables one party to diminish the effect of adverse outcomes, in a

given situation. Parties come together to minimize the effect of which risk of one party gets

cancelled by the risk of another. It is not that risk minimization is the only strategy. An entity

may even choose to remain exposed, in anticipation of reaping profits from its risk taking

positions.



Foreign Exchange Exposure

Exposure:

Exposure is defined as the possibility of a change in the assets or liabilities or both of a company

as a result in the exchange rate. Forex exposure thus refers to the probability of loss or gain to a

company that arises because of exchange rate fluctuations. The value of a firm’s assets, liabilities

and operating income differ continually in response to changes in many economic and financial

variables such as interest rates, exchange rates, inflation rates, relative price and so forth. We can

call these uncertainties as macroeconomic environment risks. These risks influence all firms in

the economy. However, the degree and nature of impact of even macroeconomic risks

significantly depend upon the nature of firm’s business. For Example, fluctuations of exchange

rate will affect net importers and exporters quite differently. The impact of interest rate

fluctuations will be very different from that on a manufacturing firm. The nature of

macroeconomic uncertainty can be illustrated by a number of commonly encountered situations.

An appreciation of value of a foreign currency(or equivalently, a depreciation of the domestic

currency), increase the domestic currency value of a firm’s assets and liabilities denominated in

the foreign currency-foreign currency receivables and payables, banks deposits and loans, etc. It

will also change domestic currency cash flows from exports and imports. An increase in interest

rates reduces the market value of a portfolio of fixed-rate in the rate of inflation may increase

value of unsold stocks, the revenue from future sales as well as the future costs of production.

Thus the firms exposed to uncertain changes in a numbers of variable in its environment. These

variables are sometimes called Risk Factors.

The nature of Exposure and Risk

Exposures are a measure of the sensitivity of the value of financial items to changes in the

relevant risk factor while risk is a measurable of the variability of the item attributable to the risk

factor. Corporate treasurers have become more and more concerned about exchange rate and

interest rate exposure and risk during the last ten to twenty years or so. In the case of exchange

rate risk, The increased awareness is firstly due to tremendous increase in the volume of cross

border financial transactions (which create exposure) and secondly due to the significant increase

in the degree of volatility in exchange rates(which, given the exposure, creates risk)



Classification of Foreign Exchange Exposure and Risk

Since the advent of floating exchange rates in 1973, firms around the globe have become acutely

aware of the fact that fluctuations in exchange rates expose their revenues, costs, operating cash

flows and thence their market value to substantial fluctuations. Firms which have overseas

transactions-exports and imports of goods and services, and lending, foreign portfolio, foreign

borrowings and direst investment etc, are directly exposed: but even purely domestic firms which

have absolutely no cross-border transactions are also exposed because their suppliers, customers,

and competition are exposed. Considerably effort has since been devoted to identifying and

categorizing currency exposure and developing more and more sophisticated methods to quantify

it.

Foreign exchange exposure can be classified into three broad categories:

Transaction exposure

Translation exposure

Operating exposure

The first and third together are sometimes called “Cash Flow Exposure” while the second is

referred to as “Accounting Exposure” or Balance sheet Exposure”.

Transaction exposure

When a firm has a payable or receivable in a foreign currency, a change in the exchange rate will

change the amount of local currency receivable or paid. Such a risk or exposure is called as

transaction exposure.

For instance, if an Indian exporter has a receivable of $1000, due three months hence and if in

the in the interim the dollar depreciates relative to rupee a cash loss occurs. on the other hand, if

the rate of dollar appreciates relative to the rupee, a cash gain occurs. In the case of payable, the

outcome will be different: a decrease in the rate of the dollar relative to the rupee results in a

gain, where as an appreciation of the dollar relative to the rupee result in a loss.

Translation exposure

Many MNC’s require that their accounts of branches and foreign subsidiaries get consolidated

with those of it. For such consolidation, assets and liabilities expressed in foreign currencies have



to be translated into domestic currencies at the exchange rate existing on the consolidation dates.

If the values of foreign currency changes between a two or consecutive consolidation dates,

translation exposure will arise.

Operating exposure

Operating exposure, like translation exposure involves an actual or potential gain or loss. While

the former is specific to the transaction, the latter relates to entire investment. The essence of this

operating exposure is that exchange rate changes significantly and alter the cost of firm’s inputs

along with price of it output and thereby influence its competitive position substantially.

