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BASIC CONCEPTS/TERMINOLOGIES
Foreign Currency v/s Foreign Exchange
"Foreign Exchange" means includes any instrument drawn, accepted, made or issued under clause (8) of section 17 of the State Bank of Pakistan Act, 1956, all deposits, credits and balance payable in any foreign currency, and any drafts, travelers cheques, letters of credit and bills of exchange, expressed or drawn in Pakistan currency but payable in any foreign currency;
Financial Markets
Financial market is a place where Resources/funds are transferred from those having surplus/excess to those having a deficit/shortage.
The market where the commodity traded is Currencies. Price of each currency is determined in term of other currencies.
STERLING
All Commercial Banks (Authorized Dealers only). State Bank of Pakistan. Corporate Treasuries. Public Sector/Government. Inter Bank Brokerage Houses. Resident Pakistanis Non Residents Exchange Companies Money Changers
Settlement Instructions
The bank quoting the price is price maker or market maker. The bank asking for the price or quote is the price taker or user.
Buy One Euro at 1.2805 Sell One Euro at 1.2812 Spread 0.0007
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FORWARD TRANSACTIONS
1. Out right sale/purchase of a currency against the other for settlement at a future date at the predetermined exchange rate. Forward rates are quoted as premium or discount over spot rate. Forward rates depend upon interest rate differential between the two currencies. Currency with higher interest rates is at discount wrt currency having lower interest rate. Currency with lower interest rates is at premium wrt currency having higher interest rate.
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FX SWAP Transaction
An FX swap is a contract to buy an amount of currency for one value date at an agreed rate, and to simultaneously resell the same amount of currency for a later value date, also at an agreed rate, to the same counter party. FX swap is essentially a funding or Money Market transaction and does not involve exchange risk.
Foreign exchange transactions are settled through Nostro and Vostro accounts.
Nostro accounts in a number of countries. Vostro: their account with us. Many multilateral agencies (e.g. IMF, World Bank) maintain their Nostro accounts at SBP.
Deals are done over Telephone, REUTERS dealing system etc REUTERS
Dealing Terminal
Industry Standard for FX trading. Security guaranteed by Reuters Int. Password Protected. Maintains record of all transactions. SBPK (SBPs REUTERS address)
News Terminal
Domestic Market Data/ news available on line. Real Time Exchange Rate quotes of all major Currencies. Data about Interest Rates (e.g. LIBOR) Various SBP pages on REUTERS.
Post detonation crisis (May 98) and move towards market based ERM. In early 98, Pakistan was making gradual moves towards market based ERM. Third currency rates to be quoted by banks. SBP also stopped giving customers buying and selling rate and gave a 1% band to the market, quoting its buying and selling rates for ADs. The target was to put the currency on free float.
Forex Transactions
The Demand Side of inter-bank market importers buying foreign exchange to finance their imports. A host of regulations governing imports into Pakistan. Out ward remittances for debt servicing. Out ward remittances for services.
Forex Transactions
The Supply Side of inter-bank market Exports regulations governing export receipts. Foreign Direct Investment. Capital account receipts.
NOP is the Net Asset/Net Liability position in all FCs together (Both B/S & Off B/S). Net Asset Position is also called LONG or Overbought position. Net liability Position is also called SHORT or Oversold position. NOP is a single statistic that provides a fairly good idea about exchange risk assumed by the bank. Its major flaw is that FX exposures in third currencies remain hidden.
To manage the exchange rate mechanism. Regulate inter-bank forex transactions and monitor the foreign exchange risk of the banks. Keep the exchange rate stable. Manage and maintain country's foreign exchange reserves.
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All Central Banks have treasuries to implement policy objectives vis a vis EXCHANGE RATE & INTEREST RATES Dealing room catered to the FX market only Money market was being looked after by the Securities department It soon became apparent that the two cannot work in isolation with each other as the linkage between the money market & exchange market became pronounced Finally the dealing room and securities department were merged to form EDMD to from first ever Treasury of SBP.
Functions of DMMD
Market Monitoring
Pro active monitoring of interbank MM & FX market by Front Office. Prepare demand/supply forecast. Gather data from various Sources. Real time feedbck to management. Real time remedial measures to remove distortions in the market.
OFFSITE MONITORING DAILY RATES FOR MARKET THIRD CURRENCY ACTIVITY FOR GoP PAYMENTS RESERVE MANAGEMENT
Currency
Rate Maturity Date
Types of transactions/customers/currency Business volume - banks/customers/currency Broker wise market volume report History of exchange rates - trend analysis
Non-Quantitative Tools
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