TERMINOLOGIES IN FOREIGN EXCHANGE MARKET
Cash date or
Trade date
The date of the transaction, say
“today”
If today is 04-02-2019, then Cash
date is 04-02-2019
Tom date Tom is short for “tomorrow” and is
the next working day from the Cash
date
If today is 04-02-2019, then Tom
date is 05-02-2019
Spot date Second working day from the Cash
date, or day after tomorrow
If today is 04-02-2019, then spot
date 06-02-2019
Spot Rate The rate quoted and transacted
today for settlement (debit/ credit) on
the Spot date
All the forex transactions get
settled on spot by default unless
specified as cash or tom.
Cash Rate The rate applicable for settlement
(debit/ credit) today itself, on the
Cash date
This is usually lower than the Spot
Rate. The difference between the
two rates is known as the Cash-
Spot rate or Cash-Spot difference.
Tom Rate The rate quoted and transacted
today for settlement (debit/ credit)
tomorrow, on the Tom date
This is lower than the Spot Rate,
but higher than the Cash Rate
OTC
(Over
the counter)
A decentralized market, without a
central physical location, where
market participants trade with one
another through various
communication modes such as the
telephone, email and proprietary
electronic trading systems.
OTC markets are primarily used to
trade bonds, currencies,
derivatives and structured
products.
Bid rate Buying rate USD/INR = 71.67/69, 71.67
buying rate
Ask rate
/Offer rate
Selling rate USD/INR = 71.67/69, 71.69 is
selling rate
Spread The difference between the bid rate
and the ask rate
USD/INR = 65.01/03,
Spread is 0.02 paise
1. Nostro account It refers to an account that a bank holds in a foreign currency with
another bank. This account is used to facilitate foreign exchange
and trade transactions. E.g SBI, FD, maintaining an account with
SBI, New York or Citi Bank New York.
2. Vostro account It is an account a correspondent bank holds on behalf of another
bank. These accounts are an essential aspect of correspondent
banking in which bank holding the funds acts a custodian for or
manages the account of a foreign counterpart
3. Derivatives It is a financial instrument whose value is derived from the value of
another asset, which is known as the underlying.
When the price of the underlying changes, the value of the
derivative also changes.
This underlying can be an asset, index or interest rate
4. Uses of derivatives It can be used for a number of purposes, including insuring against
price movements, increasing exposure to price movements for
speculation or getting access to otherwise hard to trade assets or
markets.
Examples of derivatives: Forwards, Futures, Options, Swaps
5. Forward contract It is a customized contract between two parties to buy or sell an
asset at a specified price on a future date.
Forward contract can be customized to any amount and any
delivery date or delivery period, which is provided at the initiation of
a forward contract. (Such option period of delivery shall not extend
beyond one month).
In such an arrangement, the risk of loss which might accrue
because adverse movement in the rate of exchange is sought to be
removed. It helps the exporter to crystallize the amount realizable in
terms of his own currency. Similarly, the importer is also able to
determine the cost of imports in terms of his own currency.
Similarly, it renders debtors and creditors free from the risk arising
through fluctuations in the exchange rate
6. Futures It is a standardized forward contract, a legal agreement to buy or
sell something at a predetermined price at a specified time in the
future, between parties not known to each other
7. Options It is an agreement between a buyer and seller that gives the
purchaser of the option the right to buy or sell a particular asset at a
pre-determined price on a specified date or period.
The advantage of buying an option is the opportunity of the
unlimited profit. And the opportunity loss is limited to the premium
paid.
Strike price The strike price is the price at
which a buyer of a call option can
buy the security (Foreign
currency) while for put options it is
the price at which the security
(Foreign currency) can be sold
(Put option). The strike price is
fixed in the contract and does not
fluctuate with any change in the
underlying security.
Strike price is also known as exercise
price. Option holder is the buyer of call
option/put option. Option holder has the
right but not the obligation.
Option style
An option contract can be either
American style or European style
American style options can be
exercised any time before
expiration while European style
options can only be exercise on
expiration date itself
American style option
Delivery period e.g.