For instance, Volkswagen had a successful export market for its ‘BEETLE’ model in the US

prior to 1970. With the breakdown of Bretten-woods of fixes exchanged rates, the deutschemark

appreciated significantly against the dollar. This created difficulty for Volkswagen as its

expenses were mainly in deutschemark but its revenue in dollars. However, in a highly price-

sensitive US market, such an action caused a sharp decreased in sales volume-from 600,000

vehicles in 1968 to 200,000 in 1976.

Techniques for managing forecasts

The aim of Forex risk management is to stabilize the cash flows and decrease the uncertainty

from financial forecasts. To hedge any transaction is to buy certainty to make sure that

unexpected exchange rate movements will have no impact on our operations. What determines

the price of this certainty?

Flexibility -- Do we want to have perfect coverage?

Opportunity – Do we want the chance to gain on the upside?

Efficiency – How (liquid/transparent /regulated) is the market?



Fig: 3.2

The above graph shows that the value of the firm increases after the risks are hedged. There are a

variety of hedging instruments that can be used to reduce risk. Hedging Alternatives include:

Forwards, futures, options, swaps, etc.

Example: Swedish company has got a sales order to an American customer. Delivery time is

In three months and price is in US dollar.

Open position

No hedging. If the Swedish Kroner (SEK) increases in value the Swedish company loses.

Forward contract

An exchange rate quoted today for settlement at a future date.

Futures contract

A standardized agreement for settlement at a future date.

Money market hedge

Borrow US dollar today and exchange the proceeds to local currency.

Options contract

A contract giving the Swedish company the right, but not the obligation to sell US dollar at an

agreed rate. Provides a hedge and a chance to win.



Derivatives: A derivatives transaction is a mutual contract or payment exchange agreement

whose value depends on - derives from - the value of an underlying asset, reference rate or index.

Nowadays, derivatives transactions cover a broad range of underlyings -, exchange rates, interest

rates, commodities, equities and other indices. Adding to privately negotiated, global

transactions, derivatives include standardized futures and options on futures that are vigorously

traded on organized exchanges and securities such as call warrants.

The term “derivative” is also used to refer to a large mixture of other instruments. These have

payoff characteristics, which reflect the fact that they comprise derivatives products as part of

their make-up. While the variety of products is diverse it is not complicated. Each derivatives

transaction is constructed from two straightforward building blocks that are basic to all

derivatives: forwards and options. They include:

Forwards: forwards and swaps, as well as exchange-traded futures (ETF’s).

Options: privately negotiated over the counter options (including caps, collars, floors and

options on forward and swap contracts), exchange-traded options.

Diverse forms of derivatives are shaped by using these building blocks in diverse ways

and by applying them to a wide variety of underlying assets, rates or indices.

(a) Forwards-Based Derivatives

There are three divisions of forwards-based derivatives:

• Forward contract;

• Swaps;

• Future contract.

(i) The Forward Contract: The simplest form of derivatives is the forward contract. It obliges

one party to purchase, and the other to sell, a particular quantity of a nominated underlying

financial instrument at a particular price, on a particular date in the future. There are markets for

a multitude of underlyings. Among these are the traditional agricultural or physical commodities,

currencies (foreign exchange forwards) and interest rates (forward rate agreements - FRAs). The

volume of trade in forward contracts is huge.



The change in value in a forward contract is generally equal to the change in value in the

underlying. Forwards vary from options in that options carry a different payoff profile. Forward

contracts are distinctive to every trade. They are tailored to meet the definite requirements of

each end-user. The characteristics of every transaction include the specific business, financial or

risk-management targets of the counterparties. Forwards are not standardized. The terms in

relation to contract size, delivery date, delivery grade, location, and credit period are always

negotiated.

In a forward contract, the buyer of the contract draws its value at maturity from its delivery terms

or a cash settlement. The buyer makes a profit if on maturity the price of the underlying is higher

than the contract price. On the other hand, If the price is lower, the buyer incurs a loss. The gain

to the buyer is a loss to the seller.

Forwards Rates: The forward rate is quite different from the spot rate. Depending upon

whether the forward rate is more than the spot rate, given the currency in consideration,

the forward may either be at a ‘premium’ or at a 'discount'. Forward premiums and

discounts are generally expressed as an annual percentage of the distinction between the

spot and the forward rates.

Premium: When a currency is costlier (higher) in forward or say, for a future value date,

it is said to be at a premium. In case of direct method of quotation, the premium is added

to both the selling and buying rates.

