International Finance-Nijay Gupta

International Finance (IF) -Overview
 Foundations of IF Management :-
 Globalization and the Multinational Firm
 International Monetary System
 Balance of Payments
 The Market for Foreign Exchange
 International Parity Relationships and
Forecasting Foreign Exchange Rates
 World Financial Markets and
Institutions:-
 International Banking and Money Market
 International Bond market/Equity Market
 Futures and Options of Foreign Exchange
 Currency and Interest Rate Swaps
 International Portfolio Investments
 Foreign Exchange Exposure and
Management:
 Management of Credit Exposure
 Management of Economic – Currency/Country
Exposure
 Management Transaction/Product Exposure
 Management of Translation & Settlement
Exposure
 Financial management of the Multinational Firm:
 Foreign Direct/FII Investments and Cross-Border
Acquisitions
 International Capital Structure and the Cost of Capital
 International Capital Budgeting
 Multinational cash Management
 Export and Imports
 International Tax Environment
 Corporate Governance around the world.
International Finance
Globalization and the Multinational Firm,
Exchange Rate History
Currency Demand and Supply
Balance of Payments
Globalization and the Multinational Firm
 Declining trade barriers, Collapse of Communist power
in Eastern Europe, move toward free market economies
by China and Latin America changes in communication,
information and transportation technologies have
globalized and integrated world economy
 ‘IF’ differs from domestic finance due to – Foreign
exchange & political risks, market imperfections and
expanded opportunity set (firms gaining from greater
economies of scale and deployment of assets on global
basis)by using proper tools and instruments.
 Goals for IF - Maximization of Shareholders worth and
need for Corporate Governance.
Globalization and the Multinational Firm
 MNC’s produces goods in one country, raise finance
from different countries and sell in other countries.
 Globalization of the World Economy – Emergence of
Globalized Financial Markets, Advent of the Euro,
Trade Liberalization (WTO, NAFTA, EU) and
Economic Integration (MNC’s taking comparative
advantage over another country (Theory of
comparative advantage) due to their controlling
capital and know-how i.e. money & technical know-
how power).
Need & Importance of IF
 International Trade & Trade Settlement in
Foreign Exchange
 Globalization & Liberalization by countries
 Integration of Financial Markets with the
development of new financial instruments,
liberalization of regulations governing the
financial markets and increased cross
penetration of foreign ownership
 Cover Trade & Forex Risk with new
instruments & Products
Basic Ingredient of IF
 Same that of WTO i.e. due to free flows
between countries on account of:
 Trade –Trade Finance Products
 Capital – Financial Markets and Instruments
 Arbitrage – Interest Rate between different
markets and different countries
 Movement of People - Need for Money
Transfer –Genuine/Non-Genuine
Trade Theories, Developments,
Barriers and Regulations
 Theory of Absolute Advantage – One country
may be more efficient in producing a
particular good than another country and that
country may be capable of producing some
other good more efficiently than the first one
 Theory of Comparative Advantage – Both
countries enjoy comparative advantage in at
least one of the products and to be seen from
the point of Perfect competition, Productivity,
Full employment, Mobility and Technology.
Developments, Barriers and
Regulations
 Growth/Developments of International Trade
 Risks involved in International Trade
 Emergence of Trading Blocks – Free Trade Area,
Custom Union, Common Market, Economic Union,
NAFTA, ASEAN, SAARC, The European Union
 Trade Barriers – Tariff –Custom/import duty,
taxes/vat –Non-Tariff Barriers – Quota, Embargo,
Subsidies to local goods. Then Technical Barriers,
procurement policies, international price fixing and
Exchange Control Regulations etc
 Various Regulations to Trade – FEMA, Exim Policy etc
International Trade Finance in
India – Risk/Exposure
 Risk in Export-Import Business
 Exposure on:
 Buyer/Seller – Credit, Capital, Capacity, Character and
Conditions of business
 Country Risk – Political Risk, War or War like situation,
Internal Disturbance & Govt. Policy
 Exchange Rate Risk –Price/Volatility Risk –Translation/-
Transaction Risk
 Product Risk - Culture
 Operation Risk, Settlement Risk
 Interest Rate Risk –Inflation, Economic conditions/exposure
India- ECONOMIC SCENARIO
 Forex Reserves touches USD 229.00 Bio
 Good Forex inflow by Exporters/ECB’s/FII’s/-
FDI’s leveraging on capital market and less
outflow by Importers
 Rupee remained between 40.90-40.95
 Inflation around 4.00%
 Forward premium around 1.00% for 1 year
 Libor at 5.50% p.a. for 3 to 6 months
International Trade Finance in India- FINANCING
MECHANISM & CORRESPONDENT BANKS
ACCOUNTS
 Permitted currencies for Payment