1 Mar till 31 Mar, 18 Feb to 17 Mar, etc.
European Style (Fixed date)
1 Jan, 15 Feb, 23 Mar etc
Underlying
asset
The underlying asset is
the financial instrument (such as
stock, futures, a commodity, a
currency or an index) on which
a derivative's price is based
Premium In exchange for the rights
conferred by the option, the option
buyer must pay the option seller
(usually a bank) a premium for
carrying on the risk that comes
with the obligation. The option
premium depends on the strike
price, volatility, as well as the time
remaining to expiration. (In simple
terms, amount paid for buying the
option)
This can be related to an insurance
premium where the buyer of the option
must pay for having the right but not the
obligation.
Buy Call Buying a call option gives the right
to the buyer and not the obligation
to buy the currency at the strike
price.
Call option Strike Price
USDINR=72.00
Market Scenario (Spot price) on due date
USD/INR=71
USD/INR=72
USD/INR=73
@71, buyer will not exercise the call
option and will go to the forex market to
buy dollars at spot price at $ 71 which is
less than strike price of $72. (option is not
exercised)
@73, buyer will exercise the option to buy
the dollars from bank at 72(strike priceoption
exercised)
@ 72, no impact (the holder may not
exercise option, the maximum loss is the
premium paid for buying the call option)
Buy Put Buying a put option gives the right
to the buyer and not the obligation
to sell the currency at the strike
price.
Put option Strike Price
USDINR=72.00
Market Scenario (Spot price) on due date
USDINR=71
USDINR=72
USDINR=73
@71, buyer will exercise the put option
and will sell dollars at strike price(Right)
@73, buyer will not exercise the option,
and will sell the dollars in the market at
spot price (no obligation)
@ 72, no impact
ATM(At the
money)
At the money is a situation where
an option's strike price is identical
to spot price. Both call and put
options are simultaneously at the
money
(Call option (Spot-Strike Price =0)
Put option (Spot-Strike price=0)
Strike Price
USDINR=72.00
Market Scenario (Spot price) on due date
USDINR=72
Call option
72-72=0
Put option
72-72=0
ITM(In the
money)
ITM is term used to describe a call
option with a strike price that is
lower than the market price of the
underlying asset, or a put
option with a strike price that is
higher than the market price of
the underlying asset.
Call option, Spot-Strike price>0
Put option, Spot – strike price<0 p="">Strike Price
USDINR=72.00
Market Scenario (Spot price) on due date
USDINR=73
Call option (in the money)
73-72=>0
Put option
71-72<0 in="" money="" p="" the="">OTM(out of
the money)
Out of the money (OTM) is term
used to describe a call option with
a strike price that is lower than
the market price of the underlying
asset, or a put option with a strike
Strike Price
USDINR=72.00
Market Scenario (Spot price) on due date
USDINR=71
USDINR=72
price that is higher than the market
price of the underlying asset where
the option goes unexercised.
Call option, Spot-Strike price<0 p="">Put option, Spot – strike price>0
USDINR=73
Call option-OTM when market price is
USD/INR=72 as 71<72 p="">Put option- OTM when market rate
USD/INR =73 as 73>72
73-72>0
S.No Terminology Explanation
8. Swaps It is a derivative contract through which two parties exchange
financial instruments. These instruments can be almost anything,
but most swaps involve cash flows based on a notional principal
amount that both parties agree to. Usually, the principal does not
change hands. Each cash flow comprises of one leg of the swap.
One cash flow is generally fixed, while the other is variable, that
is, based on a benchmark interest rate, floating currency
exchange rate, or index price.
9. Interest rate swap It is a contractual agreement between two parties to exchange
interest payments.
10. Foreign Currency
Swap
It Is an agreement to exchange currency between two foreign
parties. The agreement consists of swapping principal and
interest payments on a loan made in one currency for principal
and interest payments of a loan of equal value in another
currency.
11. Credit Exposure
Limit
It is the sum total of Current Credit Exposure (CCE) and Potential
Future Exposure (PFE).
