Introduction : ¨International trade is the exchange of capital, and services across international borders. ¨A product that is sold to the global market is an export and product that is bought from the global market is an import.
Current Account : ¨Visible trade comprise of receipt and payment towards goods/merchandise. ¨Invisible trade comprises of remittances, dividend and interest payments.
Capital Account : ¨Capital account relates to the borrowings and investments.
Balance of Trade : ¨It is a difference between visible export and visible import.
Balance of Payment : ¨It is a record of flow of economic transaction of the residents of a country with the rest of the world during a specified time period.
Meaning of Foreign Exchange
The foreign trade leads to foreign exchange ¨The foreign exchange stock include foreign currency assets, balances kept abroad, instruments payable in foreign currency and instruments drawn abroad but payable in Indian currency. ¨
¨In exchange rate system, the foreign currencies are commodities having prices, which can be bought or sold to settle transactions between parties.
¨Foreign Exchange Authorised Persons ¨AD Category I :
Commercial, State & Urban Coop. Banks. Deals in all type of foreign exchange Business. ¨AD Category II :
FFMCs (Full fledged money changers), Coop banks, RRBs. Deals in Non-Import transactions. ¨AD Category III :
Select Finanacial Institutions. Deals in transactions incidental to the foreign exchange activities.
¨RBI Guidelines for Ads in respect of Operation & Risk Management ¨
AD Cat. I banks may open/close Rupee accounts of their overseas branches/ correspondents without reference to RBI ¨Funding of account of Non-resident banks ¨Overdraft/ loans to correspondents ¨Opening of Rupee account of Exchange Houses ¨Investments by AD Cat. I banks ¨Use of FCNR(B)(Foreign Currency Non-Resident) balances ¨Facilities to Small and Medium Enterprises ¨Facilities to Resident individual ¨Loans/ Overdraft
Front office :
Dealing Room, Fund Position, Currency Position
Mid office :
Risk Management, Fixation of Risk Parameters
Back office :
Settlement, Reconciliation, Accounting
In the absence of single currency for the whole world there is a need to convert one currency to another and the mechanism by which this process is done is widely known as foreign exchange and the tool used for this conversion is the exchange rates.
Exchange rates are quoted :
For selling and buying transactions :
For different periods in different methods
¨It is OTC (over the counter) market. ¨ ¨It is global market, efficient and operate ¨ round the clock. ¨ ¨The main participants of market are :
¨Balance of payment of the country ¨Demand and supply ¨Inflation ¨Interest Rates ¨Fiscal and Monetary policy ¨Political Factor ¨Central Bank Interventions ¨Technical Reasons
¨Sometimes the value of a currency in terms of another one is not known directly. ¨In such cases one currency is sold for a common currency and then the common is exchanged for the desired currency. ¨The rate established between the two currencies is known as the cross rate. ¨Therefore cross exchange rate between two currencies is found out through their value in a common currency. ¨It is important to remember that bid and offer in trading always refer to the base currency.
Conversion rate for CHF. (Export )
Mumbai Geneva }1 USD=Rs.65.65/6700 1USD=CHF 0.9590/9600 }How many Rs. = 1 CHF ◦If 1 CHF is 0.9600 = 1 USD ◦And 1 USD = Rs. 65.65 }Therefore CHF 0.9600=USD 1=Rs.65.65 Hence 1 CHF=Rs.65.65/0.9600= Rs.68.38
Conversion rate for GBP (Import)
Mumbai London }1 USD=Rs.65.65/67 1GBP=USD1.3560/3570 }How many Rs.= 1 GBP ◦If 1 USD=Rs.65.67 ◦And 1 GBP=USD 1.3570 }Hence 1 GBP=USD 1.3570X65.67= Rs. 89.11
Premium and Discount
i) When the currency is costlier in future, as compared to spot, the currency is said to be at a premium vis-à-vis other currency.
ii) Premium is always added to both buying and selling rate.
iii) It is the base currency for which premium is mentioned.
i) When the currency is cheaper in future, as compared to spot, the currency is said to be at a discount vis-à-vis other currency.
ii) Discount is always deducted to both buying and selling rate.
iii) It is the base currency for which discount is mentioned.
Types of Merchant Rates
¨TT Buying rate:
If Nostro A/c of the bank is credited before credit to customers account.
TT buying rate will be applicable when:
For e.g. 1.A receipt of electronic remittances from abroad for credit to local A/c . 2.Payment of a foreign demand draft drawn on us. 3.Collection of foreign bills. ¨
Bill Buying rate :
When customer in India is paid before credit to nostro a/c of the bank.
for e.g. Purchase or discount of export bill.
TT Selling rate : it is applied when sell of foreign exchange takes place but import bill does not handle.
1. Issue of foreign demand draft.
2. Crystallization of overdue export bills ¨ ¨
Bill Selling rate : It is applied when there is outflow of foreign currency along with sell of foreign , import bills are handle. ¨For. Eg. Payment of the import bills.
Note: The above article are shortest and best way to read and revise the unit-01 of BFM (CAIIB).
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