(Trade/Investments)
 Collection, Purchase, Discounting or Negotiation
of Export Documents
 Nostro Accounts
 Vostro Accounts
 ACU Dollar Account
 Foreign Currency Accounts for Residents: EEFC,
RFC account and RFC (Domestic) account
India- INCOTERMS –ICC PARIS
 Most commonly used Terms of Shipment are:
 FOB - SHIP, AIR, RAIL(FOR), TRUCK(FOT)
 All cost till the time goods are kept “ON BOARD”
ship/air/rail/truck are borne by the exporter
 CFR:-
 FOB PLUS the freight for the Voyage
 CIF:-
 CFR PLUS the Insurance for the Voyage
India- INCOTERMS –ICC PARIS
 Other Incoterms not much in use:
 FAS : Free Along-side Ship (loading/unloading
expenses not included)
 CIFC: Cost, Insurance, Freight & Commission
 DAF: Deliver at Frontiers
 DDP: Delivered Duty Paid
 ICC, Paris have now grouped these Incoterms as
‘C’, ‘D’, ‘E’ and ‘F’.
India- TERMS OF PAYMENTS
 ADVANCE PAYMENT : By way of
Swift/TT/DD/Cheque /TC’s /CN etc
 DP – SIGHT/COD/CAD: Delivery of Documents
against Payment
 DA – USANCE/CREDIT/TERM
 Delivery of Documents against acceptance.
Maximum credit can be allowed upto 180 days
from the date of shipment
 Letter of Credit
 Consignment & Deferred Payment
International Trade Finance in India- RISKS
ASSOCIATED WITH TERMS OF PAYMENTS
 ADVANCE PAYMENT : Currency Fluctuations,
need to be exported within one year
 DP: The buyer may not come forward to take up
the documents
 DA: The buyer takes the documents but do not
pay on due date
 To cover these risks the Exporters prefers LC,
where a payment is guaranteed by a bank
 Importers prefer LC in order to maintain delivery
schedule by the Exporter
International Trade Finance in India-
TERMS OF PAYMENT-LC
LC is a sort of Guarantee issued by a Bank, on
behalf of the Buyer (applicant) favouring the
supplier (Beneficiary), undertakes to pay by
authorizing another bank (Negotiating Bank) to
pay on complying with the Terms & Conditions
mentioned therein.
 LC is also known as Documentary Credit as Banks
deals in Documents and not in goods
 Each LC should mention that “This LC is subject
to UCPDC publication no. 600, (2007 Revision)
ICC guidelines” to be operative
International Trade Finance in India- TYPES OF
DOCUMENTARY CREDITS/LC’S
 REVOCABLE: Which can be cancelled by the
applicant without the consent of beneficiary
 IRREVOCABLE: Which can not be cancelled or
amended without the consent of beneficiary
 Irrv. CONFIRMED: Which has been confirmed
by advising, another bank in the same country or
another country
 Irrv. TRANSFERABLE: Which is transferred by
the Advising Bank at the request of Beneficiary to
third party
 Irrv. Back to Back: Wherein another Lc is
established by beneficiary on security of main LC
 Irrv. Revolving: Wherein the credit available gets
re-instated after utilization of the amount, Can be
Cumulative or Non-Cumulative
 Irrv.Standby: Used for transactions in US in place
of Guarantee for payment of Loan/lease etc
 Irrv. Deferred Payment: Wherein the payments are
made in Installments and deferred over one year
 Irr. Red Clause: Wherein the payment is made in
advance through an LC mechanism by the buyer’s
bank against the Indemnity & undertaking by the
Beneficiary to export the goods
 Irr. Restricted: Wherein the Lc is restricted for
negotiation to a particular bank
CHECKLIST ON RECEIPT OF LC
 Name & Address of the Applicant & Beneficiary
& Amount
 Should be in English language only
 Description of goods should be as per LC
 Terms of Shipment/Payment/Reimbursement
 Mode of Transport, Part/Trans-shipment
 Restricted or confirmed, charges thereon
 Inspection & other Terms & Conditions matches
with that of the Performa Invoice or Contract
 Shipment/ Expiry date and Negotiation Period
EXPORT/IMPORT FINANCE SCHEME
 Common Scheme for all types of Exporters in all
the Banks in India
 Scheme guided by RBI in its Monetary Policy
 Money given at Concessional Rate of Interest at
Pre-shipment & Post Shipment stage to meet
Short-Term Working Capital.
 Repayment of Loan/credit from Overseas only
 Banks are partly Refinanced by RBI & this ranks
for Priority Sector Finance of Banks
 PRE-SHIPMENT CREDIT: (RUPEES/FC)
 Upto 180 Days : Not exceeding PLR
minus 2.5%
 Beyond 180 to 270 days: Not exceeding PLR
plus 0.5%
 PCFC upto 180 days: Not exceeding
LIBOR plus 1.00%
 PCFC 181 to 365 days: Not exceeding
LIBOR plus 3.00%
 POST SHIPMENT CREDIT (RUPEES/FC)
 On DP Bills upto NTP : Not exceeding PLR
minus 2.5%
 On Usance Bills:
 upto 90 days : Not exceeding PLR minus
2.5% (PLR -4.50% for SME)
 Beyond 90 to 6 months: Not exceeding PLR
plus 0.5%
 Bills Reds. Scheme : Not exceeding LIBOR
plus 1.00%
 IMPORTERS are not given any concessional Finance, however they
take benefit through Buyer’s Credit from overseas Banks/Institutions
IMPORTS - PAYMENTS
 Advance payment beyond USD 100,000 or 15%
of the amount for Import of Capital goods,
requires guarantee from an reputed International
Bank outside India. Ad’s now free to decide their
own policy based on Importers past relationship.
 Remittance against import bills should be made
within 6 months.
 Interest on import bills upto 6 months can be paid
upto LIBOR/Prime rate of the country. Beyond 6
month, payment of interest under suppliers credit
requires RBI approval
INTERNATIONAL FACTORING
 Factoring is purchase of EXPORT receivable
(with or without recourse) on an ongoing basis.
 The management, collection & administration is
taken over by the factor for exports on open
accounts terms
 Finance is made available upto 90% of the invoice
value
 Offered by Global Trade Finance a subsidiary of
Exim Bank in India, Canfactors & HSBC Factors
etc
INTERNATIONAL FORFAITING
 Forfaiting is purchase of medium to long-term
export receivables backed by a LC or banker’s
acceptance from the buyers bank at a discount on
a without recourse basis
 Exim Bank and Authorized Dealers offers this
product to exporters for a minimum amount of
USD 50,000/-
 RBI allows banks to pay forfaiting charges in
advance
FACTORING : FORFAITING
 Suited for on going  Single transactions
open a/c sales not backed by LC or a
backed by LC or Bank Guarantee
accepted Bills of
Exchange  For long-term credit
 Provide short-term upto 10 yeas, though
credit upto 180 days available for Short
term too
FACTORING : FORFAITING
 Requires regular  Deals concluded
arrangement for all the transaction wise
sales  Single discount
 Separate charges for charges for
Financing, collection, Guaranteeing Bank,
Admn, credit Country risk, credit
protection, providing period involved and
information and can be currency of debt &
with or without addl. Charge of
recourse commitment fee
International Monetary System
 It’s a system where Intl payments are made, movement of
capital accommodated and exchange rates of currencies
determined
 It went through 5 stages – Bimetallism (coinage in silver & gold
lead to Gresham’s law for fixing exchange ratio of 2 metals)),
classical gold standard (exchange ratio decided on gold
contents of currencies), interwar period (no clear rule lead to 44
nations meeting in 1944), Bretton Woods system (established a
par value in relation to USD which was fully convertible to gold)
and flexible exchange rate regime (replaced Bretton Woods due
to spectacular rise & fall of USD in 1980).
 1987 –G-7 countries agreed for Managed-float system for jointly
intervening in Forex market to cover over- or undervaluation of
currencies.
International Monetary System
 1979 – EEC launched European Monetary System (EMS) to establish
‘zone of monetary stability’ in Europe
 EMS are ECU (European Currency Unit basket) and ERM (Exchange
Rate Mechanism) instruments based on parity grid that member
countries required to maintain for EMS accounting.
 1999 – 11 countries adopted common currency called Euro. Greece
adopted in 2001. Euro -12 helps reduced transactions cost, elimination
of exchange rate uncertainty and development of continentwide capital
markets
 European Monetary Union (EMU) common monetary policy for 12 euro
countries formulated by ECB located at Frankfurt. European System of
Central Banks (ESBS) implements monetary policy of EMU in 12 –euro
countries
 EMU members prefer Fixed Exchange rate whereas US & Japan prefer
Flexible exchange rates. Choice between two involves trade-off
between national policy autonomy and international economic
integration
Balance of Payments
Current Account
Capital Account
Official Reserve Transactions
Quick vocab review - BOP
 Credit: any money flowing into the country is
listed on balance of payments as a credit
 Exports
 Foreigners investing in domestic real or financial
assets
 Debit: any money flowing out of the country is
listed on balance of payments as a debit
 Imports
 Domestic citizens investing in foreign real or financial
assets
International Finance
 A country’s balance of payments summarizes all