A common credit exposure limits (CEL) to be sanctioned for
booking forward contracts or derivatives. It needs to be assessed
and sanctioned along with regular credit limits as part of regular
appraisal. As per RBI guidelines, the exposure under derivatives
and forwards is categorized under off-balance sheet exposures
for capital adequacy norms and will form part of total
indebtedness of the customer. CEL should be grouped under
Non find based limits as other off balance sheet exposure such
as LC and BG. A separate limit needs to be calculated for imports
and exports. A single limit to be sanctioned for both Contracted
(documentary evidence) and probable exposures (past
performances)
Current Credit Exposures (CCE): Sum of negative MTMs (Mark
to Market) of the customer of the outstanding contracts
Potential Future Exposure (PFE): Notional principal times CCF
(Credit Conversion Factor) based on nature of instrument and
residual maturity
Mark to Market: It is an accounting method that records the value
of an asset per its current market price.
12. Foreign currency
loan and its types
To provide access to the international markets to the Indian
exporters, for making the exports competitive, Reserve Bank of
India has introduced this loan facility of financing the Working
Capital and Term Loan requirements by way of Foreign Currency
Loans through deployment of FCNRB funds of the commercial
Banks. FCNRB(DL) / FCNRB(TL) can be availed in USD, GBP,
EURO and YEN, subject to availability of funds
FCNRB(DL) – For working capital purposes
FCNRB(TL) – For capital expenditure
13. Buyer’s credit It is a short-term credit available to an importer from overseas
lenders for financing their imports.
The overseas banks usually lend the importer based on the letter
of comfort issued by the importer’s Bank.
14. Supplier’s credit It relates to credit for imports into India extended by the overseas
suppliers.
15. External
commercial
borrowing
It is basically a loan availed by an Indian entity from a
nonresident lender in foreign currency.
Benefits: The cost of funds is usually cheaper from external
sources if borrowed from economies with a lower rate of interest.
Routes available for raising ECB: Automatic and Approval
Methods of availing ECB
Track I Medium term foreign currency denominated
ECB with min. average maturity of 3/5
years
Track II Long term foreign currency denominated
ECB with min. average maturity of 10 years
Track III INR denominated ECB with min. average
maturity of 3/5 years
ECB - End uses falling under Negative List
• Investment in Real Estate
• Purchase of Land
• Investment in capital market
16. Foreign Currency
convertible bond-
FCCB
It is a type of convertible bond issued in a currency other than the
issuer’s domestic currency. In other words, the money being
raised by the issuing company is in the form of a foreign
currency. A convertible bond is a mix between debt and equity
instrument. The bonds also give the option to bondholder to
convert the bond into stock.
Advantages of FCCB
• FCCB issuance allows companies to raise money outside
the home country thereby enabling tapping of new markets
for investment options
• FCCBs Aare generally issued by companies in the
currency of those countries where interest rates are
usually lower than the home country.
• FCCB holder may choose to convert the bonds into equity
to benefit out of the equity price appreciation that may
have taken place.
• FCCB holder enjoy the safety of guaranteed payments on
the bond and may opt to continue with the bond if equity
conversion is not beneficial.
17. “All in cost” in
Trade credits
It includes arranger fee, upfront fee, management fee,
handling/processing charges, out of pocket and legal expenses if
any. In trade credit the ceiling is 6 M LIBOR plus 350 basis points
as advised by RBI
18. American
Depository Receipt
(ADR)
It is a security issued by a bank or a depository in United States
of America against underlying rupee shares of a company
incorporated in India.
19. Global Depository
Receipt
It is a security issued by a bank or a depository outside India
against underlying rupee shares of a company incorporated in
India.
20. Foreign Direct
Investment (FDI)
It is the investment through capital instruments by a person
resident outside India (a) in an unlisted Indian company; or (b) in
10 percent or more of the post issue paid-up equity capital on a
fully diluted basis of a listed Indian company.
21. Foreign Portfolio
Investment (FPI)
It is any investment made by a person resident outside India in
capital instruments where such investment is (a) less than 10
percent of the post issue paid-up equity capital on a fully diluted
basis of a listed Indian company or (b) less than 10 percent of the
paid-up value of each series of capital instruments of a listed
Indian company.
22. Joint Venture (JV)/
Wholly Owned
Subsidiary (WOS)
It means a foreign entity formed, registered or incorporated in
accordance with the laws and regulations of the host country in
which the Indian party makes a direct investment.
A foreign entity is termed as JV of the Indian Party when there
are other foreign promoters holding the stake along with the
Indian Party. In case of WOS entire capital is held by the one or
more Indian Company.
