Internship full report Date-18.05.2015 revise.pdf

Foreign Exchange Management Of First Security Islami Bank

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CHAPTER ONE

INTRODUCTION


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1.1 Introduction:

When someone mentions Foreign Exchange (Forex) market, the usual image that immediately

comes to mind is a person waiting behind a counter while a clerk just behind the parting glass

counts and changes your local currency into US Dollars. At some point either when travelling or

making an overseas purchase, most people would have in some way participated in the FX

market. However, it is more than currency conversion. Increasingly many are now turning to the

FX market for the purposes of speculation or dealing at prices formerly only available to

financial institutions. So what is Foreign Exchange all about? As defined in The Economist's

Guide to Financial Markets, foreign exchange, more popularly referred to as "forex" is a

worldwide decentralized over-the-counter financial market for the trading of currencies, wherein

financial centers around the globe serves as anchors of trading between a wide range of different

types of buyers and sellers 24 hours a day, five days a week (Villamar, 2011).

Some countries governments, instead of floating, fix their exchange rate, at least for periods

of time, which means that the governments central bank is an active trader in the foreign

exchange market. To do so, the central bank buys or sells foreign currency, depending on which

is necessary to peg the currency at a fixed exchange rate with the chosen foreign currency. An

increase in foreign exchange reserves will add to the MONEY SUPPLY, which could lead to

INFLATION if it is not offset by the monetary authorities via what are called sterilization

operations. Sterilization by the central bank means responding to increases in reserves so as to

leave the total money supply unchanged. A common way to accomplish it is by selling BONDS on

the open market; a less common way is to increase the reserve requirements placed on

commercial banks. Still other countries follow some regime intermediate between pure fixing

and pure floating (examples include bands or target zones, basket pegs, crawling pegs, and

adjustable pegs).

Many central banks practice managed floating, whereby they intervene in the foreign exchange

market by leaning against the wind. To do so, a central bank sells foreign exchange when the

exchange rate is going up, thereby dampening its rise, and buys when it is going down. The

motive is to reduce the variability in the exchange rate. Private speculators may do the same


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thing: such stabilizing speculationbuying low with the plan of selling highis profitable if

the speculators correctly anticipate the direction of future exchange rates (Frankel,2004).Foreign

Exchange Market allows currencies to be exchanged to facilitate international trade and financial

transactions. Evolution of the market in Bangladesh is closely linked with the exchange rate

regime of the country. It had virtually no foreign exchange market up to 1993. BANGLADESH

BANK, as agent of the government, was the sole purveyor of foreign currency among users. It

tried to equilibrate the demand for and supply of foreign exchange at an officially determined

exchange rate, which, however, ceased to exist with introduction of current account

convertibility. Immediately after liberation, the Bangladesh currency taka was pegged with

pound sterling but was brought at par with the Indian rupee. Within a short time, the value of

taka experienced a rapid decline against foreign currencies and in May 1975, it was substantially

devalued. In 1976, Bangladesh adopted a regime of managed float, which continued up to

August 1979, when a currency-weighted basket method of exchange rate was introduced. The

exchange rate management policy was again replaced in 1983 by the trade-weighted basket

method and US the dollar was chosen as intervention currency.

By this time a secondary exchange market (SEM) was allowed to grow parallel to the official

exchange rate. This gave rise to a kerb market. At present, the system of exchange rate

management in Bangladesh is to monitor the movement of the exchange rate of taka against a

basket of currencies through a mechanism of Real Effective Exchange Rate (REER) intended to

be kept close to the equilibrium rate. The players in the foreign exchange market of Bangladesh

are the Bangladesh Bank, authorized dealers, and customers.The Bangladesh Bank is empowered

by the Foreign Exchange Regulation Act of 1947 to regulate the foreign exchange regime. It,

however, does not operate directly and instead, regularly watches activities in the market and

intervenes, if necessary, through commercial banks. From time to time it issues guidelines for

market participants in the light of the countrys MONETARY POLICY stance, FOREIGN EXCHANGE

RESERVE position, BALANCE OF PAYMENTS, and overall macro-economic situation. Guidelines are

issued through a regularly updated Exchange Control Manual published by the Bangladesh

Bank.

The authorized dealers are the only resident entities in the foreign exchange market to transact

and hold foreign exchange both at home and abroad. Bangladesh Bank issues licenses of


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authorized dealership in foreign currencies only to scheduled banks. The amount of foreign

exchange holdings by the authorized dealers are subject to open position limits prescribed by

Bangladesh Bank, which itself purchases and sells dollars from and to the dealers on spot basis.

In addition to authorized dealers, there are registered moneychangers to buy foreign currencies

from tourists and sell them to outgoing Bangladeshi travelers as per entitlement. Their excess

holdings beyond the permitted balance are required to be retained with authorized dealers. Some

service institutions like hotels and shops have also obtained limited money changing licenses to

accept foreign currencies the foreign tourists, but those are to be sold to authorized dealers.

Transactions by customers take place mainly to satisfy customer demand for individual needs

and to facilitate export, import, and remittances.

Since May, 2003 with the floating of BDT, foreign exchange market of Bangladesh entered into

a new phase with deregulated characteristics. In their dealings for the first time, market players

were free from government or Bangladesh Bank intervention. Although, there had been a fear of

adverse consequences of floating, the market responded rationally to the change in foreign

exchange dealing system. It was observed that the value of one dollar increased by around Tk

1.00 to Tk 61.30 in the market amid a buying pressure caused by the speculator. However, this

situation might be due to the closure of the most of the money market around the world. It was

recorded that Bangladeshi taka gained in first interface with international market in Floating

Exchange Rate (FER) regime. US dollar was traded between Tk 58.55 and Tk 58.63 on next day

after floating as compared to Tk 58.55 and Tk 58.70 on the previous day. Around US $22 million

was transacted in the market in one day without any abnormal market behavior. In the secondary

market, the rate of dollar varied between Tk 60.00 and Tk 61.30 during the week as compared to

the range of Tk 59.80 to Tk 60.35 in the preceding week.

From the trend, it was revealed that Bangladesh taka maintained its strength against US dollar

throughout the first week after the float, although the exchange rate of dollar showed somewhat

upward bias. The strong supply position, particularly, adequate supply from the authorized dealer

reasonably offset the strong demand for dollar. However, in the informal market, as before,

dollar was traded a bit higher compared to the inter-bank market. It may be mentioned that

Bangladesh Bank had taken necessary cautionary steps to avert possible erratic behavior of the

market. (Bangladesh Bank,2012)


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The foreign exchange market experienced some occasional pressure due mainly to seasonal

pattern in the flow of imports and exports and the speculative factors. The FY 2005 and FY 2006

the countrys foreign exchange market showed some substantial instability. The highest volatility

of exchange rate was observed in March 2006. In the interbank market, the taka/US$ exchange

rate reached its peak at 71.75 on 21 March 2006. From the overall pattern of transactions, it was

found that in these two fiscal year BDT rapidly lost its value against US $ and average TK/$ rate

stood at 61.39 and 67.08 respectively. However, taka further lost its value in FY 2007 and stood

at 69.03 reflecting more than 17 percent depreciation from FY 2004. To ease the pressure

Bangladesh Bank intervened in the market through selling US$ in the interbank market. In

addition Bangladesh Bank approved the banks limited excess withdrawal from their foreign

exchange clearing account and made some relaxation on restrictions forward and SWAP

transactions. During FY 2008 and 2009 taka fairly appreciated against US$ and amidst some

fluctuation stood at 68.80 on average in FY 2009 due mainly to sufficient inflow of remittances

and export receipts and the trend is continuing.

