BFM
INTERNATIONAL BANKING:
UNIT – 1: EXCHANGE RATES AND FOREX BUSINESS
1. Foreign Exchange: Conversion of currencies from the currency of invoice to the home currency of the exporters is called as Foreign Exchange.
2. Foreign Exchange Management Act (FEMA),1999 defines Foreign Exchange as “All deposits, credits and balances payable in foreign currency and any drafts, traveler’s Cheques, LCs and Bills of Exchange, expressed or drawn in Indian Currency and payable in any foreign currency.” 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.
3. A Foreign Exchange transaction is a contract to exchange funds in one currency for funds in another currency at an agreed rate and arranged basis.
4. Exchange Rate means the price or the ratio or the value at which one currency is exchanged for
5. Foreign Exchange markets participants are
- Central Banks - Commercial Banks - Investment Funds / Banks
- Forex Brokers - Corporations - Individuals
6. The Forex Markets are highly dynamic, that on an average the exchange rates of major currencies fluctuate every 4 Seconds, which effectively means it registers 21,600 changes in a day (15X60X24)
7. Forex markets usually operate from “Monday to Friday” globally, except for the Middle East or other Islamic Countries which function on Saturday and Sunday with restrictions, to cater to the local needs, but are closed on Friday.
8. The bulk of the Forex markets are OTC (Over the Counter).
9. Factors Determining Exchange Rates:
- Balance of Payment - Economic Growth rate - Fiscal policy
- Monetary Policy - Interest Rates - Political Issues
- Government Control can lead to unrealistic value.
- Free flow of Capital from lower interest rate to higher interest rates
- Speculative - higher the speculation higher the volatility in rates
10. Due to vastness of the market, operating in different time zones, most of the Forex deals in general are done on SPOT basis.
11. The delivery of FX deals can be settled in one or more of the following ways:
- Ready or Cash - TOM - Spot - Forward - Spot and Forward
12. Ready or Cash: Settlement of funds takes place on the same day (date of Deal)
13. TOM: Settlement of funds takes place on the next working day of the deal. If the settlement day Is holiday in any of the 2 countries, the settlement date will be next working day in both the countries.
14. Spot : Settlement of funds takes place on the second working day after/following the date of Contract/deal. If the settlement day is holiday in any of the 2 countries, the settlement date will be next working day in both the countries.
15. Forward: Delivery of funds takes place on any day after SPOT date.
16. Spot and Forward Rates: On the other hand, when the delivery of the currencies is to take place at a date beyond the Spot date, it is Forward Transaction and rate applied is called Forward Rate.
17. Forward Rates are derived from Spot Rates and are function of the spot rates and forward
premium or discount of the currency, being quoted.
18. Forward Rate = Spot Rte Premium or – Discount
19. If the value of the currency is more than being quoted for Spot, then it is said to be at a premium.
20. If the currency is cheaper at a later date than Spot, then it is called at a Discount.
21. The forward premium and discount are generally based on the interest rate differentials of the
22. In a perfect market, with no restriction on finance and trade, the interest factor is the basic factor in arriving at the forward rate.
23. The Forward price of a currency against another can be worked out with the following factors:
- 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.
24. The price of currency can be expressed in two ways i.e. Direct Quote, Indirect Quote.
25. Under Direct Quote, the local currency is variable
E.g.: 1 USD = `48.10
26. Direct Quote rates are also called Home Currency or Price Quotations.
27. Under indirect Quote, the local currency remains fixed, while the number of units of foreign currency varies.
E.g. `100 = 2.05 USD
28. Globally all currencies (Except a few) are quoted as Direct Quotes, in terms of USD = So many
29. Only in case of GBP (Great Britain Pound) £, €, AU$ and NZ$, the currencies are quoted as
30. Japanese Yen being quoted per 100 Units. (To type GBP symbol £ in key board : Pressing and holding the ALT with the left hand while a short code 1, 5, 6 is typed in on the keypad with the right hand. The ALT key is then released and the £ symbol appears). (To type Euro symbol in Key board : Pressing and holding the ALT with the left hand while a short code 0,1,2,8 is typed in on the keypad with the right hand. The ALT key is then released and the € symbol appears.)
31. Cross Currency Rates: When dealing in a market where rates for a particular currency pair are not directly available, the price for the said currency pair is then obtained indirectly with the help of
32. How to calculate Cross Rate?:
The math is simple algebra: [a/b] x [b/c] = a/c
Substitute currency pairs for the fractions shown above, and you get, for instance,
GBP/AUD x AUD/JPY = GBP/JPY.
