Treasury Management

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 Need for foreign exchange

Every sovereign country has a currency which is legal tender

within its territory
Whenever a country buys or sells goods/services from or to
another country the residents exchange currencies
Thus the need for foreign exchange which simply means
foreign money

2
 Exchange rate
Rate of exchange means price of one currency in
terms of another currency OR Rate at which
number of units of one currency can be
exchanged for number of units of another
currency
e.g.. USD/INR --- 1 USD = 45.25 INR
EUR/USD --- 1 EURO = 1.2335 USD
Two way quotations
Direct and Indirect rates
Bid and Offer rates
24 hour x 5 day market (except USD/INR market)

3
Factors affecting exchange rates
Balance of payments
Strength of the economy
Fiscal policy
Interest rate
Monetary policy
Political factors
Exchange control
Central bank intervention
Speculation
Technical factors

4
 Market participants
Customers those who buy and sell forex for their
trade requirements and other needs
Commercial banks are those authorized to deal in
forex
Hedge Funds Invest and speculate on the forex
movements
Central banks control volatile and undue
movements of their currency
Exchange brokers who act as intermediary
between banks for doing the deals

5
 Market participants

Customers
who are engaged in foreign trade avail these
services provided by the banks
exporters need to convert their receivables
importers need to remit their payables
may also need forex for settlement of other
international obligations
are allowed to trade with some limitations

6
 Market participants
Commercial banks
deal with international trade transactions offer
services for converting one currency into
another
specialized in international trade transactions
and have branch/correspondent network
have the authority to trade in forex besides
merchant transactions

Exchange brokers
deal on behalf of banks
act as intermediaries

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 Market participants
Hedge funds
manage huge funds for their investors
have the mandate to trade a certain percentage of
this fund
invest based on the forecast of currency
movements and also try to move the market

Central banks
have the responsibility to maintain the external
value of their currency
ensure that there is orderliness in exchange
movements through intervention

8
 Features of Indian FX Market

Limited market makers

More market takers
RBI presence
Growing awareness amongst corporates
to hedge
Limited time i.e.. 9 am to 4.30 pm for the
market

9
 Exchange rate system in India

Historically linked to the Pound Sterling

As a signatory to the Bretton Woods RBI was
authorized to maintain par value of rupee
within the permitted band of 1%
First devaluation in 1966 running up to to
1995
Delinked from the Pound Sterling in 1975 and
linked to a basket of currencies

10
 Quotes in Forex
Direct Quotes
A foreign currency quoted in terms of the local
currency e.g..USD/INR -- 1 USD = INR 45.25

Indirect Quotes
Local currency unit quoted in terms of number of
foreign currency
e.g.. INR/USD -INR100=USD2.2099

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Cross currency spot quotes

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Currency pairs Way they are quoted

USD/INR USD/JPY USD/SGD USD/CHF

45.2500/26 110.85/90 1.7085/90 1.2805/10
USD/AED USD/HKD USD/CAD USD/LKR
3.6730/33 7.7922/32 1.3228/30 96.95/99

AUD/USD EUR/USD GBP/USD NZD/USD

0.7605/10 1.2320/25 1.8205/08 0.6682/86
USD/PKR USD/PHP USD/TWD USD/KRW
57.10/25 56.17/21 33.22/29 1172.50/80

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World Currency Forwards

14
USD/INR Forwards

15
 Premium/discount
Determined by the interest rate differential between
the two countries
e.g. :
Spot USD/INR 45.25 EUR/USD 1.2325
INT rate USD 1.00% INT rate USD 1.00%
INT rate INR 6.00% INT rate EUR 2.00%
Fwd prem(for 6 mths) 0.10 paise Fwd disc
59 pips

The currency associated with the higher interest rate

will be at a discount
The currency associated with the lower interest rate
will be at a premium

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Exchange Rate Arithmetic settlement

Value date is a date on which the exchange of

currencies actually takes place
Cash is the same day transaction
Tom is the transaction on the next working day
after the deal date
Spot is the transaction on the second working
day after the deal date
Forward is the transaction after a period of spot
date