To prevent further falling of the value of US$ Bangladesh Bank purchase US$ 499.2 million

(net) in FY 2009. The scope of foreign exchange market has been further widened with the

allowing of the ADs for hedging of the price risk of the commodities of their customers through

standard exchange traded future/options and over the counter derivatives on commodities with

the prior permission of Bangladesh Bank. The volume of interbank transaction in the countrys

foreign exchange market including spot, forward and swap also increased substantially during

FY 2009 which stood at US$ 4.4 billion which is more than 25 percent higher than in the

preceding year. This reflects that the market is rapidly gaining maturity and the dependency of

the banks on Bangladesh Bank is gradually reducing. (Khan and Sarkar, 2012).

In terms of FSIBL (first security islami bank), they are committed to extend high quality services

to its clients through different financial products and profitable utilization of found by

undertaking various lending operation including financial trade, consumer finance, commerce

and industry etc. In conducting lending operations FSIBL always bears in mind the essence of

their effectives securities management. It is also dedicated that purpose in proper identification

and management of foreign exchange may result in a large quantum of bank advances turning

into non-performing. FSIBL calls attention to the need of an effective foreign exchange


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management process has prepared the policy guidelines for foreign exchange and securities

management. The policy will be reviewed board of director of the bank. The policy must be

strictly followed by all concerned officials and any deviation from the risk management policies

to be clearly identified and justified for approval to be provided. (FSIBL, 2012).

1.2 Aims and Objectives:

The Aims of this report are to analyze the foreign exchange management of the First Security

Islami Bank Limited. This report is also analyzing the Import and Export procedures in terms of

our country. This also concentrated on the foreign remittances and GDP growth. This study may

be helpful to first security islami bank for increasing the customer satisfaction. This study is to

provide an overview of internship program and fulfill the internship requirements.

Objectives: The specific objectives of this report are:-

1. To analyze how foreign exchange impact on our economy.

2. To achieve the practical knowledge about the foreign exchange

operation.

3. To know the views of import and export procedures.

4. To analyze the interrelation between Remittance and export-import.

5. To identify the risk involved in foreign exchange business.


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1.3 Rational of the Study:

With the rapid growing competition (due to free market economy) among nationalized, foreign

and private commercial banks as to how the banks operates its banking and how customer

service can be made more attractive, the expectations of the customers have immensely

increased. In the modern world no country is self-sufficient; one country is to depend on other

countries and from this point of view there raises the question of foreign trade and foreign

currency transactions. Bank is related to foreign exchange business or foreign trade. That is, the

international trade involves foreign exchange transactions particularly for receipt and payment

against export and import of goods and services from one country to another. With every

growing business world knowledge about the Foreign Exchange is mandatory. Without foreign

exchange transactions we cannot think of foreign trade. Of course various rules and regulations

are to be followed in connection with the foreign trade and foreign exchange transactions. Letter

of credit is the key player in the foreign exchange business. With the globalization of economies,

international trade has become quite competitive. Timely payment for exports and quicker

delivery of goods is, therefore, a pre-requisite for successful international trade operations. Many

developed and developing countries works with foreign trade. They develop various rules and

regulations for Foreign exchange operation. This report will be helpful to know about the foreign

exchange procedures of different countries including Bangladesh. This report will also be helpful

for First security islami bank. By this report, they can be known about their strength and

weakness in foreign trading system. This is helpful for me to apply the theoretical knowledge in

the practical field. By this report, I am able to know, how the Bangladesh Bank Clearing House

work, how to sanction the loan and overall services of the Bank. I think it is very important for

all students to increase their vacuum with practical and theoretical vacuum as well.


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CHAPTER TWO

LITERATURE REVIEW


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2. Literature Review:

The following studies have been conducted on the subject:

According to The Economist, foreign exchange market is arguably the world's largest market

place. It has an average daily turnover of US$1.9 trillion, with some other sources such as GO

Markets Introduction to Foreign Exchange estimating the market to have an average daily

turnover in excess of US$4 trillion. The Bank for International Settlements says that average

daily turnover in global foreign exchange markets is estimated at $3.98 trillion as of April 2010,

which is a growth of more or less 20% over the $3.21 trillion daily volume in the same month

back in 2007. It has increased day by day. He mentioned that Bottom-line foreign exchange has a

huge turnover. He mentioned also some sort of advantages. One of the prime advantages to

trading foreign exchange is the sheer volume of geographically-dispersed market participants.

This in turn creates liquidity which cannot be matched by any regulated exchange-traded product

or instrument. According to a Wikipedia entry, this liquidity unique to foreign exchange markets

along with other characteristics is the reason why it has been referred as the closest ideal of

perfect competition. (Villamar, 2011).

The foreign exchange market facilitates international trade and investment and is central to the

global financial system. He said about the Market participants, both public and private,

commonly think of the foreign exchange market as highly liquid at all times. This column

challenges this view by documenting significant declines in liquidity during the recent financial

crisis. With an estimated average daily trading volume of $4 trillion, the foreign exchange

(Forex) market is by far the worlds largest market (Bank for International Settlements 2010).

This is only happened due to the foreign exchange market size, market participants commonly

regard foreign exchange as highly liquid at all times liquid in the sense that you can buy or sell

very large sums quickly and without turning the price against yourself by much. In a recent study

we challenge this view by documenting significant declines in Forex liquidity during the 2007-

2009 financial crisis. Moreover, Forex liquidity risk impairs investors' international


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diversification and affects the returns of popular Forex trading strategies such as carry trades.

(Mancini et al. 2012).

Large-scale forex intervention in emerging market economies (EMEs) aimed at resisting

currency appreciation has major implications for the composition of banking system balance

sheets. The domestic monetary consequences depend on the nature of central bank liabilities that

are the counterpart of forex reserves. Even if the immediate change in bank reserves due to FX

intervention is offset by the sale of securities, bank lending may still be stimulated, running

counter to the aims of the monetary authority. In this paper, we empirically investigate the

impact of banks' holdings of liquid government securities, generated by such intervention, on

bank credit in a panel of EMEs. We find that, for well capitalized banking systems, holdings of

government and central bank paper over time lead to an expansion in their credit to the private

sector. This result is confirmed at both country and bank level. The balance sheet effects of

large-scale FX intervention therefore require close attention. (Gadanecz et al. 2014).

The foreign exchange market is a form of exchange for the global decentralized trading of

international currencies. Financial centers around the world function as anchors of trading

between wide ranges of different types of buyers sellers around the clock, with the exception of

weekends. The foreign exchange market assists international trade and investment by enabling

currency conversation. For example, it permits a business in the United States to import goods

from the European Union member states especially Euro zone members and pay Euros, even

though its income is in USD. It also supports direct speculation in the value of currencies, and

the carry trade, speculation based on the interest rate differential between two currencies.

(Charles, 2004).

The foreign exchange market, in which traders are able to buy, sell, exchange and speculate on

currencies, is one of the world's largest and most actively traded financial markets," with trading

averaging $5.3 trillion a day (recently published). And six of the biggest banks in that market just

settled charges of manipulating it, paying a total of about $4.3 billion to a bunch of regulatory

agencies, with a bunch more regulators (and Barclays!) still to come. So that seems like a big

deal. Bigger than Libor, even, though still a speck next to the Everest that is Bank of America's

pile of mortgage settlements. He guesses me could ask, well, OK, but how much money did


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those banks make manipulating that $5.3 trillion foreign exchange market? He doesn't know! No

one seems to care. The U.K. Financial Conduct Authority says "that it is not practicable to

quantify the financial benefit" that each bank got from its manipulations; the U.S. Commodity

Futures Trading Commission and Office of the Comptroller of the Currency don't even

acknowledge that the question might be interesting. But you can sort of gesture at an answer. For

instance you can look at the profits mentioned in the orders. So take Citigroup, the worst

offender by sheer amount of fines at $1.02 billion.

