INTERNATIONAL BANKING

General Bank Management (Module-A)

Live Interactive Learning SessionC.S.BALAKRISHNAN FACULTY MEMBER SIR SPBT COLLEGE 18.04.2007

Forex Market

The total turnover in Forex Market apprx. US dollar 1.5 trillion per day. Indian Market USD 1.20 BN per day. Round the clock market starting from Sydney and Tokyo in the east through Hong Kong, Singapore, Bahrain, London and New York. participants are central banks , commercial banks, investment funds, corporates, individuals and brokers. Over the counter market

FEMA ACT 1999 Defines Foreign Exchange as Foreign Exchange means & includes: a) All deposits,credits and balances payable in foreign currency,and any drafts,travellers cheques,letters of credit and bills of exchange,expressed or drawn in Indian currency and payable in any foreign currency. b) Any instrument payable at the option of the drawee or holder,thereof or any other party thereto,either in Indian currency or in foreign currency,or partly in one and partly in the other.

FX Rates

What is Exchange Rate ? Exchange Rate is a rate at which one currency can be exchanged into another currency. In other words it is value one currency in terms of other. say: US $ 1 = Rs.45.18 This rate is the conversion rate of every US $ 1 to Rs. 45.18

Factors Determining Exchange Rates

(a). Fundamental Reasons: - Balance of Payment surplus leads to stronger currency. - Economic Growth Rates High/Low growth rate. - Fiscal / Monetary Policy- deficit financing leads to depreciation of currency. - Interest Rates currency with higher interest will appreciate in the short term. - Political Issues Political stability leads to stable rates (b). Technical Reasons - Government Control can lead to unrealistic value. - Free flow of Capital from lower interest rate to higher interest rates. (c). Speculation higher the speculation higher the volatility in rates

Methods of Quotation

Method I One Orange = Rs 2 One Apple = Rs 2.50

Method II Rs. 10 = 5 Oranges Rs. 10 = 4 Apples

Price

under both the methods is the same though expressed differently

Method - I DIRECT(FC fixed) USD 1 = Rs 45.18 GBP 1 = Rs.85.99 EUR 1 = Rs 57.92

Method - II INDIRECT( HC fixed) Rs 100 = USD 2.2133 Rs 100 = GBP 1.1629 Rs 100 = EUR 1.7265

With Effect from 02.08.1993, all exchanges are quoted in Direct Method

Understanding Two Way Exchange Quotes

In Forex markets , there are two way quotes i.e. both buying and selling rates are given. 1 USD = INR 45.16/ 18 BUYING RATE $/RE = RE 45.16 SELLING RATE $/RE = RE 45.18
In the abovementioned quote, lowest is market buying rate and highest is market selling rate.

Understanding Two Way Exchange Quotes

One of the features of the FX markets is that this is the nearest form of perfect markets existing today. One of the reasons why this is so is that prices are always Quoted as TWO WAY QUOTES

USD 1 = CHF 1.2570/73

CHF 1.2570

CHF 1.2573

BUYING RATE

SELLING RATE

Understanding Exchange Rates

Dollar/Swiss Francs -- USD/CHF Note the order of the currencies USD comes before the CHF

The first currency($) - Base currency Second currency (CHF) - Terms currency It is important to remember that Bid & Offer in trading always refers to the BASE CURRENCY.

Understanding Exchange Quotes

In the FX market, Time is of great importance. Therefore, there are short forms for everything. While quoting, the dealers use only the third & fourth decimals. USD/CHF 1.2540 / 45 USD/INR 45.1675 / 00 GBP/USD 1.8000 / 10 BIG FIGURE In a live dealing scenario dealers would quote only 40/45 , 75/figure , figure/10 and the market assumes that all players already know the BIG FIGURE

Calculating Cross Rates

India is a market maker for Indian Rupee Dollar/ Rupee trading ( the first quotes) start in the Mumbai Market BUT WHAT ABOUT OTHER CURRENCIES ? WHERE DO RATES FOR CHF, GBP, EUR ETC COME FROM? HOW ARE THEY CALCULATED?

