FOREIGN EXCHANGE MARKETS & EXCHANGE RATE MECHANISM

MAJOR FOREX MARKETS

(a) Spot Markets (b) Forward markets Futures market (d) Options markets (e) SWAPs Markets Future Swaps and Options are called Derivatives

Most active Forex market is UK (London)followed by USA, Japan, Singapore, Switzerland, Hongkong , Germany , France and Australia . All other markets combined together , represent only 15 Percent of the total volume, traded globally.

FOREIGN EXCHANGE TRANSACTION

1. PURCHASE TRANSACTION -Bank acquires Foreign Exchange and parts with Home Currency . 2. SALE TRANSACTION -Bank acquires Home Currency and Parts with the Foreign Currency

FOREX QUOTATION
Direct Quotation - Exchange rate is expressed as price per unit of Foreign Currency in terms of home currency. Number of units of Foreign Currency is constant and any change in the exchange rate will be made by changing the value in terms of rupees.MAXIM BUY LOW;SELL HIGH

Indirect Quotation -It is the commodity of the trade-in. Foreign currency which is varying in accordance with the change in the exchange rates. For a fixed unit of home currency the bank would acquire more units of foreign currency while buying and part with lesser units of foreign currency while selling. MAXIM BUY HIGH ;SELL LOW

RECIPROCAL QUOTATION --Currencies can be quoted in terms of number of units of currency X to per unit of currency Y , or the number of units of currency Y per unit of X. The two rates represent equal value and are reciprocal . Eg . 1 USD=Rs 42.55 is same as 1 Rs =$0.02350

POINTS & PIPS Point --- 4 decimals( 0.0001) PIPS ---5th decimal place is pip (0.00001)

TERMS
-SPOT The transaction where the exchange of currencies takes place two days after the date of contract FORWARD The delivery of foreign currency and payment in rupees takes place after a specified future date . FORWARD RATE =SPOT RATE---AT PAR FORWARD RATE SPOT RATE =FORWARD MARGIN

PREMIUM Foreign currency is costlier under forward rate than under the spot rate DISCOUNT Foreign currency will be cheaper for the forward delivery than for spot delivery. DIRECT RATE ADD PREMIUM MINUS DISCOUNT FORWARD RATE - SPOT RATE = FORWARD MARGIN = SWAP POINTS

SPOT CONTRACTS
- Simplest and used by Corporate to cover their receivables and payables Commitment by a client to buy or sell one currency against another at a fixed rate for delivery two business days after the transaction

CURRENCY SWAPS
-Extended Forward contract and normally for periods beyond one year. An Indian Company that has raised Foreign Currency can exchange the same thereby matching their liabilities. Companies have to execute ISDA documentation with the Bank

FORWARD RATE AGREEMENT ( FRA)

Provides means for hedging the interest rate risk arising on account of lending or borrowing made at fixed/ variable interest rates. FRA is agreement between Bank and customer to exchange interest payments for a notional principal amount. On settlement date, for a specified period from start date to maturity date

FORWARD CONTARCTS
Commitment by the client to buy or sell currency at a fixed rate for delivery on a specified future date. FIXED( Date Specified ) / OPTION FORWARD CONTRACTS Option period of delivery should not be more than 1 month. Option is with the customer ( Rule 7 , FEDAI )

Regulations
Documentary evidence be there Maturity of hedge should not exceed maturity of underlying transaction Currency of hedge and tenor are left with choice of customer Contracts having rupee value can be rebooked after cancellation/ rolled over Substitution of contracts permissible

EXCHANGE RATES -BUYING

A. TT BUYING RATE Dollar/ Rupee market spot rate ---Rs--Less Exchange margin --- Rs --TT BUYING Rate *For DD/MT/TT

Rounded off to 0.0025 -Nostro credits - cancellation of Foreign Exchange sold earlier

BILLS BUYING RATE Dollar/ Rs Market spot rate ----Rs -Add Forward Premium ----Rs -Less Forward discount Less Exchange Margin ------- Rs -BILLS BUYING RATE ----Rs
*EXPORTS(FDBP/FBP)

Rounded off nearest 0.0025

EXCHANGE RATES

SELLING

TT SELLING RATE *Issue DD/MT/TT Dollar/ Rs Spot Market selling rate Add Exchange Margin +----TT SELLING RATE ADD + Exchange margin --------BILLS SELLING RATE-------------* IMPORTS

QUESTION
On 10/10/2003, an exporter at Oriental bank of Commerce, A Block, New Delhi Branch has tendered a demand bill for USD 1,00,000 drawn on New York. The spot rates as per the rate chart are: Spot ---------- USD = Rs 43.30000/3500 Spot Sept/October 6000/7000 October 8000/9000 November 10000/1000 Transit Period is 20 Days. The Exchange margin of 0.15% is required.

--Contd -Interest on the export Finance is 10%p.a. The Exporter opts to retain 15% of the proceeds in US Dollars Please Compute 1. The Rate at which the bill will be Purchased 2. The Rupee Equivalent Payable to the Exporter Interest to be recovered from the Exporter

ANSWER
Since the currency is on Premium, the transit period will be rounded off to the lower month i.e. NIL and the rate will be based on spot rates Dollar / Rupees Spot market rate 43.30000 Less Exchange Margin 0.06495 43.23505 Rounded off 43.2350

--Contd_Exporters Account will be credited USD 85000 X 43.2350 = 36,74,975 Interest charged on Rs 36,74,975 at 10% for 20 days =Rs 20137 ------------------------------------

On 12th February your customer has received an import bill for USD 10000/-. He asks you to retire the bill to the debit of his account . Interbank rate for Dollar is Spot --USD 1=Rs48.7050/7200 Spot/March 5000/4500 You require an exchange margin of 0.15%for TT sales and 0.20% for bills Selling rate. What amount will you debit from his account?

The Bank will be quoting at market selling rate = 48.7200 Add Margin0.15% +0.07308 TT selling Rate 48.79308 Add Margin 0.20% +0.09759 Bills Selling Rate 48.89067 Round Off 48.8900 Customer to be debited 48.89067x10000=Rs 488900