Citi's trading in EUR/USD in this example generated a profit of USD 99,000" on a trade with a

notional amount of about 542 million Euros. The Citi trader made that money by teaming up

with his chat-room buddies to manipulate a fix. Here's how they reacted: Subsequent to the ECB

fix, Citis trading was variously described by other traders in chat rooms as impressive,

lovely and cnt teach that. Citi noted yeah worked ok. Citi did some other bad stuff, but

that's the only example in the FCA order with an actual profit figure. The CFTC and OCC orders

for Citi have no profit figures at all. So we have one case of Citi making $99,000. The FCA order

covers conduct over a six-year period, though that might be a bit generous. Figure 250 trading

days a year and you get $150 million of profits for Citi if every single day was as "impressive"

and "lovely" as the day singled out by the FCA as, one assumes, a particularly egregious

example of manipulation. That's not the case: The CFTC order, for instance, recounts a fixing in

which "the Citibank trader reported that he was 'hosed.'" The manipulation was not foolproof,

and fools abounded. But take $150 million as an upper bound, and Citi paid about an order of

magnitude more in fines than it made in manipulative profits (Levine, 2014).

So much barbarism, however, still remains in the transactions of most civilized nations that

almost all independent countries choose to assert nationality by having to their own

inconvenience and that of their neighbors a peculiar currency of their own (Mill, 1894). Of all

the winds of change that have buffeted multinational corporations (MNCs) in recent years, none

has had a more pervasive impact upon their risk profile than the demise of the international

monetary system of quasi-fixed exchange rates that had prevailed until March 1973 under the

Bretton Woods agreement (1944-1971) and, later, under the short-lived Smithsonian accord

(1971-1973). A somewhat chaotic system of floating exchange rates has emerged in its stead.

The resulting heightened volatility in currencies' prices have severely disrupted the steadiness of


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multinational corporations' foreign income streams. The recent implementation of the

controversial and inflexible FASB Statement No. 8 has further exacerbated this seemingly erratic

earnings pattern by doing away with the former widely used practice of reserving for foreign

exchange gains and losses and forcing upon MNCs the periodic disclosure of such gains and

losses even though no cash flows may be involved. This unprecedented situation has stirred a

considerable amount of interest among both academics and practitioners in Foreign Exchange

Risk Management. This article reviews the literature on Foreign Exchange Risk Management

published in the last decade to identify the conceptual weaknesses underlying the normative

Foreign Exchange Risk Management decision models currently available and to suggest fruitful

directions for future managerially oriented research. (JACQUE, 1981).

The speed of economic development of a nation poses one of the most essential issues in

economic debate. A nation could accelerate the rate of economic growth by promoting exports of

Goods and services. The volume of imports is negatively related to its relative price and varies

positively with aggregate demand (real GDP growth). The higher relative price leads to

substitution away from importsnecessarily reducing the dollar value of imports as volumes

decline. Remittances have been used in financing the import of capital goods and raw materials

for industrial development. Garments manufacturing is treated as the highest foreign exchange

earning sector of the country (US$4.583 billion in 2003). However, if the cost of import of raw

material is adjusted, then the net earnings from migrant workers remittances are higher than that

of the garments sector. In 2003, net export earnings from RMG stood between US$2.29-2.52

billion, whereas the earning from remittance is net US$3.063 billion. In 1998-1999, 22 percent of

the official import bill was financed by remittances. The steady flow of remittances has resolved

the foreign exchange constraints, improved the balance of payments, and helped increase the

supply of national savings.

The contribution of remittance to GDP has also grown from a meager 1 percent in 1977-1978 to

5.2 percent in 1982-83. During the 1990s, the ratio hovered around 4 percent. However if one

takes into account the unofficial flow of remittances, its contribution to GDP would certainly be

much higher. Remittance constitutes an important source of foreign exchange for the poor

countries, which have substantial development impact as can be understood from micro and

macro point of view. In case of, macro frontier, remittances are used to make import payments

and are used for productive investment by the government. World Bank identified overseas


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remittances achieving a favorable balance of payments and as well as creating a new resources

base for the country. In Bangladesh perspective, a significant portion of overseas earnings is

spent for consumption purposes, acquisition of assets, investment in trade and business and to

finance import of capital goods. It will positively affect the socio economic condition of migrant

families. Some of the early studies focused on the macroeconomic impact of overseas

remittances in Bangladesh. However, remittances are not devoid of adverse effects. Manpower

exports are alleged to deprive the country of their services and upsetting the normal functioning

of the economy. (Ahmed and Uddin, 2009).

Academics typically regard technical analysis-or Chartism-with great skepticism since it seems

to violate fundamental notions of rationality in foreign exchange markets. On the other hand,

many so-called puzzles in international finance are hard to reconcile with elementary notions of

rationality. Leading surveys on foreign exchange markets attest a significant lack in our

understanding of exchange rate behavior over horizons from days to a few years. (Sarno and

Taylor,2002;Frankel and Rose,1995;Taylor,1995). At the same time recent research has

established a remarkable prominence of Chartism in decision-making among FX dealers, starting

with the questionnaire (Taylor and Allen, 1992). Despite some early attempts, technical analysis

did not emerge as a major instrument to the better understanding of exchange rate movements,

on the contrary, order flow analysis has attracted attention recently (Frankel and Froot, 1990;

Vigfusson, 1997). The rise of the order flow concept should not be misunderstood as a signal to

neglect technical analysis. A repetition of an earlier questionnaire survey after nine years seems

to suggest that Chartism has gained ground among FX professionals during the 1990s. The

increasing importance of technical analysis is an unexpected finding due to several arguments:

the first argument is the-above mentioned-increasing attention given to order flows which has

thus turned the earlier competition between fundamental and technical analysis into a tripartite

battle.

This alone could indicate that technical analysis is losing ground. Second, in the 1990s foreign

exchange dealing underwent a process of concentration and international fund management was

mushrooming. The resulting larger participants are now better equipped to apply possibly more

expensive instruments which are potentially useful for fundamental analysis (Menkhoff, 1997).

Third, the relative weight of fund managers on foreign exchange markets has increased, and

precisely this group of market participants seems to rely comparatively less on technical analysis


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(Gehrig and Menkhoff, 2005). This might also set an incentive for FX dealers to put more

emphasis on fundamentals. Fourth, there is an early suspicion that the profitability of technical

analysis may decrease over time, a claim that has been made recently for some trading rules in

the 1990s. Why should professionals rely on possibly unprofitable instruments? Finally, surveys

for the UK and US from the later 1990s have questioned a possible dominance of technical

analysis among FX dealers. On the basis of this reading of the literature, one would expect a

diminishing role and importance of technical analysis over time. Moreover, the structural

changes mentioned may have influenced the way in which technical analysis is used (Gehrig,

2006).

The exchange rate plays vital role in the financial market and its importance is increasing in the

developing economies. Aside from factors such as interest rates and inflation the Exchange rate

is one of the most important determinants of a country's relative level of economic health. They

play a vital role in a country's level of trade, which is critical to most every free market economy

in the world (Meenai & Ansari, 2004). Exchange rates are among the most watched, analyzed

and governmentally manipulated economic measures. Recent studies and analysis has proved an

unstable relationship between exchange rate and Macroeconomic fundamentals and this

instability has shown a significant effect on the volatility of exchange rates. Moreover, the

exchange rate is influenced by other income factors such as interest rates, inflation and even

capital gains from domestic securities. As the change comes in interest rates, it is immediately

reflected in Exchange rate markets (Baccheta & Wincoop, 2009).

