FOREIGN EXCHANGE MARKETS AND EXCHANGE RATE MECHANISM

FINANCIAL MARKET

MARKET IN WHICH BUYING AND SELLING OF FINANCIAL ASSETS TAKE PLACE

TYPES OF FINANCIAL MARKETS

FOREX MARKET

MARKET IN WHICH THE BUYING AND SELLING OF FOREIGN CURRENCIES TAKE PLACE

CLASSIFICATION OF FOREX MARKETS

TYPES OF FOREIGN EXCHANGE MARKETS

ACCORDING TO PERIOD OF SETTLEMENT: SPOT MARKET FORWARD MARKET ACCORDING TO NATURE OF CURRENCIES: DEEP MARKET SHALLOW MARKET MARKET ACCORDING TO PARTICIPANTS: INTERBANK MARKET CORPORATE MARKET

FOREX MARKETS
SPOT MARKET FOREIGN CURRENCIES BOUGHT AND SOLD FOR IMMEDIATE DELIVERY. (TECHNICALLY, A SPOT DEAL HAS DELIVERY TWO* WORKING DAYS AFTER THE SPOT TRANSACTION *ONE WORKING DAY IN CASE OF USD/CAD FORWARD MARKET FOREIGN CURRENCIES BOUGHT AND SOLD TODAY AT AN AGREED RATE WITH DELIVERY SOMETIME IN THE FUTURE

FOREX MARKETS

DEEP MARKET

SHALLOW MARKET

REFER TO THOSE CURRENCIES REFER TO CURENCIES WHICH ARE WHICH ARE WIDELY DEALT, FOR TRADED ONLY OCCASIONALLY, FOR EXAMPLE, USD, STG, EUR, JPY ETC. EXAMPLE, SOUTH AFRICAN RAND, NIGERIAN QUACHA, UGANDAN DOLLAR, EGYPTIAN POUNDS ETC.

PRINCIPAL CHARACTERISTICS OF FOREX MARKET

CHARACTERISTICS OF FOREIGN EXCHANGE MARKETS

24 HOURS INTEGRATED MARKET/ GLOBAL MARKET PRINCIPAL MEANS OF TRANSACTING BUSINESS IS VIA TELEPHONE, TELEX, INTERNET, DEALING SYSTEM ETC. TELEPHONE / OVER THE COUNTER MARKET NO CENTRAL MEETING / DEALING PLACE HIGHLY RISKY MARKET TWO-WAY PRICE MARKET

24 HOUR MARKET (GLOBAL MARKET)

TOKYO MAXIMUM ACTIVITY SINGAPORE LONDON: AFTERNOON/EVENING NEW YORK - MORNING BOMBAY LONDON

NEW YORK

24 HOUR MARKET (GLOBAL MARKET)

NEW YORK LOS ANGELES

LONDON

MARKET MOVES AS THE SUN MOVES AROUND THE WORLD

ZURICH FRANKPURT

MELBOURN SYDNEY

TOTAL FOREX MARKET IS LARGEST OF ALL MARKETS IN THE WORLD

TOKYO SINGAPORE

BAHARAIN DUBAI BOMBAY HONGKONG

MAJOR GLOBAL MARKETS

FOREIGN EXCHANGE MARKETS

MAJOR GLOBAL MARKETS:

ASIA PACIFIC: HONG KONG, SINGAPORE, TOKYO AND SYDNEY EUROPE USA : LONDON, FRANKFURT, ZURICH, PARIS, MILAN : NEW YORK, SAN FRANCISCO

MAJOR PARTICIPANTS IN THE FOREX MARKET

MARKET PARTICIPANTS

COMMERCIAL BANKS INVESTMENT BANKS LARGE MULTINATIONAL CORPORATIONS GOVERNMENT DEPARTMENTS CENTRAL BANKS NBFCS SPECULATORS

