Deciding of inter-bank rates in forex: Bid & Ask (BID 54.8912- ASK .

9005); Bid: Buyers price, Ask: Sellers price Best Bid Highest rate, as it cant be zero Best Ask- Lowest ask rate, as it cant be infinity Spread: Difference b/w bid rate and ask rate. When spread becomes zero, it means the transaction has happened. Methods: Exchange: intermediary b/w buyer and seller. Hence counter party risk is high OTC: No intermediary b/w buyer and seller, hence no risk. Hence no counter party risk. Merchant traders rate fixation: Any-body who are not a bank and dealing with forex can approach Merchant traders FEDAI guidelines to determine rate for merchant traders who deal with forex. When we move from inter-bank rate to merchant traders rate, it should be a multiple of 25 Different types of merchant rates: 1. Spot transaction/Telegraphic rate (TT) is always Sell. Transaction cycle is WITHIN T+2 a. Eg: TT Sell. I am a merchant banker. So I will be looking for least ASK rate. Inter- bank ASK Price + Margin(0.1%) = 54.9005+.5490 = 55.4495 ; because of FEDAI guidelines of multiples of 25 rate is rounded to 55.45 b. Eg: TT Buy?????? 2. a. b. c. Bill rate: Based on invoice, BEYOND T+2 ; ie) ( T+2) +X ; Here spread is b/w SPOT & FWD Date of quotation Date of bill X is divided into 2 components. 1. Transit figure to be considered when payment is based at the time of delivery of goods to importer. FEDAI has given 25 days. If this bill has a facility of providing credit facility. If credit days is 30 days, then (T+2)+25+30. We will look into Forward rates as the payment usually happens on monthly basis. And forward rates are not done in daily basis. Thumb Rule: If ask is greater than bid, it is a case of premium. In other way round it is discounting.

Eg: Premium Spot rate 9th Jan 2013 54.8912 - .9005 Forward rate : Jan- 1212-1515 Jan Bid = 54.8912+.1212 = 55.0124 Jan Ask= 54.9005+.1515= 55.0520 Thumb Rule: If ask is greater than bid, it is a case of premium. In other way round it is discounting. Eg:- Discounting : Spot rate 9th Jan 2013 54.8912 - .9005 Forward rate: Jan- 1812-1515 (Bid quotation greater than Ask) Jan Bid = 54.8912-.1812 = 54.7100 Jan Ask= 54.9005-.1515= 55.7490 Bill buy rate: Rate quoted to the seller is called Bill buy rate. Consider zeroed in rate eg:- Bidders rate (FWD bid rate) is 55.1032, ie the buyers are willing to buy at this price, hence I will buying from inter- bank at this rate. So the margin should be deducted. Margin should include 1. Risk, 2. Admin / operation cost, 3. Profit 3. Travelers cheque rate:

New Topic: Types of risks involved: 1. Credit risk 3 levels (Time- Settlement risk; Interest default- Partial default; Principal default) The probability that the receivables are not attained within the stipulated time and for stipulated amount 2. Market risk Uncertainty related to the prices of the assets owned by banks. (Loans, Bond portfolio). Uncertainties arise with specific to market. Caused by Macroeconomic factors. Currency risk is a part of market risk. 3. Settlement risk Risk specific to International banking 4. Liquidity risk Risk specific to international banking. Uncertainty if the held assets can be liquidated or not? 5. Legal risk Exposure limits as per RBI to a particular sector. 10th Jan Quiz on Trade docs and Trade financ.