This is the implied (or theoretical) value of the GBP/JPY, based on the value of the other two pairs.
The actual value of the GBP/JPY will vary around this implied value, as the following calculation shows. Here are Friday's actual closing BID prices for the 3 currency pairs in this example (taken from FXCM's Trading Station platform):
GBP/AUD = 1.73449,
AUD/JPY = 0.85535 and
GBP/JPY = 1.48417.
Now, let's do the math:
GBP/AUD x AUD/JPY = GBP/JPY
1.73449 x 0.85535 = 1.4836, which is not exactly the same as the actual market price. Here's why.
During market hours (Sunday afternoon to Friday afternoon, EST), all prices are LIVE, and small departures from the mathematical relationships can exist momentarily.
33. Fixed Vs Floating Rates:
- The fixed exchange rate is the official rate set by the monetary authorities for one or more currencies. It is usually pegged to one or more currencies.
- Under floating exchange rate, the value of the currency is decided by supply and demand factors for
34. Since 1973, the world economies have adopted floating exchange rate system.
35. India switched to a floating exchange rate regime in 1993.
36. Bid & Offered Rates: The buying rates and selling rates are referred to as Bid & Offered rate.
37. Exchange Arithmetic – Theoretical Overview:
- Chain Rule:
It is used in attaining a comparison or ratio between two quantities linked together through another or other quantities and consists of a series of equations.
- Per Cent or Per mile:
A percentage (%) is a proportion per hundred. Per Mile means per
38. Value Date:
The date on which a payment of funds or an entry to an account becomes actually effective and/or subjected to interest, if any. In the case of TT, the value date is usually the same in
39. The payments made in same day, so that no gain or loss of interest accrues to either party is called as Valuer Compensate, or simply here and there.
40. Arbitrage in Exchange: Arbitrage consist in the simultaneous buying and selling of a commodity in two or more markets to take advantage of temporary discrepancies in prices.
41. A transaction conducted between two centers only is known as simple or direct arbitrage.
42. Where additional centers are involved, the operation is known as compound or Three (or more)
43. Forex Operations are divided into 3:
1) Forex Dealer
2) Back Office
3) Mid Office
INTERNATIONAL BANKING:
UNIT – 1: EXCHANGE RATES AND FOREX BUSINESS
1. Foreign Exchange: Conversion of currencies from the currency of invoice to the home currency of the exporters is called as Foreign Exchange.
2. Foreign Exchange Management Act (FEMA),1999 defines Foreign Exchange as “All deposits, credits and balances payable in foreign currency and any drafts, traveler’s Cheques, LCs and Bills of Exchange, expressed or drawn in Indian Currency and payable in any foreign currency.” 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.
3. A Foreign Exchange transaction is a contract to exchange funds in one currency for funds in another currency at an agreed rate and arranged basis.
4. Exchange Rate means the price or the ratio or the value at which one currency is exchanged for
5. Foreign Exchange markets participants are
- Central Banks - Commercial Banks - Investment Funds / Banks
- Forex Brokers - Corporations - Individuals
6. The Forex Markets are highly dynamic, that on an average the exchange rates of major currencies fluctuate every 4 Seconds, which effectively means it registers 21,600 changes in a day (15X60X24)
7. Forex markets usually operate from “Monday to Friday” globally, except for the Middle East or other Islamic Countries which function on Saturday and Sunday with restrictions, to cater to the local needs, but are closed on Friday.
8. The bulk of the Forex markets are OTC (Over the Counter).
9. Factors Determining Exchange Rates:
- Balance of Payment - Economic Growth rate - Fiscal policy
- Monetary Policy - Interest Rates - Political Issues
- Government Control can lead to unrealistic value.
- Free flow of Capital from lower interest rate to higher interest rates
- Speculative - higher the speculation higher the volatility in rates
10. Due to vastness of the market, operating in different time zones, most of the Forex deals in general are done on SPOT basis.
11. The delivery of FX deals can be settled in one or more of the following ways:
- Ready or Cash - TOM - Spot - Forward - Spot and Forward
12. Ready or Cash: Settlement of funds takes place on the same day (date of Deal)
13. TOM: Settlement of funds takes place on the next working day of the deal. If the settlement day Is holiday in any of the 2 countries, the settlement date will be next working day in both the countries.
14. Spot : Settlement of funds takes place on the second working day after/following the date of Contract/deal. If the settlement day is holiday in any of the 2 countries, the settlement date will be next working day in both the countries.