CONTROL MECHANISM IN DOMESTIC FOREX MARKET

BASICS OF FOREIGN EXCHANGE FOREIGN EXCHANGE THE MONEY OF ANOTHER COUNTRY IS CALLED FOREIGN EXCHANGE EXAMPLES: US DOLLARS EURO POUND STERLING (USD) (EUR) (STG)

JAPANESE YEN ETC. (JPY) ARE FOREIGN EXCHANGE IN INDIA

FOREIGN EXCHANGE IN INDIA AS PER FEMA FOREIGN CURRENCY MEANS ANY CURRENCY OTHER THAN INDIAN CURRENCY AND FOREIGN EXCHANGE MEANS AND INCLUDES: DEPOSITS, CREDITS AND BALANCES PAYABLE IN FOREIGN CURRENCY DRAFTS, TRAVELLER CHEQUES, LETTERS OF CREDIT OR BILL OF EXCHANGE, EXPRESSED OR DRAWN IN INDIAN CURRENCY BUT PAYABLE IN ANY FOREIGN CURRENCY DRAFTS, TRAVELLER CHEQUES, LETTERS OF CREDIT OR BILL OF EXCHANGE, EXPRESSED OR DRAWN BY BANKS, INSTITUTIONS OR PERSONS OUTSIDE INDIA, BUT PAYABLE IN INDIAN CURRENCY

CONVERTIBILITY OF INDIAN RUPEE (INR)

CLASSIFICATION OF FOREIGN CURRENCIES

TYPES OF CURRENCIES

SPECIE CURRENCY: MONEY COINED FROM PRECIOUS METALS COMMODITY CURRENCY: BACKED OR REDEEMABLE CURRENCY, IN THE FORM OF PAPER NOTES BAKCED BY GOLD OR SILVER FIAT CURRENCY: CURRENCY THAT IS NOT BACKED BY GOLD ETC. THAT IS PAPER CURRENCY IN THE FORM OF LEGAL TENDER CONVERTIBLE* CURRENCY VERSUS NON- CONVERTIBLE CURRENCY (* CONVERTIBLE ON TRADE ACCOUNT, CURRENT ACCOUNT AND CAPITAL ACCOUNT) HARD CURRENCY VERSUS SOFT CURRENCY

FOREIGN EXCHANGE RATES

PRICE OF ONE CURRENCY IN TERMS OF ANOTHER CURRENCY

CONSIDER THE FOLLOWING PRICES: I KG MANGO I VIDEO RENTAL 1 USD* I GBP* INR 44.00 INR 45.00 INR 43.80 INR 84.00

*EXCHANGE RATES ARE SIMPLY PRICES OF FOREIGN CURRENCY

TYPES OF FOREX RATES

CLASSIFICATION OF FOREIGN EXCHANGE RATES

ON THE BASIS OF QUOTATION: DIRECT QUOTE INDIRECT QUOTE

ON THE BASIS OF TRADING AND DELIVERY: CASH / READY TOM SPOT FORWARD

FACTORS AFFECTING EXCHANGE RATES

ECONOMY (FUNDAZMENTAL FACTORS) PURCHASING POWER PARITY DEMAND AND SUPPLY REAL INTEREST DIFFERENTIALS BALANCE OF PAYMENT, EXCHANGE RESERVE AND ITS COMPOSITION INFLATION AND RELATED INDICATORS LIKE EMPLOYMENT, GROWTH, CAPACITY UTILISATION ENVIRONMENT CLIMATE EARTHQUAKES HARVESTS VIOLENT STROMS COMMODITIES ETC. POLITICS ELECTIONS NATIONALISM TYPE OF GOVERNMENT COMPOSITION OF PARLIAMENT

PEOPLE MENTALITY PROPENSITY TO SAVE RELIGION

EXCHANGE RATES
AT 10.30 A.M. IST CURRENCY USD USD BUY INR BUY 48.5300

MONDAY 07 APRIL,2005
USD SELL INR SELL 48.5350

EUR

0.8621

41.8400

0.8626

41.8675

GBP

1.4166

68.7500

1.4171

68.7800

JPY (100 UNITS)