Discount: If the currency is cheaper (lower) in forward or for a future value date, it is

said to be at a discount. In case of direct quotation method, the discount is deducted from

both the selling and buying rate. The following example explains how to calculate

Premium / Discount both under Direct/indirect quotes.

To calculate the Premium or Discount of a currency vis-à-vis another, we have to to find out how

much each unit of the first currency can buy units of the 2nd

currency. For example, if the Spot

rate between INR and USD is ` 56 to a dollar and the six months forward rate is ` 62 to a dollar,

it is obvious the USD is strengthening against the Rupee and therefore is at a premium. Which

also means that Rupee is at discount?



Forward Rates in India: in India, Forward rates are not determined by interest rate differentials

i.e. forward quotations do not have a obvious rule but are determined by actual demand/supply

conditions for individual currencies, mostly the US dollars. These rates reveal to an extent the

actual and expected currency changes, while re-booking and cancellation of forward contracts

are introduced in India. The cost of forward cover will be the agreed forward rate minus the

ruling spot rate on the transaction day (opportunity cost).

According to the Reserve Bank Of India guidelines, Authorized Dealers can enter into contracts

for forward sale and purchase of foreign currency with residents (corporate) who have a

crystallized exposure to exchange risk in respect of actual transactions permitted under Exchange

Control Regulations. The choice of the currency and tenor are left to the customer. Where the

exact amount is not ascertainable owing to the rates/costs being linked to variable factors,

contracts may be booked on the basis of a reasonable estimate. However, the maturity of the

cover should not surpass the maturity of the underlying transaction.

The greater flexibility provided by the Reserve Bank Of India now requires the corporate

treasurer to be well familiar with the mechanism of cancellation and early delivery under a

forward contract.

Extension of forward contracts: Extension of a forward contract becomes essential when the

contract is booked for a short period as compared to the due date or when the payment to be

made is delayed beyond the period covered by the forward contract. Extension of a forward

contract involves a swap (concurrently selling in the spot market and buying in the forward

market or vice versa), the cost of which is recovered or paid to the corporation, as the case may

be. According to the FEDAI rules, if the swap period is for a period of 30 days or less than 30

days, gain from the swap will not be conceded on the corporation. The extension cost, simply

put, is the distinction between the spot rate existing on the date of the extension and the forward

rate for the period upto which the contract is sought to be extended.

Cancellation of forward contract: In case of cancellation of a contract on the demand of the

customer, the bank shall recover or pay as the case may be, the variation between the contracted

rate and the rate at which the cancellation is effected. In case there is no instruction from the

customer, contracts which have matured, shall on the 15th day from the date of maturity be



automatically cancelled. The customer will not be permitted to the exchange difference, if any, in

his favour as the contract has been cancelled on account of his default.

(ii) Swaps: Swaps are considerably flexible. In scientific terms they are a method of exchanging

the underlying economic basis of an asset or debt without affecting the underlying principal

obligation on the debt or asset.

A swap transaction enables the participants to exchange cash flows at particular intervals, which

are called settlement or payment dates. Cash flows are either fixed or calculated for particular

dates by multiplying the quantity of the underlying by particular reference rates or prices. The

vast majority of swaps are classified into the following groups:

Equity

Currency

Interest rate

Commodity

The notional principal (i.e. the face value of a security) on all these, excluding currency swaps, is

used to ascertain the payment stream but not exchanged. Interim payments are generally netted -

the difference is paid by one party to the other. Like forwards, the key users of swaps are huge

multinational banks or corporations. Swaps create credit exposures and are individually tailored

to meet the risk-management objectives of the participants.

Interest Rate Swaps: In an interest rate swap, the exchange of principal do not takes place but

interest payments are made on the notional principal amount. Interest payments can be

exchanged between two parties to attain changes in the calculation of interest on the principal,

for instance:

Floating to fixed

Fixed to floating

LIBOR to prime - based

Prime to LIBOR

Currency A to currency B.



In an interest rate swap, both parties raise finance as they generally would in the markets where

they have relative benefit. They then engage in the swap. The arrangement benefits both parties

as it exploits one's comparative advantage. Here LIBOR refers to the ‘London Interbank Offered

Rate’, which is a daily reference rate based on the interest rates at which banks borrow unsecured

funds from other banks in the interbank market. This rate is formally fixed once a day by the

British Bankers Association but the rate changes throughout the day.

Currency Swaps: These involve an exchange of liabilities between currencies. A currency swap

can consist of three stages:

A spot exchange of principal - this forms part of the swap agreement as a similar effect

can be obtained by using the spot foreign exchange market.

