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* Exchange rate mechanism:

time zones involved- settlement time- determining contract
ways of settlement
- spot basis: T+2 , eg if on monday settlement date on wednesday
- ready/cash basis: same day
- Tom basis: T+1
- Forward : settlment takes place on futute date
* Exchange rates and forex business
FEDAI : foreign exchaneg dealers association of India
-guidelines: underlying exposure, definite amt date specified,
option period specified delivery not greater than month
- other restriction (banks)
-allowed to open/close rupee a/c, foreing a/c, invest in
money market/ debt instrument (less than one year), allow
client to book forward to hedge their risk
* Markets
- individuals (student persuing study abroad)
- business enttites
-commercial (accpeting deposti lending/invest) and investment banks
(advisory services, exotic derivatvie products, merger & eval)
- central banks (rbi,
- investor (fx denomited bonds, debentures, equit)
- arbritators- price diferen in two market
- speculaors:
-forex brokers ( on behalf of bank purc/sale of fx currency)
- hedge funds
- electronic form
- over the counter
- price discover
- Majors: USD, EUR, JPY, CHF (swiss francs), AUD, GBP
* Sampling methods
when these terms descirbe population - parameters
descirp sample - statistics
* when sd is high curver is short and wide
when sd is small curve is tall and narrow
- skewness
in sys distri - mean, median, mode are equal
in positive skyew dis - mean<median > mode
in negativ ske dis - mean< median < mode
- 4 trillion daily turnover
- highly liquid
* risks relating to forex operations
-transaction - normal operations
- translation - revaluation inhome currency, eg bank statement
- operating - external factors
settlement risk : counterparty risk
- receipts and payments on individual basis

- pre settlement - bankruptcy,

- call risk
* country risk:
* Non-resident accounts
* PIO other then banglades and pakistan
* Nro deposit rates can't be more than resident interest
* Export Decalaration forms:
1. GR other than post
2. PP by post parcel
3. softex form
4. necessary docs - sdf with shipping bills
regulation 4 : 23/2000 date 3.5.2000 fema
- free samples, persoanl effe, deffective goods for repairs
* Faciliteis for exporters and importers:
- Agency commison : reduction in invoice value of exports -GR form
- reduction in invoice val:
conditions to be met for redution by AD
- reduction < 25%
- not subject to export quota/ floor price restriction
- the exporter is not on exporter's caution list of RBI

Claims against export

refund of export proceeds
exetension of time limit: ext form
extension of time and self write-off

- Effective date of realization: date of credit in nostro ac

- Foreign currency accounts: overseas foreign currency a/cs
diamon dollar account (track record of 2 year and 3 cr turnover)
* Export Finance
- Preshipment finance
- Postshipment finance
Preshipment finance
- packing credit
- advance against dutydrawback ( goverenment receviables)
Post-shipment finance
- export bill purchased/negoticated/collection basis/
consignment basis/ undrawn balance/ duty drawbacks
- method of packing credt
- Firm Order
- lC:
Broad guidlins
Presanction: cutomer, IEC, rbi list, ECGC list (not), capacity
expected turnover, duration of packing credit 180/360

Post sanction: No PC for same LC from any bank

- Stock statement, regulattion, Inform ECGC, advise liquidated
incase exports do not take place after PCL advance traeted
advance treated as local, locat penal
interst rate charges
- Special Cases
Packing credit advance exteded EOH and manufacture of goods
Banks autorhised to grant pre-shipment advance running acout
* Post- Shipment finance
advance against recivable in form of export doccuments
-involves handling of export douccment and send to forieng
different types of post-shipment finance
- Export bills - purchased/discounted
- negotiated
- collective bases
- consignment basis
- Undrawn balance
- advance against claims of dutydrawback
bill collection - sending doccuemnts to buyer bank
bill disocounting - get amt while submitting doccuments
Duty drawback: inhouse concession is given if cost of
prodcut> greater the international market price
* Factoring
Debt administration - managing sales ledger fo clietn
credit protection : factors assess credit risk and advise
facotor financing : advacne about 75-80% outstandin debts
Facotroring mechanism : exporter- export factor - import factro
if non-payment of dues import facotr makes the payment
* systems in which factoring can be done:
sigle/two factor/ dicre export/ direc import
* features of factoring
discouting, fixed rate, debt in form of bill of exce, promissory
note, without recourse to seller
* Exchange trade guidelines for importers:
- export-import code number
* Advance remmittance for import of goods
permitted to allow advance remmitance without any ceiling
for import of goods
- amt upt usd 200000
- exceeds usd 200000 a gurantee/irrovacable LC internatl reput bank
- eceeds usd 100000 a gurantee/ standby Lc international/domestic
- gurantee not insisste if BOD approves (2-3 lakh$)
- above > 500000 sent to rbi
- docc evidence indicating cost of goods and advance pay

