International Exchange Systems

Foreign Exchange has been defined as the mechanism of converting currency of one country into to that subtitle style of another. This Click edit Master presupposes the existence of an international monetary system which brings together the 4/29/12

International Exchange Systems

Different systems of monetary arrangements were tried over the years to achieve the above objectives, like gold standards etc Exchange rate between currencies in a foreign exchange market is affected by a number of factors, which influence the demand for and supply of foreign exchange in the market. There are two systems of exchange rates - fixed exchange rate and floating exchange rate. Fixed exchange rates refer to a system where the exchange rate for a currency is determined by the government of the country and is maintained at that predetermined level, irrespective of the market forces.
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Floating exchange rates system -

the rate of

International Exchange Systems Fixed Exchange Rates There were different systems like Gold Standard where the rate of exchange of was linked to value of gold. Then after IMF was started, every country declared the value of its currency in terms of gold and US dollars known as par value . Par value was abolished and the system of fixed rates continues in many countries in the form of pegging their currencies to 4/29/12 a major currency. Countries like

International Exchange Systems Floating exchange rates - Free or floating rates refer to the system where the exchange rates are determined by the conditions of demand for and supply of foreign exchange in the market. The rates are free to fluctuate according to the changes in demand and supply forces with no restrictions on buying and selling of foreign currencies in the exchange market.
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Under the floating rates no par value

International Exchange Systems

Depreciation and Appreciation change in the value of currency may indicate either an increase in its value or a decrease in its value as compared to that of another currency. Under fixed exchange rate system, the change in value is a result of deliberate action by the monetary authority. A decrease in value under fixed exchange rate due to the 4/29/12 decision of the monetary authority

International Exchange Systems

Current Exchange Rate Regimes - IMF classified the exchange rate policies of its members into ten categories on the basis of their flexibility and the existence of formal and informal commitments to maintenance of exchange rate paths. As on April 30, 2009, it is as under Exchange Arrangement with no separate legal tender ( 10 countries)
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Currency Board Arrangements (13)

International Exchange Systems

A currency is converted to effect remittances, either from the country or into the country from abroad. Remittances are broadly classified into Remittances on Current Account Remittances on Capital Account Current Account transactions are those that are not capital account transactions, like payment due in connection with foreign trade, other current business, services and short term banking and credit facilities in the ordinary course of business Payments due as interest on loans and net income from investment Remittances for living expenses of spouses, and children residing abroad 4/29/12 parents,

International Exchange Systems

Under Section 5 of FEMA, the Government of India is empowered to impose restrictions on certain current account transactions Capital Account transactions are still restricted. Section 6 of FEMA provides that RBI may specify the class of and limits for capital account transactions which are permissible. Capital Account transactions include Transfer or issue of any foreign security by a resident Transfer or issue of any foreign security by a nonresident Transfer or issue of any security or foreign security by any branch, office or agency of a non-resident 4/29/12

International Exchange Systems

Deposits between residents and non-residents Export, import or holding of currency Transfer of immovable property outside India, other than by lease up to 5 years, by a resident Giving of a guarantee in respect of any debt, obligation or other liability incurred a) by a resident and owed to a non-resident or b) by a non-resident

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International Exchange Systems

CONVERTABILITY OF RUPEE Convertibility of a currency say rupee refers to its convertibility into a foreign currency as desired by its holder. The currency is fully convertible if the holder can convert it into any other currency at rates determined by the forces of demand and supply and without any interference from the Government. Convertibility involves The rate of exchange should be determined by the market and not by the regulatory authority and thus the holder does not incur any loss on conversion There should not be any quantitative restrictions on the repatriation of the currency
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Indian rupee is fully convertible now and the value

BALANCE OF PAYMENTS

BALANCE OF PAYMENTS Foreign exchange is required to settle the economic transactions a country has with other countries. These economic transactions are captured in its balance of payments statement Balance of payment is a record of the value of all transactions between residents of a country with outsiders. It constitutes the result of demand and supply of foreign exchange for various purposes Since rate of exchange between currencies is determined by the forces of demand and supply, balance of payment is the fundamental factor in determining the exchange rates A change 4/29/12 in the balance of payments of a country will affect the exchange rate of its currency

BALANCE OF PAYMENTS

Balance of payments is the systematic summary of the economic transactions of the residents of a country with the rest of the world during a specified time period, normally a year. They are Economic Transactions movement of goods in the form of exports and imports, rendering services abroad and using foreign services, gifts/grants from one country to another, investments made abroad 4/29/12

BALANCE OF PAYMENTS

A Flow Statement : Balance of payments is compilation of the flow of economic transactions of the country during the period and not a statement of the position as on a date, even though it is prepared for a year normally or even for a month. It is more like a funds flow statement of a company, rather than a balance sheet. For instance, if the balance of payments show USD 300 million as plus in non-resident deposit, it means the balance held by the non-residents of the country with banks in India has changed during the period by USD 300 million; it does not mean the aggregate of such balances is USD 300 million; Periodicity : Normally balance of payments 4/29/12 statement is prepared covering a period of one