Continuing exchange of interest payments during the term of the swap - this represents a

series of forward foreign exchange contracts during the term of the swap contract. The

contract is typically fixed at the same exchange rate as the spot rate used at the outset of

the swap.

Re-exchange of principal on maturity.

A currency swap has the following benefits:

Treasurers can hedge currency risk.

It can provide considerable cost savings. A strong borrower in the Japanese Yen market

may be interested in borrowing in the American USD markets where his credit rating

may not be as good as it is in Tokyo. Such a borrower could get a better US dollar rate by

raising funds first in the Tokyo market and then swapping Yen for US dollars.

The swap market permits funds to be accessed in currencies, which may otherwise

command a high premium.

It offers diversification of borrowings

A more complex version of a currency swap is a currency coupon swap, which swaps a

fixed-or-floating rate interest payment in one currency for a floating rate payment in

another. These are also known as Circus Swaps.

In a currency swap the principal sum is usually exchanged:

At the start;



At the end;

At a combination of both; or

Neither.

Many swaps are linked to the issue of a Eurobond. An issuer offers a bond in a currency

and instrument where it has the greatest competitive advantage. It then asks the

underwriter of the bond to provide it with a swap to convert funds into the required type.

(2) Money Market Hedge: A money market hedge involves simultaneous borrowing and

lending activities in two different currencies to lock in the home currency value of a future

foreign currency cash flow. The simultaneous borrowing and lending activities enable a

company to create a homemade forward contract.

(3) Netting: Netting involves associated companies, which trade with each other. The technique

is simple. Group companies merely settle inter affiliate indebtedness for the net amount owing.

Gross intra-group trade, receivables and payables are netted out. The simplest scheme is known

as bilateral netting and involves pairs of companies. Each pair of associates nets out their own

individual positions with each other and cash flows are reduced by the lower of each company's

purchases from or sales to its netting partner. Bilateral netting involves no attempt to bring in the

net positions of other group companies.

(4) Matching: Although netting and matching are terms, which are frequently used

interchangeably, there are distinctions. Netting is a term applied to potential flows within a group

of companies whereas matching can be applied to both intra-group and to third-party balancing.

(5) Leading and Lagging: Leading means paying an obligation in advance of the due date.

Lagging means delaying payment of an obligation beyond its due date. Leading and lagging are

foreign exchange management tactics designed to take advantage of expected devaluations and

revaluations of currencies.

(6) Price Variation: Price variation involves increasing selling prices to counter the adverse

effects of exchange rate change. This tactic raises the question as to why the company has not



already raised prices if it is able to do so. In some countries, price increases are the only legally

available tactic of exposure management.

(7) Invoicing in Foreign Currency: In a buyer's market, sellers tend increasingly to invoice in

the buyer's ideal currency. The closer the seller can approximate the buyer's aims, the greater

chance he or she has to make the sale.

(8) Asset and Liability Management: This technique can be used to manage balance sheet,

income statement or cash flow exposures. Concentration on cash flow exposure makes economic

sense but emphasis on pure translation exposure is misplaced. Hence our focus here is on asset

liability management as a cash flow exposure management technique.

(9) Arbitrage: Arbitrage is not a method of hedging foreign exchange risk in a real sense. It is

however a method of making profits from foreign exchange transactions. The term arbitrage is

used in many areas of finance. It refers to the process of buying and selling of currencies. The

sale/purchase of currencies takes place within an unstable market. The prices are affected by the

supply and demand of currencies and arbitrage helps in adjusting the market to equilibrium. The

process of buying in one market and selling the same in another market is known as arbitrage.

For example.

Rs 55.50 = 1 £

Rs 35.62 = 1 $

$ 1 = 1 £

We will convert USD into Indian rupee, then rupee to pound and then again back to USD in

order to calculate the arbitrage profit.

$→ RS→ £→ $

1$ →36.525 Rs → 0.461£→1.015

It shows that for every one USD we will make an arbitrage profit of 0.015 $.

