A Report

on
Forex
Submitted in the partial fulfillment for the award of
BBA-FINANCE

By
Abhishek Chohan
(AY: 2017-2020)
Roll Number: 11101
Under the supervision of
Shri Pradeep Kumar Sehrawat
(Deputy General Manager)
Treasury Department IDBI Bank

World Trade Center, IDBI Bank

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 ACKNOWLEDGEMENT
Accomplishing the projects of this scope cannot be credited to an
individual alone. Here, I feel pleasure to express my gratitude to
the people who have helped me in all the phases of my research
study and without whom my project may not have been in this
form. I would like to list the few who helped me during my study:
Ms. Shree Deepa (HR Department), IDBI Bank for approving the
project.
Mr.Pradeep Kumar Sehrawat my project guide and DGM
Treasury Department), and Mr. Tripurari Panda AGM (Treasury
Department) for taking time off their busy schedule, enriching my
experience here at IDBI bank and providing me with valuable
suggestions for shaping my understanding of the domain and also
providing me with the details of the project and answering my
queries patiently.
I am also thankful to all the employees of IDBI bank, Mumbai who
gave their precious time and support during the entire internship
program.
Finally, I would like to express my sincere thanks to Ms. Lawly
Das (HOD-BBA Department, Modern College, Pune) and all my
friends who helped me in making this project a success.

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 DECLARATION BY THE STUDENT
I, Abhishek Chohan, Roll no.11101 of the batch of BBA 2017-20
of Progressive Education Society’s Modern College, Pune hereby
declare that the Internship report work is my original work carried
out at IDBI Bank.

I have not copied from any other students’ work or from any other
sources except where due reference or acknowledgement is
made explicitly in the text, nor has any part been written for me by
another person.

This declaration is made on the ……………..day

of……………..201 at Mumbai

Sign of the student:

3
CERTIFICATE

4
 INDEX
S.No. Particulars Page
No.
1)
Introduction 6

2)
Company Profile +SWOT Analysis 7-25

3)
Treasury 26-29

4)
Treasury Front Office(TFO) 30-34

5)
Forex 35-49

6)
Forex in IDBI Bank 50-

7)
Conclusion

8)
Bibliography

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 INTRODUCTION
OBJECTIVE OF THE STUDY
MAIN OBJECTIVE
-This project attempt to study the intricacies of the foreign
exchange market.
-The main purpose of this study is to get a better idea
and comprehensive details of foreign exchange risk
management.

SUB OBJECTIVES

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 -To know about the various concept and technicalities
in foreign exchange.
-To know the various functions of forex market.
-To get the knowledge about the hedging tools used in foreign
exchange.

2.Company Profile + SWOT

2.1.BANKING SECTOR IN INDIA

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The Banking industry plays a dynamic role in the economic
development of a country. Today, the Indian Banking System is
known the world over for its robustness.

In the past three decades the growth in India's banking

system has been incredible. The most striking has been its
extensive reach. It is no longer confined to only metropolitans; in
fact, Indian banking system has reached the remotest corners of
the country. This has been one of the main reasons of India's
growth process. The government's regular policy for Indian bank
since 1969 has paid rich dividends with the nationalization of 14
major private banks of India.

The first bank in India, though conservative, was established in

1786. From 1786 till today, the journey of Indian Banking System
can be segregated into three distinct phases. They are as
mentioned below:

 Early phase from 1786 to 1969 of Indian Banks.

 Nationalization of Indian Banks and up to 1991 prior to
Indian banking sector Reforms.
 New phase of Indian Banking System with the advent of
Indian Financial & Banking Sector Reforms after 1991.

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After 1991, under the chairmanship of Mr. M.Narasimham, a
committee was set up which worked for the liberalization of
banking practices.

Structure of Indian Banking Industry

9
The Reserve Bank of India is the Central/Apex Bank which
regulates the functioning of all banks operating within the country.
The banking system, largely, comprises of scheduled banks
(banks that are listed under the Second Schedule of the RBI Act,
1934). Unscheduled banks form a very small component (function
in the form of Local Area Bank). Scheduled banks are further
classified into commercial and cooperative banks, with the basic
difference in their holding pattern. Cooperative banks are
cooperative credit institutions that are registered under the
Cooperative Societies Act and work according to the cooperative
principles of mutual assistance.

Major players
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 in

Indian Banking Industry

Public Sector Banks (PSB):

Public Sector Banks (SBI and associates + Nationalized banks)
control more than 74-75% of the total credit and deposits
businesses in India whereas Private Sector Banks around 17-
18%. Public Sector Banks (PSBs) are banks where a majority
stake (i.e. more than 50%) is held by a government. The shares
of these banks are listed on stock exchanges. There are a total of
21 PSBs in India. Like-Andhra Bank, Bank of India, Bank of
Baroda & Punjab National Bank ,etc. State Bank of India
(SBI) and Industrial Development Bank of India (IDBI) Bank often
11
mentioned in this list are regarded as PSUs and not as
nationalized banks themselves.

