Treasury Management

Need for foreign exchange

Every sovereign country has a currency which is legal tender within its territory Whenever a country buys or sells goods/services from or to another country the residents exchange currencies Thus the need for foreign exchange which simply means foreign money

Exchange rate
Rate of exchange means price of one currency in terms of another currency OR Rate at which number of units of one currency can be exchanged for number of units of another currency e.g.. USD/INR --- 1 USD = 45.25 INR EUR/USD --- 1 EURO = 1.2335 USD Two way quotations Direct and Indirect rates Bid and Offer rates 24 hour x 5 day market (except USD/INR market)

Factors affecting exchange rates

Balance of payments Strength of the economy Fiscal policy Interest rate Monetary policy Political factors Exchange control Central bank intervention Speculation Technical factors
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Market participants
Customers those who buy and sell forex for their trade requirements and other needs Commercial banks are those authorized to deal in forex Hedge Funds Invest and speculate on the forex movements Central banks control volatile and undue movements of their currency Exchange brokers who act as intermediary between banks for doing the deals

Market participants
Customers who are engaged in foreign trade avail these services provided by the banks exporters need to convert their receivables importers need to remit their payables may also need forex for settlement of other international obligations are allowed to trade with some limitations

Market participants
Commercial banks deal with international trade transactions offer services for converting one currency into another specialized in international trade transactions and have branch/correspondent network have the authority to trade in forex besides merchant transactions Exchange brokers deal on behalf of banks act as intermediaries

Market participants
Hedge funds manage huge funds for their investors have the mandate to trade a certain percentage of this fund invest based on the forecast of currency movements and also try to move the market Central banks have the responsibility to maintain the external value of their currency ensure that there is orderliness in exchange movements through intervention
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Features of Indian FX Market

Limited market makers More market takers RBI presence Growing awareness amongst corporates to hedge Limited time i.e.. 9 am to 4.30 pm for the market

Exchange rate system in India

Historically linked to the Pound Sterling As a signatory to the Bretton Woods RBI was authorized to maintain par value of rupee within the permitted band of 1% First devaluation in 1966 running up to to 1995 Delinked from the Pound Sterling in 1975 and linked to a basket of currencies

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Quotes in Forex
Direct Quotes A foreign currency quoted in terms of the local currency e.g..USD/INR -- 1 USD = INR 45.25 Indirect Quotes Local currency unit quoted in terms of number of foreign currency e.g.. INR/USD -INR100=USD2.2099

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Cross currency spot quotes

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Currency pairs Way they are quoted

USD/INR 45.2500/26 USD/AED 3.6730/33 AUD/USD 0.7605/10 USD/JPY 110.85/90 USD/HKD 7.7922/32 EUR/USD 1.2320/25 USD/SGD 1.7085/90 USD/CAD 1.3228/30 GBP/USD 1.8205/08 USD/CHF 1.2805/10 USD/LKR 96.95/99 NZD/USD 0.6682/86

USD/PKR 57.10/25

USD/PHP 56.17/21

USD/TWD 33.22/29

USD/KRW 1172.50/80

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World Currency Forwards

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USD/INR Forwards

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Exchange Rate Arithmetic settlement

Value date is a date on which the exchange of currencies actually takes place Cash is the same day transaction Tom is the transaction on the next working day after the deal date Spot is the transaction on the second working day after the deal date Forward is the transaction after a period of spot date

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Forward rates
Derived by adding or deducting the premium or discount to the spot rate e.g. : Spot $/INR 45.25 Euro/$ 1.2325 Aug end +0.085(Pr) (-) 0.0049 (Dis) 2004 ---------------------------45.3350 1.2276

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Examples
To book a forward contract for an import transaction in USD/INR value 30st Nov,04 Spot USD/INR 45.2550 / 2650 Fwd (sp/Nov) 14.50 / 15.50 Rate is 45.2650 + 15.50 = 45.4200 To book a forward contract for an exporter in USD/INR value 31st Aug,04 Fwd (sp/Aug) 8.50 / 9.50 Rate is 45.2550 + 8.50 = 45.3400

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Examples
To book a contract to cover Euro export value 31 Oct , 2004 (Euro dollar at discount) Spot USD/INR Fwd 45.25 / 27 11.5 / 12.5 EUR/USD 1.2335 / 38 72 / 70

(45.25 + 0.115) x (1.2335 - 0.0072) 45.365 x 1.2263 Rate 55.63

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Types of client transactions

Inward remittances Outward remittances Trade - Export/Import bills Forward Contracts Bookings Forward Contracts Cancellations Derivatives

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Types of client transactions

Inward and Outward remittances Telegraphic transfer Demand draft/Cheque Traveler Cheques/Currency Notes Trade Export/Import Bills Purchase/discounting/negotiating/clearing of bills

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Types of client transactions

Forward Contracts Bookings For any transaction that is to happen after the spot date a customer/bank can book either a purchase or sale forward contract This can be fixed or option forward contracts Utilization of forward contracts on the due dates

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Types of client transactions

Forward Contracts Cancellations In the absence of any instructions from the customer,matured/unutilized contracts will be automatically cancelled after the specified grace period At the request of the customer it is optional for the bank to 1. Accept or give early delivery 2. Extend the contract 3. Cancel the contract before or after the maturity date In all the above cases bank shall recover the costs incurred in effecting the transactions
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Foreign exchange forward contract

An agreement between a bank and a counter party to buy or sell a specific amount of one currency against another currency on a specific future date at a fixed rate

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Forward contracts - merits

Simple hedge instruments Eliminates exchange risk,provides certainty Useful in long unidirectional movements Flexible dates can be matched exactly with underlying exposure To overcome the time lag between buying or selling goods and payment for the same Off-balance sheet