Chapter 4- Data Analysis and

Interpretation



Balance sheet of J&K Bank

Sources of funds: 2013-14

(Rs in crores)

2012-13

(Rs in crores)

Share capital 48.49 48.49

Share warrants and outstandings 0.00 0.00

Reserves and surplus 5675.12 4816.20

Shareholders’ funds 5723.61 4864.69

Borrowings 1765.00 64220.62

Deposits 69335.86 1075.00

Other Liabilities & Provisions 1795.25 1583.00

TOTAL LIABILITIES 78619.73 71743.32

Application Of Funds:

Cash and balance with Reserve Bank of India 3045.59 2695.15

Balances with banks and money at call and short notice 1168.31 2709.18

Investments 26195.07 25741.07

Advances 46384.60 39200.41

Gross block 1074.53 933.66

Less: accumulated depreciation 568.01 490.16

Less: impairment of assets 0.00 0.00

Net block 506.52 443.50

Lease adjustment 0.00 0.00

Capital work In progress 27.29 12.68

Other assets 1292.35 941.33

Total assets 78619.73 71743.32

Contingent liability 16140.72 32282.80

Bills for collection 1235.89 896.00




(Rs in crores)

2010-11

(Rs in crores)

2009-10

(Rs in crores)

Share capital 48.49 48.49 48.49

Share warrants and outstandings 0.00 0.00 0.00

Total reserve 4044.69 3430.19 2961.97

Shareholders’ funds 4093.18 3478.69 3010.46

Borrowings 1240.96 1104.65 1100.21

Deposits 53346.90 44675.94 37237.16

Other Liabilities & Provisions 1588.18 1248.88 1198.97

TOTAL LIABILITIES 60269.22 50508.15 42546.79


Cash and balance with Reserve Bank of India 2783.65 2974.96 2744.73

Balances with banks and money at call and short

notice

1670.21 573.85 1869.51

Investments 21624.32 19695.77 13956.25

Advances 33077.42 26193.64 23057.23

Gross block 855.52 788.10 561.35

Less: accumulated depreciation 440.42 396.47 358.54

Less: impairment of assets 0.00 0.00 0.00

Net block 415.09 391.64 202.81

Lease adjustment 0.00 0.00 0.00

Capital work In progress 5.18 2.13 1.32

Other assets 693.34 676.17 714.95

Total assets 60269.22 50508.15 42546.79

Contingent liability 15066.08 25517.66 11499.25

Bills for collection 920.34 1461.68 592.26



Ratio Analysis:

Loans /deposits ratio:

LTD is a commonly using stastic for analyzing bank’s liquidity by dividing banks total loans by

its total deposits. If the ratio is too high it implies that the banks might not have enough liquidity

to cover any unforeseen fund requirements and if the ratio is too low banks may not be earning

as much as they could be.

Table- 4.1: showing calculation of loans/deposits ratio

Fig- 4.1: Loans/Advances ratio

Year Loans(crs) Deposits(crs) Ratio

2009-10 1765.00 69335.86 0.025

2010-11 1075.00 64220.62 0.016

2011-12 1240.96 53346.90 0.023

2012-13 1104.65 44675.94 0.024

2013-14 1100.21 37237.16 0.029

0.025

0.016

0.023 0.024 0.029

0

0.005

0.01

0.015

0.02

0.025

0.03

0.035

2009-10 2010-11 2011-12 2012-13 2013-14

R

a

t

i

o

year

loans/advances ratio



Interpretation:

The loans and advances ratio shows the degree of loans granted to the customers and deposits

accepted from customers. In the financial year 2010-11, the ratio keeps on increasing till the

previous year 2013-14. It is because the bank has received sufficient amount of funds in terms of

public deposits and has granted sufficient amount of loan. In the financial year 2011-12, the ratio

was 0.016; it is because the banks borrowings were reduced to 1075 crores.

Quick ratio:

The ratio is similar to current ratio concept that it excludes inventory from the numerators of

the ratio. The term liquid refers to current assets which can be converted in to cash immediately

or at a short notice. It is computed as follows;

uick Ratio Current Assets In entories

Current Lia ilities

Table- 4.2: showing calculation of quick ratio

Year Quick assets Current liabilities Quick ratio

2009-10 4614.24 1198.97 3.84

2010-11 3548.81 1248.88 2.84

2011-12 4453.86 1,588.18 2.80

2012-13 5404.33 1583.00 3.41

2013-14 4213.90 1795.25 2.34



Fig- 4.2 : Quick Ratio

Interpretations:

Higher the ratio betters the coverage. And the standard ratio is 1:1. An asset is liquid if it can be

converted into cash immediately without loss of value. The above table shows that the company

maintains its quick ratio above 1. The quick ratio is falling from the year 2009-10 till 2012-13 it

is because of the non performance of the debtors who were unable to repay the loan amount to

the bank due to the agitation over the Kashmir issue.