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2.2.ABOUT IDBI Bank Ltd.
IDBI Bank Ltd. is one of India's largest commercial Banks. For
over 40 years, IDBI Bank has essayed a key nation-building role,
first as the Apex Development Financial Institution (DFI) (July 1,
1964 to September 30, 2004) in the realm of industry and
thereafter as a full-service commercial Bank (October 1, 2004
onwards). As a DFI, the erstwhile IDBI stretched its canvas
beyond mere project financing to cover an array of services that
contributed towards balanced geographical spread of industries,
development of identified backward areas, emergence of a new
spirit of enterprise and evolution of a deep and vibrant capital
market. On October 1, 2004, the erstwhile IDBI converted into a
Banking company (as Industrial Development Bank of India
Limited) to undertake the entire gamut of Banking activities while
continuing to play its secular DFI role. Post the mergers of the
erstwhile IDBI Bank with its parent company (IDBI Ltd.) on April 2,
2005 (appointed date: October 1, 2004) and the subsequent
merger of the erstwhile United Western Bank Ltd. with IDBI Bank
13
on October 3, 2006, the tech-savvy, new generation Bank with
majority Government shareholding today touches the lives of
millions of Indians through an array of corporate, retail, SME and
Agri products and services.

Headquartered in Mumbai, IDBI Bank today rides on the back of a

robust business strategy, a highly competent and dedicated
workforce of over 18000 employees spread across the country
and a state-of-the-art information technology platform, to structure
and deliver personalized and innovative Banking services and
customized financial solutions to its clients across various delivery
channels. Currently, the Bank has a network of 1899 Branches
and 3739 ATMs.

As on March 31, 2018, IDBI Bank had a balance sheet of Rs.3.5

lakh crores and business size (deposits plus advances) of
Rs.4.18 lakh crores. As a Universal Bank, IDBI Bank, besides its
core banking and project finance domain, has an established
presence in associated financial sector businesses like Capital
Market, Investment Banking and Mutual Fund Business. Going
forward, IDBI Bank is strongly committed to work towards
emerging as the 'Bank of choice' and 'the most valued financial

14
conglomerate', besides generating wealth and value to all its
stakeholders.

As on March 5, 2012, IDBI Bank was ranked as one of the top

500 Banks in the world by Brand Finance (A leading global
organization conducting brand valuations since 1996.) Last year
the rank was 324 and this year IDBI’s position moved up the
ladder to No 274.Brand Finance has compiled these the
valuations of the brands (ranking) based on the market
capitalization (current price per share multiplied by the number of
shares in issue) and brand value (The net present value of the
estimated future cash flows attributable to the brand value of the
brand in relation to the royalty rate that would be payable for its
use were it owned by a third party. The royalty rate is applied to
future revenue to determine an earnings stream that is
attributable to the brand).

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IDBI Timeline: The bank has undergone the following stages
during various years.

Industrial Development bank of India

Industrial Development bank of India (IDBI) was constituted under

Industrial Development bank of India Act, 1964 as a Development
Financial Institution and came into being as on July 01, 1964 vide
Government of India notification dated June 22, 1964. It was
regarded as a Public Financial Institution in terms of the
provisions of Section 4A of the Companies Act, 1956. It continued
to serve as a DFI for 40 years till the year 2004 when it was
transformed into a Bank.

Industrial Development Bank of India Limited

In response to the felt need and on commercial prudence, it was

decided to transform IDBI into a Bank. For the purpose, Industrial
Development bank (transfer of undertaking and Repeal) Act, 2003
16
[Repeal Act] was passed repealing the Industrial Development
Bank of India Act, 1964. In terms of the provisions of the Repeal
Act, a new company under the name of Industrial Development
Bank of India Limited (IDBI Ltd.) was incorporated as a Govt.
Company under the Companies Act, 1956 on September 27,
2004. Thereafter, the undertaking of IDBI was transferred to and
vested in IDBI Ltd. with effect from the effective date of October
01, 2004. In terms of the provisions of the Repeal Act, IDBI Ltd.
has been functioning as a Bank in addition to its earlier role of a
Financial Institution.

Merger of IDBI bank Ltd. with IDBI Ltd.

Towards achieving the faster inorganic growth of the Bank, IDBI

Bank Ltd., a wholly owned subsidiary of IDBI Ltd. was
amalgamated with IDBI Ltd. in terms of the provisions of Section
44A of the Banking Regulation Act, 1949 providing for voluntary
amalgamation of two banking companies. The merger became
effective from April 02, 2005.

Merger of United Western bank with IDBI Ltd.

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The United Western bank Ltd. (UWB), a Satara based private
sector bank was placed under moratorium by RBI. Upon IDBI Ltd.
showing interest to take over the said bank towards its further
inorganic growth, RBI and Govt. of India amalgamated UWB with
IDBI Ltd. in terms of the provisions of Section 45 of the Banking
Regulation Act, 1949. The merger came into effect on October 03,
2006.

Change of name of IDBI Ltd. to IDBI Bank Ltd.

In order that the name of the Bank truly reflects the functions it is
carrying on, the name of the Bank was changed to IDBI Bank
Limited and the new name became effective from May 07, 2008
upon issue of the Fresh Certificate of Incorporation by Registrar of
Companies, Maharashtra. The Bank has been accordingly
functioning in its present name of IDBI Bank Limited.

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VISION of IDBI Bank

19
+

MISSION of IDBI Bank

20
21
 Subsidiaries and Joint ventures of IDBI

IDBI Capital Market Services Limited (ICMS)

It is a wholly owned subsidiary of IDBI Bank. Its businesses
include Merchant Banking, Stock Broking, Distribution of Financial
Products, Corporate Advisory Services, Debt Arranging &
Undertaking, Portfolio Management of Pension / PF Funds &
Research services.

IDBI Intech Limited (IIL)

IIL was incorporated in March 2000. The major business activities

of the company are Information Technology Services, Information
Security Practices, National Contact Center and Outbound Sales
Team.

