JAIIB_CAIIB_Prep|| USE CODE RAJEEV TO GET MAXIMUM DISCOUNT ON OLIVEBOARD

JAIIB_CAIIB_Prep|| USE CODE RAJEEV TO GET MAXIMUM DISCOUNT ON OLIVEBOARD

Accounting & Financial

Management for Bankers
Paper III

International
CAIIB New Selection Batch
Banking[Basics of Forex
May_June 2023:
Derivatives]
JAIIB_CAIIB_Prep|| USE CODE RAJEEV TO GET MAXIMUM DISCOUNT ON OLIVEBOARD
JAIIB_CAIIB_Prep|| USE CODE RAJEEV TO GET MAXIMUM DISCOUNT ON OLIVEBOARD

Reserve Bank of India - Role And Exchange

Control Regulations In India
JAIIB_CAIIB_Prep|| USE CODE RAJEEV TO GET MAXIMUM DISCOUNT ON OLIVEBOARD

Reserve Bank of India, being the central bank of the country, is

empowered under the statute to control and regulate the foreign
exchange reserves and policies related to international trade,
inflow/outflow of foreign exchange, as also has supervisory powers over
the persons authorized to deal in foreign exchange.
JAIIB_CAIIB_Prep|| USE CODE RAJEEV TO GET MAXIMUM DISCOUNT ON OLIVEBOARD

UNIT 3: BASICS OF FOREX DERIVATIVES

JAIIB_CAIIB_Prep|| USE CODE RAJEEV TO GET MAXIMUM DISCOUNT ON OLIVEBOARD
JAIIB_CAIIB_Prep|| USE CODE RAJEEV TO GET MAXIMUM DISCOUNT ON OLIVEBOARD

A derivative is a contract between two or more parties whose

value is based on an agreed-upon underlying financial asset (like
a security) or set of assets (like an index).
JAIIB_CAIIB_Prep|| USE CODE RAJEEV TO GET MAXIMUM DISCOUNT ON OLIVEBOARD
JAIIB_CAIIB_Prep|| USE CODE RAJEEV TO GET MAXIMUM DISCOUNT ON OLIVEBOARD
JAIIB_CAIIB_Prep|| USE CODE RAJEEV TO GET MAXIMUM DISCOUNT ON OLIVEBOARD
JAIIB_CAIIB_Prep|| USE CODE RAJEEV TO GET MAXIMUM DISCOUNT ON OLIVEBOARD

✓ Suppose a company from the USA is going to receive payment of €15M in 3

months.
✓ The company is worried that the euro will depreciate and is thinking of using
a forward contract to hedge the risk.
✓ This effectively means they fear they will receive less $ when they go out to
exchange their € in the market.
✓ Therefore by using a forward contract, the company can sell the euro right now
at a predetermined overhead rate and avoid the risk of receiving less $.
JAIIB_CAIIB_Prep|| USE CODE RAJEEV TO GET MAXIMUM DISCOUNT ON OLIVEBOARD

❑ There are two classes of derivative products: "lock" and

"option." Lock products (e.g., futures, forwards, or swaps) bind
the respective parties from the outset to the agreed-upon terms over
the life of the contract.

❑ Option products (e.g., stock options), on the other hand, offer the
holder the right, but not the obligation, to buy or sell the
underlying asset or security at a specific price on or before the
option's expiration date.
❑ The most common derivative types are futures, forwards,
swaps, and options.
JAIIB_CAIIB_Prep|| USE CODE RAJEEV TO GET MAXIMUM DISCOUNT ON OLIVEBOARD
Futures
✓ A futures contract or simply futures, is an
agreement between two parties for the purchase and
delivery of an asset at an agreed-upon price at a
future date.
✓ Futures are standardized contracts that trade on an
exchange.
✓ Traders use a futures contract to hedge their risk or
speculate on the price of an underlying asset.
JAIIB_CAIIB_Prep|| USE CODE RAJEEV TO GET MAXIMUM DISCOUNT ON OLIVEBOARD

Forwards
❑ Forward contracts, or forwards, are similar to futures, but
they do not trade on an exchange. These contracts only
trade over-the-counter.
❑ When a forward contract is created, the buyer and seller may
customize the terms, size, and settlement process.
❑ As OTC products, forward contracts carry a greater
degree of counterparty risk for both parties.
JAIIB_CAIIB_Prep|| USE CODE RAJEEV TO GET MAXIMUM DISCOUNT ON OLIVEBOARD

Swaps
Swaps are another common type of derivative,
often used to exchange one kind of cash flow with
another.
For example, a trader might use an interest rate
swap to switch from a variable interest rate loan to
a fixed interest rate loan, or vice versa.
JAIIB_CAIIB_Prep|| USE CODE RAJEEV TO GET MAXIMUM DISCOUNT ON OLIVEBOARD

Options
An options contract is similar to a futures contract in that it is an agreement
between two parties to buy or sell an asset at a predetermined future date
for a specific price.
❑ The key difference between options and futures is that with an option, the buyer
is not obliged to exercise their agreement to buy or sell.
❑ It is an opportunity only, not an obligation, as futures are.
❑ As with futures, options may be used to hedge or speculate on the price of the
underlying asset.
JAIIB_CAIIB_Prep|| USE CODE RAJEEV TO GET MAXIMUM DISCOUNT ON OLIVEBOARD