- importer should hold Exchange control copy valid import liscece

* Evidence of Import
submit exchange control copy to ADS otherwise Rbi
companies with NW <100 cr listed ADs accpet BOE or doc signed
by ceo (remittance <1000000 usd)
* Trade credit for importers
Suppliers credit credit for imports extended by over supplie
Buyers credit: loans for pay of import into india arranged
by importer froma bank or fina innstu outside india
* Functions of Exim Bank:
- financing programes
- deferred payment exports: a: export of capital and capital
b: consumer durables and industrial manufacture
- assistance for project exports:
Civil, turnkey proje, consultancy, supply contracts
- other services and programmes:
consultany, overseas, imort loan, internation merch,
project liablit, export vendor
- Line of credit programm for other countries
- Financiing programe: loans to other banks
Pre-shipment credit: provid fin to compan execut ex contrac
with cycle time of six months
- term loans for export production:
- oversear investment financ
- fiannce for export marketing: by world bank

lending actvit to foreing by exmi bank

ovesear buyer credit
line of credit
re-lening facility to ovesar banks

- loans to commercial banks: export bill re-disc, refian of

export credit
- deffered payment exports/project export - avialal for
consultancy, technolgy other services
* other services and programmes:
Export marketing fund: cover upto 50% of marketing activiitesp
- product liability insurance: PLI premium
- export vendor development lending programmes
* LOC programmes - risk free non-recourse export financi programee
benefiacry govt 3-5 years
* FEMA foreign exchange management act 1999
* crystalliazation of over due bill: 30th day after ntp and Ndd
- EEFC A/c
non -interes bearing currennt ac

- Section: FERA 165/95-RB exemption on gifting of f exc held in

* Risk Management:
risks in banking business:
the banking book includes all advances,dep, borrw
risk - liquidity, interest, default, credit, operational risk
Trading book: profit or loss is the diffrerenc between
the market price and book value
risk - market risk, market liquidity risk, default/ credit
risk, operational risk
-Market risk:
equity risk: change in stokc price
interest rate risk: currency risk, commodity rissk
-interest rate risk
*types of bonds
- government bonds: issued by national govt denominated in
country's own currency; 5-30 years; (sovereing bonds);
safe = (collect tax, create additional currency)
- Zero coupon bond: not provide coupon till maturity
- floating r bond: variable coupon + spread
- convertible bond : can be converted into shart
- callable: issuer has the rightnot obligation to buy back bond
- when the coupon rate is same as interest rate bonds sells
at face value
* when bond purchased at discount YTM > coupon rate
* risk in bond investment
- interest rate risk
- default risk - differenc in the yield of a govt bond
and corporate bond) - defualt premioum/ risk premium
* If bonds' YTM increases the ROR during the period will be
less than the yield and if the yield decreases, the ROR will
be greater than the yield
*sampling methods:
the graph of normal distribution depends upon 2 facotors
- kurtosis:
measure of deviation of distribution
High kurtosis - less data concen toward mean
-low kurtosis - more data conenctrate towar mean
three major diist types
leptokurtic: kurtos > normal di
platykuric : kurtosis < norma disk
mesokurtic: zero excess kurtosis