23. Escrow account It is a third-party account. It is a separate bank account to hold
money which belongs to others and where the money parked will
be released only under fulfillment of certain conditions of a
contract. It is a temporary pass through account as it operates
until the completion of a transaction process, which is
implemented after all the conditions between buyer and the seller
are settled. An escrow account is an arrangement for
safeguarding the seller against its buyer from the payment risk for
the goods or services sold by the seller to buyer. This is done by
removing the control over cash flows from the hands of the buyer
to an independent agent. The independent agent, i.e. the holder
of the escrow account would ensure that the appropriation of
cash flows is as per the agreed terms and condition between the
transaction parties. In India, it is widely used in Public partnership
projects in infrastructure. RBI has also permitted banks to open
escrow accounts on behalf of Nonresident corporate for
acquisition/ transfer of shares/convertible shares of an Indian
company
24. Factoring It is a financial transaction in which an exporter sells its accounts
receivable (i.e. invoices) to a third party (called a factor) at a
discount. Factoring involves the selling of all the accounts
receivable to an outside agency (Factor). A business will
sometimes factor its receivable assets to meet its present
immediate cash needs. It is a short-term financing of receivables
up to 90 days.
Benefits of Factoring
• A non-recourse factor will assume the risk of bad debt.
• Factoring is not a loan and therefore no debt obligation on
the exporter
• Improved cash flow enhances the productivity.
25. Forfeiting It is a method of export financing in which the forfeiter purchase
an exporter’s receivables at a discount price and takes all the risk
of non-payment of the importer. Forfeiting is a buying a long term
long term receivables.
Benefits to Exporter
• 100% Financing without recourse and bank credit limits
are freed to that extent.
• Receivables becomes current cash and improves financial
status of the exporter.
• The exporter can save his cost of administration and
management of the receivables.
26. Bond It is a debt instrument in which an investor loans money to any
entity(typically corporate or government) which borrows the funds
for a defined period at a variable or fixed interest rate. Owners of
bonds are debt holders or creditors of the issuer.
27. Government
Security
(G-Sec)
It is a tradeable instrument issued by the Central Government or
the State Governments. It acknowledges the Government’s debt
obligation. Such securities are short term (usually called treasury
bills with original maturities of less than one year) or long term
(usually called Government bonds or dated securities with
original maturities maturity of one year or more). In India, the
Central Government issues both, treasury bills and bonds or
dated securities while the State Government issue only bonds or
dated securities, which are called the State Development Loans
(SDLs). G-Secs carry practically no risk of default and hence are
called risk free gilt edged instruments.
28. Treasury Bills (TBills)
They are money market instruments, are short term debt
instruments issued by the Government of India and are presently
issued in three tenors, namely 91 day, 182 day and 364 day.
Treasury bills are zero coupon securities and pay no interest.
They are issued at a discount and redeemed at the face value at
maturity.
29. Packing credit It is a loan/advance granted to an exporter for financing the
purchase, processing, manufacturing and/or packing of goods
prior to shipment.
30. Packing credit in
foreign currency
(PCFC)
Preshipment/Packing Credit granted in a foreign currency is
called PCFC. The aim is to provide the access of credit to
exporters at internationally competitive rates.
31. Bills Discounting It is a facility where bank pays the amount of the bill to the drawer
in advance. These instruments are in the nature of usance or
time bills or in other words there are also bills drawn with a credit
period (usance) which are payable after the credit period. They
become due on a specified date say 60 or 90 days from the date
of drawing, after which sales proceeds are realised from the
drawee. The interest for the usance period is deducted up-front
while creating a loan.
32. Bill Purchase It refers to demand bills which are paid immediately by the bank
in advance before realisation of proceeds. This is typically the
case with sight bills, where fixed maturity is not known. The loan
will be created for the full value of the draft and the interest will be
recovered when the actual payment comes. If a bank lends
against such bills receivable, it is called as bill purchase.
33. Bill Negotiation Negotiation of bill happens if shipment is under LC terms, the
bank verifies and satisfies all necessary terms and conditions
under letter of credit and negotiate thee export bills. The invoice
amount under the said shipment is credited to exporters account.
After realization of the export proceeds from the overseas buyer,
the bank deducts the necessary bank interest from the
negotiation date till realization.