A CHF/RUPEE RATE IS A CROSS OF DOLLAR/RUPEE & DOLLAR / CHF. DOLLAR / RUPEE = 45.35/36 DOLLAR / CHF = 1.3440 / 45
CHF / RUPEE = 33.73 / 75 In other words, 45.36 / 1.3440 = 33.75 AND 45.35 / 1.3445 = 33.73

Calculating Cross Rates

India is a market maker for Indian Rupee Dollar/ Rupee trading ( the first quotes) start in the Mumbai Market BUT WHAT ABOUT OTHER CURRENCIES ? WHERE DO RATES FOR CHF, GBP, EUR ETC COME FROM? HOW ARE THEY CALCULATED?

A CHF/RUPEE RATE IS A CROSS OF DOLLAR/RUPEE & DOLLAR / CHF. DOLLAR / RUPEE = 45.16/18 DOLLAR / CHF = 1.2570 / 73
CHF / RUPEE = 35.92 / 94 In other words, 45.16 / 1.2570 = 35.92 AND 45.18/ 1..2573 = 35.94

Types of Transaction: Value Date Concept

Due to vastness of the market and origin of transactions and settlements may take place at different time zones, most of times deal dates and settlement date differs. Market uses different terminology which are used universally to avoid conflict.

Type of TXN Cash/Ready TOM

Date of Deal
15.11.2006 Wednesday 15.11.2006

Value Date
15.112006 Wednesday 16.11.06

Spot Forward

Wednesday 15.11.2006 Wednesday 15.11.2006 Wednesday

Thursday 17.11.06 Friday Any day after 17.11.06

Types of Transaction: Value Date Concept

Due to vastness of the market and origin of transactions and settlements may take place at different time zones, most of times deal dates and settlement date differs. Market uses different terminology which are used universally to avoid conflict.

Type of TXN Cash/Ready TOM

Spot Forward

Date of Deal
17.11.06 Friday

Value Date
17.11.06 Friday

17.11.06 Friday 17.11.06 Friday 17.11.06 Friday

20.11.06 Monday 21.11.06 Tuesday Any day after 21.11.06

Forward Rates

What is a Forward Rate ? Rate agreed for settlement on an agreed date in the future All rates are derived from Spot rates Forward rate is the spot rate adjusted for the premium / discount

Forward Rate = Spot Rate + / premium or discount

Premium/Discount

Forward price = Spot price plus or minus forward margin. Premium forward value of currency is higher than spot rate. A currency with lower rate of interest is said to be at premium in the forwards. Forward margins added to spot rate. Discount forward value of currency is lower than spot rate. A currency with higher rate of interest is said to be at discount. Forward margins deducted from spot rate.

Derivative Instruments
Derivatives instruments are management tools derived from underlying exposures (Assets) such as Currency, Commodities, Shares, Bonds or any other indices, used to reduce or neutralize the exposure on the underlying contracts. Derivatives could be Over the Counter (OTC) i.e. made to order or Exchange Traded Facilities which are standardized in terms of quantity, quality, start & ending dates.

What is an FX Option

An FX option contract gives the buyer (or holder) the right, but not the obligation, to:

Buy Rupees, in the case of a Rupee call/ Dollar put option, against Dollars (or sell Rupees against Dollars in the case of a Rupee put/Dollar call option); For a predetermined quantity of Rupees; At a predetermined fixed price (the strike or exercise price); On (if European style) or until (if American style) a fixed future date; For a premium (option price) negotiated at the time of dealing.

How does an FX Option Differ from a Forward

Consider an exporter who expects to receive $1MN in 3 months. The exporter can go in for
Forward contract or Option contract Forward contract performance is obligatory on the for buyer and seller.* Option contract performance is not obligatory for for option holder. Suppose , exporter goes for option contract. He will agree to sell $1 mn after 3 months. On due date, depending upon $/RE rate, he will decide to exercise the option or not.

Q.

Option pricing would depend upon Which of the following aspects?

(a) Amount (Whether market lot or small lot) (b) Strike Price (c) Spot Rate (d) Type- American or European (e) All of the above
Answer: (e)

Q.

Which of the following statement is false for a Forward Contract?