15. Forward: Delivery of funds takes place on any day after SPOT date.
16. Spot and Forward Rates: On the other hand, when the delivery of the currencies is to take place at a date beyond the Spot date, it is Forward Transaction and rate applied is called Forward Rate.
17. Forward Rates are derived from Spot Rates and are function of the spot rates and forward
premium or discount of the currency, being quoted.
18. Forward Rate = Spot Rte Premium or – Discount
19. If the value of the currency is more than being quoted for Spot, then it is said to be at a premium.
20. If the currency is cheaper at a later date than Spot, then it is called at a Discount.
21. The forward premium and discount are generally based on the interest rate differentials of the
22. In a perfect market, with no restriction on finance and trade, the interest factor is the basic factor in arriving at the forward rate.
23. The Forward price of a currency against another can be worked out with the following factors:
- 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.
24. The price of currency can be expressed in two ways i.e. Direct Quote, Indirect Quote.
25. Under Direct Quote, the local currency is variable
E.g.: 1 USD = `48.10
26. Direct Quote rates are also called Home Currency or Price Quotations.
27. Under indirect Quote, the local currency remains fixed, while the number of units of foreign currency varies.
E.g. `100 = 2.05 USD
28. Globally all currencies (Except a few) are quoted as Direct Quotes, in terms of USD = So many
29. Only in case of GBP (Great Britain Pound) £, €, AU$ and NZ$, the currencies are quoted as
30. Japanese Yen being quoted per 100 Units. (To type GBP symbol £ in key board : Pressing and holding the ALT with the left hand while a short code 1, 5, 6 is typed in on the keypad with the right hand. The ALT key is then released and the £ symbol appears). (To type Euro symbol in Key board : Pressing and holding the ALT with the left hand while a short code 0,1,2,8 is typed in on the keypad with the right hand. The ALT key is then released and the € symbol appears.)
31. Cross Currency Rates: When dealing in a market where rates for a particular currency pair are not directly available, the price for the said currency pair is then obtained indirectly with the help of
32. How to calculate Cross Rate?:
The math is simple algebra: [a/b] x [b/c] = a/c
Substitute currency pairs for the fractions shown above, and you get, for instance,
GBP/AUD x AUD/JPY = GBP/JPY.
This is the implied (or theoretical) value of the GBP/JPY, based on the value of the other two pairs.
The actual value of the GBP/JPY will vary around this implied value, as the following calculation shows. Here are Friday's actual closing BID prices for the 3 currency pairs in this example (taken from FXCM's Trading Station platform):
GBP/AUD = 1.73449,
AUD/JPY = 0.85535 and
GBP/JPY = 1.48417.
Now, let's do the math:
GBP/AUD x AUD/JPY = GBP/JPY
1.73449 x 0.85535 = 1.4836, which is not exactly the same as the actual market price. Here's why.
During market hours (Sunday afternoon to Friday afternoon, EST), all prices are LIVE, and small departures from the mathematical relationships can exist momentarily.
33. Fixed Vs Floating Rates:
- The fixed exchange rate is the official rate set by the monetary authorities for one or more currencies. It is usually pegged to one or more currencies.
- Under floating exchange rate, the value of the currency is decided by supply and demand factors for
34. Since 1973, the world economies have adopted floating exchange rate system.
35. India switched to a floating exchange rate regime in 1993.
36. Bid & Offered Rates: The buying rates and selling rates are referred to as Bid & Offered rate.
37. Exchange Arithmetic – Theoretical Overview:
- Chain Rule:
It is used in attaining a comparison or ratio between two quantities linked together through another or other quantities and consists of a series of equations.
- Per Cent or Per mile:
A percentage (%) is a proportion per hundred. Per Mile means per
38. Value Date:
The date on which a payment of funds or an entry to an account becomes actually effective and/or subjected to interest, if any. In the case of TT, the value date is usually the same in
39. The payments made in same day, so that no gain or loss of interest accrues to either party is called as Valuer Compensate, or simply here and there.
40. Arbitrage in Exchange: Arbitrage consist in the simultaneous buying and selling of a commodity in two or more markets to take advantage of temporary discrepancies in prices.
41. A transaction conducted between two centers only is known as simple or direct arbitrage.
42. Where additional centers are involved, the operation is known as compound or Three (or more)
43. Forex Operations are divided into 3:
1) Forex Dealer
2) Back Office
3) Mid Office
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