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Swap transactions in forex

A swap transaction is a simultaneous exchange of two currencies at a specified rate and at an agreed date

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Fundamental Analysis

GDP Industrial Production Unemployment Inflation BOP

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Factors affecting USD/INR forwards

Call rate / G-sec yields USD o/n rate / treasury yields Govt. borrowing program Credit policy announcements Spot INR Demand & supply

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Data Releases
Non farm payrolls Housing starts CPI / PPI Retail Sales Business Confidence Index Jobless Claims Inflation Data Trade deficit

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USD/JPY technical analysis

QJP Y= , 3/ 9/ 04 QJP Y= , 3/ 9/ 04 Bid , Can d le 1 1 1 .1 7 1 1 1 .6 1 1 1 1 .1 2 1 1 1 .3 3 Clo se(Bid ), M A 1 4 1 0 9 .6 4 Th e rise f ro m 1 0 5 .2 0 t o 1 1 2 .3 0 h as ret racemen t at 1 0 9 .8 0 (3 8 .2 ),1 0 8 .7 5 (5 0 ) an d 1 0 7 .9 5 (6 1 .8 ) Tren d lin e resist an ce co mes at 1 1 2 .5 0 b reak o f w h ich t g t s 1 1 3 .8 0 / 1 1 5 .3 0 M acd is st ill p o sit ive so a mo ve t o 1 1 3 .8 0 can n o t b e ru led o u t w it h 1 0 8 .3 0 as su p p o rt P rice / US D 117 116 115 114 113 t ren d lin e resist an ce 112 111 110 3 8 .2 50 6 1 .8 109 108 107 106 M A CD / US D 0 -1 27 03 10 17 24 S ep 0 3 01 08 15 22 Oct 0 3 29 05 12 19 No v 0 3 26 03 10 17 24 Dec 0 3 31 08 15 22 Jan 0 4 29 05 12 19 Feb 0 4 26 04 11 M ar 0 4

QJP Y= , 3/ 9/ 04 QJP Y= , 3/ 9/ 04

Clo se(Bid ), S ig n al 1 2 , 2 6 , 9 0 .9 7 Clo se(Bid ), M A CD 1 2 , 2 6 1 .3 1

M A CD is st ill p o sit ive

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SENSEX technical analysis

Q.BS ES N, Last Trad e, Can d le 3 / 1 0 / 0 4 5 ,8 3 3 .1 9 5 ,8 3 3 .1 9 5 ,7 6 1 .0 2 5 ,8 2 0 .3 0 Q.BS ES N, Clo se(Last Trad e), M A 1 4 3 / 1 0 / 0 4 5 ,7 8 2 .7 7 P rice INR 6000 5800 5600 3 8 .2 50 6 1 .8 Fo r t h e rise fro m 4 2 0 0 t o 6 2 5 0 ret racemen t co mes at 5 4 3 0 ,5 1 9 0 an d 4 9 3 5 R es.is at 5 9 8 0 w h ich h as t o b reak o u t fo r t h e n ext u p mo ve an d t ill t h is resist s w e can exp ect a d ip t o w ard s t h e su p p o rt at 5 6 8 0 an d lat er 5 5 6 5 t h e recen t lo w s w h ich w ill h o ld fo r t h e n ext u p mo ve t o w ard s 6 0 0 0 4200 4000 M A CD INR 100 M A CD lo o ks like b o t t o min g o u t 0 24 01 S ep 0 3 09 16 23 Oct 0 3 30 06 13 20 No v 0 3 28 05 12 19 Dec 0 3 29 05 12 19 Jan 0 4 27 04 11 18 Feb 0 4 25 04 11 M ar 0 4 5400 5200 5000 4800 4600 4400

Q.BS ES N, Clo se(Last Trad e), S ig n al 1 2 , 2 6 , 9 3 / 1 0 / 0 4 -4 .4 3 Q.BS ES N, Clo se(Last Trad e), M A CD 1 2 , 2 6 3 / 1 0 / 0 4 1 .7 2

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USD/INR technical analysis

QINR =IN, Bid , Cand le 2 / 1 6 / 0 4 4 5 .2 2 5 4 5 .2 4 0 4 5 .2 2 2 4 5 .2 3 7 QINR =IN, Clo se(Bid ), M A 1 4 2 / 1 6 / 0 4 4 5 .2 7 4 Break o f t rend line at 4 5 .2 0 w ill t ake it d o w n t o 4 4 .8 0 t he lo w er end o f t he channel A b o unce fro m here w ill b ring 4 5 .4 5 int o p ict ure P rice 4 6 .2 4 6 .1 46 4 5 .9 4 5 .8 4 5 .7 4 5 .6 4 5 .5 4 5 .4 4 5 .3 t rend line R SI and M A CD are t urning aro und p o sit ive R SI 60 40 20 QINR =IN, Clo se(Bid ), 2 / 1 6 / 0 4 -0 .0 6 5 QINR =IN, Clo se(Bid ), 2 / 1 6 / 0 4 -0 .0 6 5 QINR =IN, Clo se(Bid ), 2 / 1 6 / 0 4 2 6 .2 6 7 17 24 01 09 Sep 0 3 Sig nal 1 2 , 2 6 , 9 M A CD 1 2 , 2 6 R SI 1 4 16 23 Oct 0 3 30 06 13 20 No v 0 3 28 05 12 19 Dec 0 3 29 05 12 19 Jan 0 4 27 04 11 18 Feb 0 4 4 5 .2 4 5 .1 45 M A CD 0 -0 .1

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Thank You

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