17
 Forward rates

Derived by adding or deducting the premium or

discount to the spot rate
e.g. : Spot $/INR 45.25 Euro/$ 1.2325
Aug end +0.085(Pr) (-) 0.0049 (Dis)
2004
---------------- -------------
45.3350 1.2276

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 Examples
To calculate a rate for an importer value
cash in USD/INR with spot at 45.2525 /
2625
Cash/spot is 0.35 / 0.40
Cash rate is 45.2625 0.35 = 45.2590

To calculate a rate for an exporter value

tom in USD/INR with spot at 45.2475 / 2550
Tom / spot is 0.20 / 0.30
Tom rate is 45.2475 0.30 = 45.2445

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 Examples
To book a forward contract for an import transaction
in USD/INR value 30st Nov,04
Spot USD/INR 45.2550 / 2650
Fwd (sp/Nov) 14.50 / 15.50
Rate is 45.2650 + 15.50 = 45.4200
To book a forward contract for an exporter in
USD/INR value 31st Aug,04
Fwd (sp/Aug) 8.50 / 9.50
Rate is 45.2550 + 8.50 = 45.3400

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 Examples
To book a contract to cover Euro export
value 31 Oct , 2004 (Euro dollar at discount)

Spot USD/INR 45.25 / 27 EUR/USD 1.2335 / 38

Fwd 11.5 / 12.5 72 / 70

(45.25 + 0.115) x (1.2335 - 0.0072)

45.365 x 1.2263
Rate 55.63

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 Types of client transactions

Inward remittances
Outward remittances
Trade - Export/Import bills
Forward Contracts Bookings
Forward Contracts Cancellations
Derivatives

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 Types of client transactions

Inward and Outward remittances

Telegraphic transfer
Demand draft/Cheque
Traveler Cheques/Currency Notes

Trade Export/Import Bills

Purchase/discounting/negotiating/clearing of bills

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 Types of client transactions

Forward Contracts Bookings

For any transaction that is to happen after the

spot date a customer/bank can book either a
purchase or sale forward contract
This can be fixed or option forward contracts
Utilization of forward contracts on the due dates

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 Types of client transactions

Forward Contracts Cancellations

In the absence of any instructions from the
customer,matured/unutilized contracts will be
automatically cancelled after the specified grace
period
At the request of the customer it is optional for the
bank to
1. Accept or give early delivery
2. Extend the contract
3. Cancel the contract before or after the maturity date
In all the above cases bank shall recover the costs
incurred in effecting the transactions

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Foreign exchange forward contract

An agreement between a bank and a counter

party to buy or sell a specific amount of one
currency against another currency on a specific
future date at a fixed rate

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 Forward contracts - merits

Simple hedge instruments

Eliminates exchange risk,provides certainty
Useful in long unidirectional movements
Flexible dates can be matched exactly with
underlying exposure
To overcome the time lag between buying or selling
goods and payment for the same
Off-balance sheet

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 Swap transactions in forex

A swap transaction is a simultaneous exchange of

two currencies at a specified rate and at an agreed
date

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Fundamental Analysis

GDP
Industrial Production
Unemployment
Inflation
BOP

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Factors affecting USD/INR forwards

Call rate / G-sec yields

USD o/n rate / treasury yields
Govt. borrowing program
Credit policy announcements
Spot INR
Demand & supply

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Data Releases

Non farm payrolls

Housing starts
CPI / PPI
Retail Sales
Business Confidence Index
Jobless Claims
Inflation Data
Trade deficit

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 USD/JPY technical analysis
P rice
QJP Y= , Bid , Can d le / US D
3/ 9/ 04 1 1 1 .1 7 1 1 1 .6 1 1 1 1 .1 2 1 1 1 .3 3
QJP Y= , Clo se(Bid ), M A 1 4
3/ 9/ 04 1 0 9 .6 4 117

Th e rise f ro m 1 0 5 .2 0 t o 1 1 2 .3 0 h as ret racemen t at 1 0 9 .8 0 (3 8 .2 ),1 0 8 .7 5 (5 0 ) an d 1 0 7 .9 5 (6 1 .8 ) 116

Tren d lin e resist an ce co mes at 1 1 2 .5 0 b reak o f w h ich t g t s 1 1 3 .8 0 / 1 1 5 .3 0 115