133.1300

36.4400

133.1800

36.4575

EXCHANGE RATES
AT 02.30 P.M. IST CURRENCY USD USD BUY INR BUY 48.5575

MONDAY 07 APRIL,2005
USD SELL INR SELL 48.5650

EUR

0.8616

41.8375

0.8621

41.8700

GBP

1.4155

68.7350

1.4160

68.7700

JPY (100 UNITS)

133.2000

36.4425

133.2500

36.4625

CORPORATE FOREX RISK MANAGEMENT

RISK SENSIVITY TO CHANGE IN THE VALUE OF UNDERLYING CASH FLOWS EXCHANGE RISK SENSIVITY TO CHANGE IN THE VALUE OF UNDERLYING CASH FLOWS DENOMINATED IN FOREIGN CURRENCY DUE TO MOVEMENT IN EXCHANGE RATES

CORPORATE FOREX RISK MANAGEMENT

WHY ? TO HEDGE TO MAKE MONEY

TYPES OF FOREX EXPOSURES

CORPORATE APPROACHES TO EXPOSURE MANAGEMENT

PROFILE OF CORPORATES AND EXPOSURE MANAGEMENT STRATEGY

SETTING UP THE FOREIGN EXCHANGE TRADING LIMITS

NET WORTH OF THE COMPANY PERCENTAGE OF NET WORTH ALLOCATED FOR FOREX TRADING AMOUNT ALLOCATED FOR FOREX TRADING ERMR (EXCHANGE RISK MANAGEMENT RATIO) FOREX TRADING LIMIT (10 x 100 / 5) EAR (EARNING AT RISK):ONE WEEK OF LAST THREE MONTHS AVERAGE EARNINGS LAST THREE MONTHS EARNINGS (0.20 + 0.30 + 0.40 M) LAST THREE MONTHS AVERAGE OF EARNINGS

USD 100 M 10% USD 10 M 5% USD 200 M

USD 0.90 M USD 0.30 M

THEREFORE, EAR , THAT IS, ONE WEEK OF LAST THREE MONTHS AVERAGE USD 0.075 M EARNINGS

INTERNAL TECHNIQUES OF EXPOSURE MANAGEMENT

WHY EXCHANGE RISK?

EXCHANGE RISK ARISE DUE TO FOREIGN CURRENCY EXPOSURES TYPES OF EXPOSURES TRANSACTION EXPOSURE TRANSLATION EXPOSURE ECONOMIC EXPOSURE

TRANSACTION EXPOSURE

CONCERNED WITH HOW CHANGES IN EXCHANGE RATES AFFECT THE VALUE OF ANTICIPATED FOREIGN CURRENCY DENOMINATED CASH FLOWS RELATING TO TRANSACTIONS ALREADY ENTERED INTO.

ALSO REFERRED AS OPERATIONAL EXPOSURE

TRANSLATION EXPOSURE

ARISES AS A RESULT OF THE PROCESS OF CONSOLIDATION OF FOREIGN CURRENCY ITEMS INTO GROUP FINANCIAL STATEMENTS DENOMINATED IN THE CURRENCY OF THE PARENT COMPANY.

ALSO REFERRED EXPOSURE

AS

BALANCE

SHEET EXPOSURE

OR

ACCOUNTING

ECONOMIC EXPOSURE REFERS TO THE POSSIBILITY THAT THE PRESENT VALUE OF FUTURE OPERATING CASH FLOWS OF A BSINESS EXPRESSED IN PARENT CURRENCY MAY BE AFFECTED BY A CHANGE IN FOREIGN CURRENCY RATES

