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Retail Market
Tourists Individual needs Forex in the form of TC, Drafts Importer Exporters The amount is small in this market
Nostro Account Nostro account is an account maintained by a bank in India with a bank abroad i.e.S.B.I. may maintain an account with CitiCiti-Bank New York or with HSBC in London for $ operations and Sterling operations respectively. While corresponding with the Citi or HSBC SBI would refer its account with former two as Nostro account, means our account with you. All foreign exchange transactions are routed through Nostro accounts. Vostro Account A foreign bank may open rupee account with an Indian bank. while corresponding with the foreign bank maintaining an account with it, the Indian bank would refer to the account as Vostro account meaning your account with us .Bank of Baharin and Kuwait may open an account with Union Bank of India and draw drafts on the account. On presentation of drafts, the Indian bank would pay to the debit of the foreign banks account with it. For exchange control purposes such accounts are known as non-resident bank accounts non
Forex Terms
SwiftSwift-Society for world wide Interbank Financial Telecommunication. It is replaces paper by electronic fund transfer by secure SWIFT Codes ,thereby reduces Transaction costs. It is supported by 1200 professional organizations throughout the world CHIPSCHIPS-Clearing House for Interbank Payment system is a US Based electronic payment system CHAPSCHAPS-Clearing House for Automated payment system is a UK based electronic payment system ReutersReuters- Reuter is a London based organization established in the year 1851.First Electronic trading screen which gives real time quotes was established in the year 1973 by Reuters TelrateTelrate- Telrate is an American organization established in 1969 to deal in screen based trading for foreign exchange EuroclearEuroclear- Euroclear is a Brussels based organization, involved in large scale bond clearance CEDELCEDEL-Cedel is in Luxembourg, involved in large scale bond clearance Fedwire The transactions at NY-Forex market ultimately get settled NYthrough Fedwire.It is a communication network that links the computers of about 7000 banks to the computers of Federal Reserve Banks
Arbitrage
Arbitrage is the simultaneous taking of a position in two or more markets in order to exploit a valuation discrepancy between the pricing of assets in the different markets SBI quotes 46.72/74 ,BOB Quotes 46.75/77 then buy from SBI and sell to the BOB (The Market Quotes 46.73/75) SBI must be in over-bought position and hence it discourage the $ overseller to her and encourage the $ buyer from her by giving the lower quote than the market BOB must be in short position and hence it discourage the $ buyers from her and encourage the $ seller to her by giving the higher quote than the market Mumbai Quotes 1$= 46.78/79 INR, London Quotes 1= 86.63/64 INR and New York Quotes 1= 1.8485 /1.8490 $ Sell 100,000 buy INR i.e.86,63,000 Sell these INR buy $ (8663000/46.79)=$185,146.40 Sell these $ against the ( 185,146.40/1.8490) = 100,133.25 Put Cost 33.25 ,Net gain will be 100 i.e. 0.1 %
Forwards Transations
The transaction in which the exchange of currencies takes place at a specified future date subsequent to the spot date is known as Forward Transaction. The exchange rate of settlement is called as forward rate The forward rate has two components Spot rate Forward Points Forward points are also called forward differentials between the pair of currencies provided capital flows are freely allowed Forward Transactions Theoretically the forward price of the currency can be equal to the spot price and in such case a situation this is called at par. But this happens rarely When a currency is costlier in future as compared to spot, the currency is said to be at a premium vis--vis another currency. vis{Fwd rate > Spot rate} When a currency is cheaper in future as compared to spot, the currency is said to be at a discount vis--vis another currency. vis{Fwd rate < Spot rate}
TT Buying Rate
This is the rate applied when the transaction does not involve any delay in realization of the foreign exchange by the bank. In other words, the Nostro account of the bank is would already have been credited .The rate is calculated by deducting from Interbank buying rate the exchange margin as determined by the bank So any transaction where no delay is involved in the bank acquiring the Forex will be done at the TT Rate Payment of demand drafts, mail transfers, TTs drawn on the bank where banks Nostro account is already credited Foreign bills collected. When a foreign bill is taken for collection, the bank pays the exporter only when the importer pays for the bill and the banks Nostro account abroad is credited
Selling Rates
When a bank sells Forex it receives local currency from the customer and parts with forex.the sale is effected by issuing a payment instrument on the correspondent bank with which it maintains the Nostro account. Immediately on sale, the bank buys the requisite Forex from the market and gets its Nostro account credited with the amount so that when the payment instrument issued by it is presented to the correspondent bank it can be honored by debit to the Nostro Account. Therefore, 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 rate. However depending upon the work involved i.e. the sale involves handling of documents by the bank or not TT Selling Rate This is the rate to be used for all transactions that do not involve handling of documents by the bank. The TT selling rate is calculated on the basis of interbank selling rate. The rate to the customer is calculated by adding exchange margin to the interbank rate. Bills Selling Rate This rate is to be used for all transactions which involve handling of documents by the bank i.e. payment against import bills. The 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 TT selling rate
Balance of Payment BoP represents the demand for and supply of Forex which ultimately determine the value of the currency If BoP of a country is at deficit then the value of currency falls while if the BoP of a country is at surplus then the value of currency gains Inflation Higher the inflation higher would be the domestic prices of goods and commodities that may not be competitive in export market
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Interest Rates The interest rate has a great influence on the short term movement of capital. When there is rise in interest rate in one centre ,it attracts the short term funds from other centres. Monetary Policy An Increase in money supply in the country will affect the exchange rate through causing inflation in the country. The total money supply in the country represents the value of total goods, commodities and services in the country and external value of the currency will be derived from it
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National Income An Increase in National Income in the country will increase the demand for goods in the country. If there is underutilized production capacity in the country, this will lead to increase in production, but if there is no immediate increase in production vis--vis with income then it leads to visincreased imports and increased supply of the home currency in the Forex market. Thus an increase in national income will lead to an increase in investment or in consumption and accordingly its effect on the exchange rate will change Central Bank Intervention Buying and selling Forex in the market by the central bank with a view to increase the supply or demand, thereby affecting the exchange rate is known as intervention. The central banks all over the world play a crucial role in maintaining the Forex markets in an orderly manner.Thus,at the time of violent fluctuations central banks of different countries act together and intervene in the markets It is said that the fear of intervention in the Forex market by the central bank of the country is more important and effective, than the actual intervention
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Resource Discoveries Discovery of North Sea oil by Briton helped GBP to rise against USD Speculation In Forex market there is lot of speculative activity. If a few big speculators start buying a currency in an aggressive manner, others may follow suit. And the currency may strengthen in the short run. This is known as Bandwagon effect. effect. Similarly, if a few big speculators start selling a currency in an aggressive manner, others may also join them for making a quick buck by 'riding the' market' the currency may weaken in the short run. Capital Movement Bright investment climate and political stability may encourage portfolio investments in the country. This leads to higher demand for the currency and upward trend in its rate. Poor economic outlook may mean repatriation of the investments leading to decreased demand and lower exchange value for the currency of the country Political Factors As financial Flows seeking safe and better returns, the political stability in the country plays a vital role. Both FDI & Particularly FII are sensitive to political conditions prevailing in the country Exchange Control Exchange control is generally aimed at controlling free movement of capital flows and therefore affects the exchange rates. Sometimes countries exercise exchange control through exchange rate mechanism by keeping the exchange rate of currencys at artificial level
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