3.84

2.84 2.8

3.41

2.34

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

2009-10 2010-11 2011-12 2012-13 2013-14

R

a

t

i

o

year

quick ratio



Earnings per share

Earnings per Share (EPS) of a business are the portion of its net income of a period that can be

attributed to each share of its common stock. Earnings per share can be calculated by dividing

net income of a period by the number of common shares outstanding during the period.

Companies are required to show EPS with their income statement.

Earnings per Share (EPS) =

Table- 4.3: showing calculation of earnings per share

Fig- 4.3: Earnings per Share

Year Net profit (₹ in crores) No of equity shares Earnings per share

2009-10 512.38 4,84,77,802 105.69

2010-11 615.20 4,84,77,802 126.90

2011-12 803.25 4,84,77,802 165.70

2012-13 1055.10 4,84,77,802 217.65

2013-14 1182.40 4,84,77,802 243.92

105.69 126.9

165.7

217.65 243.92

0

50

100

150

200

250

300

2009-10 2010-11 2011-12 2012-13 2013-14

R

a

t

i

o

year

earning per share



Interpretations:

Earnings per share is calculated on annual basis i.e. annual net income and preferred stock

dividends are used in the formulas. The use of weighted average common shares outstanding

delivers accurate result however, just a simple average, or the number of common share

outstanding at the end of the year can also be used instead of weighted average figure for

simplicity. The above graph shows that the company is performing well as the EPS keeps on

growing with every passing year from financial year 2009-10 to 2013-14. In the year 2012-13,

the EPS is slightly higher than the previous year 2011-12 ,it is because of the increment of the

net profit.

Return on assets ratio:

Return on assets is the ratio of annual net income to average total assets of a business during a

financial year. It measures efficiency of the business in using its assets to generate net income. It

is a profitability ratio.

Table- 4.4: showing Return on Assets Ratio

Year ROA

2009-10 1.28

2010-11 1.32

2011-12 1.45

2012-13 1.60

2013-14 1.57



Fig- 4.4: Return On Assets Ratio

Interpretations:

Return on assets indicates the number of cents earned on each dollar of assets. Thus higher

values of return on assets show that business is more profitable. This ratio should be only used to

compare companies in the same industry. The reason for this is that companies in some

industries are most asset-insensitive. Their ROA will naturally be lower than the ROA of

companies which are low asset-insensitive.. The above figure shows that the company’s ROA

keeps on increasing till the financial year 2012-13. In the financial year 2013-14, the ROA is less

as compared to the 2012-13 financial year. It is because in the year 2012-13, the bank had

2,709.18 crores balance with banks and money at call and short notice , which is comparatively

more than of the year 2013-14 i.e., 1,168.31 .it is a way of earning interest and is the reason of

falling down the ROA ratio to 1.57%.

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

2009-10 2010-11 2011-12 2012-13 2013-14

1.28 1.32 1.45

1.6 1.57

R

a

t

i

o

year

ROA (%)



Return on capital employed:

Return on capital employed is a financial ratio that measures the company’s efficiency and

profitability with which its capital employed. it is calculated as

ROCE

Table- 4.5: showing Return on Capital Employed Ratio

Fig- 4.5: Return on Capital Employed Ratio

Year ROCE

2009-10 22.99

2010-11 23.80

2011-12 26.15

2012-13 28.50

2013-14 27.64

0

5

10

15

20

25

30

2009-10 2010-11 2011-12 2012-13 2013-14

22.99 23.8 26.15

28.5 27.64 R

a

t

i

o

year

ROCE (%)



Interpretations:

A higher Return on capital employed indicates more efficient use of capital. ROCE should be

higher than the company’s cost of capital: otherwise shows that the company is not employing its

resources (capital) effectively and is not generating shareholder value. The Jammu and Kashmir

bank’s cost of capital in the year 2013-14 is 5.05 and the maximum in the last five years is 5.85.

The above figure shows that company’s profitability and efficiency in the last five years. The

bank is maintaining its ROCE much higher than its cost of capital which indicates that the

company is using its capital more effectively.

Debt Equity ratio:

It is the measure of company’s financial leverage calculated by dividing the total liabilities by

stockholders equity. It indicates the proportion of debt and equity the company is using to

finance its assets.