IDBI Asset Management Limited (IAML)

IAML was incorporated on January 25, 2010. Presently, ICMS

has acquired 33.33% equity stake in IAML and remaining 66.67%
equity is with IDBI Bank. The company is currently managing nine

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schemes launched by IDBI Mutual Fund i.e. two equity schemes
(IDBI Nifty Index Fund and IDBI Nifty Junior Index Fund), six debt
schemes (IDBI Liquid Fund, IDBI Ultra Short Term Fund, IDBI
Short Term Bond Fund, IDBI Monthly Income Plan, IDBI Fixed
Maturity Plan and IDBI Dynamic Bond Fund) and one gold
scheme (IDBI Gold ETF).

IDBI MF Trustee Company Limited (IMTCL)

Incorporated on January 25, 2010, the company acts as the

Trustee of IDBI Mutual Fund.

IDBI Trusteeship Services Ltd (ITSL)

IDBI Bank’s shareholding in ITSL is 54.70%.The company’s

present operations include, acting as trustees to securitization
transactions, acting as Bond/Debenture trustee, Security
trusteeship assignments, Share pledge Trustee, Venture Capital
Fund, Safe Keeping, Escrow Agency and other trusteeship
services.

IDBI Federal Life Insurance Company Limited (IDBI

Federal)
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IDBI Federal is a Joint Venture of Life Insurance Company of IDBI
Bank Ltd., The Federal Bank Ltd. and Ageas Insurance
International (Ageas). IDBI Bank holds 48% equity shares in IDBI
Federal. The Company’s life insurance business comprises
individual life and pension and group life, including non-
participating, health and linked segments.

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 SWOT ANALYSIS:

STRENGTH: WEAKNESS:

*Cutting edge technology *Less penetration in rural

areas
*Large Network of 1899
branches,1412 centers, 3739 *Less number of branches
ATMs and 58 E-lounges and ATMs as compared to
other major players
*Young employees
*Concentrates on commercial
*Good growth rate banking services whereas the
individual banking services is
*First mover advantage in
where the main revenue lies
opening ‘G-sec portal’
*Inefficient help desk which
*One of the largest
leads to unresolved customer
commercial banks
complaints
*Focuses on industrial
*customer complaints
infrastructure and
regarding servicing charges
development
*Lacks in promotional
*Product portfolio with 14
activities
broad classifications ,with
sub categories in each *Large NPAs

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*Customized solutions for
industrial clients
*Headquarters located in
Mumbai which fosters its
growth
*It’s subsidiaries are into
capital market services ,IT
services, asset management
and life insurance
*Ministry of finance via it’s
notifications dated 17
April,2014 has notified IDBI
bank to be at par with SBI
bank and other nationalized
banks
*F.Y.2017-2018 third largest
tax collector-Rs3.10 lakh
crores

OPPURTUNITY: THREAT:
*Scope for bagging *Faces tough competition
government schemes as IDBI from both government and
bank belongs to the public private banks in terms of new
sector market development
*financial expertise to face *FDI in Indian banking has
the emerging industrial and been opened up to 74% by
economic growth in India the RBI
*Only bank in public sector *Major competitors:
which has enabled social
media plug-in in its website Private banking-HDFC Bank
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which leads to increased ,ICICI Bank
brand awareness and better
reach to it’s customers Public banking-PNB ,Andhra
Bank ,Allahabad Bank
*Good opportunities in semi-
urban areas and Tier II cities *The bank has to focus on
as the industrial growth is improving the customer
very rapid satisfaction in order to
sustain the loyal customers
*The memorandum of
understanding (MOU) signed *Recent scams and
on 5th March,2015 between fraudulent activities of the
Indian Army and IDBI Bank bank has gained mistrust
Ltd.(valid till May from its customers and
2018),currently under renewal investors
*Entitled for banking of
Regimental Funds of Indian
Army vide letter dated 17th
May,1999
*Collecting taxes for Central
Government and 26 state
government

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 TREASURY
What is Treasury?
-The word “Treasury” has originated from the French word
‘Tresorie’ and the English word ‘Treasure’.
-The literal meaning of it is a place or a building where treasure is
stored.
-In some countries the government department responsible for
budgeting for and controlling public expenditure, management of
the national debt, and the overall management of the economy.
-In banking the treasury department is responsible for balancing
and managing the daily cash flow and liquidity of funds within the
bank.

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-The investments in securities, foreign exchange, asset/liability
management and cash Taxation and Finance.

TREASURY DEPARTMENT(IDBI Bank)

-Treasury maintains the statutory reserves, manages liquidity,
deploys available resources to maximize yield by reducing -the
cost of funds and contain the market risk of the Bank within the
approved and prudential internal norms and regulatory guidelines.

-Treasury operations constitute mainly money market, foreign

exchange, debt market and equity market. They offer standard
and tailor-made solutions at competitive rates to clients through
various market making activities bydealing with qualified
counterparties. The Treasury is equipped with state-of-the-art
technology to achieve efficient business operations.

-For marketing of Treasury products, they have dedicated

merchant team (FX Sales) across the country which effectively
manages sales of Treasury’s domestic and foreign exchange
products. The team caters to both corporate and retail customers
with investment advisory and solutions to manage their market
operations across asset classes.

-The Bank is the pioneer in providing Treasury Product, IDBI

Samriddhi G-Sec Portal to retail investors enabling them to trade /
invest in Govt. Securities through online and ATM mode.