Cash date or
Trade date
The date of the transaction, say
“today”
If today is 04-02-2019, then Cash
date is 04-02-2019
Tom date Tom is short for “tomorrow” and is
the next working day from the Cash
date
If today is 04-02-2019, then Tom
date is 05-02-2019
Spot date Second working day from the Cash
date, or day after tomorrow
If today is 04-02-2019, then spot
date 06-02-2019
Spot Rate The rate quoted and transacted
today for settlement (debit/ credit) on
the Spot date
All the forex transactions get
settled on spot by default unless
specified as cash or tom.
Cash Rate The rate applicable for settlement
(debit/ credit) today itself, on the
Cash date
This is usually lower than the Spot
Rate. The difference between the
two rates is known as the Cash-
Spot rate or Cash-Spot difference.
Tom Rate The rate quoted and transacted
today for settlement (debit/ credit)
tomorrow, on the Tom date
This is lower than the Spot Rate,
but higher than the Cash Rate
OTC
(Over
the counter)
A decentralized market, without a
central physical location, where
market participants trade with one
another through various
communication modes such as the
telephone, email and proprietary
electronic trading systems.
OTC markets are primarily used to
trade bonds, currencies,
derivatives and structured
products.
Bid rate Buying rate USD/INR = 71.67/69, 71.67
buying rate
Ask rate
/Offer rate
Selling rate USD/INR = 71.67/69, 71.69 is
selling rate
Spread The difference between the bid rate
and the ask rate
USD/INR = 65.01/03,
Spread is 0.02 paise
1. Nostro account It refers to an account that a bank holds in a foreign currency with
another bank. This account is used to facilitate foreign exchange
and trade transactions. E.g SBI, FD, maintaining an account with
SBI, New York or Citi Bank New York.
2. Vostro account It is an account a correspondent bank holds on behalf of another
bank. These accounts are an essential aspect of correspondent
banking in which bank holding the funds acts a custodian for or
manages the account of a foreign counterpart
3. Derivatives It is a financial instrument whose value is derived from the value of
another asset, which is known as the underlying.
When the price of the underlying changes, the value of the
derivative also changes.
This underlying can be an asset, index or interest rate
4. Uses of derivatives It can be used for a number of purposes, including insuring against
price movements, increasing exposure to price movements for
speculation or getting access to otherwise hard to trade assets or
markets.
Examples of derivatives: Forwards, Futures, Options, Swaps
5. Forward contract It is a customized contract between two parties to buy or sell an
asset at a specified price on a future date.
Forward contract can be customized to any amount and any
delivery date or delivery period, which is provided at the initiation of
a forward contract. (Such option period of delivery shall not extend
beyond one month).
In such an arrangement, the risk of loss which might accrue
because adverse movement in the rate of exchange is sought to be
removed. It helps the exporter to crystallize the amount realizable in
terms of his own currency. Similarly, the importer is also able to
determine the cost of imports in terms of his own currency.
Similarly, it renders debtors and creditors free from the risk arising
through fluctuations in the exchange rate
6. Futures It is a standardized forward contract, a legal agreement to buy or
sell something at a predetermined price at a specified time in the
future, between parties not known to each other
7. Options It is an agreement between a buyer and seller that gives the
purchaser of the option the right to buy or sell a particular asset at a
pre-determined price on a specified date or period.
The advantage of buying an option is the opportunity of the
unlimited profit. And the opportunity loss is limited to the premium
paid.
Strike price The strike price is the price at
which a buyer of a call option can
buy the security (Foreign
currency) while for put options it is
the price at which the security
(Foreign currency) can be sold
(Put option). The strike price is
fixed in the contract and does not
fluctuate with any change in the
underlying security.
Strike price is also known as exercise
price. Option holder is the buyer of call
option/put option. Option holder has the
right but not the obligation.
Option style
An option contract can be either
American style or European style
American style options can be
exercised any time before
expiration while European style
options can only be exercise on
expiration date itself
American style option
Delivery period e.g.
