Trade Finance and Forex

Concepts

Controls

Practices

Foreign Exchange and Risk Management by Mr. C Jeevanandan

Risk involved in cross border transactions.

Trade transaction- There is a seller and a buyer. Seller sends goods and buyer pays for them. If both
are in same country it is domestic or inland trade transaction. If they are in different countries, it is
called International Trade Transaction.

When goods are going out of country, export. When they are coming, import.

Every country has its own currency as a legal tender. Indians can hold up to $2000 foreign currency.

Only 13 currencies of the world are acceptable or convertible currencies. Major ones, dollar, pound,
euro and yen. But dollar plays a dominating role in industrial market.

Steps of trade transaction:

Contract- This brings in foreign currency and so any transaction that takes place in foreign
currency in India gives rise to foreign exchange transactions. In India, any transaction which is
denominated in a currency other than is called as a foreign exchange transaction. To
complete a foreign exchange transaction, two steps are important-
1. Transfer of funds from buyer to seller
2. Conversion of currency (sequence of these steps is immaterial)

Foreign exchange position of India

Inflow receipts Outflow payments

Exports Imports
Travel Travel
Services Services
Private transfers (inward remittance) Private transfers (outward remittance)
Loans Loans
Investments Investments

A country earns foreign exchange from exports and makes payment in foreign exchange towards
imports.

BALANCE OF TRADE of a country is the difference between receipts in foreign exchange from visible
exports and payments in foreign exchange towards visible imports during a particular period.

If exports > imports, it is termed as trade surplus. If imports > exports, it is trade deficit.
Major exports and imports of India

EXPORTS IMPORTS

Engineering goods Oil and petroleum

Gems and jewellery Defence equipment
Textiles Raw material
Pharma Capital goods- machinery
Agro based
Marine products

Share of India in Industrial Trade is 0.91%. Not even 1% exports.

Inbound travel results in inflow of foreign exchange and outbound travel results in outflow of same.

CONSULTANCY BPO

SERVICES

SOFTWARE EXPORTS KPO

LOANS

DISBURSEMENT REPAYMENTS
BALANCE OF PAYMENTS: of a country is a schematic representation of all the transactions undertaken
by the residents of one country with the residents of other countries and vice versa during a particular
period.

Residents includes individuals, firms, corporates, banks and government.

Companies have to maintain current account transactions and then capital account transactions.

Any transaction that changes or alters foreign currency assets/liabilities position of a country is
classified as capital account transaction. Example, loans and investments.

In case receipts in foreign exchange of a country are more than payments, it is favourable BOP. It is
unfavourable BOP if payments > receipts.

FOREX RESERVES: $480 billion in 2017. Assets of the government which are denominated in a currency
other than home currency are called as FOREX RESERVES of the country. It was $5.8 billion in 1991.

Hence components of BOP are:

1. Current Account Transactions

2. Capital Account Transactions
3. Forex Reserves

As far as India is concerned, the deficit on current account transactions is financed by a surplus on
capital account transactions.