economic transactions that occur during a given time
period between residents of a country and residents
of other countries.
 Balance of payments statements measure a flow because
they summarize transactions in a given time period (year).
 Transactions that don’t involve money are included.
(Example: Food sent by world hunger organizations would
be included.)
 Accounts are maintained according to double-entry book
keeping. (Debits- payments from us to the rest of the world,
Credits – payments by the rest of the world to us
Components of Balance of Payment
Accounts
 Current account balance:

 Balance on goods and services – The section of a
country’s balance of payments account that
measures the difference in value between a
country’s exports of goods and services and its
imports of goods and services. (Includes income
earned from foreign assets owned by Indians
minus income earned from India’s assets owned
abroad.)
 Unilateral transfers–payments of gifts and grants
among countries (India has negative net unilateral
transfers since World War II)
Implications of Current Account
Deficit (i.e. trade deficit)
 Is a trade deficit financed by a capital
accounts surplus bad?
 The trade deficit as an automatic
stabilizer
 How could the trade deficit be
removed?
 Exchange rate devaluation
 Economic recession
Current account
 Includes all transactions involving goods
and services, as well as transfers
between residents of different countries
 Here, India typically runs deficit
 Exports < imports (deficit)
 Net unilateral transfers mostly deficit
Components of Balance of
Payment Accounts (cont.)
 Capital account – The record of a country’s
international transactions involving purchases or
sales of financial and real assets (borrowing, lending,
and investments).
 Official reserve transactions account – The section of
a country’s balance-of-payments account that reflects
the flow of gold, Special Drawing Rights, and
currencies among central banks
 A negative current account will be offset by a positive
capital account if exchange rates are flexible (no
intervention of official reserves)
Capital account
 Calculates foreign investment
 Foreigners’ purchases of India’s financial
assets or real assets (India credit)
 India purchase of foreign financial assets
or real assets (India debit)
Exchange Rate History
Gold Standard
Bretton Woods
International Monetary Fund
Gold standard
 Currency of each country could be
redeemed directly for a fixed amount of
gold
 Problems with commodity money: subject
to forces of supply and demand
 New gold discoveries caused inflation
 Country’s money supply strongly affected
by its international balance of payments
Bretton Woods
 Foreign currencies were linked to U.S.
dollar for exchange rates
 U.S. dollar was fixed to gold
 Foreign currencies could be exchanged
to dollars, which could then be
exchanged for gold
 Creation of the International Monetary
Fund (IMF)
Currency appreciation
 If U.S. $ appreciates relative to the
German mark, 1 $ will now buy more
marks, or it will take more marks to
exchange for 1 U.S. dollar
 Originally: 1 $ = 2.2965 German marks
1 German mark = 0.4355 U.S. $
 After $ appreciation: 1 $ = 2.50 German
marks
Currency depreciation
 If U.S. $ depreciates relative to the
German mark, 1 $ will now buy fewer
marks, or it will take less marks to
exchange for 1 U.S. dollar
 Originally: 1 $ = 2.2965 German marks
 After $ depreciation: 1 $ = 2.00 German
marks
Other terminology
 Currency devaluation: foreign exchange
becomes more expensive; domestic
currency becomes weaker (relative to
other currencies)
 Currency revaluation: foreign exchange
becomes less expensive; domestic
currency becomes stronger (relative to
other currencies)
Relationship Between Trade
Balance and Currency Value
How does an appreciation or

depreciation of the dollar affect
our imports and exports?
Net export function - Holds constant
 Home Country price level
 Price levels in foreign countries
 Home Country interest rates
 Interest rates in foreign countries
 Foreign income levels
 U.S. dollar/INR exchange rates
Indian interest rates
 Capital account includes purchase of
both financial and real assets
 Increase in Indian interest rates relative to
interest rates in other countries make
investment in India relatively more
attractive to foreign investors
 This is counted as a credit for the India
capital account
Interest rates in foreign
countries
 Remember that capital account does include
financial (interest – earning) assets
 Increase in interest rates in foreign countries
relative to interest rates in India makes foreign
investment relatively more attractive to foreign
and domestic investors
 India investors to send money abroad
 This is counted as a debit for the India capital
account
Foreign income levels
 Increase in income will increase demand
 This does not only increases demand for domestic
goods and services, but also for foreign goods and
services (imports)
 This will potentially increase India exports
 A decrease in income (in foreign countries)
will reduce demand for goods and services
(both domestic and imported)
Currency appreciation
 INR now buys more units of a foreign
currency
 Indian goods now relatively more expensive for
foreigners, so exports decrease
 Foreign goods now relatively less expensive for
domestic consumers, so imports increase
 Decreases India’s net exports (exports – imports)
Currency depreciation
 INR now buys fewer units of a foreign
currency
 Indian goods now relatively less expensive
for foreigners, so exports increase
 Foreign goods now relatively more
expensive for domestic consumers, so
imports decrease
 Increases India’s net exports (exports –
imports)
Purchasing Power Parity
What is the general idea?

