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BROAD IDEA OF FEX SET-UP ROLE OF DEALING ROOM RETAIL & WHOLESALE MARKETS EXCHANGE CONTROLS COUNTER-PARTY RISK OPERATING IN WHOLESALE MARKET USING WHOLESALE MARKET TO PRICE PRODUCTS OBJECTIVE : TO UNDERSTAND PRICING OF RETAIL TRANSACTIONS
Brief History :
Par value system & stable exchange rates Intra-day positions allowed Internal Control Guidelines Over-valued exchange rate Crisis of early 1990s
Downward exchange rate adjustment by 9 & 11 % in July 91 Quasi market determined exchange rates ( LERMS ) Unified exchange Rates system in March 93 Current a/c convertibility since Aug 94 Sodhani Committee
Market Segments Market Players Sources of demand & supply Market instruments Trading Platforms Settlement of Transactions Market turnover
Market Segments :
On-shore and Off-shore markets Retail and wholesale markets Central and decentralized markets
Market Segments :
Exporter $ Bank
Importer
Bank
Retail
Inter-bank
Market Players :
Authorized Dealers
Customers must necessarily buy or sell forex from/to an Authorized Dealer RBI under section 10(1) of FEMA authorizes
Banks ( category I ) Financial institutions ( category III ) FFMCs, RMCs, RRBs ( Category II )
Ads offer different products to Customers to suit their needs Large public and private sector companies from manufacturing & service sector Medium sized corporates and service providers SMEs Their requirements can range between a few thousand dollars to a few million dollars
Customers
Pricing Process
Q A
Protocol
Retail Market :
Arranges for collection Sends out remittances ( SWIFT ) Uses correspondent network ( NOSTRO A/C ) Uses an appropriate exchange rate quoted by Treasury Ensures compliance with control regulations
Treasury quotes exchange rate and covers in interbank market Customers are necessarily required to go to an Authorized Dealer
Various types
Merchant Rates
Rates are also quoted for currency notes and traveler's cheques Buying rate is always less than Selling rate Between TT and Bill rate, the former is always better for the customer Rates differ from bank to bank & are negotiable
2.
3.
5.
6.
Banks selling rate for a customer is based on the rate at which they (banks ) can buy the forex from interbank market Banks buying rate for a customer is based on the rate at which they (banks ) can sell the forex in inter-bank market Acquisition and Disposal Rates Banks do not carry large risks on merchant business
Intermediation
1$ Exporter Bank
40 INR
41 INR 1$
COVER OPERATION
INTER-BANK
Intermediation
1$ Importer Bank
43 INR
42 INR 1$
COVER OPERATION
INTER-BANK
Intermediation
Bank is quoting this rate because it is able to sell the $ in inter-bank market at a rate of 41.00
Bank is quoting this rate because it is able to buy the $ in inter-bank market at a rate of 42.00
This means that the inter-bank market is quoting a rate 1 $ = 41.00 INR to buy $ and 1 $ = 42.00 INR to sell $
This is called a two-way price where a buying and selling price is simultaneously quoted
Market Instruments
Retail Market :
Ready Deals Inward & outward remittances Issuance of demand drafts in foreign currencies Negotiation / Discounting / Purchasing of foreign currency bills Export factoring Handling export and import bills on collection Opening letters of credit Handling bills under L/Cs
Retail Market
Settlement of Deals :
ADs settle the deals using their NOSTRO accounts for the foreign currency leg and a rupee account with them for the rupee leg SWIFT is widely used for messaging
Trading Platforms :
Servicing of external borrowings including trade credits Outflows on a/c of NR deposits maturing and disinvestments by foreign investors
Exports Invisibles
Travel, investment income, insurance, inward remittances from NRIs, software & service exports
Foreign Direct and Portfolio Investments NR deposits accepted by Indian banks External Commercial Borrowings by Indian companies
BRIEF RE-CAP
Handled by the PoS Counter-party Risk also managed by PoS Executed at a rate quoted by Dealing Room
Acquires risk from the customer business and covers that in the inter-bank market Finds out a cover rate adds margin and quotes to a customer Intermediation Function
Inter-bank Market :
