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    IFM UNIT 2

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    6 views23 pages

    Ifm Unit 2

    Uploaded by

    Jamman Ayesha

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    of 23
    $$ 11.4 billion iy national financial ial management? ficrence Coote mnagement? iad rules of gold { Breton wood advantages and of exchanging I. ments (BOP) i cting BOP. of payments roc, UNIT 2 De ens WE ig eS Sead Z 21.1. Meaning of Foreign Exchange “en exchange is currency other than th ee J gstem of trading in and converting the curency of one count Bee eS ae ee Srverting one national currency into another and of transferring the Genership of money from one country to another country. Foreign exchange as defined by Section 2 of FEMA, 1999: 1) "Foreign Currency” means any curreney other than Indian curency 2) “Foreign Exchange” means foreign currency and includes: {) Deposits, credits, and balances payable in any foreign currency ii) Drafts, traveller's cheques, letters of credit or bills of exchange, expressed or drawn in Indian currency but payable in any foreign currency. ii) Drafts, traveller's cheques, letters of credit or bills of exchanss drawn, by banks, institutions or persons outside India, Put payable in Indian currency. 2:12. Meaning and Definition of Foreign Exchange Market ‘The Foreign exchange (currency or F\ the market for currencies. Transactions in th ne party purchasing @ quantity 0 a quanto of another, ‘The FX market ise WEST ig financial market in the world, and inc! ie central banks, currency speculators, ‘ther institutions. JOREX or FX) market refers © 's market typically involve AE ate Keeording to Kindleberger, “FOig® SX excanee Me ‘where foreign moneys are bovEht: spa Fore foreign cure au insutinyal arrangement on bape steter asta tet Exporters sell the foreign currencies and ir Banks and Money ‘Changes Caren, ‘Nek chee a "en currencies, fohave two para foterbank market can, thus, be sil cers. Operating TAT gyosons E Teolect buy ane sell ‘oun whe gui fon the expe toureney, These inders derma $ave an wading Fone eonveney, Shey dos wl hud any euneney oxen of Foreign Exchange Market bias know 218. Transaction Smog ering, when investors Gia eres 09 meh on the tore) Ala citanes, Sores vr agretent betes 0 fs © Ne cir ea fan agreed exchange eon cist unfartl xcan® bers: While rt mbers: While economic numbers ca i palicy, rs can certainly "¥> Some reports and numbers take on & Aforeign exchange tra Tsk asociated wi er. ‘hung foreign currency denot fen currency contractual arrangemen’ na sate diferent ype of foreign exch ent oy et Soot Market Transactions: The ss ae a the foreign exchange ake eh ee cause tne AMEN: Bal Mansactions are sett The bageaSMNRE rae of is MENS of «country Payments isa somaie currency to fetus tummary.of all economic at! zoeecn MBA Fourth Sem er, mn ‘Types of Spot Market The spot market can be of two types: i) Organized Market, an Exchange: market where (e foreign exchange are 2) Forward Market Transactions: The forward exchange ma teers to foreign exchange deals forsale and purchase he currency at some future date, normally after 90 days When buyers and foreign currene ion. The in foreign exchange make the forward mi exchange rate settled between the buy sale and purchase of currencies is called forward exchang. rate. ‘Types of Forward Exchange Contracts Forwards contracts in India are broadly governed by Contracts (Regulation) Act, 1952, According to th euaets are ofthe following three major categories Optional Term Forward Contract: Bi buying and selling forward exchange contracts may be eithe! fixed or optional term contracts, a) Fixed Term Contracts: Fixed Term Contract low te delivery | tment 10 the FOR ferable Specific a ally exempted from, Se commonly arranged on ‘ach settlerent date by rele MIBOR, LIBOR or other whet ee : z 4 i i Fortean won wonmpon9 asc “yeu ve sak painuinoy a, me a Wong ‘sarnsuin dorng ssdows Kouaaany ( ot pny nem 16m Sidhe A cash transaction requires all aspects, ‘of payment to be finalised on the trade the cums BLBA. Nature of Foreign Exchange Transactions lation. Tenaire of foreign exchange transactions are a Future or Forward Contracts: In both future and for ‘Natron Econ tact is entered on a given day to settle the transis ae 5 SESS ft te at acd pie. n Pes : ae the parties and on that specific day = ae Spectaion 4 cag Arbitraging ‘Term of forward . 2 a" | ‘most common ‘may vary from 3 days till 3 yeas® 2185, Hed, _ Pe i 1. 36 and 12 mont periods. i 6 4 Wis ay import eature of the forward exes ier tha 6 ms forward prices are relatively stable for Soren and importers enter an agen! © Sl SL Sa ne ‘ance nse esiod market i very Oo) MB fits date at current prices 204 Te gg mii peat Determine whether the f« they ate not appropriate, deteen wing $1,00.000 from Rit arbitrage before the r arbitrage is possi uy Thai bat from Bank 1 (§ 2) Sell Thai batt Bunk 2¢THB 4,405,286,34 x $0,028) Ieitey can vary aper in New Yor ve an “The appropriate cross 4 4 New Zealand dolls then exchang Srategy would generate $1,006,667 thereby represen id are given these quotes; ‘You ean buy a euro for 14 pe The bank will pay you 13 pes : Behance You can buy a U.S dollar for.9 euros. Fea nte arbitrage is based upon the principle of interest ate pari The bank will pay you 8 Euros fora U.S. dolla. | risexpressed Dy: ‘You can buy a U.S, dollar for 10 pesos. The bank will pay you 9 pesos fora U.S. dollar. © fpis the forward rate of exchange of the fore acuro. ign curency agaist EQevan ». ‘ sarrencies: spot rate of exchange between the wo ot terest rate on the foreign currency: ‘on the home currency. A te abi important point to note in an interest se conversion el Suppose one borrows Use $1,000 to purchase euros) Qc Sonvert 80 custo y peu Spe 25" 800 cures. ‘Convert the 10, sn i 1400 pesos to U, 's profit of $40 ona $1,609 inves in he alternative strateg itt 1 er the ‘Use $1,000 t0 puree? YOU cou} Rieicnes. ‘The lars higher. to be simple, one D _strong-

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