The general idea
 The exchange rate between 2 countries will
adjust to reflect the differences in the price
levels between the 2 countries, so that the
same amount of money should allow you to
buy the same amount of goods / services in
either country
 If a country has a high price level, its currency will
be cheaper
 If a country has a low price level, its currency will
be more expensive
The general idea (cont.)
 If a country has a high price level
 Exports will fall (currency demand decreases)
 Imports will rise (currency supply increases)
 Currency depreciates
 If a country has a low price level
 Exports will rise (currency demand increases)
 Imports will fall (currency supply decreases)
 Currency appreciates
Determinants of Foreign
Exchange Rate
 Foreign exchange is needed to carry out foreign
transactions
 The exchange rate is the price of one country’s
currency measured in terms of another country’s
currency
 Currency depreciation lowers the price of your
currency to foreigners (and lowers the price of your
exports and raises the price of imports)
 Currency appreciation increases the price of your
currency to foreigners (and increases the price of your
exports and lowers the price of imports)
Flexible and Fixed Exchange
Rates
 Flexible exchange rates – Rates determined by the
forces of supply and demand without government
intervention
 Fixed exchange rates – Rates pegged within a narrow
range of values by central banks’ ongoing purchases
and sales of currencies
 The Current System: Managed Float- an exchange
rate system that combines features of freely floating
rates with intervention by central banks (to moderate
fluctuations in exchange rates).
 The ideal system would foster international trade,
lower inflation, and promote a more stable economy.
The Foreign Exchange Market
 The Functions & Structure of the Forex Market
 Foreign Exchange
 Types of Transactions
 The Spot Market
 Spot Rate Quotations
 The Bid-Ask Spread
 Spot FX Trading
 Cross Exchange Rate Quotations
 Arbitrage
 Spot Foreign Exchange Market Microstructure
 The Forward Market
 Settlement Dates
 Quotes for Various Kinds of Merchant Transactions
 The Indian Scenario
Convertibility, Exchange Control
The FEDAI Rules Regarding Inter-bank Dealings
Forex Dealing Room Operations
Structure of the Forex Market
Decentralized, over-the-counter market, also known
as the 'interbank' market
 Main participants: Central Banks, commercial and
investment banks, hedge funds, pension funds,

corporations & private speculators
 The free-floating currency system began in 1973,
and was officially mandated in 1978

 Online trading began in the mid to late 1990's
Trading Hours
24 hour market
Sunday 5pm EST through Friday 4pm EST. Rollover at 5pm EST
Trading begins in New Zealand, followed by Australia, Asia, the
Middle East, Europe, and America
Size
Largest market in the world
$ 2 trillion average daily turnover, equivalent to:
15 times the average daily turnover of global equity markets
Nearly 50 times the average daily turnover of the NYSE
The spot market accounts for about one-third of daily turnover
Major Markets
 The US & UK account for more than 50% of turnover
 Major markets: London, New York, Tokyo
 Trading activity is heaviest when major markets overlap
 Nearly two-thirds of NY activity occurs in the morning hours
while European markets are open
Trading
 An estimated 95% of transactions are speculative
 More than 40% of trades last less than two days
 About 80% of trades last less than one week
 Brokers research: 90% of traders lose money, 5% break even, 5%
make money
Structure of the Forex Market -
Country wise turnover
Currency Percentage Share
USD 88.7
EURO 37.2
JPY 20.3
GBP 16.9
CHF 6.1
AUD 5.5
CAD 4.2
Others 21.1
Total 200.0
Structure of the Forex Market -
Country Pair-wise turnover
Currency Percentage Share
EURO/USD 28
USD/JPY 17
GBP/USD 14
AUD/USD 5
USD/CHF 4
USD/ CAD 4
EURO/JPY 3
Others 25
Total 100
Average Electronic Conversions Per Hour
Around-the-clock FX trading
25,000
20,000
15,000
10,000
5,000
Greenwich Mean Time

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
10 AM Lunch Europe Asia Americas London Afternoon 6 pm Tokyo

In Tokyo In Tokyo opening closing open closing in America In NY opens
World FX transactions
USD 2 trillion per day
spot
33%
FX sw aps
50%
forw ard
gap 11%
6%
FX market in the U.S. is the most
active market in the U.S
 600 billion turnover per day, in 2006
 Comparisons with U.S. asset markets:
· 10 times the turnover of U.S. govt. bonds
· 50 times the turnover of NYSE stocks
 Comparisons with real activity in U.S.:
· 10 times U.S. daily GDP
· 30 times U.S. daily exports + imports
Primary functions of FX Market
 Currency conversions associated with
international payments process
 Provision of credit to clients
(also part of international payments
process)
 Managing exchange rate risk
Structure of FX Market (retail level)
domestic ($/INR) foreign (FC)
central bank for. central bank
Interbank mkt
firms ($/INR or FC) for. firms
investors Exchange-traded for. investors

futures & options (not
In India)
Structure of FX Market: interbank
(wholesale) level
 Banks trade with each other
· in response to the retail orders they receive
· to manage their own accounts
 Banks trade
· directly with other banks
· indirectly through FX brokers
FX market
domestic foreign
($/INR) (FC)
FX broker
Corp.
order dom. for. Corp.
bank bank order
Corp. dom. for. Corp.

order bank bank order
$/INR or/FC
Direct vs. brokered interbank trades
 Direct dealing
Banks face another bank’s bid-ask spread, at which they can transact
immediately
 Brokered trades
Get best price of all posted buys/sells
· 56% of all dealers’ trades are with other dealers
· 31% are with other financial institutions
(brokers, mutual funds, ...)
· 13% are with non-financial customers
· 66% of all trades are with foreign counterparties
 Much (56%) of FX trading is in the interbank (wholesale) market
 However, the retail orders are the important ones
that determine exchange rates
· Interbank traders are intermediaries
(market makers)
· temporarily take positions intra-daily, but
work hard to zero out their positions regularly

and by the end of the day
FOREX Market Participants
 The FOREX market is a two-tiered market:
 Interbank Market (Wholesale)
 About 700 banks worldwide stand ready to make a market in
Foreign exchange.
 Nonbank dealers account for about 20% of the market.
 There are FX brokers who match buy and sell orders but do
not carry inventory and FX specialists.

 Client Market (Retail)
 Market participants include international banks, their customers,

nonbank dealers, FOREX brokers, and central banks.
Correspondent Banking Relationships
 Large commercial banks maintain demand deposit
accounts with one another which facilitates the efficient
functioning of the forex market.
 International commercial banks communicate with one
another with:
 SWIFT: The Society for Worldwide Interbank
Financial Telecommunications.
 CHIPS: Clearing House Interbank Payments System
 ECHO Exchange Clearing House Limited, the first
global clearinghouse for settling interbank FOREX

transactions.
FOREIGN EXCHANGE MARKET
 PRICES AND NEWS - LIFE BLOOD
 F I R E - LITTLE IS GOOD BUT MUCH IS BAD
 MARKET MOVERS
 TRADERS
 HEDGERS
 ARBITRAGERS
 SPECULATORS
GLOBAL MARKET MOVERS
 OIL PRICES
 GROUP OF SEVEN G 7
 GLOBAL STOCK MARKETS {DOW JONES, NIKKEI,