1 Mar till 31 Mar, 18 Feb to 17 Mar, etc.
European Style (Fixed date)
1 Jan, 15 Feb, 23 Mar etc
Underlying
asset
The underlying asset is
the financial instrument (such as
stock, futures, a commodity, a
currency or an index) on which
a derivative's price is based
Premium In exchange for the rights
conferred by the option, the option
buyer must pay the option seller
(usually a bank) a premium for
carrying on the risk that comes
with the obligation. The option
premium depends on the strike
price, volatility, as well as the time
remaining to expiration. (In simple
terms, amount paid for buying the
option)
This can be related to an insurance
premium where the buyer of the option
must pay for having the right but not the
obligation.
Buy Call Buying a call option gives the right
to the buyer and not the obligation
to buy the currency at the strike
price.
Call option Strike Price
USDINR=72.00
Market Scenario (Spot price) on due date
USD/INR=71
USD/INR=72
USD/INR=73
@71, buyer will not exercise the call
option and will go to the forex market to
buy dollars at spot price at $ 71 which is
less than strike price of $72. (option is not
exercised)
@73, buyer will exercise the option to buy
the dollars from bank at 72(strike priceoption
exercised)
@ 72, no impact (the holder may not
exercise option, the maximum loss is the
premium paid for buying the call option)
Buy Put Buying a put option gives the right
to the buyer and not the obligation
to sell the currency at the strike
price.
Put option Strike Price
USDINR=72.00
Market Scenario (Spot price) on due date
USDINR=71
USDINR=72
USDINR=73
@71, buyer will exercise the put option
and will sell dollars at strike price(Right)
@73, buyer will not exercise the option,
and will sell the dollars in the market at
spot price (no obligation)
@ 72, no impact
ATM(At the
money)
At the money is a situation where
an option's strike price is identical
to spot price. Both call and put
options are simultaneously at the
money
(Call option (Spot-Strike Price =0)
Put option (Spot-Strike price=0)
Strike Price
USDINR=72.00
Market Scenario (Spot price) on due date
USDINR=72
Call option
72-72=0
Put option
72-72=0
ITM(In the
money)
ITM is term used to describe a call
option with a strike price that is
lower than the market price of the
underlying asset, or a put
option with a strike price that is
higher than the market price of
the underlying asset.
Call option, Spot-Strike price>0
Put option, Spot – strike price<0 p="">Strike Price
USDINR=72.00
Market Scenario (Spot price) on due date
USDINR=73
Call option (in the money)
73-72=>0
Put option
71-72<0 in="" money="" p="" the="">OTM(out of
the money)
Out of the money (OTM) is term
used to describe a call option with
a strike price that is lower than
the market price of the underlying
asset, or a put option with a strike
Strike Price
USDINR=72.00
Market Scenario (Spot price) on due date
USDINR=71
USDINR=72
price that is higher than the market
price of the underlying asset where
the option goes unexercised.
Call option, Spot-Strike price<0 p="">Put option, Spot – strike price>0
USDINR=73
Call option-OTM when market price is
USD/INR=72 as 71<72 p="">Put option- OTM when market rate
USD/INR =73 as 73>72
73-72>0
S.No Terminology Explanation
8. Swaps It is a derivative contract through which two parties exchange
financial instruments. These instruments can be almost anything,
but most swaps involve cash flows based on a notional principal
amount that both parties agree to. Usually, the principal does not
change hands. Each cash flow comprises of one leg of the swap.
One cash flow is generally fixed, while the other is variable, that
is, based on a benchmark interest rate, floating currency
exchange rate, or index price.
9. Interest rate swap It is a contractual agreement between two parties to exchange
interest payments.
10. Foreign Currency
Swap
It Is an agreement to exchange currency between two foreign
parties. The agreement consists of swapping principal and
interest payments on a loan made in one currency for principal
and interest payments of a loan of equal value in another
currency.
11. Credit Exposure
Limit
It is the sum total of Current Credit Exposure (CCE) and Potential
Future Exposure (PFE).
