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M S Ahluwalia
CAIIB Super-Notes
Sirf Business
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
Contents
Coverage:
1. Foreign Exchange Definition
and Markets
2. Factors Exchange Rates 3. Exchange Rate Mechanism 4. Foreign Exchange Dealing Room Operations 5. RBI/FEDAI Guidelines
M S Ahluwalia CAIIB Super-Notes Sirf Business
Determining
1.
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
arranged basis.
All claims payable abroad, whether consisting funds held in foreign currency with banks abroad or bills, checks payable abroad.
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
ii)
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
2.
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
Technical Reasons
Speculation
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
3.
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
Types of Transactions
Ready/Cash Tom Spot
Settlement of funds on the same day (t+0)
Settlement of funds on the next working day (t+1) Settlement of funds on the second working day (t+2) Delivery of funds on any day after the spot date
Forward
Value date
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
In a perfect market, with no restriction on Finance and Trade, the interest factor is the basic factor in arriving at the forward rate Forward price of a currency can be worked out on the basis of:
Spot price of the currencies involved The interest rate differentials for the currencies The term, i.e., the future period for which the price is worked out
M S Ahluwalia CAIIB Super-Notes Sirf Business
Type of Quotes
Direct Quote
Foreign currency expressed in terms of home currency (Local Currency is Variable) Also called Home Currency or Price Quotations Ex: USD 1 = Rs. 44.35
Home currency expressed in terms of foreign currency Ex: Rs. 100 = USD 2.25.
Internationally, all currencies other than GBP, Euro, AUD and NZD are quoted as direct rates.
M S Ahluwalia CAIIB Super-Notes Sirf Business
Cross Rates
When rates for a particular currency pair are not directly available Ex:
USD/INR Rate is 49.10/11 GBP/USD Rate is 1.5000/10 GBP/INR Rate will be: 49.10 x 1.5000/49.11 x 1.5010
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
Terminology
1 Per Mille: 1 part in every thousand Valuer Compensee payments: Where value date is same in both centers Arbitrage:
Simple/Direct Arbitrage: Between 2 centers only Compound/Three (or more) Point Arbitrage: Where additional centers are involved
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
4.
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
Functions
1. To meet requirements of customers of other
branches/divisions to buy or sell foreign currency. 2. Manage Foreign currency assets and liabilities. 3. Fund and manage Nostro accounts 4. Undertake proprietary trading in currencies.
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
Front Office
Mid Office
Dealers who are actually involved in buying and selling the currencies, or undertaking market activities.
M S Ahluwalia
CAIIB Super-Notes
Back Office
Dealing Room
Sirf Business
Positions
Funds Position Reflects inflow and outflow of funds i.e. receivables and payables. Mismatches between the two throw open interest rate Risks. Comprises of items that are both ready(immediate effect) and forward in nature Currency Position Deals with overbought or oversold positions. The overall net position exposes the dealer to exchange Risks from market movements.
M S Ahluwalia CAIIB Super-Notes Sirf Business
Terminology
Exchange Position/Position
The difference between the amount of a currency bought and the amount of the same currency sold is known as position in that currency.
Overbought Position
If the amount of FC bought by a bank is more than the amount sold, the difference between the two is Overbought/Long/Plus position
Oversold Position
If the amount of FC sold by a bank is more than the amount bought, the difference between the two is Oversold/Short/Minus position.
Square Position
If the amount of FC bought by a bank equals the amount sold, then the bank is said to have square position. If there is a small difference, it is known as Near Square position
M S Ahluwalia
Open Position
Exchange position at given point of time
O/N Position
Open Exchange position at the end of the day
CAIIB Super-Notes
Sirf Business
Exchange Risk
Liquidity Risk
Legal Risk
Systemic Risk
Sovereign Risk
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
5.
RBI/FEDAI GUIDELINES
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
Cat 3 Allowed to undertake only purchase of FC notes and travellers cheques Earlier known as Restricted Money Changers (RMCs)
M S Ahluwalia
Sirf Business
FEDAI Guidelines/Rules
1. 2. Standard transit period for export bills Crystallisation of bills in foreign currency in case of delay in realisation within 60 days 3. 4. 5. 6. Sight bills for Import LC would crystallise on 10th day after date of receipt Forward contracts to have definite amounts and specific delivery dates Delivery period under option contract shall not exceed one month All forward contracts to be automatically cancelled on the 7th working day after maturity if not picked up 7. All cancellation at Banks opposite TT rates
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
FEDAI Guidelines/Rules
8. Interest @ 2% above the prime rate of the currency to be charged in event of delay in payment of interbank foreign currency funds 9. Interest @ 2% above the NSE MIBOR to be charged in event of delay in payment of rupee settlement funds 10. All currencies to be quoted as:
Per unit of Foreign currency =INR. Ex: $1 = Rs 45.67 Except JPY, Indonesian Rupaih and Kenyan Schilling. To be quoted as 100 units of Foreign currency = INR.
FEDAI also prescribes code of conduct for FOREX dealers, as also guidelines with regard to dealings with forex brokers.
M S Ahluwalia CAIIB Super-Notes Sirf Business
RBI Guidelines
Guidelines related to:
Open positions Gaps Borrowing and Lending in Foreign currencies Interbank dealings in India and overseas markets Hedging of banks own exposures as well as that of its resident and non-resident clients
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
RBI Guidelines
1. AD CAT 1 Banks allowed to open/close rupee accounts
1. 2. In names of overseas branches or correspondents without prior reference to RBI In names of exchange houses with prior reference to RBI
2. 3.
AD CAT 1 Banks allowed to open/close foreign currency accounts abroad AD CAT 1 Banks can undertake investments in overseas markets in money market instruments and/or debt instruments, issued by foreign state, maturity < 1 yr, rated as per guidelines
4.
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
RBI Guidelines
5. All borrowings in Nostro accounts (including ECB and Temp. Overdraft) not adjusted within 5 days shall not exceed 50% of their unimpaired Tier 1 Capital or USD 10 million whichever is higher 6. Banks can allow banks to book Forward Exchange contracts to hedge their exchange risk exposure
The genuineness of the underlying documentary evidence and exposure must be ascertained
7. 8.
Banks can allow importers/exporters to book Fwd. Contract on basis of declaration of the exposure with limit based on past performance SME customers may be allowed to book forward contracts in alignment with the credit facilities availed by it from the bank
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
RBI Guidelines
9. Banks can allow resident individuals to book Forward contracts on deliverable basis with tenors up to 1 year up to a limit of USD $ 100,000. 10. Banks can offer other derivative contracts to resident entities who have borrowed foreign exchange in accordance with the provisions of FEMA 1999 11. Banks can also offer Foreign currency Rupee Swap to resident entities that have a forex or rupee liability to hedge long term exposure 12. Banks can enter into cross currency options and foreign currency-rupee options with their customers on back to back basis
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
Do you have any questions or queries or some feedback to give? Just mark an email to super.msahluwalia@yahoo.com
M S Ahluwalia
CAIIB Super-Notes
Sirf Business
M S Ahluwalia, amongst other things, is a visual artist, blogger, blog designer and of course an MBA and Banker from New Delhi, India.
To know more about him you may visit his blog-site: Estudiante De La Vida
M S Ahluwalia
Sirf Business