HANG SENG, FTSE, DAX 30, BSE, NSE, OTC}
 BALANCE OF TRADE
 WAR OR THREAT OF WAR
 VALUE OF DOLLAR
PEOPLE MARKET MOVERS
 PRESIDENT OF U.S.
 CHAIRMAN OF FEDERAL RESERVE
 PRIME MINISTER OF U.K.
 CHANCELLOR OF EXCHEQUER
 INDIAN P.M / F.M / RBI GOVERNOR
 ECB PRESIDENT
 SUMMIT/TRADE TALKS
MONETARY AND FINANCIAL MARKET
MOVERS
 INTEREST RATES
 SHORT TERM/LONG TERM
 YIELD CURVE
 BASE RATE
 FED FUNDS RATE/DISCOUNT RATE
 INFLATION AND MONEY SUPPLY

 TOO MUCH OF MONEY CHASING TOO FEW GOODS
 OPEN MARKET OPERATIONS
 TAXATION - HIKES AND CUTS
 LEADING INDICATORS
SPECIAL FEATURES OF FX MKT
 MANAGED FLOAT
 FLOW DRIVEN
 TRADE FLOWS
 CAPITAL FLOWS
 OPTIONS HEDGING
 REER / RBI EAR

 MONTH END SYNDROME
 GLOBAL DOLLAR VALUE
 IMPACT OF US DATA RELEASE
 INFLUENCE OF NDF MARKET
CAPITAL FLOWS
 FII FLOWS
 FDI FLOWS
 FCCB / ECB FLOWS
 NRI REMITTANCE
 FCNR(B) DEPOSITS
 NRE RUPEE DEPOSITS – REMITTANCES

The Spot Market
 Spot Rate Quotations - SPOT USD INR, SPOT CROSSES
 The Bid-Ask Spread
 Spot FX trading
 Cross Rates
 SWAP USD INR
 POSITION TRADING
 IN AND OUT TRADING
 MARKET MAKERS
 MARKET USERS
 FUNDAMENTAL ANALYSIS
 TECHNICAL ANALYSIS
Spot Rate Quotations Spot Rate
Quotations
 Direct quotation
 the U.S. dollar equivalent
 e.g. “a Japanese Yen is worth about a penny” =
$.01/yen
 Indirect Quotation
 the price of a U.S. dollar in the foreign currency
= Y100/$
 e.g. “you get 100 yen to the dollar”
Spot Rate Quotations
USD
equiv USD equiv Currency per Currency per
Country Friday Thursday USD Friday USD Thursday
Argentina
(Peso) 0.3309 0.3292 3.0221 3.0377
Australia
(Dollar) 0.5906 0.5934 1.6932 1.6852
Brazil (Real) 0.2939 0.2879 3.4025 3.4734
Britain (Pound) 1.5627 1.566 0.6399 0.6386
The direct
1 Month quote for
Forward 1.5596 1.5629 0.6412 0.6398
British pound
3 Months is:
Forward 1.5535 1.5568 0.6437 0.6423
6 Months £1 = $1.5627
Forward 1.5445 1.5477 0.6475 0.6461
Canada (Dollar) 0.6692 0.6751 1.4943 1.4813
1 Month
Forward 0.6681 0.6741 1.4968 1.4835
Spot Rate Quotations
USD equiv USD equiv Currency per Currency per

Argentina (Peso) 0.3309 0.3292 3.0221 3.0377
Note that the
Australia (Dollar) 0.5906 0.5934 1.6932 1.6852
direct quote
Brazil (Real) 0.2939 0.2879 3.4025 3.4734 is the
Britain (Pound) 1.5627 1.566 0.6399 0.6386 reciprocal of
1 Month Forward 1.5596 1.5629 0.6412 0.6398 the indirect
3 Months Forward 1.5535 1.5568 0.6437 0.6423 quote:
6 Months Forward 1.5445 1.5477 0.6475 0.6461
Canada (Dollar) 0.6692 0.6751 1.4943 1.4813 1
1.5627 
1 Month Forward 0.6681 0.6741 1.4968 1.4835 .6399
3 Months Forward 0.6658 0.6717 1.502 1.4888
6 Months Forward 0.662 0.6678 1.5106 1.4975
The Bid-Ask Spread
 The Bid price is the price a dealer is willing
to pay for a currency
 The Ask price is the amount the dealer
offers to sell you a currency. It’s the price
the dealer wants for the sale of currency
 Bid-Ask Spread = [Ask price - Bid price] >
0
Spot FX trading
 In the interbank market, the standard size
trade is about U.S. $10 million.
 A bank trading room is a noisy, active
place.
 The stakes are high.
 The “long term” is about 10 minutes
Spot Foreign Exchange Microstructure
 Market Microstructure are the mechanics of how a
marketplace operates.
 Spot mkt Bid-Ask spreads in the:
 increase with FX exchange rate volatility and
decrease with dealer competition.

 Private information is an important determinant of spot
exchange rates. - Mkt adjusts to econ info in 1min.
- 1/3 of traders claim adjustment < 10 sec
- Central bank intervention does not work; it increase
volatility.
The Forward Market
 Forward Rate Quotations
 Long and Short Forward Positions
 Forward Cross Exchange Rates
 Swap Transactions
 Forward Premium
 A forward contract is an agreement to buy or sell

an asset in the future at prices agreed upon today.
If you have ever had to order an out-of-stock
textbook, then you have entered into a forward
contract.
Forward Rate Quotations
 The forward market for FOREX involves
agreements to buy and sell foreign currencies in
the future at prices agreed upon today.
 Bank quotes for 1, 3, 6, 9, and 12 month
maturities are readily available for forward
contracts.
 Longer-term swaps are available.
Quotations
USD equiv USD equiv Currency per Currency per Clearly the
market
Argentina (Peso) 0.3309 0.3292 3.0221 3.0377
Australia (Dollar) 0.5906 0.5934 1.6932 1.6852
participants
Brazil (Real) 0.2939 0.2879 3.4025 3.4734 expect that the
Britain (Pound) 1.5627 1.566 0.6399 0.6386 pound will be
1 Month Forward 1.5596 1.5629 0.6412 0.6398 worth less in
3 Months Forward 1.5535 1.5568 0.6437 0.6423 dollars in six
6 Months Forward 1.5445 1.5477 0.6475 0.6461 months.
Canada (Dollar) 0.6692 0.6751 1.4943 1.4813
1 Month Forward 0.6681 0.6741 1.4968 1.4835
3 Months Forward 0.6658 0.6717 1.502 1.4888
6 Months Forward 0.662 0.6678 1.5106 1.4975
Forward Rate Quotations
 Consider the example from above:

for GBP, the spot rate is
$1.5627 = £1.00
While the 180-day forward rate is
$1.5445 = £1.00
 What’s up with that?
Long and Short Forward Positions
 If you have agreed to sell anything (spot or
forward), you are “short”.
 If you have agreed to buy anything (forward
or spot), you are “long”.
 If you have agreed to sell FX forward, you are
short.
 If you have agreed to buy FX forward, you are
long.
SWAPS/ Forward Premium
A swap is an agreement to provide a counterparty with
something he wants in exchange for something that
you want.Swap transactions account for
approximately 56 percent of interbank FX trading,
whereas outright trades are 11 percent.
Forward Premium is just the interest rate differential
implied by forward premium or discount.
Convertibility-Definition
 The ease with which a country's currency can be
converted into gold or another currency.
Convertibility is extremely important for
international commerce. When a currency in
inconvertible, it poses a risk and barrier to trade with
foreigners who have no need for the domestic
currency
 The quality of being exchangeable (especially the
ability to convert a currency into gold or other
currencies without restriction)
Convertibility-Definition
 Government restrictions can often result in a
currency with a low convertibility. For example, a
government with low reserves of hard foreign
currency often restrict currency convertibility
because the government would not be in a position
to intervene in the foreign exchange market (i.e.
revalue, devalue) to support their own currency if
and when necessary
Rupee Convertibility
The Indian Rupee is

1) for all intents and purposes, fully Convertible to
the US$ on the Trade Account and Current
Account. This means Indians can buy US$ for
their Trade, Travel, Fees, Education, Interest,
Dividend payments etc. US Dollars can also be
converted into Rupees
2) largely, NOT convertible to US$ on the Capital
Account, especially when the flow of capital is
from India to outside.
However, degrees of convertibility have been

brought in. For instance,
- Indian companies can invest in/ set up
subsidiaries abroad. Limits are placed on the
amount of investment
- Indian mutual funds, since last year, have been
allowed to invest in overseas markets, though we
doubt if activity has picked up on this front
- Dividend and Interest payments to investors
abroad are unhindered
 Flow of Capital from outside India (investments into India) are

unencumbered from the "convertibility" point of view.
 Investors may need to garner various necessary permissions as
required to invest in the equity market, debt market or to set
up greenfield projects or buy over existing companies. These
are, essentially, outside the ambit of "convertibility"
 Indian Rupee is not legally pegged to the Dollar. It is market
traded currency, though the trading itself is controlled by
various measures. Technically, the Indian Rupee is in a
"Managed Float" or "Dirty Float", like the Yen.
Exchange Control
 Introduced during post-WW II period
 More stringent in post-independence era
 FERA 1948, MORE powers in 1973
( Rigid import controls, highest duties, industrial policy
towards import substitution, foreign investment discouraged
etc.– CLOSED ECONOMY)
 1991 BOP crisis – Policy shifts
 August 1994—Current account convertibility
 1999 FEMA
Objectives of Dealing Room

 Affording the best possible customer service
 Managing the bank’s foreign currency exposures
 Generating profit for the bank
 Ensuring the compliance of relevant regulations
Participants
 Organizations
 Commercial banks
 Central banking authority
 Brokers
Indian Regulations
 Brokers role is to bring market participants together
 Brokers do not buy or sell on their own account
 Brokers not allowed to as principals or maintaining foreign
currencies
 Brokers notes to be received promptly and acted upon on the
same day by dealers

 Nominations of deals not done by them not permitted
 Spread of brokers
 Duty separation for dealers

Dealing Process
Dealing
Customer Bank Branch Room
Front Office
Front Office: Actual dealing Mid-Office

Domestic market
Mid-Office: Risk
management,
accounting and MIS Back Office
Back Office: Settlement,
Reconciliation, compliance
and accounting Global Market
Regulatory Requirements
Daily Fx turnover and Gaps position and Cash Balance
Monthly statement in USD denomination
 Gap Limits, Aggregate gap limit (AGL) approved
 Maximum AGL on any day
 VaR approved
 Maximum VaR on any day during the month
 TRADING LIMITS
 DAYLIGHT LIMITS
 OVERNIGHT LIMITS
 STOP LOSS LIMITS
 CREATING AND MONITORING MISMATCHES
 EXPORT AND IMPORT TRANSACTIONS
 GENUINE MISMATCHES
 DELIBERATE MISMATCHES
 Front Office: Confirmation, stamped agreement, P/L
evaluation monthly report, gold and record maintenance
 Policy prescriptions
 Strategy formulation
 Concentration limits
 Risk processes
 Task delineation
 Internal accounting/reporting
 Secrecy issues
Managing Risks
 Open position  Day light, overnight and cut loss
 Maturity  IGL, Monthly Limits, AGL, etc.
mismatch
 Credit risk  Country/group, currency limits
 Operational  Duty segregation, processes, etc
Risk
 Legal Risk  Responsibility fixation, supports,
 Sovereign etc.
Risks  External data, monitoring, etc.
Rate Mechanism
Transaction Buying Selling
Spot TT Base 48.5500 Base
Less Margin@.08% 0.0380 48.7000
Spot TT 48.5120 Add Margin@.15%
0.0731
Spot TT 48.7731
Forward TT Base 48.5500 Base 48.7000
Add Premium 0.1500 Add Premium 0.2000
Less Margin@0.08% 0.0389 Add Margin@.15% 0.0734
Forward 48.6611 Forward 48.9734
Bill Base 48.5500 Base 48.7000
Premium 0.4000 Add Margin@.15% 0.0731
Add Margin@0.2% 0.0975
Less Margin@.15% 0.0734 Bill 48.8706
Bill 48.8766
TC Base 48.7500 TT Selling 48.7641
Less Margin@1% 0.4875
MANAGING FOREX TRADING DESK
 ANALYSING AND INTERPRETING THE DATA
 DATA IN LINE WITH THE MARKET EXPECTATION
 HOW MUCH IS ALREADY DISCOUNTED?
 NO REACTION FROM THE MARKET – PRICED IN
 DATA GOOD OR BAD
 ARE THERE ANY SEASONAL ADJUSTMENTS?
 ECONOMIC DATA VIZ., INDUSTRIAL PRODUCTION,
EXPORT AND IMPORT, MONEY SUPPLY, RETAIL SALES
MAY BE INFLUENCED BY SEASONALFACTORS
 RIFLE APPROACH
 R - READ
 I – INTERPRET
 F – FORM THE VIEW
 L – GO LONG OR SHORT
 E – EXIT AT THE OPPORTUNE OR
APPROPRIATE TIME
INR – DISCOUNT & PREMIUM
 IN THE INDIAN FOREX MARKET FORWARD DIFFFERENTIAL
NOT LINKED TO THE INTEREST RATE DIFFERENTIAL
 MULTIPLICITY OF INTEREST RATES
 ADMINISTERED INTEREST RATES
 RESTRICTIVE MONEY MARKET CONDITIONS
 DEMAND AND SUPPLY FACTORS DOMINATE
 PERCEPTION OF THE CURRENCY – DEPRECIATION OR
APPRECIATION OF INR
 CENTRAL BANK’S PARTICIPATION
 MONEY MARKET CONDITIONS – ADVANCE TAX OUTLFOWS,
FCNR(B), EEFC AND ECB FUNDS
 MONETARY AND FISCAL POLICY
 INFLUENCE OF NDF MARKET
 SOME TRADING MAXIMS
 WHEN YOU HAVE A POSITION FORGET YOUR EMOTIONS
 TREND IS YOUR FRIEND – DONT FIGHT THE TREND
 CONTRARIAN VIEW MAY WIN BUT NOT ALWAYS
 THE FEAR OF LOSS IS MORE THAN THE LOSS
 WHEN IN DOUBT GET OUT
 WHEN THE ONLY THING LEFT IS HOPE YOU ARE SITTING
WITH THE WRONG POSITION
 TRADING DISCPLINE IS NOT ONLY IN CUTTING LOSSES
BUT ALSO IN TAKING PROFITS
 THERE IS MORE TO LIFE THAN TRADING
FEMA ACT 1999 Defines Foreign Exchange as “Foreign Exchange means &
includes:
a) All deposits, credits and balances
payable in foreign currency, and any
drafts, traveller’s cheques, letters of credit
and bills of exchange, expressed or
drawn in Indian currency and payable in
any foreign currency.
b) Any instrument payable at the option of