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 Structure of the Integrated Treasury
Integrated Treasury in the Bank is segregated into three
structures based on the function and reporting as under:
(i) Treasury Front Office (TFO):
Dealing and Risk Taking (Reports to Treasury)

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(ii) Treasury Mid Office (TMO):
Risk Management and Management information (Reports to Risk
Department)

(iii) Treasury Back Office (TBO):

Confirmation, Settlements, Accounting and Reconciliations
(Reports to Chief Financial Officer)

TREASURY FRONT OFFICE

Activities
Desk wise major activities and instruments dealt by TFO are as
below:
(i) Money Market and CRR Desk:

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-The primary responsibility of this desk is to maintain the liquidity
and Cash Reserve Ratio position of the Bank and to undertake
transaction in call, notice, term money and repo borrowings,
undertake repo / reverse repo transactions.
-The CRR Desk deals with Call Money, CBLO, Repos, Reverse
Repos, Bulk Deposits, Bills Rediscounting Scheme (BRDS),
MIBOR Link Deposits, and any instruments approved in
investment policy.
- In terms of section 42(1) of the RBI Act, 1934, the Bank is
required to maintain certain amount of average cash balances
with the Reserve Bank of India on a fortnightly basis. The ratio of
such cash balances to the Net Demand and Time Liabilities
(NDTL) of the Bank is known as CRR. The present rate of
maintenance of CRR is 4.00 % of NDTL.
(ii) SLR Desk
-The SLR desk maintains the Statutory Liquidity Ratio (SLR)
requirement of the Bank and trades in Govt. Securities for capital
gain.
- The instruments traded are Central Govt. Securities, State Govt.
Securities and Treasury Bills etc.
- In terms of section 24 of the Banking Regulation Act, 1949, the
Bank has to maintain certain percentage of the NDTL as liquid
assets, known as SLR.
(iii) Non-SLR Investment Desk.
-Like the Government, Companies also borrow from the market to
meet their long and short term requirements via the bond route.
These are called corporate or more frequently as "Non-SLR"
bonds in the banking parlance.

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- Quasi Government bonds like Oil Marketing Companies' Special
Bonds, Government of India Fertilizer Bonds, Food Corporation of
India Special Bonds etc. are also classified as Non-SLR (NSLR)
bonds.
-Instruments dealt by the Desk are Certificate of Deposit (CD),
Commercial Paper (CP), Corporate Bonds, Mutual Fund, Pass
through Certificate.
(iv) Primary Dealers Business:
-Primary Dealer (PD) is an institution created with the objective of
supporting the borrowing program of the Government. It
strengthen the infrastructure in the government securities market
in order to make it vibrant, liquid and broad based by:
(a) Ensuring development of underwriting and market making
capabilities for government securities outside the RBI so that the
latter will gradually shed these functions.
(b) Improving secondary market trading system, which would
contribute to price discovery, enhance liquidity and turnover and
encourage voluntary holding of government securities amongst a
wider investor base.
(c) Making PDs an effective conduit for conducting open market
operations (OMO).
-The instruments dealt by PD are Central Govt. Securities, State
Govt. Securities, Treasury Bills, etc.
(v) Retail Debt Sales.
-The Retail debt are entrusted to Market and open new Gilt
accounts, Market and popularize RBI NDS OM Web based
system, Market and popularize IDBI Samriddhi Portal (Online and
ATM), Provide quotes in the secondary market in SLR and Non –
SLR Securities to promote retailing in securities and generate
33
income for Treasury, Provide product & procedural knowledge,
Organize investor meets to popularize the debt market products,
Work closely with back office for settlement / accounting /
valuations and interact with client regularly.
-The instruments dealt by Debt Sales are Central Govt.
Securities, State Govt. Securities, Treasury Bills, etc.
(vi) Domestic Resources Desk

-Domestic Resources looks after long term rupee borrowing

requirements of the Bank through issue of bonds on private
placement basis (via Omni Bonds) or on public issue basis (via
Flexi bonds).
-The bonds are also issued to meet the capital adequacy
requirements of the bank.
(vii) Equity
-The Equity Desk trades in financial instrument to earn trading
revenues through short term and medium term price movements.
-The instruments dealt by the desk are:
(a) Equity and Equity linked Investment
(b) Equity Mutual Fund

(viii) Foreign Exchange -Inter-Bank.

-FX Inter Bank Desk manages the FX liquidity and the FX
Exposures of the Bank within the overnight position limit given to
the Bank by RBI, and within the internal day-light open position
limit and daily / monthly stop loss limit (position-wise, dealer wise,
and portfolio level limit) set by the Bank.
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-The Desk provides support services to the different desks within
Treasury Front Office (TFO) by way of acting Market Maker (i.e.
providing two way quotes).
-As an integral part of exposures management, the interbank
Trading Desk runs a proprietary trading book in the permitted
cross currency pairs on spot, forward and swaps segment.
-Primary activities involved are:
(a) Providing Forex quotes to Banking / Financial counterparties
and FX Merchant desk
(b) Managing bank’s foreign exchange loans / deposits through
borrowing / placement.
(c) Maintaining foreign exchange fund position through swaps.
(ix) Foreign Exchange-Merchant (FX Sales)
-The primary responsibility this Desk is to contact, manage,
liaison and service the Bank’s clients in its jurisdiction for their
treasury related needs including forex and derivatives
transactions.
-The merchant desk also assists Trade Finance centers and retail
branches pan India in fixing margins, providing rates and
providing all necessary information relating to FX products such
as:
(a) Inward / outward remittance, sale purchase of foreign
currency, outright cash / tom / spot (USD / INR and crosses),
forward contracts, early / part utilization of forward contracts,
cancellation of overdue forward contracts.
(b) Hedging solutions (derivative instruments) to clients having
ECB / FCY loan exposure. Prior deal, ensuring completion of