In most of the countries, exchange rate volatility has a short run effect on export flows and there

are substantive casual relationship in which changes in exchange rate volatility Granger cause

changes in real exports(Arize, Osang & slottje, 2000).The real exchange rate contributes

importance for capital accumulation because it affects the potential for investors to provide

internal finance. As the appreciation in three factors such as discount rates, interest rates and

exchange rates attracts the foreign investors in the developed countries. Every investor wants to

have transactions in a big money market (Antinolfi1 & Huybens, 1998). Exchange rate

movements can be explained by considering two factors. (1). Credit market conditions changes

can be reflected by changes in interest rate differentials across countries. (2). Changes in

monetary policy stances of central banks, especially federal reserves. Using changes in discount

rate as a proxy for unanticipated changes in U.S monetary policy, we find that both of these


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factors have a significant impact on daily movements of the bilateral exchange rate between the

U.S Dollar and other currencies of five considered countries. So a bit change in discount and

interest rate cause a substantial impact positively on the exchange rate among considered

countries here as a sample(Islam and Raza,2014).

The most significant effect of Monetary and Fiscal policies is felt by Exchange rates and in

respond to that exchange rates push other monetary factors like Domestic inflation, interest rates

and import prices. One way in which monetary and fiscal policies of the country affects the

interest and then inflation rate is by first influencing its exchange rate, and then interest rate

which in turn influences import prices which in turn influences domestic prices and ultimately

have a great effect on the inflation rate of the country. So, interest rate change and exchange rate

have a significant relation in a positive mode (Fair, 1982). One can extract the specific variables

or factors that determine or influence foreign exchange rate in the past from previous studies

carried out by researchers. Purchasing power parity (PPP) is the oldest popular and important

theory of exchange rate determination though its root is from no particular theoretical platform.

The idea of PPP is based on the law of one price, which denotes that the prices of every good

across countries will be equalized when expressed in terms of a common currency. As it is, it

still serves at least three useful purposes or policy implications viz: it serves (i) as an indicator of

impending currency crises or prelude to currency crises, (ii)for the purpose of monetary union or

currency pegs and (iii)as a measure of income inequality. At the empirical level, specific causal

variables were investigated using various inputs and models. For instance they used capital flow

model, test foreign direct investment, credit rating, debt servicing ratio, foreign/domestic interest

rate differential and real income proxied by real GDP. They examined such variables as

export(non-oil), ratio of the relative price of export, credit to the non-oil sector of the economy.

They focused on the role of exchange rate on BOP position in Nigeria. Others also investigated

the role of exchange rate on several other macroeconomic variables and vice versa. These

include investigated the determination of foreign exchange from monetary perspective and also

investigated exchange rate reforms and its inflationary consequences. (Allsopp and

Zurbruegg,2003).

In Nigeria, Field operators in foreign exchange identified specific factors that influence exchange

rate in the short and long run as (i) interest rate differentials (ii) speculation (iii) central bank

intervention (iv) hot money (v) hedging (vi) demand and supply (vii) exchange controls and


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regulation and (viii) political and general economic climates. As no one policy is best for all

nations or for one country at all times, to be on a sustainable path of exchange rate policy, a

country needs to identify the macroeconomic variables and policy that fits its economic

developmental goals. What has become clear from the above review is that exchange rate as

important as it is in economic development cannot be determined in isolation of other

macroeconomic variables. It therefore becomes necessary to review the relationship of some of

these macroeconomic variables and the foreign exchange rate. (Nwude,2012). An important tool

in the global financial markets, hedging is used in every asset class to mitigate losses. This can

be utilized by anyone, whether it is an individual or corporate, to overcome the negative impact

of price volatility. For the corporate in which the business activity is dependent on import and

export of commodities, there is an automatic exposure to foreign exchange and, hence, the need

for hedging is higher. In the current context, since the world markets are interlinked, they

eventually affect and impact the movement of currencies.

Hedging, in any asset class, is ultimately a strategy to decrease or transfer risk in order to protect

one's portfolio or business from uncertainty in prices.In case of hedging in the foreign exchange

market, a participant who is entering a trade with the intention of protecting the existing position

from an unexpected currency move, is said to have created a forex hedge. With the help of a

forex hedge, a participant who is long in a foreign currency pair can protect himself from the

downside risk. On the other hand, a hedger who is short on a foreign currency pair will protect

his existing position from the upside risk. The strategy to create a hedge would depend on the

following parameters: (a) risk component (b) risk tolerance and (c) to plan and execute the

strategy. From the point of view of Indian importers and exporters, we have tried to explain this

strategy with some illustrations. It will help us gauge better as to why and how one should hedge,

and the manner in which an importer and/or exporter can hedge his currency risk.

The impact of the movement in the USD-INR currencies affects both importers and exporters. In

other words, an importer will benefit when the rupee appreciates, while the exporter will gain

when the rupee depreciates against the US dollar. The cost of import reduces when the rupee

gains strength, thus benefiting an importer, and at the same time creating a loss for the exporter,

since a stronger rupee will reduce the export remittances when converted to Indian rupees. In

order to reduce the risks associated with these uncertain movements in the financial markets,

both importers and exporters can utilize the derivatives platform of currency futures. By creating


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an equal and opposite position in the derivatives market, a hedge can be created (Mathur,

2014).Foreign exchange intervention is the practice of monetary authorities buying and selling

currency in the foreign exchange market to influence exchange rates. Researchers have studied

whether intervention is successful in influencing exchange rate movements and how it affects

volatility. Secondarily, they have asked how the type of intervention affects these results and

through which channels it might operate. Intervention has several characteristics that complicate

ones ability to study it. It is conducted sporadically, with several interventions over the course

of a few days or weeks. Thus, it has an unusual distribution. Intervention policy is rarely stable

for long periods.

Finally, because intervention quickly reacts to exchange rate movements and other variables,

exchange rates and intervention are determined simultaneously. These problems have made it

difficult to show that central bank intervention has reduced exchange rate volatility or moved the

exchange rate in the desired direction. Yet, every central banker surveyed in Neely (2000)

those who actually conduct interventionremains convinced that intervention is effective in

changing the exchange rate. Recently two phenomena have advanced our understanding of

intervention. The first is the use of event studies to evaluate the effects of intervention.

Generically, an event study is an examination of asset price behavior associated with some event,

such as a merger, announcement, or intervention. Event studies are used to assess the markets

reaction to the event, how the event influenced prices, and whether the market priced the event

efficiently.

The second advance is the use of high-frequency databoth exchange rates and interventionto

better understand the behavior of exchange rates immediately around intervention. Despite these

advances, inferring the effects of central bank intervention remains difficult. Although describing

the data is a worthy and necessary goal, explaining the nature of the process by which exchange

rates and intervention are jointly determined requires strong assumptions, which are rarely

explicitly stated. While many intervention researchers are doubtless cognizant of such issues,

those less familiar with the literature are probably not well aware of them. The purpose of this

article is to selectively review the recent literature on the effects of intervention and to analyze

the assumptions and limitations of such exercises. Identifying the assumptions and limitations of

the intervention literature is not to condemn those procedures. Rather such recognition enables

the limitations to be better understood and overcome. This paper does not expend much effort


18

describing the disparate conclusions of the literature. The appendix summarizes such conclusions

and specific methods for interested readers. This article first discusses central bank intervention

practices and explains how researchers typically study intervention. Selected intervention studies

are then discussed. The fourth section considers the assumptions behind intervention studies,

with a special emphasis on the often implicit assumptions behind the new event-study

methodologies. In its conclusion, the article discusses the strengths and weaknesses of the

methods of studying the effects of intervention and suggests avenues for future research.

(Neely,2005).