the 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”.
FX Rates
 What is Exchange Rate ?
 Exchange Rate is a rate at which one currency can
be exchanged into another currency. In other
words it is value one currency in terms of other.
say:
US $ 1 = Rs.45.18
This rate is the conversion rate of every US $ 1 to
Rs. 45.18
Factors Determining Exchange
Rates
(a). Fundamental Reasons:
- Balance of Payment – surplus leads to stronger currency.
- Economic Growth Rates –High/Low growth rate.
- Fiscal / Monetary Policy- deficit financing leads to depreciation of
currency.
- Interest Rates –currency with higher interest will appreciate in the short
term.
- Political Issues –Political stability leads to stable rates
(b). Technical Reasons
- Government Control can lead to unrealistic value.
- Free flow of Capital from lower interest rate to higher
interest rates.
(c). Speculation – higher the speculation higher the volatility in rates
(d) Developments abroad
Methods of Quotation
 Method – I  Method – II
 One Orange = Rs 2  Rs. 10 = 5 Oranges
 One Apple = Rs 2.50  Rs. 10 = 4 Apples
Price under both the methods is the same though expressed differently
Method - I Method - II
DIRECT(FC fixed) INDIRECT( HC fixed)
USD 1 = Rs 45.18 Rs 100 = USD 2.2133
GBP 1 = Rs.85.99 Rs 100 = GBP 1.1629
EUR 1 = Rs 57.92 Rs 100 = EUR 1.7265
With Effect from 02.08.1993, all exchanges are quoted in Direct

Method
Understanding Two Way Exchange Quotes
In Forex markets , there are two way
quotes i.e. both buying and selling
rates are given.
 1 USD = INR 45.16/ 18
 BUYING RATE $/RE = RE 45.16
 SELLING RATE $/RE = RE 45.18
In the abovementioned quote,

lowest is market buying rate and highest is market selling rate.
Understanding Two Way Exchange Quotes
One of the features of the FX markets is that this is the
nearest form of perfect markets existing today.
One of the reasons why this is so is that prices are always

Quoted as TWO WAY QUOTES
U S D 1 = C H F 1 .2 5 7 0 /7 3
C H F 1 .2 5 7 0 C H F 1 .2 5 7 3
B U Y IN G R A T E S E L L IN G R A T E
Understanding Exchange Rates
Dollar/Swiss Francs -- USD/CHF
 Note the order of the currencies
 “USD” comes before the “CHF”
 The first currency($) - Base currency

 Second currency (CHF) - Terms currency
 It is important to remember that Bid & Offer in

trading always refers to the BASE CURRENCY.
Understanding Exchange Quotes
 In the FX market, Time is of great importance.
 Therefore, there are short forms for everything.
 While quoting, the dealers use only the third & fourth
decimals.
 USD/CHF 1.2540 / 45
 USD/INR 45.1675 / 00
 GBP/USD 1.8000 / 10
 BIG FIGURE
 In a live dealing scenario dealers would quote only
40/45 , 75/figure , figure/10 and the market assumes

that all players already know the BIG FIGURE
Calculating Cross Rates
 India is a market maker for Indian Rupee
 Dollar/ Rupee trading ( the first quotes) start in the Mumbai Market
 BUT WHAT ABOUT OTHER CURRENCIES ?
 WHERE DO RATES FOR CHF, GBP, EUR ETC COME FROM? HOW
ARE THEY CALCULATED?
 A CHF/RUPEE RATE IS A CROSS OF DOLLAR/RUPEE & DOLLAR /

CHF.
 DOLLAR / RUPEE = 45.35/36
 DOLLAR / CHF = 1.3440 / 45
 CHF / RUPEE = 33.73 / 75

 In other words, 45.36 / 1.3440 = 33.75 AND
 45.35 / 1.3445 = 33.73
Calculating Cross Rates
 India is a market maker for Indian Rupee
 Dollar/ Rupee trading ( the first quotes) start in the Mumbai Market
 BUT WHAT ABOUT OTHER CURRENCIES ?
 WHERE DO RATES FOR CHF, GBP, EUR ETC COME FROM? HOW
ARE THEY CALCULATED?
 A CHF/RUPEE RATE IS A CROSS OF DOLLAR/RUPEE & DOLLAR /