35
ISDA documentation. Post deal closure, collection of underlying
documents and submission to TBO.
-The merchant desk (based at HO), apart from the above,
undertakes the following activities:
(a) Updating Nostro balances and carry forward figures in iTFS
system.
(b) Generation, publishing (in intranet and internet) and
maintenance of merchant card rates.
(c) Generation and publishing (in intranet) of Mibor / Libor Rates.
(d) Sending opening and closing messages.
(e) Managing Retail FX system - maintaining rate feed system,
creation, modification and deletion of user ids.
(f) Day end tally process.
(x) Derivatives.
-Derivatives Desk structures Derivatives Products for the clients
to help them manage their risk exposures, take proprietary trading
positions (in OIS, MIFOR & USD / INR Option Derivatives
etc.),provides FX Derivatives pricing support, market research
and derivative idea to the Corporate FX Desks.
-The common Derivatives structures are Interest Rate Swaps,
Principal Only Swap, Currency Swaps, Options (FC / INR),
Options (Non INR), Forward Rate Agreements, Long term foreign
exchange (LTFX) contracts, Structured deals, Basis Swaps,
Interest Rates Futures (IRF), Credit Default Swaps (CDS) and
Exchange traded Currency Futures.

36
FOREX
37
-Particularly for foreign exchange market there is no market place
called the foreign exchange market. It is a mechanism through
which one country’s currency can be exchanged i.e. bought or
sold for the currency of another country. The foreign exchange
market does not have any geographic location.
-Foreign exchange market is described as an OTC (over the
counter)market as there is no physical place where the
participants meet to execute the deals, as we see in the case of
stock exchange.
- The largest foreign exchange market is in London, followed by
the New York, Tokyo, Zurich and Frankfurt.
-The markets are situated throughout the different time zone of
the globe in such a way that one market is closing the other is
beginning its operation. Therefore it is stated that foreign
exchange market is functioning throughout 24 hours a day.
-In most market US dollar is the vehicle currency, i.e., the
currency used to dominate international transaction.
-In India, foreign exchange has been given a statutory definition.
Section 2 (b) of foreign exchange regulation ACT, 1973 states:
Foreign exchange means foreign currency and includes:
(a) All deposits, credits and balance payable in any foreign
currency and any draft, travellers cheque, letter of credit and bills
of exchange. Expressed or drawn in Indian currency but payable
in any foreign currency.

38
(b) Any instrument payable, at the option of 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.
-In order to provide facilities to members of the public and
foreigners visiting India, for exchange of foreign currency into
Indian currency and vice-versa .RBI has granted to various firms
and individuals, license to undertake money-changing business at
seas/airport and tourism place of tourist interest in India. Besides
certain authorized dealers in foreign exchange (banks) have also
been permitted to open exchange bureaus.
Following are the major bifurcations:
-Full fledge moneychangers: They are the firms and individuals
who have been authorized to take both, purchase and sale
transaction with the public.
-Restricted moneychanger: They are shops, emporia and hotels
etc. that have been authorized only to purchase foreign currency
towards cost of goods supplied or services rendered by them or
for conversion into rupees.
-Authorized dealers : They are one who can undertake all types
of foreign exchange transaction .Bank are only the authorized
dealers. The only exceptions are Thomas Cook, Western Union,
UAE exchange which though are not a bank but are an AD.
Even among the banks RBI has categorized them as follows:
-Branch A: They are the branches that have Nostro and Vostro
account.

39
-Branch B: The branch that can deal in all other transaction but do
not maintain Nostro and Vostro a/c’s fall under this category.
For India we can conclude that foreign exchange refers to foreign
money, which includes notes, cheques, bills of exchange, bank
balance and deposits in foreign currencies.

40
 Need for Foreign Exchange
Let us consider a case where Indian company exports cotton
fabrics to USA and invoices the goods in US dollar. The American
importer will pay the amount in US dollar, as the same is his
home currency. However the Indian exporter requires rupees
means his home currency for procuring raw materials and for
payment to the labor charges etc. Thus he would need
exchanging US dollar for rupee. If the Indian exporters invoice
their goods in rupees, then importer in USA will get his dollar
converted in rupee and pay the exporter. From the above
example we can infer that in case goods are bought or sold
outside the country, exchange of currency is necessary.
Sometimes it also happens that the transactions between two
countries will be settled in the currency of third country. In that
case both the countries that are transacting will require converting
their respective currencies in the currency of third country. For
that also the foreign exchange is required.

41
Participants in foreign exchange market
The main players in foreign exchange market are as follows:
1.CUSTOMERS-The customers who are engaged in foreign trade
participate in foreign exchange market by availing of the services
of banks.
-Exporters require converting the dollars in to rupee and importers
require converting rupee in to the dollars, as they have to pay in
dollars for the goods/services they have imported.
2.COMMERCIAL BANK-They are most active players in the forex
market.
-Commercial bank dealing with international transaction offer
services for conversion of one currency in to another.
- They have wide network of branches.
- Typically banks buy foreign exchange from exporters and sells
foreign exchange to the importers of goods.
-As every time the foreign exchange is bought or oversold
position. The balance amount is sold or bought from the market.