Foreign Exchange Risk is commonly defined as the additional variability experienced by a

multinational corporation in its worldwide consolidated earnings that results from unexpected

currency fluctuations. It is generally understood that this considerable earnings variability can be

eliminated-partially or fully-at a cost, the cost of Foreign Exchange Risk Management. Is such a

cost warranted or, in other words, should corporate treasurers be concerned with the smooth

period-to-period earnings pattern so cherished by security analysts, because a volatile earnings

pattern is commonly believed to affect the firm's price-earnings ratio and, in turn, its ability to

raise funds at a reasonable cost? Modern capital market theory, which defines foreign exchange

risk as "the systematic risk associated with a foreign currency denominated return (or cost)

stream and measured by the covariance between the rate of change of the exchange rate and the

domestic market return" answers in the negative. It argues that under certain assumptions of

market efficiency (to be spelled out below) Foreign Exchange Risk Management is totally

superfluous. (JACQUE, 1981).

This somewhat extreme point of view, that a firm's risky prospects are valued directly by the

market on the basis of their expected profitability and their systematic risk (that is, the risk which

cannot be "diversified away"); thus, it should make "no difference to the valuation of either the

total market portfolio or the individual firm whether exchange risks...are passed through to the

capital market as part of the risk of the firm's shares, or 'laid off,' or transferred directly to the

market through forward exchange or foreign currency debt contracts."In this somewhat

hypothetical world, MNCs' treasurers abdicate the initiative of Foreign Exchange Risk

Management whose responsibility is fully transferred to the firm's shareholders who, in turn, will

manage the unsystematic portion of exchange risk through efficient portfolio diversification. The

relevant question for scholarly investigation thus becomes that of exchange risk diversification


19

from the viewpoint of the investor selecting claims on firms located in different countries or

operating across national boundaries (MNCs), claims which are clearly denominated in different

currencies. Normative research efforts in this direction are aimed at extending the Capital Asset

Pricing Model to a multicurrency world; however, existing International Capital Asset Pricing

Models are based on extraordinarily restrictive assumptions. (Logue and Oldfield).International

capital market segmentation (that is, international capital markets are fully integrated). The

former model presumes further that investors consume only one homogeneous good and that

Purchasing Power Parity holds at all times. (Fama, Farber and Grauer; Litzenberger, and Stehle,

1979).

Aliber writes: The question is whether the firm or individual investor can do a more effective

job of diversifying against exchange risk. The firm may have superior knowledge, and may be

able to protect itself against these risks at lower costs."Indeed, to the extent that individual

investors face exchange controls, high transaction costs, and taxation, MNCs, because they can

lessen the burden of such market imperfections, are superiorly equipped to carry out currency

diversification on behalf of their shareholders. Having explained the logic behind the relevance

of corporate Foreign Exchange Risk Management, these discussion next proceeds with a review

of available methodologies for generating the two key informational inputs for effective Foreign

Exchange Risk Management; namely, reliable probabilistic forecasts of future spot exchange

rates as well as a projection of corporate exposures on a currency-by-currency basis.

The foreign exchange market is among the most active of all financial markets. As of mid1989,

the average volume of trading activity (adjusted for double counting) was about $430 billion per

day. To get a sense for just how big this number is, consider that daily U.S. GNP is about $22

billion, and daily world trade in goods and services is about $11 billion. Since foreign exchange

trading is so much greater in volume than is trade in real goods and services, foreign exchange

markets would seem to be highly liquid and efficient. Recently this debate has escalated, as both

sides try to come to grips with the dramatic, temporary 65 percent appreciation in the value of

the dollar during the mid-1980s. Some hold that these swings in the dollar's value were

attributable to changes in fundamentals, and that given those fundamentals the appreciation was

both predictable and optimal. Others, however, point to the experience as evidence of a

capricious delinking of the dollar from its usual determinants, and argue that at least some of the

dollar's appreciation could have been prevented beneficially. The debate about whether exchange


20

rates are "correctly priced" is particularly important (in comparison to similar debates about the

pricing of other assets) since the exchange rate simultaneously affects the prices of all foreign

assets, goods, and factors of production. If Nurske's followers are right that speculation drives

prices away from fundamentals, then the argument for intervention might be considered

strongest in the market for foreign exchange. (Froot and Thaler,1990).


21

CHAPTER THREE

RESEARCE METHODOLOGY


22

3. Research Methodology:

3.1. Research Design:

Firstly, exploratory research has been conducted for gathering better information that will give a

better understanding or different financial data. It cannot give much information to conclude the

research. Then, the descriptive research has been used to draw the conclusion on this research.

Here, I used both the qualitative and quantitative method as well. Both are collected from some

unstructured sources and analyzed it for the proficient use on the research. In this research I have

collected data from unstructured sources. Here, exploratory and descriptive researches are used

for defining the research question. First Security Islami Bank provides the better services to the

customers especially foreign exchange division. I have collected data from officers who work on

the foreign exchange division. Not only qualitative data are used mostly but also quantitative

data are used where necessary.

3.2. Sources of Data:

Both primary and secondary sources of data collection procedure have been used to generate in

this report. To make report more meaningful and presentable, two sources of data and

information have been used widely.

Sources

Primary Data Secondary Data


23

3.2.1. Primary Sources:

1. Face to face conversation with the respective officers: Face to face conversations

are useful to collect accurate information. When Respondent and question makers are doing

conversion various unknown will be known by their conversion. And it is easy process to gather

the actual information from the respondent.

2. Interviewing of the officers: Interview is also efficient process to get the research

information. Here, Respondent can give much information for the respective question.

3. Showing practical knowledge of officials: Sometimes, Respondent shares their

practical knowledge which they earn from their job. This is helpful to conclude the research

paper.

4. Relevant file study: Relevant study or documents are useful for the research which

has provided by the officers. This study is helpful to give answer of the research question.

3.2.2. Secondary Sources:

Secondary data consists of the data and information which was collected from different sources.

There are-Bank websites, Annual report of FSIBL, Audit report etc. Secondary data was also

collect from various Journals, Relevant books, Research paper or Newspaper. Internet was very

helpful to collect relevant information. From there, I have collected various comprehensive

literature reviews which were helpful to prepare the research question. Annual report and audit

reports or Bank was very influential to complete the research paper. From journals and research

paper give various database which was used before and from there, I used different variable

which was important for my paper.


24

3.3. Survey Instrument:

This survey was conducted through personal survey. The respondents asked to give the answer

of the question. Here, I used recorder to record their conversation. I used the open ended

question which I got from the literature view. I had arranged the in-depth interview, where I

asked the question one by one. The respondent gave the answer from their view point. They used

some table and analyzed some equation through the conversation. All questions was designed

about the foreign exchange operation. They gave the answer both Bangladesh and world

perspective. Literature view was helped to make the question. Firstly, I took some variables

which were included in the literature view and then asked to the officers. They shared their

practical knowledge about the questionnaire. I designed these questions to know their perception

and they answered it very confidentially. This was helpful for findings of the research paper.

3.4. Sample Size:

I surveyed 11 people (10 male and 01 female) of foreign exchange division in the First Security

Islami Bank at Dilkusha branch. There have only 11 employers in that department thats why I

couldnt take more. Here, I used both quantitative and qualitative method to get the information.

3.5. Sample Selection:

In case of this survey, I used the convenient judgmental sampling method. This was very

influential for the research paper. Firstly, I conducted with the officer in charge in the foreign

exchange division named Mohammad Abu Taher. I took the in-depth interview from him. He

gave me the answer about overall foreign activities which they conducted. Then I also selected

10 employees. And I arranged the interview with them; they answered me with very

confidentially. They answered me about foreign exchange operation in our country perspective

as well as world perspective. In term of First Security Islami Bank, dilkusha Branch is an AD

branch and must active branch. So, all employees are very well known about foreign exchange

operation. So that, interview was helpful to complete my research paper.