CHF.
 DOLLAR / RUPEE = 45.16/18
 DOLLAR / CHF = 1.2570 / 73
 CHF / RUPEE = 35.92 / 94

 In other words, 45.16 / 1.2570 = 35.92 AND
 45.18/ 1..2573 = 35.94
Forex market conventions
 Standard nomenclatures
 Concept of value date
 Dealing and settlement locations
 Standard ways of quoting
 Direct Quote
 Indirect Quote
 Exchange rate quote is always given as a number of
units of the quoted currency per unit of the base
currency eg. USD/INR
Forex market conventions-contd
 Example of a Standard Quotation
 USD/CHF Spot: 1.4550/1.4560
 The left-side price is the bid i.e the dealer will buy 1
USD and the “bid” rate for USD is CHF1.4550. His
“offer” or “ask” rate for one USD is CHF 1.4560 i.e he
would be paid CHF 1.4560 for 1 USD sold.
 For most currencies quotations the base currency
is the dollar. The major exceptions are
EUR,GBP,AUD and NZD
Forex market conventions-contd
 Quotations in inter-bank are usually up to
four decimal places and the last two digits
are called pips or points.
 Direct and Indirect methods of quoting
 No fees charged
 Transaction cost in the bid-offer spread
 Message confirmations through SWIFT
Types of transactions
 Ready or Cash –value today
 Tomorrow or “tom”-value tomorrow
 Spot transactions –two business days after
trade date
 Forward transactions- any value date
beyond spot
 Swap transaction – combination of spot
and forward
Types of Transaction: Value Date Concept
Due to vastness of the market and origin of transactions and settlements may take
place at different time zones, most of times deal dates and settlement date
differs. Market uses different terminology which are used universally to avoid
conflict.
Type of TXN Date of Deal Value Date
Cash/Ready 15.11.2006 15.112006
Wednesday Wednesday
TOM 15.11.2006 16.11.06

Wednesday Thursday
Spot 15.11.2006 17.11.06

Wednesday Friday
Forward 15.11.2006 Any day after 17.11.06

Wednesday
Types of Transaction: Value Date Concept
 Due to vastness of the market and origin of transactions and settlements may take place
at different time zones, most of times deal dates and settlement date differs. Market uses
different terminology which are used universally to avoid conflict
Type of TXN Date of Deal Value Date
Cash/Ready 17.11.06 17.11.06
Friday Friday
TOM 17.11.06 20.11.06
Friday Monday
Spot 17.11.06 21.11.06
Friday Tuesday
Forward 17.11.06 Any day after

Friday 21.11.06
Forward Rates
 What is a Forward Rate ?
 Rate agreed for settlement on an agreed date in the
future
 All rates are derived from Spot rates
 Forward rate is the spot rate adjusted for the
premium / discount
 Forward Rate = Spot Rate + / - premium or

discount
Premium/Discount
 Forward price = Spot price plus or minus forward
margin.
 Premium –forward value of currency is higher
than spot rate. A currency with lower rate of
interest is said to be at premium in the forwards.
Forward margins added to spot rate.
 Discount – forward value of currency is lower
than spot rate. A currency with higher rate of
interest is said to be at discount. Forward margins
deducted from spot rate
Derivative Instruments
 Derivatives instruments are management tools
derived from underlying exposures (Assets) such
as Currency, Commodities, Shares, Bonds or any
other indices, used to reduce or neutralize the
exposure on the underlying contracts.
 Derivatives could be Over the Counter (OTC) i.e.
made to order or Exchange Traded Facilities
which are standardized in terms of quantity,
quality, start & ending dates.
What is an FX Option
 An FX option contract gives the buyer (or holder) the
right, but not the obligation, to:
 Buy Rupees, in the case of a Rupee call/ Dollar put option,
against Dollars (or sell Rupees against Dollars in the case of a
Rupee put/Dollar call option);
 For a predetermined quantity of Rupees;
 At a predetermined fixed price (the strike or exercise price);
 On (if European style) or until (if American style) a fixed
future date;
 For a premium (option price) negotiated at the time of dealing.
How does an FX Option Differ from a
Forward
 Consider an exporter who expects to receive $1MN in 3
months.
 The exporter can go in for
 Forward contract or Option contract
 Forward contract – performance is obligatory on the
for buyer and seller.*

• Option contract – performance is not obligatory for
for option holder.
 Suppose , exporter goes for option contract. He will agree to sell
$1 mn after 3 months. On due date, depending upon $/RE rate, he

will decide to exercise the option or not.

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International Finance (IF) -Overview

 Permitted currencies for Payment

 A country’s balance of payments summarizes all

 Current account balance:

How does an appreciation or

What is the general idea?

investment banks, hedge funds, pension funds,

and was officially mandated in 1978

Greenwich Mean Time

10 AM Lunch Europe Asia Americas London Afternoon 6 pm Tokyo

domestic ($/INR) foreign (FC)

central bank for. central bank

investors Exchange-traded for. investors

Corp. dom. for. Corp.

work hard to zero out their positions regularly

 About 700 banks worldwide stand ready to make a market in

not carry inventory and FX specialists.

 Market participants include international banks, their customers,

 ECHO Exchange Clearing House Limited, the first

global clearinghouse for settling interbank FOREX

 F I R E - LITTLE IS GOOD BUT MUCH IS BAD

 GLOBAL STOCK MARKETS {DOW JONES, NIKKEI,

 WAR OR THREAT OF WAR

 CHAIRMAN OF FEDERAL RESERVE

 PRIME MINISTER OF U.K.

 INDIAN P.M / F.M / RBI GOVERNOR

 FED FUNDS RATE/DISCOUNT RATE

 INFLATION AND MONEY SUPPLY

 OPEN MARKET OPERATIONS

 TAXATION - HIKES AND CUTS

 REER / RBI EAR

 FCCB / ECB FLOWS

 NRE RUPEE DEPOSITS – REMITTANCES

 e.g. “a Japanese Yen is worth about a penny” =

USD equiv USD equiv Currency per Currency per

decrease with dealer competition.

 Forward Cross Exchange Rates

 A forward contract is an agreement to buy or sell

 Consider the example from above:

The Indian Rupee is

However, degrees of convertibility have been

 Flow of Capital from outside India (investments into India) are

Objectives of Dealing Room

 Managing the bank’s foreign currency exposures

 Generating profit for the bank

 Ensuring the compliance of relevant regulations

 Central banking authority

 Brokers do not buy or sell on their own account

 Brokers not allowed to as principals or maintaining foreign

same day by dealers

 Duty separation for dealers

Front Office: Actual dealing Mid-Office

b) Any instrument payable at the option of

With Effect from 02.08.1993, all exchanges are quoted in Direct

 BUYING RATE $/RE = RE 45.16

 SELLING RATE $/RE = RE 45.18

In the abovementioned quote,

One of the reasons why this is so is that prices are always

 “USD” comes before the “CHF”

 The first currency($) - Base currency

 It is important to remember that Bid & Offer in

 Therefore, there are short forms for everything.

40/45 , 75/figure , figure/10 and the market assumes