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Freedom to convert local financial asset to foreign financial asset. Free to make investment for all capital needs. Current account convertibility means free inflow and outflow of foreign exchange for all purposes other than capital a/c. CAC application is debatable.
SDRs
Special Drawing Rights was a new international fiat money created in 1960s. Initially valued at 35 SDRs = one ounce of gold . Between 1975 to 1980 basket of 16 currencies corresponding to the relative share of each currencys share in the worlds exports. After 1981 it was valued against a basket of 5 currencies($,British pound,Yen,FFrs,Duetsche marks) After birth of Euro it is valued against a basket of 4 currencies ($, British pound, Euro,Japanese Yen) SDRs expressed in the terms of U.S. $.
SDRs
After the breakdown of the Bretton Wood system SDRs today have a ltd use as a reserve asset . It acts as a potential claim on freely usable currency of IMF members. Holders of SDRs can obtain these currency in exchange by voluntary exchange between members and by IMF members having strong external position buying SDRs from members having weak external position.
SWIFT
Society for world wide International financial telecommunications is a communication system regarding international financial transactions connected by Data transmission lines . The information can be collected from any part of the world 24 hrs a day.
ARBITRAGE
It is a purchase of a currency by a speculator fm a forex market where it is cheaper and sold immediately in another forex market for a higher price. The diff. between the 2 rates is the gain for the speculator. This mechanism acts as a equalizer between 2 forex markets.
Forex quotations
Nos of currency that can be bought against 1 unit of another currency. Quotations are expressed generally up to 4th decimal places i.e. 1/10000. Few currencies are relatively small in absolute value they are expressed up to 2 decimal places. A smallest amount of change in price of a currency is expressed as a pip.
Forex quotations
Direct quotation or Indirect quotation or American style. Nos of European style. Nos of units of home currency units of foreign for one unit of foreign currency for one unit of currency. Commonly home currency. used by banks while Commonly used for dealing with international business international banks. by banks. $=Rs 54.37 or Re 1 = $0.20252 or 1/54.3700 Re 1/ 0.20252
Forex rates
Spot rate is the rate in the spot market, i.e. . Today's mkt. The settlement is done within 2 business days. It is an OTC mkt. dealing are done thru telephones, computer terminals, automated dealing systems. Bloomberg, Reuters are the vendors of the large screen used for this trading. Forward rate is predecided for buying/selling of foreign exchange on a future date. Usually it is 30,60. 90 and 120 days. It is generally done to hedge exposure to fluctuations in exchange rates. Forward rates have to be fulfilled irrespective of the rates on the date of maturity.
Premium/Discount = FR SR/SR x n x 100 This prem and dis has to be annualised. If FR given for 90 days n=4 E.g. SR Rs 50.37 = 1$ 6 mths FR Rs 50.65 than Re is selling at a Forward discount of 25 basis points.