Options
A call option gives the holder the
right to buy a stock and a put option
gives the holder the right to sell a
stock.
JAIIB_CAIIB_Prep|| USE CODE RAJEEV TO GET MAXIMUM DISCOUNT ON OLIVEBOARD
JAIIB_CAIIB_Prep|| USE CODE RAJEEV TO GET MAXIMUM DISCOUNT ON OLIVEBOARD
JAIIB_CAIIB_Prep|| USE CODE RAJEEV TO GET MAXIMUM DISCOUNT ON OLIVEBOARD

Disadvantages
Derivatives are difficult to value because they are based on
the price of another asset. Most derivatives are also
sensitive to the following:
❑ Changes in the amount of time to expiration
❑ The cost of holding the underlying asset
❑ Interest rates
These variables make it difficult to perfectly match the
value of a derivative with the underlying asset.
JAIIB_CAIIB_Prep|| USE CODE RAJEEV TO GET MAXIMUM DISCOUNT ON OLIVEBOARD

Special MCQ
JAIIB_CAIIB_Prep|| USE CODE RAJEEV TO GET MAXIMUM DISCOUNT ON OLIVEBOARD
NRI is defined for banking purpose in?
a. FEMA
b. Income Tax Act
B
c. NI Act
d. RBI Act
JAIIB_CAIIB_Prep|| USE CODE RAJEEV TO GET MAXIMUM DISCOUNT ON OLIVEBOARD
A returning from US should surrender his unused foreign exchange in
excess of $2000 to an authorised dealer within?
1. 60 days of his return to India, if he is holding foreign currency notes
2. 90 days of his return to India, if he is holding foreign currency notes
3. 90 days if he is holding Travellers cheque
4. 180 days if he is holding Travelers cheque D
a. 1 & 3
b. 1 & 4
c. 2 & 3
d. 2 & 4
JAIIB_CAIIB_Prep|| USE CODE RAJEEV TO GET MAXIMUM DISCOUNT ON OLIVEBOARD

B
JAIIB_CAIIB_Prep|| USE CODE RAJEEV TO GET MAXIMUM DISCOUNT ON OLIVEBOARD

B
JAIIB_CAIIB_Prep|| USE CODE RAJEEV TO GET MAXIMUM DISCOUNT ON OLIVEBOARD

What is HRIS and example?

A human resource information system (HRIS) is software
that provides a centralized repository of employee master
data that the human resource management (HRM) group
needs for completing core human resource (core HR)
processes. An HRIS can help HR and organizations
become more efficient through the use of technology.
JAIIB_CAIIB_Prep|| USE CODE RAJEEV TO GET MAXIMUM DISCOUNT ON OLIVEBOARD

BASICS OF FOREX DERIVATIVES

A risk can be defined as an unplanned event with financial consequences

resulting in loss or reduced earning.

FOREIGN EXCHANGE RISK

Foreign exchange risk (also known as FX risk, exchange rate
risk or currency risk) is a financial risk that exists when a
financial transaction is denominated in a currency other than
the domestic currency of the company.
JAIIB_CAIIB_Prep|| USE CODE RAJEEV TO GET MAXIMUM DISCOUNT ON OLIVEBOARD

Basically, foreign exchange exposures can be classified into three

types

1. Transaction Exposure
2. Translation Exposure
3. Operating/Economic Exposure
JAIIB_CAIIB_Prep|| USE CODE RAJEEV TO GET MAXIMUM DISCOUNT ON OLIVEBOARD
Transaction Exposure/RISK
Arising due to normal business operations consequent to which the value
of transactions will be affected.
This is affected by the transactions undertaken which may expose the
company/firm to currency risk, when compared to the value in home
currency.
✓JAIIB_CAIIB_Prep|| USEThis
Translation Exposure: arises
CODE whenTOfirms
RAJEEV GEThave to revalue
MAXIMUM their assets
DISCOUNT and liabilities
ON OLIVEBOARD
or receivables and payables in home currency, at the end of each accounting period.
✓ This also is affected due to consolidating the accounts of all foreign operations. These
are not actual costs or gains, but notional, as the actual loss or gain is booked at the
time of actual translation of the exposure.
✓ It means any translation exposure would undergo a transaction exposure at a future
date.

It Is Also Known as Balance Sheet

Accounting Risk
JAIIB_CAIIB_Prep|| USE CODE RAJEEV TO GET MAXIMUM DISCOUNT ON OLIVEBOARD
JAIIB_CAIIB_Prep|| USE CODE RAJEEV TO GET MAXIMUM DISCOUNT ON OLIVEBOARD
JAIIB_CAIIB_Prep|| USE CODE RAJEEV TO GET MAXIMUM DISCOUNT ON OLIVEBOARD
 JAIIB_CAIIB_Prep|| USE CODE RAJEEV TO GET MAXIMUM DISCOUNT ON OLIVEBOARD

Operating/Economic Exposure
Economic exposure, also sometimes called operating exposure, is a measure of the change
in the future cash flows of a company as a result of unexpected changes in foreign
exchange rates (FX)
JAIIB_CAIIB_Prep|| USE CODE RAJEEV TO GET MAXIMUM DISCOUNT ON OLIVEBOARD