A common credit exposure limits (CEL) to be sanctioned for
booking forward contracts or derivatives. It needs to be assessed
and sanctioned along with regular credit limits as part of regular
appraisal. As per RBI guidelines, the exposure under derivatives
and forwards is categorized under off-balance sheet exposures
for capital adequacy norms and will form part of total
indebtedness of the customer. CEL should be grouped under
Non find based limits as other off balance sheet exposure such
as LC and BG. A separate limit needs to be calculated for imports
and exports. A single limit to be sanctioned for both Contracted
(documentary evidence) and probable exposures (past
performances)
Current Credit Exposures (CCE): Sum of negative MTMs (Mark
to Market) of the customer of the outstanding contracts
Potential Future Exposure (PFE): Notional principal times CCF
(Credit Conversion Factor) based on nature of instrument and
residual maturity
Mark to Market: It is an accounting method that records the value
of an asset per its current market price.
12. Foreign currency
loan and its types
To provide access to the international markets to the Indian
exporters, for making the exports competitive, Reserve Bank of
India has introduced this loan facility of financing the Working
Capital and Term Loan requirements by way of Foreign Currency
Loans through deployment of FCNRB funds of the commercial
Banks. FCNRB(DL) / FCNRB(TL) can be availed in USD, GBP,
EURO and YEN, subject to availability of funds
FCNRB(DL) – For working capital purposes
FCNRB(TL) – For capital expenditure
13. Buyer’s credit It is a short-term credit available to an importer from overseas
lenders for financing their imports.
The overseas banks usually lend the importer based on the letter
of comfort issued by the importer’s Bank.
14. Supplier’s credit It relates to credit for imports into India extended by the overseas
suppliers.
15. External
commercial
borrowing
It is basically a loan availed by an Indian entity from a
nonresident lender in foreign currency.
Benefits: The cost of funds is usually cheaper from external
sources if borrowed from economies with a lower rate of interest.
Routes available for raising ECB: Automatic and Approval
Methods of availing ECB
Track I Medium term foreign currency denominated
ECB with min. average maturity of 3/5
years
Track II Long term foreign currency denominated
ECB with min. average maturity of 10 years
Track III INR denominated ECB with min. average
maturity of 3/5 years
ECB - End uses falling under Negative List
• Investment in Real Estate
• Purchase of Land
• Investment in capital market
16. Foreign Currency
convertible bond-
FCCB
It is a type of convertible bond issued in a currency other than the
issuer’s domestic currency. In other words, the money being
raised by the issuing company is in the form of a foreign
currency. A convertible bond is a mix between debt and equity
instrument. The bonds also give the option to bondholder to
convert the bond into stock.
Advantages of FCCB
• FCCB issuance allows companies to raise money outside
the home country thereby enabling tapping of new markets
for investment options
• FCCBs Aare generally issued by companies in the
currency of those countries where interest rates are
usually lower than the home country.
• FCCB holder may choose to convert the bonds into equity
to benefit out of the equity price appreciation that may
have taken place.
• FCCB holder enjoy the safety of guaranteed payments on
the bond and may opt to continue with the bond if equity
conversion is not beneficial.
17. “All in cost” in
Trade credits
It includes arranger fee, upfront fee, management fee,
handling/processing charges, out of pocket and legal expenses if
any. In trade credit the ceiling is 6 M LIBOR plus 350 basis points
as advised by RBI
18. American
Depository Receipt
(ADR)
It is a security issued by a bank or a depository in United States
of America against underlying rupee shares of a company
incorporated in India.
19. Global Depository
Receipt
It is a security issued by a bank or a depository outside India
against underlying rupee shares of a company incorporated in
India.
20. Foreign Direct
Investment (FDI)
It is the investment through capital instruments by a person
resident outside India (a) in an unlisted Indian company; or (b) in
10 percent or more of the post issue paid-up equity capital on a
fully diluted basis of a listed Indian company.
21. Foreign Portfolio
Investment (FPI)
It is any investment made by a person resident outside India in
capital instruments where such investment is (a) less than 10
percent of the post issue paid-up equity capital on a fully diluted
basis of a listed Indian company or (b) less than 10 percent of the
paid-up value of each series of capital instruments of a listed
Indian company.
22. Joint Venture (JV)/
Wholly Owned
Subsidiary (WOS)
It means a foreign entity formed, registered or incorporated in
accordance with the laws and regulations of the host country in
which the Indian party makes a direct investment.
A foreign entity is termed as JV of the Indian Party when there
are other foreign promoters holding the stake along with the
Indian Party. In case of WOS entire capital is held by the one or
more Indian Company.