42
 3.CENTRAL BANK- In all countries Central bank have been
charged with the responsibility of maintaining the external value of
the domestic currency. Generally this is achieved by the
intervention of the bank.
4. EXCHANGE BROKERS-Forex brokers play very important role
in the foreign exchange market. However the extent to which
services of foreign brokers are utilized depends on the tradition
and practice prevailing at a particular forex market center.
- In India as per FEDAI guideline the ADs are free to deal directly
among themselves without going through brokers. The brokers
are not allowed to deal in their own account all over the world and
also in India.
5. OVERSEAS FOREX MARKET-Today the daily global turnover
is estimated to be more than US$ 1.5 trillion a day. The
international trade however constitutes hardly5 to 7 % of this total
turnover.
- The rest of trading in world forex market is constituted of
financial transaction and speculation.
- As we know that the forex market is 24-hour market, the day
begins with Tokyo and thereafter Singapore opens, thereafter
India, followed by Bahrain, Frankfurt, Paris, London, New York,
Sydney, and back to Tokyo.
6. SPECULATORS-The speculators are the major players in the
forex market.
-Bank dealing are the major speculators in the forex market with a
view to make profit on account of favorable movement in
exchange rate, take position i.e. if they feel that rate of particular
currency is likely to go up in short term. They buy that currency
and sell it as soon as they are able to make quick profit.

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-Corporation’s particularly multinational corporation and
transnational corporation having business operation beyond their
national frontiers and on account of their cash flows being large
and in multi currencies get in to foreign exchange exposures. With
a view to make advantage of exchange rate movement in their
favor, they either delay covering exposures or do not cover until
cash flow materializes.
-Individuals like share dealers also undertake the activity of
buying and selling of foreign exchange for booking short term
profits. They also buy foreign currency stocks, bonds and other
assets without covering the foreign exchange exposure risk. This
also results in speculations.

44
 Exchange Rate System
-Countries of the world have been exchanging goods and
services amongst themselves. This has been going on from time
immemorial. The world has come a long way from the days of
barter trade. With the invention of money the figures and
problems of barter trade have disappeared. The barter trade has
given way to exchange of goods and services for currencies
instead of goods and services.
-The rupee was historically linked with pound and sterling. India
was a founder member of the IMF. During the existence of the
fixed exchange rate system, the intervention currency of the
Reserve Bank of India (RBI) was the British pound, the RBI
ensured maintenance of the exchange rate by selling and buying
pound against rupees at fixed rates. The interbank rate therefore
ruled the RBI band. During the fixed exchange rate era, there was
only one major change in the parity of the rupee- devaluation in
June 1966.

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-Different countries have adopted different exchange rate system
at different time. The following are some of the exchange rate
system followed by various countries.
THE GOLD STANDARD-Many countries have adopted gold
standard as their monetary system during the last two decades of
the 19thcentury. This system was in vogue till the outbreak of
World War 1. Under this system the parties of currencies were
fixed in term of gold. There were two main types of gold standard:
1) Gold specie standard- Gold was recognized as means of
international settlement for receipts and payments amongst
countries. Gold coins were an accepted mode of payment and
medium of exchange in domestic market also. A country was
stated to be on gold standard if the following condition were
satisfied:
*Monetary authority, generally the central bank of the
country, guaranteed to buy and sell gold in unrestricted amounts
at the fixed price.
*Melting gold including gold coins, and putting it to different use
was freely allowed.
*Import and export of gold was freely allowed.
*The total money supply in the country was determined by the
quantum of gold available for monetary purpose.
2) Gold Bullion Standard-Under this system, the money in
circulation was either partly of entirely paper and gold served as
reserve asset for the money supply. However, paper money could
be exchanged for gold at any time. The exchange rate varied
depending upon the gold content of currencies. This was also

46
known as “Mint Parity Theory” of exchange rates. The gold bullion
standard prevailed from about 1870 until1914, and intermittently
thereafter until 1944.World War I brought an end to the gold
standard.
3) Bretton Woods System- All economies suffered in the world
wars. In order to correct the balance of payments disequilibrium,
many countries devalued their currencies, which dealt a
deathblow to international trade. In1944, following World War II,
the United States and most of its allies ratified the Bretton Woods
Agreement, which set upon adjustable parity exchange-rate
system under which exchange rates were fixed (pegged) within
narrow intervention limits (pegs) by the United States and foreign
central banks buying and selling foreign currencies. In addition to
setting up fixed exchange parities (par values) of currencies in
relationship to gold, the agreement established the International
Monetary Fund (IMF) to act as the “custodian” of the system.
Under this system there were uncontrollable capital flows, which
lead to major countries suspending their obligation to intervene in
the market and the Bretton Wood System with its fixed parities,
was effectively buried. Thus, the world economy has been living
through an era of floating exchange rates since the early 1970.
4) Floating Rate System-In a truly floating exchange rate regime,
the relative price of currencies is decided entirely by the market
forces of demand and supply. There is no attempt by the
authorities to influence exchange rate. Where government
interferes directly or through various monetary and fiscal
measures in determining the exchange rate, it is known as
managing of dirty float.

47
5) Purchasing Power Parity (PPP)-Professor Gustav Cassel, a
Swedish economist, introduced this system. The theory, to put in
simple terms states that currencies are valued for what they can
buy and the currencies have no intrinsic value attached to it.
Therefore, under this theory the exchange rate was to be
determined and the sole criterion being the purchasing power of
the countries. As per this theory if there were no trade controls,
then the balance of payments equilibrium would always be
maintained. Thus if 150 INR buy a fountain pen and the same
fountain pen can be bought for USD 2, it can be inferred that
since 2 USD or 150 INR can buy the same fountain pen, therefore
USD 2 = INR 150.For example India has a higher rate of inflation
as compared to the US then goods produced in India would
become costlier as compared to goods produced in US. This
would induce imports in India and also the goods produced in
India being costlier would lose in international competition to
goods produced in US. This decrease in exports of India as
compared to exports from US would lead to demand for the
currency of US and excess supply of currency of India. This in
turn causes currency of India to depreciate in comparison of
currency of the US that is having relatively more exports.