*sampling methods
-judgmental sampling:non-probablity method, based on exprience
- biased sampling: sample do not truly represent population
-radno: simple, systmatic, strait, culuster
simple: with replacement: items saples placed picked again population
withou replace: not placed bankc can't be picked
- systematicc: every nth element is selected from sample
- central imite theorem based on with replacement
- pdf curves of stock returns negatively skewed
- when sampling the sample mean gives expected mean of pouplulation
- correlation between 2 evetns not assure one event cause of
- scattehr diagram usually shows one of the six possible
correlation between the variables
- scatter diagram
best fit line has min residual error,
coeficitn of correlation dentoted by r
* variation in time series:
Secular trend:
cyclic fluctation:
seasonal variation:
Irregular variation:
secular trend: expect to sustain over long term
eg- steady increase in cost of living - effective increase
Irregular variati: tsunami, earth quakee
coding: susbstracting mean value from each period in series
cal varry depedning uopon observation even/odd
- seasonal variatio: repetive trend in one year or less
effect of periodic variation in time-series
- sesonalit used to study regular priod effe (within year)
cyclity for longer irregular moves
* Credit management
nationazliaion: 1969 - priority sector
- aspects inclued in loan policy
exposure limits, individual, sector, discretionary powers,
- credit appraisal
-delivery- creating charge over security, method of delivery,
and the procedure for disbursal of term loan
- credit monitoring: optimum utilization of banks funds

reduce default
-rehablilit & recovery
genuie/wilful, genuine - rehablitation, wilful - recover process
- refinance: nabard, sidbi, rbi
* role of rbi in credit management
*analysis of financial statements
incase of banking companies bala shee & pf format - br act
schedule 6th of companies act
* sample questions 2015 by murgan
60% of samll entereprise advance to micro entrprise for foreign
- equilibrium price- market clearing price
- returns on bond which are at premium > current yield
- as standered error decreases, value of sample mean closer
to value of population mean
- decreasing standare erro increasing prec sample mean
can be used to estimate the population mean
- the conduct of LC business is governed by UCPDC 600
- regulated interest rates of rbi, applicable to credit
limit 2 lakh
- priorty sector target for foregin banks - 32%
- if Market price < face valuef , ytm > CR
- job enrichment means higher responsibility
- rbi purchases govt bond - money injected into economy
- when rbi sells govt bons money is sucked from market
* Computation of GDP
- Expenditure method
GDP = conusmption + gross invest + govt spending + (Ex-IM)
consumption: peronsal expediture food,household
gross invest: construction, purcha machin, equip
not investment in financial prodcuts
- Income method
assuem to equal aggregate of incomes generated through
goods manufacuturing and service renderment
GDP = compensation of empl(wages + property income (rent from
goods/service generation activiites) + product tax and dep
on capital
compensation of employees: rep wages, salr and other suppl
property income: corporate profit, propteri income and

interest and rents

market price is the economic price goods/servi offered
cal can yeild 2 diff no:
- GDP at market price: value of o/p at market prices
- gdp at factor cost: measures o/p in terms of factors of
- Prodcut-Wise method:
Nominal gDp
real gdp - does not take inflation/deflation - real growth

* bfM
Crystallization of contigent liabilities called call risk
- in bal sheet of bank = liabilite: sources of fund
asets application of funds
* components of bank's liabilites
capital: sharholders/owner's stake in captial
reserves: statutory requirement
depostts: cheap source, current, saving, term, recurring
borrowing: rbi, IDBI, NABARD, exim
provision: bills payable, sal payable, tax payable,
interest accru
- bank's asset
cash and bal with rbi:
cash in hand, balances with rbi, bal with banks, money
at call and short notice
- investments: gov sec, apprvoe sec, shardes, debent
-Advances: cash credit, term loans, bills purchase and
- profit loss acc of bank
: Income
fee based: advisory servies;
interest based income:
trading income; other income
- intest expen: interst income > interst expens
NII, when expressed as %age of assets called net int margin
- asset default when not paid inteste in last 180 days
- factors negatively effecting liquidity
decline earning, decrease in quality of assets,
uncertainity in cash flows, downgrading by rating agencies
- liquidity risk
funding risk: uanticipated - liability in foreign currencies
timing mismatch:

- measuerment of liqudity risk ma

- stock approah:
- liquidity risk mitigation:
* interest rate risk management:
earning losses: less NIM, NIM + but opeartional expenses high
economic losses:
* soucres of intersat rate risk:
- conession ROI post-ship financ valid: 90 days