23. Escrow account It is a third-party account. It is a separate bank account to hold
money which belongs to others and where the money parked will
be released only under fulfillment of certain conditions of a
contract. It is a temporary pass through account as it operates
until the completion of a transaction process, which is
implemented after all the conditions between buyer and the seller
are settled. An escrow account is an arrangement for
safeguarding the seller against its buyer from the payment risk for
the goods or services sold by the seller to buyer. This is done by
removing the control over cash flows from the hands of the buyer
to an independent agent. The independent agent, i.e. the holder
of the escrow account would ensure that the appropriation of
cash flows is as per the agreed terms and condition between the
transaction parties. In India, it is widely used in Public partnership
projects in infrastructure. RBI has also permitted banks to open
escrow accounts on behalf of Nonresident corporate for
acquisition/ transfer of shares/convertible shares of an Indian
company
24. Factoring It is a financial transaction in which an exporter sells its accounts
receivable (i.e. invoices) to a third party (called a factor) at a
discount. Factoring involves the selling of all the accounts
receivable to an outside agency (Factor). A business will
sometimes factor its receivable assets to meet its present
immediate cash needs. It is a short-term financing of receivables
up to 90 days.
Benefits of Factoring
• A non-recourse factor will assume the risk of bad debt.
• Factoring is not a loan and therefore no debt obligation on
the exporter
• Improved cash flow enhances the productivity.
25. Forfeiting It is a method of export financing in which the forfeiter purchase
an exporter’s receivables at a discount price and takes all the risk
of non-payment of the importer. Forfeiting is a buying a long term
long term receivables.
Benefits to Exporter
• 100% Financing without recourse and bank credit limits
are freed to that extent.
• Receivables becomes current cash and improves financial
status of the exporter.
• The exporter can save his cost of administration and
management of the receivables.
26. Bond It is a debt instrument in which an investor loans money to any
entity(typically corporate or government) which borrows the funds
for a defined period at a variable or fixed interest rate. Owners of
bonds are debt holders or creditors of the issuer.
27. Government
Security
(G-Sec)
It is a tradeable instrument issued by the Central Government or
the State Governments. It acknowledges the Government’s debt
obligation. Such securities are short term (usually called treasury
bills with original maturities of less than one year) or long term
(usually called Government bonds or dated securities with
original maturities maturity of one year or more). In India, the
Central Government issues both, treasury bills and bonds or
dated securities while the State Government issue only bonds or
dated securities, which are called the State Development Loans
(SDLs). G-Secs carry practically no risk of default and hence are
called risk free gilt edged instruments.
28. Treasury Bills (TBills)
They are money market instruments, are short term debt
instruments issued by the Government of India and are presently
issued in three tenors, namely 91 day, 182 day and 364 day.
Treasury bills are zero coupon securities and pay no interest.
They are issued at a discount and redeemed at the face value at
maturity.
29. Packing credit It is a loan/advance granted to an exporter for financing the
purchase, processing, manufacturing and/or packing of goods
prior to shipment.
30. Packing credit in
foreign currency
(PCFC)
Preshipment/Packing Credit granted in a foreign currency is
called PCFC. The aim is to provide the access of credit to
exporters at internationally competitive rates.
31. Bills Discounting It is a facility where bank pays the amount of the bill to the drawer
in advance. These instruments are in the nature of usance or
time bills or in other words there are also bills drawn with a credit
period (usance) which are payable after the credit period. They
become due on a specified date say 60 or 90 days from the date
of drawing, after which sales proceeds are realised from the
drawee. The interest for the usance period is deducted up-front
while creating a loan.
32. Bill Purchase It refers to demand bills which are paid immediately by the bank
in advance before realisation of proceeds. This is typically the
case with sight bills, where fixed maturity is not known. The loan
will be created for the full value of the draft and the interest will be
recovered when the actual payment comes. If a bank lends
against such bills receivable, it is called as bill purchase.
33. Bill Negotiation Negotiation of bill happens if shipment is under LC terms, the
bank verifies and satisfies all necessary terms and conditions
under letter of credit and negotiate thee export bills. The invoice
amount under the said shipment is credited to exporters account.
After realization of the export proceeds from the overseas buyer,
the bank deducts the necessary bank interest from the
negotiation date till realization.
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