INTERNATIONAL

BANKING – MODULE A

Prof. B.B. Bhattacharyya

Welingkar Institute of Management Development &
Research, Mumbai
 What is an exchange rate ?
 Factors determining exchange rates

VALUE OF $
VALUE OF $

DEMAND SUPPLY

S
$1.75

$1.75
$1.65

$1.65
$1.60

$1.60

D
X-1 x X+1 X-1 X X+1
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QUANTITY OF £ QUANTITY OF £
 What is an exchange rate ?
 Factors determining exchange rates

S
VALUE OF $

$1.75

$1.65

$1.60

X-1 X X-1
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QUANTITY OF £
 Why do Exchange Rates change?
INFLATION
S1

S
1.70
VALUE OF $

1.67

$1.65

$1.60

D1
D

QUANTITY OF £
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 Interest rate
 Investment in foreign securities – demand and supply of currencies
- exchange rates.
 Relative income levels
 Government controls
 Expectations
 Strength of the economy
 Political factors
 Central bank interventions
 Technical factors

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 Direct quote – Foreign currency constant,
home currency varies.eg. USD 1 = Rs. 39.50

 Indirect quote – Home currency constant,

foreign currency varies. Eg. Rs. 100 = USD
2.53.

 Two-way quotes
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 Cash /TOM/ SPOT – date on which the
exchange of currencies actually take place.

 Forward Transaction – Beyond Spot date

 Value date

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 Derivatives
 Forwards, Futures, Options, Swaps

 Financial contract whose value is derived from

or depends on the price of some underlying
asset. Value of derivative changes when there
is a change in the price of the underlying
related asset.

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 Forward – to buy a specified asset on a specified date
at a specified price.
 Both right and obligation.
 Future Contract – similar to forward contract.
 A Currency futures contract is an agreement to buy or
sell at ‘futures exchange’ a standard quantity of a
foreign currency at a future date at the price agreed to
between the parties to the contract
 Difference – Contracts standardized, price negotiated.
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 Differences contd.
• Exchange traded – no default risk –clearing house
becomes the opposite party to both buyer and seller.

• Most contracts are eventually offset.Only a small

portion results in actual delivery.

• Profits/ Losses on forward contracts are realized only

on the delivery day, the change in the value of a
futures contract results in cash flow every day- hence
less default risk
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 Option
 Gives the buyers right but no obligation to buy or sell
the underlying at the agreed rate on or before an
agreed date,
 Premium
 Call Option
 Put Option
 Seller (Writer)
 American style options – on or before the expiration
date
 European Style options – only on the expiration date
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 Swaps
 Contractual agreements between two parties to
exchange flows -very common and popular product
in derivative markets.
 IRS – No exchange of principal but periodic
exchange of streams of interest payments in terms of
predetermined terms on a notional agreed principal.
 Currency Swap – two parties agree to exchange
specific amounts of two different currencies in the
beginning and make periodic payments over time in
accordance with predetermined terms.

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 IRS – Plain Vanilla
FIXED FLOATING

COMPANY A 6% LIBOR + 25 bps

COMPANY B 6.75% LIBOR + 50 bps

DIFFERENTIAL 0.75% 25 bps or 0.25 %

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 LIBOR

COMPANY A COMPANY B
6.15%

FIXED RATE FLOATING RATE

FUNDING FUNDING
6% LIBOR + 50 bps

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 PAYS RECIEVES NET
COMPANY -6% + 6.15% 6.15% -
(6% + LIBOR)
A -LIBOR =-(LIBOR-0.15%)

COMPANY -6.15% +LIBOR -6.15% - LIBOR

-50BPS + LIBOR
B -(LIBOR + =-(6.15 +0.50)
50bps) =-6.65%

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 Documentary L/C
 LC is an arrangement whereby a bank acting at the
request of the customer undertakes to pay a third
party by a given date acording to agreed stipulations
and against presentation of documents the counter-
value of goods and services supplied
• Banks deal only in documents and not in goods.