Table- 4.6: Showing Calculation of Debt Equity Ratio

Year Long term debt ( in crs) Shareholders’ funds( in crs) Ratio

2009-10 1,100.21 3,010.46 0.36

2010-11 1,104.65 3,478.69 0.31

2011-12 1,240.96 4,093.18 0.30

2012-13 1075.00 4,864.69 0.22

2013-14 1,765.00 5,723.61 0.30



Fig- 4.6: Debt equity Ratio

Interpretations:

Debt equity ratio indicates the proportion of equity and debt in the capital structure of a

company. In the financial year 2009-10 the ratio was 0.36 and it started gradually declined till

the financial year 2012-13 i.e., 0.22. The reason behind the declining trend of ratio is increment

in the shareholders funds. In the previous year the ratio has gone up to 0.3 because the company

has borrowed long term debt of almost 700 crore.

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

2009-10 2010-11 2011-12 2012-13 2013-14

0.36 0.31 0.3

0.22

0.3

R

a

t

i

o

year

debt equity ratio

Chapter 5- Summary of

Findings, Suggestions and

Conclusion



Findings

1) J&K bank play a vital role in export market development plan in Indian market. For

international trade, firms need to exchange currencies for the purpose of buying goods

and services overseas and this facility is facilitated by J&K Bank.

2) ) International trade exposes exporters and importers to substantial risk, especially when

the trading partner is far away or in a country where contracts are hard to enforce, so the

firm can mitigate the risk through various risk mitigating options provided by the banks.

3) The banks can take risk more consciously, anticipates adverse changes and hedges

accordingly; it becomes a source of competitive advantage, as it can offer its products at a

better price than its competitors.

4) J&K bank provides financial assistance to the exporters by providing pre-shipment credit

through which exporters can acquire raw materials, plant and machinery etc for their

trade.

5) J&K Bank helps in earning profits from price movements in the market.

6) J&K Bank as a market participant with a diverse group affects the supply and demand

within the market and thus the exchange rates at any given moment of time.

7) J&K Bank, other commercial and investment banks do not trade only on behalf of their

own and for their customers, but also provides channel through which all other

participants trade.

8) With the advancement in technology, electronic trading systems now allow dealers to

conduct a number of trades simultaneously and to trade with much faster speed, greater

efficiency, lower costs and most importantly, far greater transparency rather than the old

telephone system had provided.

9) J&K Bank and other commercial banks are intermediaries that move money from the

capital market to businesses and institutions.

10) J&K Bank facilitates in trade finance, foreign exchange transactions and trading.

11) J&K Bank can also be called as merchant bank because it finances trade between

companies and customers located in different countries by issuing LOC and other

documentary collection.



Suggestions

Foreign exchange has caused large losses to many undisciplined and inexperienced traders over

the years. In order to make profit in trading, you must make recognize the market. To identify the

markets, you must first know and identify yourself. The first step of gaining self awareness is

ensuring that your tolerance capital allocation to Forex and trading are not excessive or lacking.

An analytical approach to trading does not begin at the fundamental and technical analysis of

price trends, or the formulation of trading strategies. It begins at the first step taken into the

career , with the first dollar placed in an open position, and the first mistakes in calculation and

trading methods.



CONCLUSIONS

1. Risk management underscores the fact that the survival of an organization depends heavily

on its capabilities to anticipate and prepare for the change rather than just waiting for the change

and react to it.

2. The objective of risk management is not to prohibit or prevent risk taking activity, but to

ensure that the risks are consciously taken with full knowledge, clear purpose and understanding

so that it can be measured and mitigated.

3. Functions of risk management should actually be bank specific dictated by the size and

quality of balance sheet, complexity of functions, technical/ professional manpower and the

status of MIS in place in that bank.

4. Risk Management Committee, Credit Policy Committee, Asset Liability Committee, etc are

such committees that handle the risk management aspects.

5. The banks can take risk more consciously, anticipates adverse changes and hedges

accordingly; it becomes a source of competitive advantage, as it can offer its products at a better

price than its competitors.

6. Regarding use of risk management techniques, it is found that internal rating system and risk

adjusted rate of return on capital are important.

7. The effectiveness of risk measurement in banks depends on efficient Management

Information System, computerization and net working of the branch activities.

ANNEXURE-1

BIBLIOGRAPHY

Bibliography

BOOKS

Christopher Neely, P. W. (2010). fundamentals of forex. Is Technical Analysis in the Foreign

Exchange Market Profitable?

Kolb, R. W. (2011). Futures, options and Swaps. Wiley India pvt Ltd.

shulz, c. l. Risk Management & Derivative.

Don M Chance, D. (2008). Introduction to Derivatives and Risk management. Cenage Learning.

ARTICLES

usmani, f. (2012). business and finance review. forex problems and solutions .

Jain, Dr. Akansha. (2015, December). Forex Risk Management.