Market between ADs OTC Market Telephonic and electronic communication between ADs - no physical interface Sometime brokers may also be involved Standardized Deal amounts and maturity
Surplus/Deficit that an individual AD may have from his operations in the retail market is cleared in this market
Market information vending firms like Bloomberg, Reuters etc serve a very useful purpose
Market Players :
They help the price discovery process in the inter-bank market Brokers can not cater to customers requirements Electronic broking systems are threatening to marginalize the voice brokers
Intervention
Market Instruments :
Inter-bank Market :
Cash, Tom, SPOT deliveries Anything beyond SPOT Simultaneous sale and purchase for different maturities Foreign currency rupee swap Foreign currency rupee options Cross currency options Cross currency swaps Structures involving swaps and options
Forwards
Swaps
Other derivatives
Inter-bank Market
Trading Platforms :
Settlement Process:
Deals with counter-party banks in India are mostly settled using clearing platform provided by CCIL Deals with overseas counter-party banks are settled using NOSTRO accounts in corresponding currencies
RBIs Role
Market Turnover
Daily turnover in inter-bank market increased from $ 5 bio in 97/98 to $ 18 bio in 2005/06 This has increased further to $ 23 bio in 2006/07 Inter-bank to merchant turnover ratio has decreased from 5.2 in 97/98 to 2.6 in 2005/06 Mumbai alone accounts for more than 80% of the market turnover Turnover in India was 6.6 times the size of the Balance of Payments during 2005/06 as compared to 5.4 in 2000/01
40.4200 40.3900
-0.0725 40.3250 63
Market Turnover
Market Turnover
TWO-WAY PRICE
1 USD = 40.50 / 40.51 INR
BASE CURRENCY
BID SPREAD
DELIVERY DATE : CASH / TOM / SPOT / FORWARD STANDARD LOT : USD 1 MIO
TWO-WAY PRICE
1 EUR = 1.3700 / 1.3703 USD
BASE CURRENCY
BID SPREAD
DELIVERY DATE : CASH / TOM / SPOT / FORWARD STANDARD LOT : USD 5 MIO
IMPORTANCE OF $
Preferred Vehicle currency Reserve currency Commodity and Debt prices Importance of $/INR Rate About 70 % of the transactions are denominated in $
TWO-WAY PRICE
MARKET PRACTICES
NO CENTRAL BANK RULES HIT ON THE PRICE ? THE RULE OF LEFT & RIGHT QUOTED PROMPTLY FOR STANDARD MARKET LOT NARROW SPREAD
PRICE CHANGE
LET US DO AN EXERCISE
TWO-WAY PRICE
AT WHAT PRICE DO I BUY ? AT WHAT PRICE DO I SELL ? I MUST DO AT MARKET RATE & NOT AS PER MY WISH OR DESIRE SPREAD GOES AGAINST ME !
COMBINING USD/INR RATE WITH USD/NON-USD RATE MUST REMEMBER MARKET PRACTICE
QUOTING CONVENTIONS
BID*BID ; ASK*ASK
BID/ASK ; ASK/BID
LET US DO AN EXERCISE
COVER OPERATION
WE NOW FAMILIAR WITH THE INDIAN & INTERNATIONAL FOREX MARKET PRICE INFORMATION PRICING FOREX PRODUCTS USING THIS INFORMATION IS VERY EASY A STEP-WISE APPROACH HELPS
UNDERSTAND TRANSACTION DECIDE WHETHER TO BUY FROM OR SELL TO I.BANK MARKET SELECT APPROPRIATE RATE DECIDE MARGIN LOAD MARGIN & QUOTE RATE
STEP-WISE APPROACH : STEP 1 : STEP 2 : IS IT A FC BUYING OR SELLING TRANSACTION ? WHICH CURRENCY IS TO BE BOUGHT FROM CUSTOMER ? AGAINST WHICH CURRENCY ? IN INTER-BANK MARKET THE CURRENCY BOUGHT FROM CUSTOMER WOULD HAVE TO BE SOLD. WHAT IS THE MATURITY ? YOU NOW KNOW ---* WHICH CURRENCY TO SELL * AGAINST WHICH CURRENCY * FOR WHAT MATURITY WORK OUT THE RATE AT WHICH YOU WOULD BE ABLE TO DO THE TRANSACTION IN INTERBANK MARKET. DECIDE THE MARGIN TRANSACTION SIZE EXECUTION COSTS RISK PREMIUM CUSTOMER RELATIONSHIP LOAD MARGIN & QUOTE * BE VERY SPECIFIC * IS IT AN INDICIATION ? * IS IT A FIRM PRICE ? * IT WILL BE FIRM FOR HOW LONG ? * FOR WHAT AMOUNT THE PRICE IS GOOD ?
STEP 3 :
STEP 4 : STEP 5 :
STEP 6 :
STEP 7 :
STEP 7 :
Idea Cellular desires to remit USD 500,000.- value SPOT. Pune center reports an inward remittance for USD 10,000.value SPOT for Mr. X IBM( India) in Gurgaon wants a forward contract for USD 7 mio to cover inward remittance that it plans to bring sometime in Oct, 07. Mr. & Mrs. Y are traveling to Japan and want T/Cs for USD 5,000.- each and currency notes of $ 250.-`` Maruti Udyog Ltd are remitting JPY 100 mio today towards royalty payment.
FUNCTION OF
Profit for the year : Rs 4,541 cr. Other Income : Rs 5,769 cr Income on foerx( Schedule 14 ) : Rs 373 cr ( v/s 1,001 cr for 05/06 )
STEP 1 :
STEP 2 :
STEP 3 :
STEP 4 :