EXCHANGE ARITHMETIC

Exchange Arithmetic Foreign exchange dealing of a bank with its customer is know as merchant rate . The merchant business in which the contract with the customer to buy or sell foreign exchange is agreed to and executed on the same day is known as ready transactions or cash transaction. Like an interbank transaction, a value next day contract is 4/29/12 deliverable on the next business day

EXCHANGE ARITHMETIC

Purchase and Sale transactions The exchange rate is interpreted from the perspective of the quoting bank In a deal between bank and customer, the rates are interpreted from the perspective of the bank A transaction is always talked of from the banks point of view The item referred to is the foreign currency When we say a purchase it means that a bank/AD has purchased and it has purchased foreign currency When 4/29/12 we say a sale it means that a bank/AD

EXCHANGE ARITHMETIC

Example Say whether the following are purchase or sale of foreign exchange Bank issues a DD on London for GBP 100 Customer of the Bank purchase a TT on New York for GBP 500 A Traveller encashes at the bank a traveller cheque for GBP 50 Bank purchases a demand draft on 4/29/12 London for GBP 500

EXCHANGE ARITHMETIC

Exchange Quotations The customer has to obtain a rate specifically providing all the details of the transactions he wants to do with the bank. It is a one-way quotation from the bank When the bank buys foreign exchange from the customer, it expects to sell the same in the interbank market at a better rate and thus make a profit out of the deal. 4/29/12

EXCHANGE ARITHMETIC

EXCHANGE MARGIN Exchange rates are fluctuating constantly and by the time a bank places a buy or sell order in the interbank market, for the transaction it does with its customer, the exchange rate might have turned adverse to the bank. Therefore sufficient margin should be built into the rate to cover the 4/29/12 administrative cost, cover the

EXCHANGE ARITHMETIC

PRINCIPAL TYPES OF BUYING RATES In case of a DD drawn on SBI by its correspondent bank BOA, the correspondent bank would have already credited the nostro account of SBI while issuing the DD. In case of a purchase of on demand bill from the customer by SBI, it takes time to send and get credit since it is sent for collection to Correspondent Bank. If the time is 25 days, SBI will 4/29/12 get foreign exchange after 25 days.

EXCHANGE ARITHMETIC

TT buying rate is applied when the transaction does not involve any delay in realization of the foreign exchange by the bank, as the nostro account of the bank would already have been credited. The rate is calculated by deducting from the interbank buying rate the exchange margin as determined by the bank

Though no Telegram is involved, any 4/29/12 transaction where there is no delay in

EXCHANGE ARITHMETIC

Bill Buying Rate This rate is applied when a foreign bill is purchased. When a bill is purchased, the rupee equivalent of the bill value is paid to the exporter immediately. The proceeds will be realized by the bank after the bill is presented to the drawee at the overseas centre. In the case of a usuance bill the proceeds will be realized on the due 4/29/12

EXCHANGE ARITHMETIC

If a sight bill on London is purchased, the realization will be after a period of about 25 days i.e. transit period. The bank would be able to dispose of the foreign exchange only after this period. The rate quoted to the customer would be based not on the spot rate in the interbank market, but on the interbank rate for 25 days forward. If the bill purchased is 30 days

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EXCHANGE ARITHMETIC

Recovery of purchased

interest

on

bills

The bank claims interest from the customer from the date of purchase of the bill till the bill is realized and credited to the nostro account of the bank with the correspondent bank abroad The bank debits the customers account the interest on the bill up to its anticipated due date called 4/29/12

EXCHANGE ARITHMETIC

TYPES OF SELLING RATES When a bank sell foreign exchange, it receives Indian Rupees from the customer and parts with foreign currency The sale is effected by issuing a payment instrument on the correspondent banks with which it maintains the nostro account. Immediately on sale 4/29/12 exchange, the bank of foreign buys the

EXCHANGE ARITHMETIC

For all sales on ready/spot basis to the customer, the bank resorts to the interbank market immediately and the base rate is the interbank spot selling. Depending on the work involved viz., whether the sale involves handling of documents by the bank or not, two types of selling rates are quoted in India. They are TT Selling Rate 4/29/12

EXCHANGE ARITHMETIC

TT Selling Rate This is the rate used for all transactions the do not involve handling of documents by the bank like issue of DDs, MTs, TTs, Cancellation of Forex purchase earlier like an export bill purchase earlier is returned unpaid on its due date, the bank will apply the TT selling rate for the transaction TT Selling rate is calculated on the

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EXCHANGE ARITHMETIC

Bills Selling Rate This rate is to be used for all transactions which involve handling of documents by the bank like payment against import bills Bills Selling rate is calculated by adding exchange margin to the TT selling rate. That means the exchange margin enters into the bills selling rate twice, once on the interbank rate and again on the TT 4/29/12