INTERNATIONAL BANKING

General Bank Management (Module-A)

Live Interactive Learning SessionC.S.BALAKRISHNAN
FACULTY MEMBER
SIR SPBT COLLEGE
18.04.2007

Forex Market

The total turnover in Forex Market apprx. US

dollar 1.5 trillion per day. Indian Market USD
1.20 BN per day.
Round the clock market starting from Sydney
and Tokyo in the east through Hong Kong,
Singapore, Bahrain, London and New York.
participants are central banks , commercial
banks,
investment
funds,
corporates,
individuals and brokers.
Over the counter market

FEMA ACT 1999 Defines Foreign Exchange as

Foreign Exchange means & includes:
a) All deposits,credits and balances
payable in foreign currency,and any
drafts,travellers 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

Methods of Quotation

Method I
One Orange = Rs 2
One Apple = Rs 2.50

Price

Method II
Rs. 10 = 5 Oranges
Rs. 10 = 4 Apples

under both the methods is the same though expressed differently

Method - I
DIRECT(FC fixed)
USD 1 = Rs 45.18
GBP 1 = Rs.85.99
EUR 1 = Rs 57.92

Method - II
INDIRECT( HC fixed)
Rs 100 = USD 2.2133
Rs 100 = GBP 1.1629
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

USD 1 = CHF 1.2570/73

CHF 1.2570

CHF 1.2573

BUYING RATE

SELLING RATE

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

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
Cash/Ready

Date of Deal

Value Date

15.11.2006
Wednesday

15.112006
Wednesday

TOM

15.11.2006

16.11.06

Wednesday

Thursday

15.11.2006
Wednesday
15.11.2006
Wednesday

17.11.06
Friday
Any day after
17.11.06

Spot
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
Cash/Ready

Date of Deal

Value Date

17.11.06
Friday

17.11.06
Friday

TOM

17.11.06
Friday
17.11.06
Friday
17.11.06
Friday

20.11.06
Monday
21.11.06
Tuesday
Any day after
21.11.06

Spot
Forward

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.

Q.

Option pricing would depend upon

Which of the following aspects?

(a) Amount (Whether market lot or small

lot)
(b) Strike Price
(c) Spot Rate
(d) Type- American or European
(e) All of the above
Answer: (e)

Q.

(a)
(b)
(c)
(d)

Which of the following statement is

false for a Forward Contract?

An OTC Product
Credit Risk on counter parties exists
Can be for odd amount
Works on Margins requirement

Answer: (d)

Q.

(a)

(b)
(c)
(d)

An Irrevocable Letter of Credit can be

amended with the consent of following
parties.

The Applicant (Buyer) and The

Beneficiary (Seller).
Issuing Bank and Confirming Bank.
The Advising Bank & Reimbursing
Bank.
(a) & (B) only
Answer: (d)

Q.

(a)
(b)
(c)
(d)

Issuing Bank has to point out

discrepancies in Documents negotiated
under L/C to the negotiating bank
within a period of:

1 month
2 weeks
7 days
Only upon receipt of objections from
the applicant.
Answer: (c)

Q.

(a)
(b)
(c)
(d)

A Red Clause Letter of Credit enables

the beneficiary to avail pre-shipment
credit from

L/C Issuing Bank

L/C Confirming Bank
L/C Advising Bank or Nominated
Bank
Any
bank
preferred
by
the
beneficiary.
Answer: (c)

Q.

(a)
(b)
(c)
(d)

In case of an Acceptance Credit, the

usance period is calculated from the
date of Shipment or date of Bills of
Exchange.

Statement is true
Statement is false
Statement is partially true
Non of the above

Answer: (a)

Q.

(a)
(b)
(c)
(d)

A Certificate of Origin accompanying

documents must be issued & signed
by:

Exporter/Seller
Shipping Agents
Customs Officials
Chamber of Commerce of Exporters
Country.
Answer: (d)

Q.

Crystallization of Foreign Currency

Liability of the importer to be done by
the Issuing bank on the 10th day from
due date of payment in case of failure
on the part of importer. The conversion
of Foreign Currency Liability to Rupee
liability is done at:

(a)
(b)
(c)
(d)

Bill Buying Rate

TT Selling Rate
Bill Selling Rate
Spot Rate
Answer: (c)

Q.

(a)
(b)
(c)
(d)

Export Proceeds from any of the ACU

countries should be settled under ACU
mechanism except:

Sri Lanka
Nepal
Pakistan
Republic of Iran

Answer: (b)

Q.

(a)
(b)
(c)
(d)

Maximum amount for which AD can

permit for realization of export
proceeds beyond six months is:

USD 100,000
USD 1,000,000
USD 50,000
No such limit prescribed

Answer: (b)

Q.

(a)
(b)
(c)
(d)

The Rate of interest charged for Export

Finance for period up to 180 days
which is stipulated by RBI is:

At Banks BPLR
Maximum BPLR minus 2.50%
At Bank Rate
At 9% flat.

Answer: (b)

Q.

(a)
(b)
(c)
(d)

Waiver (exemption) for submission of

GR form is made in case of
Export/Remittance
of
Foreign
Exchange in which of the following
case(s)?

Gift up to Rs.5 lacs

Trade Samples
Export up to US $ 25000
All of the above
Answer: (d)

Q.

(a)
(b)
(c)
(d)

The GR forms are required to be signed

by Customs Officials where as PP
Forms (Post Parcel) is signed by APs in
the case of:

100% Advance Payment

Against Letter of Credit
Track Record of the Party
All of the above

Answer: (d)

Q.

(a)
(b)
(c)
(d)

The NPT (Notional Transit Period)

computation for Advance against Bills
sent
on
collection,
the
period
commences from:

Bill of Lading
Date of Bills of Exchange
Date of acceptance of Bill at Branch
level for collection
Usance period
Answer: (c)

Q.

(a)
(b)
(c)
(d)

A mechanism by which APs finances

Exporters by discounting Export
Receivables without recourse to
Exporter/Seller is known as:

Factoring
Guarantees
Forfaiting
Bill Rediscounting

Answer: (c)

Q.

(a)
(b)
(c)
(d)

IEC Code is issued by:

RBI
EXIM Bank
ECGC
DGFT

Answer: (d)

Q.

(a)
(b)
(c)
(d)

Credit arranged by the importer (buyer)

from a bank/FI outside his country to
settle payments of imports is known
as:

Suppliers Credit
Buyers Credit
External Commercial Borrowing
GDR

Answer: (b)

Q.

NRE account can be jointly opened

with

(A) With Non residents only

(B) With resident only
(C) with both Residents & Non Residents

Answer: (A)

Payment in rupees for purchase of foreign

exchange may be done in cash , if the rupee
value equivalent is not more than
A) Re 1,00,000
B) Re 50,000
C) RE 2,00,000
D) None of the above

Answer (B)