WEBLOGRAPHY

http://www.jkbank.net/fcnrRupeeDeposits.php#. (2012). Retrieved november 16, 2014, from

http://www.jkbank.net/: http://www.jkbank.net/forex

(2014). Jammu & Kashmir Bank annual report. Srinagar: Karvy Computershare Private

Limited.

www.moneycontrol.com/jkbankfinancials. (2015, march). Retrieved march 2015, from

www.moneycontrol.com.

ANNEXURE-2

BALANCE SHEET

Balance sheet of J&K Bank

Sources of funds: 2013-14 (in crores) 2012-13(in crores)

Share capital 48.49 48.49

Share warrants and outstandings 0.00 0.00

Reserves and surplus 5675.12 4816.20

Shareholders’ funds 5723.61 4864.69

Secured loans 1765.00 64220.62

Unsecured loans 69335.86 1075.00

Other Liabilities & Provisions 1795.25 1583.00

TOTAL LIABILITIES 78619.73 71743.32


Cash and balance with Reserve Bank of India 3045.59 2695.15

Balances with banks and money at call and short notice 1168.31 2709.18

Investments 26195.07 25741.07

Advances 46384.60 39200.41

Gross block 1074.53 933.66

Less: accumulated depreciation 568.01 490.16

Less: impairment of assets 0.00 0.00

Net block 506.52 443.50

Lease adjustment 0.00 0.00

Capital work In progress 27.29 12.68

Other assets 1292.35 941.33

Total assets 78619.73 71743.32

Contingent liability 16140.72 32282.80

Bills for collection 1235.89 896.00


(in crores)

2010-11

( in crores)

2009-10

( in crores)

Share capital 48.49 48.49 48.49

Share warrants and outstandings 0.00 0.00 0.00

Total reserve 4044.69 3430.19 2961.97

Shareholders’ funds 4093.18 3478.69 3010.46

Borrowings 1240.96 1104.65 1100.21

Deposits 53346.90 44675.94 37237.16

Other Liabilities & Provisions 1588.18 1248.88 1198.97

TOTAL LIABILITIES 60269.22 50508.15 42546.79


Cash and balance with Reserve Bank of India 2783.65 2974.96 2744.73

Balances with banks and money at call and short

notice

1670.21 573.85 1869.51

Investments 21624.32 19695.77 13956.25

Advances 33077.42 26193.64 23057.23

Gross block 855.52 788.10 561.35

Less: accumulated depreciation 440.42 396.47 358.54

Less: impairment of assets 0.00 0.00 0.00

Net block 415.09 391.64 202.81

Lease adjustment 0.00 0.00 0.00

Capital work In progress 5.18 2.13 1.32

Other assets 693.34 676.17 714.95

Total assets 60269.22 50508.15 42546.79

Contingent liability 15066.08 25517.66 11499.25

Bills for collection 920.34 1461.68 592.26

ANNEXURE-3

PROFIT AND LOSS

STATEMENT

Profit and loss A/c of J&K Bank

Particulars 2013-14 2012-13 2011-12 2010-11 2009-10

1. Income

Interest earned

Other income

6,767.00

390.26

6,136.80

483.73

4835.58

334.12

3713.13

364.76

3056.88

416.24

Total income 7,157.26 6,620.53 5169.70 4077.89 3473.11

2. Expenditure

Interest Expended

Operating Expenses

4,082.52

1,174.99

3,820.76

989.02

2997.22

802.15

2169.47

758.93

1937.54

577.37

PBIDT 1,899.76 1,810.76 1370.33 1149.49 959.20

Provisions and Contingencies 147.89 284.17 169.23 215.10 166.66

Profit Before Tax 1,751.87 1,526.59 1201.10 934.39 791.61

Taxes 569.40 471.49 397.85 319.19 279.23

Total 5,974.80 5,565.43 4366.45 3462.69 2960.74

3. Profit & loss

PAT 1182.47 1055.10 803.25 615.20 512.38

Extraordinary items 0.00 0.00 0.00 0.00 0.00

Profit brought forward 0.00 0.00 0.00 0.00 0.00

Adjusted net profit 0.00 0.00 0.00 0.00 0.00

Total profit & loss 1182.47 1055.10 803.25 615.20 512.38

Appropriations 1182.47 1055.10 803.25 615.20 512.38

Equity dividend (%) 0.00 0.00 0.00 0.00 0.00

Earnings per share 243.92 217.65 165.7 126.9 105.69

Risk Management in Foreign Exchange

Business

Transcript of Risk Management in Foreign Exchange