48
 FUNDAMENTALS IN EXCHANGE RATE
-Exchange rate is a rate at which one currency can be exchange
for another currency, say USD = Rs.65. This rate is the rate of
conversion of US dollar in to Indian rupee and vice versa.
-METHODS FOR QOUTING EXCHANGE RATES:
EXCHANGE QUOTATION
Direct Method Indirect Method
Variable Unit Variable Unit
Home Currency Foreign Currency
-METODS OF QOUTING RATE
There are two methods of quoting exchange rates:
1) Direct Method-Foreign currency is kept constant and home
currency is kept variable. In direct quotation, the principle adopted
by bank is to buy at a lower price and sell at higher price.
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2) Indirect Method-Home currency is kept constant and foreign
currency is kept variable. Here the strategy used by bank is to buy
high and sell low. In India with effect from august 2, 1993, all the
exchange rates are quoted in direct method. It is customary in
foreign exchange market to always quote two rates means one for
buying and another rate for selling. This helps in eliminating the
risk of being given bad rates i.e. if a party comes to know what the
other party intends to do i.e. buy or sell, the former can take the
letter for a ride. There are two parties in an exchange deal of
currencies. To initiate the deal one party asks for quote from
another party and other party quotes a rate. The party asking for a
quote is known as ‘asking party’ and the party giving a quote is
known as ‘quoting party’.
The advantage of two–way quote is:
a) The market continuously makes available price for buyers or
sellers.
b) The two way price limits the profit margin of the quoting bank
and comparison of one quote with another quote can be done
instantly.
c) As it is not necessary for any player in the market to indicate
whether he intends to buy or sale foreign currency, this ensures
that the quoting bank cannot take advantage by manipulating the
prices.
d) It automatically insures that alignment of rates with market
rates.
e) Two way quotes lend depth and liquidity to the market, which is
so very essential for efficient market.

50
- In two way quotes the first rate is the rate for buying and another
for selling. We should understand here that, in India the banks
which are authorized dealer always quote rates. So the rates
quoted- buying and selling is for banks point of view only. It
means that if exporters want to sell the dollars then the bank will
buy the dollars from them so while calculation the first rate will be
used which is buying rate, as the bank is buying the dollars from
exporter. The same case will happen inversely with importer as
he will buy dollars from the bank and bank will sell dollars to
importer.

FACTORS AFFECTING EXCHANGE RATES

In free market, it is the demand and supply of the currency which
should determine the exchange rates but demand and supply is
the dependent on many factors, which are ultimately the cause of
the exchange rate fluctuation, sometimes wild. The volatility of
exchange rates cannot be traced to a single reason and
consequently, it becomes difficult to precisely define the factors
that affect exchange rates. However, the more important among
them are as follows:
•STRENGTH OF ECONOMY-Economic factors affecting
exchange rates include hedging activities, interest rates,
inflationary pressures, trade imbalance, and euro market
activities. Irving fisher, an American economist, developed a
theory relating exchange rates to interest rates. This proposition,
known as the fisher effect, states that interest rate differentials
tend to reflect exchange rate expectation. On the other hand, the
51
purchasing power parity theory relates exchange rates to
inflationary pressures. In its absolute version, this theory states
that the equilibrium exchange rate equals the ratio of domestic to
foreign prices. The relative version of the theory relates changes
in the exchange rate to changes in price ratios.
•POLITICAL FACTOR-The political factor influencing exchange
rates include the established monetary policy along with
government action on items such as the money supply, inflation,
taxes, and deficit financing. An active government intervention or
manipulation such as central bank activity in the foreign currency
market, also have an impact. Other political factors influencing
exchange rates include the political stability of a country and its
relative economic exposure (the perceived need for certain levels
and types of imports). Finally, there is also the influence of the
international monetary fund.
•EXPECTATION OF THE FOREIGN EXCHANGE MARKET-
Psychological factors also influence exchange rates. These
factors include market anticipation, speculative pressures, and
future expectations. A few financial experts are of the opinion that
in today’s environment, the only ‘trustworthy’ method of predicting
exchange rates by gut feel. Bob Eveling, vice president of
financial markets at SG, is corporate finance’s top foreign
exchange forecaster for 1999.Eveling’s gut feeling has, defined
convention, and his method proved uncannily accurate in foreign
exchange forecasting in 1998.SG ended the corporate finance
forecasting year with a 2.66% error overall, the most accurate
among 19 banks. The secret to eveling’s intuition on any currency
is keeping abreast of world events. Any event, from a declaration
of war to a fainting political leader, can take its toll on a currency’s

52
value. Today, instead of formal modals, most forecasters rely on
an amalgam that is part economic fundamentals, part model and
part judgment:
-Fiscal policy
-Interest rates
-Monetary policy
-Balance of payment
-Exchange control
-Central bank intervention
-Speculation
-Technical factor

FOREX IN IDBI BANK

-A person dealing in the forex market is called a “corporate
dealer”.