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DIAGRAMATIC EXPLANATION OF VARIOUS STEPS IN THE OPERATION OF A L/C

1 CONTRACT
IMPORTER EXPORTER
BUYER 5 SELLER
SHIP
APPLICANT BENEFICIARY
GOODS
11
TAKE 6
2 DELIVERY
OF
GOODS NEGOTIATION PREPARE
OF EXPORT & PASS ADVISE
RELEASE
DOCUMENTS BILLS DOCUMENTS L/C
APPLY
AGAINST
L/C
CASH OR
T/R
MAKE 7 4
10 PAYMENT
9
ADVISING BANK /
SEND 8 CONFIRMING BANK
ISSUING OR
DOCUMENTS
BANK NEGOTIATING
3
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L/C
 Factoring
 An arrangement for financing a company’s
Business against the unpaid invoices drawn in
favour of the customers and in which the
factor becomes responsible for all credit
control, sales ledger administration and debt
collection activities.
 Debt Administration
 Credit Protection
 Factor Financing

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 Factoring can be defined as
 A continuing legal relationship between a financial
institution (the Factor ) and a business concern (the
client ) selling goods or providing services to trade
customers (the Customer ) on open account basis
whereby the Factor purchases the client’s book debts
(receivables) either with or without recourse to the
client and in relation thereto controls the credit
extended to customers and administers the sales
ledgers.

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 Forfaiting
 A mechanism of financing exports by
- discounting export receivables
- evidenced by bills of exchange or promissory notes
- without recourse to the seller
- carrying medium to long term maturities
- on a fixed rate basis
- upto 100 percent of the contract value
Simply put, forfaiting is the non-recourse discounting of
export receivables. The exporter surrenders, without recourse
to him, his rights to claim for payment on goods delivered to
an importer, in return for immediate cash payment from a
forfaiter. As a result, an exporter in India can convert a credit
sale in to a cash sale, with no recourse to him / his banker
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 All exports of capital goods and other goods
made on medium to long term credit are
eligible to be financed through forfaiting

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 Flow- Chart
 Exporter finalizes contract with overseas buyer and opens LC through his
bank.
 Exporter ships the goods as per schedule agreed with buyer
 Exporter draws series of bills of exchange and sends them along with the
shipping documents, to his banker for presentation to importer for
acceptance through latter’s bank. Bank returns avalised and accepted bills
of exchange to exporter.
 Exporter informs the importer’s bank about assignment of proceeds of
transaction to the Forfaiting bank
 Exporter endorses avalised Bill of Exchange (BOE) with the words “
Without Recourse” and forwards them to the Forfaiting Agency (FA)
through his bank.
 The FA effects payment of discounted value
 Exporter’s bank credit exporter
 On maturity of BOE, the FA presents the instruments to the Aval for
payment

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 Correspondent Bank – The interbank market is
a network of correspondent banking
relationships with large commercial banks
maintaining demand deposits account with one
another, called correspondent banking
accounts. The correspondent bank account
network allows for the efficient functioniong
of the foreign exchange market

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 SWIFT – a private non-profit message transfer
system. Provides an exclusive
telecommunication network throughout the
world for transmission of financial messages
among banks and financial institutions
 CHIPS provides a clearinghouse for the
interbank settlement of U S dollar payments
between international banks. A net payment
settlement system

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 FED WIRE – Communication network of the Federal
Reserve Bank- An automated computer based
message system which follows Gross settlement as
compared to Net payment system in CHIPS. Mainly
used for Interbank fund transfers, sale and purchase of
certain securities among banks, settlement of large
value commercial transactions, payments received
from other countries in favour of U.S. Banks
 CHAPS – In London, similar to CHIPS in New York

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 NRE and FCNR Accounts

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 Reserve Bank Of India
 It is empowered under the statute to control
and regulate
 foreign exchange reserves and policies related to
international trade,
 Inflow/outflow of foreign exchange,
 It also has supervisory powers over the
persons authorized to deal in foreign
exchange.