COMPARISON OF FORWARD & FUTURES MARKETS IN FOREIGN EXCHANGE

FINANCIAL FUTURES LOCATION TRADING MEDIUM CONTRACT SIZE MATURITY/DELIVERY DATE COUNTERPARTY CREDIT RISK COMMISSIONS FUTURE EXCHANGES OPEN OUTCRY STANDARDIZED STANDARDIZED CLEARING HOUSE CLEARING HOUSE ALWAYS PAYABLE FLAT RATE FLOR SMALL DEALS; OTHERWISE NEGOTIABLE. MARGIN REQUIRED FORWARD MARKETS BANKS AND OTHER TRADERS NO SINGLE LOCATION TELEPHONE/TELEX AS REQUIRED BY CUSTOMER AS REQUIRED BY CUSTOMER KNOWN BANK OR OTHER TRADER INDIVIDUAL COUNTERPARTY NEGLOTIABLE OR IMPLIED IN DEALERS SPREAD WHEN NO SPECIFIC COMMISSION IS PAYABLE COUNTERPARTY CREDIT RISK; BANKS SET THIS AGAINST CREDIT LIMITS ACCORDING TO THEIR OWN HOUSE RULES PROVIDED BY CREDIT LIMITS NO FORMAT GEARING, BUT SINCE PAYMENT IS NOT REQUIRED UNTIL DELIVERY, ALTHOUGH CREDIT LIMITS ARE USED, GEARING MAY IN EFFECT HBE ACHIEVED. VIA ARRANGEMENTS WITH BANKS

SECURITY

LIQUIDITY LEVERAGE

PROVIDED BY MARGIN PAYMENTS VERY HIGH

SETTLEMENT

VIA CLEARING HOUSE

EXCHANGE TRADED AND OTC OPTIONS COMPARED

EXCHANGE TRADED CONTRACT TERMS, INCLUDING AMOUNTS EXPIRATION TRANSACTION METHOD SECONDARY MARKET COMMISSIONS PARTICIPANTS STANDARDIZED STANDARDIZED STOCK EXCHANGE TYPE MEDIUM CONTINUOUS SECONDARY MARKET NEGOTIABLE EXCHANGE MEBERS

OTC FIXED TO SUIT CIRCUMSTANCES; TERMS ARE NOT STANDARD DETERMINED BY REQUIREMENTS OF CUSTOMERS BANK-TO-CLIENT OR BANK-TO BANK NO FORMAL SECONDARY MARKET NEGOTIABLE BUT USUALLY BUILT INTO THE PREMIUM BANKS, CORPORATIONS FINANCIAL INSTITUTIONS. AND

SWAP A LEGAL AGREEMENT BETWEEN TWO PARTIES TO EXCHANGE CASH FLOWS OVER A PERIOD OF TIME CAP AN OPTION WHICH FIXES THE CEILING ON THE INTEREST RATE PAYABLE ON BOROWINGS BY THE OPTION BUYER FLOOR IS AN OPTION WHICH FIXES THE LOWEST RATE RECEIVABLE ON DEPOSITS BY THE OPTION BUYER COLLAR IS A COMBINATION OPTION INVOLVING THE SIMULTANEOUS PURCHASE OF A CAP AND SALE SALE OF FLOOR CORRIDOR CONSISTS OF EITHER TWO CAPS OR TWO FLOORS BOUGHT AND SOLD AT TWO DIFFERENT STRIKE RATES

DERIVATIVES

DERIVATIVE INSTRUMENTS COMPRISE FINANCIAL PRODUCTS WHICH HAVE GROWN UP AROUND CURRENCY, SECURITIES AND COMMODITY TRADING AND WHOSE PRICE IS A FUNCTION OF SOME OTHER UNDERLYING SECURITY, CURRENCY RATE OR OTHER COMMODITY. THE TERM IS USUALLY USED TO EMBRACE FINANCIAL FUTURES, OPTIONS, SWAPS AND A WIDE RANGE OF FINANCIALLY ENGINEERED INSTRUMENTS WHICH ARE HYBRIDS OF OTHER FINANCIAL PRODUCTS. BUT IT ALSO INCLUDES, FORWARDS.