TOOLS USED FOR DEALING

1) Recorded Telephone Line(UNIFY Openscape Expert)
2) Router Screens
3) Ticker Plant
4) Cogencis

GENUINE NEEDS OF THE CUSTOMER

-Customer can be a corporation or an individual based on which
the needs can vary.
- Corporation Needs:

53
1) Exporter- After the sale, he receives the sale proceeds (in
foreign currency) so as to convert the foreign currency into his
domestic currency. He thus requires foreign exchange services.
2) Importer-For making the purchase, sometimes the criteria for
payment has to be made in the seller’s domestic currency. He
thus needs to avail foreign exchange services to covert his
domestic currency into foreign currency. (He contacts the dealer
and takes the rate)
3) Lending- For basically capital A/C transactions. Capital A/C
transactions alter the assets or liabilities, including contingent
liabilities, outside India of persons resident in India.
4) Internal Requirements - Sometimes a corporation requires
funds for meeting internal requirements which is known as capital
funding. It acquires them by equity or borrowing.
-Individual Needs:
1) NRI- A resident who goes and settles abroad will need to avail
the foreign exchange services.
2) Tourist- A person going abroad for a vacation will need to avail
the foreign exchange services to acquire the currency of the
country he is going to.
3) Remittance- A parent may need to transfer money in the
account of his child studying abroad. He will need the foreign
exchange services to provide the currency of the country his child
is studying in.
-How does the exchange affect the client?

54
The client in the forex market can either benefit or incur a loss
due to the fluctuations in the exchange rate. There are a variety of
factors which contribute to these fluctuations. For example if a US
exporter sells his goods to an Indian importer, the Indian importer
will have to make payment through US dollars for which he’ll need
to avail foreign exchange services to convert his Indian rupees to
US dollars to make the payment. If the position of rupees against
the dollar improves or the exchange rate goes down, the Indian
importer will benefit. In case the position of rupees against the
dollar worsens or the exchange rate goes up, the Indian importer
will incur a loss.

HEDGING
-Hedging is protecting oneself against a loss on by making
balancing or compensating transactions.
- How is the time lag covered through hedging?
When a business has an expected foreign exchange transaction
as a result of a deal, it may need to buy or sell a certain currency.
E.g. If a US company has decided to buy an asset from India it
will need to buy Indian Rupees to complete the transaction. If the
company believes the Indian rupees is going to weaken against
the US dollar they will hold the payment (lag) before the price of
the asset increases in US dollar terms. This time lag can be
covered through hedging by coming to an agreement of payment
at a specific price at a given point for the asset.
- The hedging products offered by IDBI Bank are:

55
a) Forward Contract-A forward contract is a private agreement
between two parties giving the buyer an obligation to purchase an
asset and the seller to sell the asset at a set price at a future point
in time. It is used the widely used hedging product.
b) Options Contract-An options contract 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 later due date at an agreed
upon price. Often used in securities, commodities and real estate
transactions.
c) Future Contract-A future contract is a standardized forward
contract, a legal agreement to buy or sell something at a
predetermined price at a specified time in future. The asset
involved in the transaction is usually a commodity or financial
instrument.
d) Swap-A swap is a derivative contract where two parties
exchange financial instruments. Most swaps are derivatives in
which two counter parties exchange cash flows of one party’s
financial instrument for those of the other party’s financial
instrument.

56
 QUESTIONAREE
Q1. Are you into importing or exporting?
Q2. What is your frequency of payment cycle?
Q3. Do you track the dollar exchange rate?
Q4. Do you prefer hedging or not?
Q5. What are the factors you look at or consider before you
hedge?
Q6. What are the hedging products used by your organization?
Q7. Does your firm follow a defined hedging policy/risk
management policy?
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Client Import/Export Frequency Track Hedge Factors Products Defined
hedging
policy
1)JSW BOTH DAILY VARIOUS Yes market FORWARD BOTH
STEEL MEDIANS situation AND
(lumber, OPTIONS
market
etc.)
2)
3)
4)

CONCLUSION
The foreign monetary exchange market is the biggest financial
market in the world, bigger than the New York Exchange and
Future’s Market combined. With reduced “buy-in” limits now,
even the small time players can join the Forex trading
marketplace. That doesn’t mean everyone should join, however.
Buying an auto-trading program sold to you with the promise of
making you millions probably won’t. In fact it may cost you
everything you own. The only way to win in Forex Trading is the

58
good, old-fashioned way which is hard work and solid
understanding of the market.
One has to be clued in to global developments, trends in the
world as well as economic indicators of different countries. These
include GDP growth, fiscal and monetary policies, inflows and
outflows of the currency, local stock market performance and
interest rates.
In forex futures, the margin payable is just 3%, so the leverage is
33 times. This means a 1% change can wipe out a third of the
investment. However, the Indian currency markets are well
regulated and there is almost no counter-party risk. Investors
should start small and gradually invest more.
Liberalization has transformed India’s external sector and a direct
beneficiary of this has been the foreign exchange market in India.
From a foreign exchange-starved, control-ridden economy, India
has moved on to a position of 150 billion dollars plus in
international reserves with a confident rupee and drastically
reduced foreign exchange control. As foreign trade and cross-
border capital flows continue to grow, and the country moves
towards capital account convertibility, the foreign exchange
market is poised to play an even greater role in the economy, but
is unlikely to be free of RBI interventions any time soon.

59
 BIBLIOGRAPHY
1) IDBI Bank Treasury Front Office Manual.
2) Who Moved My Interest Rate? - Ex RBI Governor Duvvuri
Subbarao.
3) IDBI’s Intranet.
4) Google.

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5) Wikipedia.

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