25

3.6. Data Analysis Method:

Thematic content analysis (TCA) was used in this survey method. For this report, I designed te

structured question for the respondent (Banker). I collected the information through both primary

and secondary sources. Here, I used both quantitative and qualitative survey method. After the

collecting data, I used to translate the respective answer and analyzed the data. I have tried to

analyze the day by the respondents view. Then I have tried to found the findings from that data.

Here, I used some sort of charts which was needed for the findings and analysis. There all was

based on foreign exchange operation. From these data, I prepared my conclusion of my research

paper.

3.7. Field Work and Data Collection:

3.7.1. Field Work:

After prepare the research question, I contracted with respondent on the bank and discussed with

them. Then, they agreed to give the interview and expressed their view point about foreign

exchange operation. I used the recorder to record their answer. They answered these questions as

a group. Every group consists of three members. They tried to give me the practical example

about the foreign exchange operation.

3.7.2. Data Collection:

In-depth interview was organized for collecting the data. The data has been also collected from

different Journal, Articles, Annual Bank report etc. Data was also collected by the face to face

conversion. Officer in charge of foreign exchange division helped me lot to collect the data. He

gave me more information which I used more in my research paper. All of the officer helped me

also.


26

CHAPTER FOUR

DATA ANALYSIS OF THE STUDY


27

4. Data Analysis:

I surveyed 11 employees including 10 male members and 1 female member. Age limit of all

employees are between 26 to 58.Their average income are 38,000 to 80,000.They all are officer

ranked. The lowest position is provisionary officer and the highest position is FAVP & incharge

of foreign exchange division. They all are highly talented, initiative, impressive, and inspiring

banking executives. I used the in-depth interview method. Firstly I set some sort of question

from the literature review then I collected the information from interviewing session. Here, I

analyzed the data which I collected from the respondents.

Q.1. How do you define foreign exchange market or foreign trade from your view point?

Whenever we talk about the foreign exchange market then one usual image come to our mind

that is Foreign exchange means the exchange of our currency to another currency or the

conversion of one currency into another currency. In case of foreign trade, we can say that its a

cross boarder business. Whenever any country buys or sells their producing products from

another country that is called foreign trade. Foreign exchange market allows currencies to be

exchanged to facilitate international or foreign trade and financial transaction. For example- A

trade will happen between Bangladeshis garments owner (Exporter) and Italian company

(Importer).They will trade between them through to the bank. The importer pays the bill by USD

or EURO or any other currencies. Say for example, the value of product is 10000 US dollar. The

importer pays it by USD. The currency rate between USD and Taka is 1:78.Then the bank pays

the bill by this currency as taka. Foreign exchange is the most active market place. In case of

import-export system, there works two different banks. One is the importer banks and another is

exporter or beneficiarys bank. Importer and Exporter are doing their transaction throughout

these banks. So it can be said that, the foreign exchange market facilitates international trade and

investment and is central to the global financial system. Here showed some foreign currency

selling and buying rate in terms of our country:


28

Currency Buying Selling

EUR 86.4669 86.4903

CAD 64.7308 64.7362

CNH 12.5363 12.5397

INR 1.2250 1.2254

USD 77.8000 77.8400

Q.2. Foreign exchange market is the world largest market place? Do you agree? Please

explain.

Obviously, foreign exchange market is arguably the worlds largest market place. Because of

globalization, there have various multinational companies in the world basis. They produce

different products and invest more and more in different country. For this reason, currencies are

circulated from country to country. In this world, there have almost over 200 countries and

everyday their needed various products. No one nation can produce all products ownly. Different

nation produce different product. This would happen for the comparative advantages. For

example, Bangladesh produces garment products more and more because it has comparative

advantage to produce the garments products. But the U.S.A produces industrial products more

and more because of their comparative advantages. But these two countries use both of these two

products. And this will happen at that time when the foreign trade occurs. For this reason we

need the foreign exchange. Every day the entire nation needs to import and export of their entire

product.

Another example is investment, various company invest their money in different countries. But

why? Because of comparative advantage and for secure their money. For all of these

transactions, we need the foreign exchange market. So there is no doubt to say foreign exchange

market is the worlds largest market. We know that the average daily turnover in the global


29

foreign exchange market is almost 4 trillion US dollar .This is only happen for the foreign trade

and investment. For this reason, we can say that foreign exchange market is the worlds largest

market place.

Q.3. How do you define the Hedging? Who will get benefit from hedging and how?

Hedging is used to minimize the risk. This can be utilized by anyone. It may be importer; it may

be exporter or any other market player. Hedging means the participants of foreign exchange

market both importer or exporter pre-determines their rate of exchange and transaction occurring

in order to minimize the risk. In case of hedging, a participant who is entering the trade wants to

protect the existing position from unexpected currency fluctuation. Our currency would change

in every day. Todays USD-BDT rate is 1:78.2 and tomorrow it can be 1:78.The impact of the

movement in the USD-BDT currencies affects both importer and exporter. In case of our

country, importer will get benefit when dollar value decreases and exporter will get benefit when

dollar value increases. For example- todays rate is 78.50:1(USD:BDT).An importer thought that

his payment date is 25 June, so exchange can be decrease at that date. So he request the banker

that exchange rate will be decreased in the June. So please you give my payment by 78 taka.

When 25 June come, the importer see currency do not fluctuate. So he gets benefit from that but

if the currency rate fluctuate that means it is higher than before than he faces the losses. For that

reason he takes the hedging. It can be importer; exporter or any other market player. So hedging

means forecasting the future to overcome the negative impact of their transaction. Though this is

not available in our country, but in the foreign country hedging is the popular term. For that

reason, there importer or exporter will get benefit from hedging.

Q.4. How foreign exchange increases the GDP and accelerates the economic growth?

If any countries can increases their foreign trade then there has huge possibility to increase the

GDP. But how this is possible? If foreign trade increases than export will be increases. If export

increases than GDP will be increases. Here are given an equation by which we will understand

clearly, how foreign exchange increases the GDP.


30

GDP=C+I+GS+NX

Here,

C=Consumption

I=Investment

GS=Government spending

NX=Net export

The people who are spending their earning money in their own country that is called

consumption. If we buy any fixed asset from the spending money that is called investment.

Government spends money for consuming the product which are using in their country. And the

last one is net export.Net export means Total export-Total import. If export is greater than

import at that time net export will be positive and GDP will be increases. But import are greater

than export than GDP will be decreases. So it can be said that if export are negative than whole

equation will be changes. So it has proved that foreign exchange increases the GDP.

Foreign exchange also helpful to accelerate the economic growth. A nation could accelerate the

rate of economic growth by promoting exports of goods and services. If the foreign trade

increases, GDP will be increases at the same time economic growth will be accelerated.GDP and

economic growth are interrelated with each other. Whenever our country could increases the

GDP then per capital income of our people will be increases. If per capital income is increases

then it can be accelerated the economic growth. From this analysis we can say that foreign

exchange increases the GDP as well as accelerated the economic growth.

Q.5. Researcher said-Remittance-Import-Export are interrelated. What is your say

regarding this? How these three work together?