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 Reserve Bank Of India
 An essential function of a central bank is to maintain
the stability of the external value of the domestic
currency corresponding to the economic strength of
the country and the monetary and fiscal policies of
the authorities concerned.

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 Reserve Bank Of India
 The guidelines and directions by RBI, so issued relate
to foreign exchange transactions relating to exports,
imports, remittances, travel and tourism, investments
in India, repatriation of funds, non-resident Indian
segment, as also overseas investment by Indian
residents.
 One important function of RBI is compiling data
related to export-import trade, forex markets, non-
resident deposits, as also international assets and
liabilities.
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 FEMA, 1999
 All transactions in Foreign exchange are governed by
FEMA 1999.
 FEMA replaced FERA,1976.
 Important Provisions of FEMA related to exports,
imports, exchange rates, currency of payments, NRIs,
etc…
 Provisions for Foreign Travel.
 Other Remittances.
 Foreign Currency A/C in India
 Exchange Earners Foreign Currency (EEFC) A/Cs
 Resident Foreign Currency (RFC) Accounts
 Resident Foreign Currency (Domestic
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 EXPORT-IMPORT BANK OF INDIA

 Established by an Act of Parliament in 1981.

 Bank commenced operations on March 1, 1982.
 Exim Bank's mission is to facilitate globalization of
Indian business.

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 Objectives of EXIM Bank
 To translate national foreign trade policies into concrete action
points.
 To provide alternate financing solutions to the Indian exporter,
aiding him in his efforts to be internationally competitive.
 To develop mutually beneficial relationships with the international
financial community
 To initiate and participate in debates on issues central to India's
international trade
 To forge close working relationships with other export development
and financing agencies, multilateral funding agencies and national
trade and investment promotion agencies.
 To anticipate and absorb new developments in banking, export
financing and information technology.
 To be responsive to export problems of Indian exporters and pursue
policy resolutions.

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 EXIM Bank
 Financing Programmes
 For Exporters and Importers
 For Commercial Banks
 For Foreign Governments, Foreign Importers and
other Financial Institutions.
 Deferred Payment Exports/Project Exports.
 Assistance for Project Exports/Turnkey
Projects/Construction Projects.
 Other Services and Programmes
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 EXIM Bank

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 Export Credit Guarantee Corporation of
India Ltd. (ECGC)
 It was set up for the promotion of exports in the year 1957.
 To protect the exporters from any financial loss.
 Primary goal of ECGC :
To support & strengthen the export promotion drive in India
by providing a range of credit risk insurance covers to
exporters against loss in export of goods and service also by
offering guarantee covers to banks and financial institutions to
enable exporters to obtain better facilities from them.

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 Export Credit Guarantee Corporation of
India Ltd. (ECGC)
 ECGC issues various types of guarantees to banks,
financing exporters, which protect banks in case of
loss from their advances to exporters.

 Guarantees to Banks
 At pre-shipment stage
 At post-shipment stage

 ECGC is a backbone of Indian Project Exports.

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 ECGC provides cover to various types of risks,
namely,
 Risk of not receiving payment from foreign
buyers,
 Trading on short term credit,
 Of not receiving payments in respect of deffered
payment exports, and
 In respect of services rendered and construction
projects undertaken abroad.
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 FEDAI

 Foreign Exchange Dealer's Association of India

(FEDAI) was set up in 1958.

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 Role of FEDAI
 It's major activities include -
 framing of rules governing the conduct of inter-
bank foreign exchange business among banks vis-
à-vis public, and
 liaison with RBI for reforms and development of
forex market.

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 Role of FEDAI
Functions:
 Set guidelines and rules for forex business.
 Training the bank Personnel
 Accreditation of Forex Brokers
 Advising/ assisting member banks in settling issues/ matters
in their dealings.
 Represent members on govt. / RBI/ other bodies.
 Monitor developments
 Identify problems/ difficulties
 Ensure proper adherence.

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 Thank You

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