(a) (b) (c) (d)

An OTC Product Credit Risk on counter parties exists Can be for odd amount Works on Margins requirement

Answer: (d)

Q.

An Irrevocable Letter of Credit can be amended with the consent of following parties.

(a)

(b) (c) (d)

The Applicant (Buyer) and The Beneficiary (Seller). Issuing Bank and Confirming Bank. The Advising Bank & Reimbursing Bank. (a) & (B) only
Answer: (d)

Q.

Issuing Bank has to point out discrepancies in Documents negotiated under L/C to the negotiating bank within a period of:

(a) (b) (c) (d)

1 month 2 weeks 7 days Only upon receipt of objections from the applicant.
Answer: (c)

Q.

A Red Clause Letter of Credit enables the beneficiary to avail pre-shipment credit from

(a) (b) (c) (d)

L/C Issuing Bank L/C Confirming Bank L/C Advising Bank or Nominated Bank Any bank preferred by the beneficiary.
Answer: (c)

Q.

In case of an Acceptance Credit, the usance period is calculated from the date of Shipment or date of Bills of Exchange.

(a) (b) (c) (d)

Statement is true Statement is false Statement is partially true Non of the above

Answer: (a)

Q.

A Certificate of Origin accompanying documents must be issued & signed by:

(a) (b) (c) (d)

Exporter/Seller Shipping Agents Customs Officials Chamber of Commerce of Exporters Country.

Answer: (d)

Q.

Crystallization of Foreign Currency Liability of the importer to be done by the Issuing bank on the 10th day from due date of payment in case of failure on the part of importer. The conversion of Foreign Currency Liability to Rupee liability is done at:

(a) (b) (c) (d)

Bill Buying Rate TT Selling Rate Bill Selling Rate Spot Rate
Answer: (c)

Q.

Export Proceeds from any of the ACU countries should be settled under ACU mechanism except:

(a) (b) (c) (d)

Sri Lanka Nepal Pakistan Republic of Iran

Answer: (b)

Q.

Maximum amount for which AD can permit for realization of export proceeds beyond six months is:

(a) (b) (c) (d)

USD 100,000 USD 1,000,000 USD 50,000 No such limit prescribed

Answer: (b)

Q.

The Rate of interest charged for Export Finance for period up to 180 days which is stipulated by RBI is:

(a) (b) (c) (d)

At Banks BPLR Maximum BPLR minus 2.50% At Bank Rate At 9% flat.

Answer: (b)

Q.

Waiver (exemption) for submission of GR form is made in case of Export/Remittance of Foreign Exchange in which of the following case(s)?

(a) (b) (c) (d)

Gift up to Rs.5 lacs Trade Samples Export up to US $ 25000 All of the above
Answer: (d)

Q.

The GR forms are required to be signed by Customs Officials where as PP Forms (Post Parcel) is signed by APs in the case of:

(a) (b) (c) (d)

100% Advance Payment Against Letter of Credit Track Record of the Party All of the above

Answer: (d)

Q.

The NPT (Notional Transit Period) computation for Advance against Bills sent on collection, the period commences from:

(a) (b) (c) (d)

Bill of Lading Date of Bills of Exchange Date of acceptance of Bill at Branch level for collection Usance period
Answer: (c)

Q.

A mechanism by which APs finances Exporters by discounting Export Receivables without recourse to Exporter/Seller is known as:

(a) (b) (c) (d)

Factoring Guarantees Forfaiting Bill Rediscounting

Answer: (c)

Q.

IEC Code is issued by:

(a) (b) (c) (d)

RBI EXIM Bank ECGC DGFT

Answer: (d)

Q.

Credit arranged by the importer (buyer) from a bank/FI outside his country to settle payments of imports is known as:

(a) (b) (c) (d)

Suppliers Credit Buyers Credit External Commercial Borrowing GDR

Answer: (b)

Q.

NRE account can be jointly opened with

(A) With Non residents only (B) With resident only (C) with both Residents & Non Residents

Answer: (A)

Payment in rupees for purchase of foreign exchange may be done in cash , if the rupee value equivalent is not more than A) Re 1,00,000 B) Re 50,000 C) RE 2,00,000 D) None of the above

Answer (B)