Import-Export-Remittance, these three sector are foreign exchange related. Firstly, we explain

about remittance. There have many ways by which we can earn remittance. Foreign remittance

refers to the transfer of fund from one to another country. In our country there are millions of

people who are doing job in the foreign country. We get remittance from their money. But we

get huge amount of money as remittance from foreign exchange specifically export. Every fiscal


31

year, there have lots of products which are exported from our country to another country and we

earn huge amount of foreign currency and rise our foreign reserve. Remittance has been used in

financing the import of capital goods and raw materials for industrial and social development or

any other sector. There are two types of remittance. Such as-

1. Inward remittance

2. Outward remittance

Whenever we export our products than we earn foreign inward remittance and we use it for

importing the product or any other else. Which remittance we use for import purpose that is

called outward remittance. So exporting the products increases the foreign remittance and we use

it for importing the products. For example- we have huge amount of foreign exchange reserve

that we get from remittance. When we import 1dollar of product then remittance will be

decreases. And if we export our product then foreign reserve will be increased. By this example

we can say, these three sectors are interrelated to each other. Export is the highest foreign

exchange earning sector and import is the highest foreign exchange spending sector. So

remittances are related both import and export. Though, we can earn remittance from-foreign

T.T, D.D, or bill but export is the highest earning sector. So we all are agreeing with these terms

that remittance, import and export are interrelated.

Q.6. Which things are needed to minimize the customer dissatisfaction and to increase the

customer satisfaction?

In case of any types of business or services, customer have to be recognized the most important

and impactful person. So, proper services have to give to the customer. In case of foreign

exchange business, customer (importer or exporter) run their business for the long period of time.

So it is necessary to give them proper services so that they are continuing it. when importer or

exporter want to open the L/C, bankers should open it at that time. But why? Say todays

exchange rate is 1:78.2(dollar: taka).who one can say, this will be same in the next day. The next

day exchange rate can be appreciated or depreciated. If the bankers do not open it today then


32

importer or exporter faces unavoidable circumstances in the next day. So, the bankers should

give the services in the proper day because anything can happen in the next day.

In terms of investment, we know interest rate is fixed for the certain period of time. But in case

of foreign exchange; it can be changed day to day. Todays rate is 1:78.2, tomorrows rate will be

1:78:3 because it can be changed each and every hour. The next benefit is Hedging. If every

bank applies the hedging, than many importer or exporter can minimize their losses. Bankers

should clear it for the importer or exporter. Bankers should give the proper information to the

customer. What is this information/these are-currency fluctuation, international market position,

currency rate, interest rate etc. Sometimes customer can make mistake to give the information

which are needed to open the L/C. So, bankers should help the customer to minimize the

discrepancies. Bankers should give these services to the customer to minimize the dissatisfaction

and to increases the satisfaction.

Q.7. Which risks are involved whenever you conducted the foreign exchange business?

There are various risks which are occurs whenever we conducted the foreign exchange business.

When we conducting the foreign trade, sometimes we dont know which product is going from

our country to another country and which are coming. Though importer or exporter ensure that

specific or legal products will be exported or imported. But there have huge possibility to export

or import the illegal products. This is one of the risks. Most of the time, when we import various

products and spend foreign currency .Is this legal money? It could be illegal money by which we

import the products. Same cases can be happened in export. Which currency we earn those can

be legal or illegal money. So, which dollar or money we spend or earn that is important for

foreign exchange. Now-a-days money laundering is the vital concern for every country. So this is

another risk for foreign exchange business. In case of foreign trade, sometimes importer or

exporter uses the black money. Another risk is terrorist financing. There have many terrorist who

want to invest their black money in different country so that they can prove it that these are not

black money. Another important risk is exchange rate risk. Exchange rate plays vital role for the

foreign exchange market. Exchange rate changes the real export. Unexpected currency

fluctuation should arise the foreign exchange risks. For example-Todays exchange rate is


33

1:78(dollar: taka).Suddenly the dollar value is rising, say it would be 78.20, in that time the

importer will faces the great losses for their product. So up-down the exchange rate should arise

the risks in foreign exchange. Another one is interest risk. This is related to the currency swaps,

forward out rights and option in foreign currency trading. These risks are involved in foreign

exchange business.

Q.8. Economists say Erosion of competitiveness of economy leads to fall in export. What

is your opinion regarding this?

Erosion of competitiveness of economy leads to fall in export is true in maximum cases .If we

have no competitor than effectiveness and efficiency will fall and output of product will be

decrease. Some people do not agree with this term. In case of monopoly market, they do not

agree with this. In monopoly market, we export such kind of product which is not producing in

another country. This is benefit for the monopoly market. But there have low possibility that

only one country will produce that product. But scarcity of competitiveness, Quality of goods

will fall and export will fall as well. In case of whole world, Each and every country wants to

export some kind of product. Say for example, Garments products are producing in 5 countries at

a time. But which country product grape the market hugely, of course quality of product,

efficiency and effectiveness is needed to sell it more. But one thing is more important that is

cost. Because we know almost every country produce quality full product because of their

effectiveness. If we reduce the cost, then we sell it hugely and people buy it more in the foreign

country. For example- USA, UK, China, produce the car at a time. They are producing the same

quality car. But which product will sell more. We know Chinese car will be sold more. But why?

All of the country use same equipment, same procedures. The answer is- cost price and another

think is currency rate. China reduces their production cost price and their currency rate is low.

Thats why they sell it hugely. In case of china and Japan, their currency rate is cheaper than

USA and UK. So when they sell their product in international market or USA, they can sell it by

low price because of the difference between USD and CNH. So they can sell any kinds of

product hugely because of their currency rate. In case of Bangladesh, USD-BDT currency rate is

1:78 but CNH:BDT rate is 1:13.So we take Chinese car more than USA or UK. If there have no

competitor for USA or china, than they do not give the much emphasize to produce the qualitiful


34

or low cost price product. Then there export would fall. So it can be said that erosion of

competitiveness of economy leads to fall in export.

Q.9. Which sector is the highest foreign exchange earning sector in our country and why?

Obviously, Garments sector (RMG) is the highest foreign exchange earning sector in our

country. Huge amount of remittance are coming from readymade garments sector. Now the

question is-why this is the highest earning sector. In our country, government had taken the

policy that one sector will be highly flourished sector which have huge possibility to dominant

the international market. And garments is that sector which have the huge capability to

dominant the market. This is why? Because of government policy is so easier for the garments

sector. There have no any another country which policy is so easier from our country in case of

RMG sector. Here any exporter gets benefit 80 dollar back to back L/C by submitting the 100

dollar export L/C. That means, exporter can buy 80 dollars raw materials by submitting 100

dollar L/C. They get this benefit without any payment. This benefit does not exist in any other

country. For this reason, Bangladesh is the heaven for the buyer who wants to buy the garments

product. Another one is the labor cost. There have no any other country which labor cost is so

cheap as mine. For lowing the labor cost, exporters sell their product hugely to the international

market by low cost. International buyers are interested more to buy our countries product

because of low price. We know every year our garments industry face various obstacles such as

fire burning, another injurious accident but the buyer doesnt return from our country. Because

they want to buy the low cost product and they know only our country provide the low cost

price. So, they are searching, where the cost is low. From all other country, our labor cost is low

thats why our products price is low. So garments industry is the highest foreign exchange

sector because of government policy and low labor cost and low raw materials cost.


35

Q.10. Any special opinion that you feel necessary related to overall foreign exchange

operation; please write it down?

We are so much dependent on garments sector. This is not so much good for our long term

development. Any how this sector will fall then how we overcome that situation. So we need to

search various sectors where we have possibility. Any unavoidable situation can be happened.

There have various reasons. For example- if any country wants to be a highest garments product

producing country and they want to lead the market then they reduce their labor cost and change

their policy about garments industry. At that time we lost our position in the international

market. So we should realize the upcoming situation. What should we do? We should emphasize

on more than two or three sector so that we can avoid any kind of negative impact. We have

many other sectors if where we can give emphasize more than we can increase our probability

and reduce our risk. This is not impossible. So, government should dependent on another sector

to earn the foreign remittance. We have to do portfolio investment so that we can increase our

probability and minimize our risk.


36

CHAPTER FIVE

FINDINGS OF THE STUDY


37

5. Findings and Analysis:

The first question was How do you define foreign exchange from your view point?