114
M acd is st ill p o sit ive so a mo ve t o 1 1 3 .8 0 can n o t b e ru led o u t w it h 1 0 8 .3 0 as su p p o rt
113

t ren d lin e resist an ce 112

111

110
3 8 .2
109
50
108
6 1 .8
107

106

M A CD
QJP Y= , Clo se(Bid ), S ig n al 1 2 , 2 6 , 9 / US D
3/ 9/ 04 0 .9 7 M A CD is st ill p o sit ive
QJP Y= , Clo se(Bid ), M A CD 1 2 , 2 6 0
3/ 9/ 04 1 .3 1
-1

27 03 10 17 24 01 08 15 22 29 05 12 19 26 03 10 17 24 31 08 15 22 29 05 12 19 26 04 11
S ep 0 3 Oct 0 3 No v 0 3 Dec 0 3 Jan 0 4 Feb 0 4 M ar 0 4

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 SENSEX technical analysis
P rice
Q.BS ES N, Last Trad e, Can d le INR
3 / 1 0 / 0 4 5 ,8 3 3 .1 9 5 ,8 3 3 .1 9 5 ,7 6 1 .0 2 5 ,8 2 0 .3 0
Q.BS ES N, Clo se(Last Trad e), M A 1 4
3 / 1 0 / 0 4 5 ,7 8 2 .7 7 6000

5800

5600

3 8 .2 5400

5200
50
5000
6 1 .8
4800

Fo r t h e rise fro m 4 2 0 0 t o 6 2 5 0 ret racemen t co mes at 5 4 3 0 ,5 1 9 0 an d 4 9 3 5 4600

R es.is at 5 9 8 0 w h ich h as t o b reak o u t fo r t h e n ext u p mo ve an d t ill t h is resist s
4400
w e can exp ect a d ip t o w ard s t h e su p p o rt at 5 6 8 0 an d lat er 5 5 6 5 t h e recen t lo w s
4200
w h ich w ill h o ld fo r t h e n ext u p mo ve t o w ard s 6 0 0 0
4000
M A CD
Q.BS ES N, Clo se(Last Trad e), S ig n al 1 2 , 2 6 , 9 INR
3 / 1 0 / 0 4 -4 .4 3
Q.BS ES N, Clo se(Last Trad e), M A CD 1 2 , 2 6
3 / 1 0 / 0 4 1 .7 2 100
M A CD lo o ks like b o t t o min g o u t
0

24 01 09 16 23 30 06 13 20 28 05 12 19 29 05 12 19 27 04 11 18 25 04 11
S ep 0 3 Oct 0 3 No v 0 3 Dec 0 3 Jan 0 4 Feb 0 4 M ar 0 4

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 USD/INR technical analysis

P rice
QINR =IN, Bid , Cand le
2 / 1 6 / 0 4 4 5 .2 2 5 4 5 .2 4 0 4 5 .2 2 2 4 5 .2 3 7 4 6 .2
QINR =IN, Clo se(Bid ), M A 1 4
4 6 .1
2 / 1 6 / 0 4 4 5 .2 7 4 Break o f t rend line at 4 5 .2 0 w ill t ake it d o w n t o 4 4 .8 0 t he lo w er end o f t he channel
46
A b o unce fro m here w ill b ring 4 5 .4 5 int o p ict ure
4 5 .9

4 5 .8

4 5 .7
4 5 .6
4 5 .5

4 5 .4
4 5 .3

t rend line 4 5 .2

4 5 .1
R SI and M A CD are t urning aro und p o sit ive
45
R SI M A CD
QINR =IN, Clo se(Bid ), Sig nal 1 2 , 2 6 , 9
60 2 / 1 6 / 0 4 -0 .0 6 5
QINR =IN, Clo se(Bid ), M A CD 1 2 , 2 6 0
40 2 / 1 6 / 0 4 -0 .0 6 5
QINR =IN, Clo se(Bid ), R SI 1 4 -0 .1
20
2 / 1 6 / 0 4 2 6 .2 6 7
17 24 01 09 16 23 30 06 13 20 28 05 12 19 29 05 12 19 27 04 11 18
Sep 0 3 Oct 0 3 No v 0 3 Dec 0 3 Jan 0 4 Feb 0 4

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35
Thank You

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