According to the respondents, foreign exchange refers to the exchange of our currency to another

currency or conversion of our currency into another currency. People are able to buy or sell and

speculate on currencies in the foreign exchange market. A foreign exchange market facilitates

the international trade and investment and it is a central to the global financial system. Foreign

trade refers to the cross boarder business. According to the literature; when someone mentions

foreign exchange market, the usual image that immediately comes to our mind is a person

waiting behind a counter while a clerk just behind the pointing glass counts and changes your

local currency into US dollar or any other currency (Villamar, 2012).

Foreign exchange market allows currencies to be exchanged to facilitate international trade and

financial transactions (Bangladesh Bank, 2012). Market participants both public and private,

commonly think of the foreign exchange market as highly liquid at all times. Here, traders are

able to sell, buy or exchange the currencies; is one of the worlds largest and most actively traded

financial markets (Mancini et al, 2012). They also said that it is a form of exchange for the global

decentralized trading of international currencies. Financial centers around the world function as

anchors of trading between wide ranges of different types of buyers and sellers around the clock

(Charles, 2004). Foreign exchange market assists international trade and investment by enabling

currency conversion. The foreign exchange market works through financial institution. Most of

them are bank but there have some insurance companies who are involved here.

By summarizing both point of view (respondent view and literature view), there have some

points where they have express their similarities view. They both are said- foreign exchange is

the conversion of currency, it facilitates the international trade and financial institution. They all

are agreeing that foreign exchange market works through financial institution such as bank. But

literature said not only bank but also other institution such as insurance are also involved there.

This point is contradicted with the respondents. Literature also said that the foreign exchange is

highly liquid at all times. But the respondents did not mention it. At one point, they are similar

that foreign exchange markets are related to the international sellers and buyers.


38

From literature view, the participants of foreign exchange can be either public or private but

respondents didnt mention this point. Though there have some similarities or contradict point

but it can be said that foreign exchange is the exchange of one currency to another currency and

it facilitate the foreign trade and also it is highly liquid market. Here are given some currencies

rate in terms of Bangladeshi Taka:

Bangladeshi Taka 1 Taka in Takas

British Pound 0.0082 122.5

Euro 0.0113 88.73

Swiss Franc 0.0118 85.05

American Dollar 0.0128 77.91

Canadian Dollar 0.0154 64.83

Australian Dollar 0.016 62.62

Chinese Yuan Renminbi 0.0796 12.56

Russian Ruble 0.636 1.573

Indian Rupee 0.814 1.228

Japanese Yen 1.53 0.6532

The Second question was Foreign exchange market is the worlds largest market place? Do

you agree? Please explain? According to the respondents, there is no doubt about the foreign

exchange market is the worlds largest market place. They said it because of globalization. There

have almost 206 countries in the world. All of the countries needed lots of product for their

necessities. No one country can produce all products at all time. So they feel needs of the trading.

All countries currencies are not same. For that reason currencies are circulated from country to

country. They also said about the investment. Various multinational companies invest their

money in different countries. They have invested their money where they get comparative


39

advantages and also for secure their money. There have huge amount of average daily turnover

in case of foreign exchange.

According to the literature, foreign exchange market is arguably the worlds largest market place

(Villamar, 20110. It has an average daily turnover about $5 trillion. It was on about $4 trillion as

of April 2010 (Bangladesh bank, 2012).It has increasing day by day. Bottom line foreign

exchange has a huge turnover (Villamar, 2011). Here are given daily averages turnover of global

foreign exchange:-

Here, we see the US dollar was the dominant currency. Most of the deals contained the dollar on

the side. One of the prime advantages to trading foreign exchange is the sheer volume of

geographically dispersed market participants. This is turn creates liquidity which cannot be

matched by any regulated exchange traded product or instrument. They also said that the foreign

exchange market in which traders are able to buy, sell, exchange and speculate on currencies, is

one of the worlds largest and most actively traded financial markets (Levine, 2014). They said it

as a worlds largest market place because of size, market participants commonly regard foreign

exchange as highly liquid at all times- liquid in the sense that you can buy or sell very large sums

quickly and without turning the price against you by much (Mancini et al. 2012).


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From the respondents view and literature view, we can said, they are agreeing strongly with one

point that the foreign exchange market is the arguably world largest market place. Respondents

agree with this term from two point of view-globalization and another one is investment. These

two points are similar with the literature point of view. But literature said some extra variables.

They said about the size of the market, liquidity of the market which are contradict with the

respondents view. Respondents not mention the about the daily average daily turnover but

literature specifies the actual average daily turnover. Literature invents some advantages by

which we can say foreign exchange is worlds largest market place. We can say that in case of

globalization all of the nations are interrelated. Trades are occurring among all countries. There

may have some similarities and contradict viewpoint but it is true that foreign exchange market

is the worlds largest market place.

The Third question was How do you define the hedging? Who will get benefit from hedging

and how? According to respondents, hedging is used to minimize the risk. This can be utilized

by anyone. Importer, exporter or any other market player can use this. They also said that

hedging means the participants of foreign exchange market both importer or exporter pre-

determines their rate of exchange and transaction occurring in order to minimize the risk. In case

of hedging, participant who is entering the trade wants to protect the existing position from

unexpected currency fluctuation. Because currency can be changed in every moment .In our

country perspective, if dollar value decrease than importer will get benefit and if dollar value

increase than exporter will get benefit. Moreover they mentioned it as a popular term in case of

foreign exchange market.

According to the literature view, hedging is used in every asset class to mitigate losses. They can

be utilized by anyone whether it is an individual or corporate, to overcome the negative impact

of price volatility. For the corporate in which the business activity is department on import and

export of commodities, there is an automatic exposure to foreign exchange and hence, the need

for hedging is higher (Nwude, 2012). They said that the current worlds market are interlinked so

they are eventually affect the movement of currencies .They used hedging in order to protect

ones portfolio or business from uncertainty in prices. In case of hedging in the foreign exchange

market, a participant who is entering a trade with the intention of protecting the existing position


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from an unexpected currency move. With the help of forex hedge, a participant who is long in a

foreign currency fair can protect himself from downside risk. On the other side, a hedger who is

short on a foreign currency fair will protect his existing position from the upside risk.

They established a strategy to create a hedge would depend on three parameters: a) risk

component b) risk tolerance c) to plan and execute the strategy .They give an example from the

point of view of Indian importer and exporters .The impact of the movements in the USD-INR

currencies affects both importers and exporters. In other worlds, while the exporter will gain

when the rupee appreciates, while the exporter will gain when the rupee depreciates against the

US dollar .The cost of import reduces when the rupee gain strength thus benefiting an importer

and at the same time creating a loss for the exporter .Since a stronger rupee will reduce the

export remittance when converted to Indian rupees (Mathur, 2014).

By measuring the both of point of view, we can say that hedging is used to minimize the ultimate

risk of the importer or exporter. They gave similarities answers that this is used by anyone .It

may be importer, may be exporter or anyone. Literature points out that it is a strategy and its

reduce the portfolio risk .This is contradict with the respondents .When the local currency

increases than importer will gain and when the local currency decreases then exporter will gain

.In that point, the respondent and literature express their same point of view .They also said this

is important both importer and exporter. Literature established three parameters for the hedging

but the respondents dont. From these entire variables, now we will see the differentiate of

unhedging and hedging company:-


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Hedging with an FX Forward

Unhedge company

If in 3 month, spot rate is 7.4500

- Unhedge company must pay:-

7.45 * 1,000,000= HRK 7,450,000

Effect of Hedging

Unhedge company has already bought

EUR Forward

- Hedge co

Documents

Internship full report Date-18.05.2015 revise.pdf