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7/23/2019 UNIT 3-Foreign Exchange Market
http://slidepdf.com/reader/full/unit-3-foreign-exchange-market 1/25
UNIT 3-Foreign Exchange Market
7/23/2019 UNIT 3-Foreign Exchange Market
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Foreign Exchange Market
• It is the market where foreign currencies are bought & sold. It broadly comprises of:
• Customer Market
Interbank Market.
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Customer market
• It comprises of transactions between banks(authorized dealers) and their customers. Suchtransactions are of two types !iz. "eadydeli!ery & #orward deli!ery.
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Interbank Market
• It comprises of:
• $ransactions between different banks in thesame center%country.
• $ransactions between banks in a country and
their correspondents and o!erseas branches.• $ransactions of the central bank of one country with central banks of other countries.
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• Interbank foreign echange dealings are of fourtypes:
• 'ash same day deli!ery
• $om deli!ery on immediately succeeding
working day• Spot deli!ery on second successi!e working day
• #orward deli!ery beyond second successi!e working day
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Features of FEM
• It is market where foreign currencies are brought and sold.
• g: If an Indian importer import goods from*S+ and has to make payment in *S dollar it
will approach #, to buy *S dollar for rupees.• +n eporter con!erts the eport proceeds
obtained in foreign currency into its owncurrency.
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• It is the o!er the counter market.
• It consist of trading desk at ma-or agenciesdealing in foreign echange throughout the world connected by telephone,telex etc
• Transaction are normally oral followed by written communication.
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Foreign Exchange Rates & Quotations
• ifferent sets of echange rates are applied for !arioustypes of foreign echange transactions as under:
• (/) $$ Selling "ate: It is applicable for all cleanremittances outside India i.e. the bank undertakes onlycurrency transfers by way of issuance of (demand
draft) ,$(money transfer) $$(telegraphic transfer)etc in terms of foreign currency.
• $he bank does not perform any other function such ashandling documents.
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• $$ Selling "ate 0 1ase "ate 2 change ,argin
• 1ase rate is the Interbank selling rate. changemargin is the profit margin that may load sub-ectto the conditions specified by FEDAI(
Foreign Exchange Dealers' Association ofIndia )
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• # +part from accepting deposits and lendingmoney 1anks also carry out on behalf of their
customers the act of transfer of money bothdomestic and foreign. from one place to another.$his acti!ity is known as 3remittance business3 .1anks issue emand rafts 1anker4s 'he5ues,oney 6rders etc. for transferring the money.1anks also ha!e the facility of 5uick transfer ofmoney also know as $elegraphic $ransfer or $ele
'ash 6rders.
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• (7) 1ill Selling "ate:
• It is applied for all outward remittances inrespect of import bills payable in India. $his rateis a little worse than $$ Selling "ate as the bank
has to handle documents relating to thetransaction.
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• 1ill Selling "ate 0 $$ selling rate 2 change,argin
• #orward 1ill Selling "ate 0 #orward $$ Selling"ate 2 change ,argin
• #orward $$ Selling "ate 0 Interbank SpotSelling "ate 2 #orward 8remium% #orwardiscount 2 change ,argin
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• . + wishes to buy pounds 7 months forward tosettle a sight bill. $he market rates are: Spot
selling: "s.99.; 7 months: /9 8aise discount change margin is ;./79< for $$ selling and;./9< for bill selling .
• #orward $$ selling rate 0 (99.;;./9) /.;;/79 0"s.99.97
• #orward 1ill Selling "ate 0 99.97 (/.;;/9) 0
"s.99.;
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• (=) $$ 1uying "ate: It is applied for all cleanforeign inward remittances which are payable inIndia. #or e.g. a $$ issued by a bank in +ustraliafor *S /;;;; drawn on 61' >ew elhi will
be con!erted into rupees at $$ buying rate as the bank in +ustralia would ha!e already paid the*S in 61' branch at >ew ?ork.
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• $$ 1uying "ate 0 1ase "ate @ change ,argin
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• (A) 1ill 1uying "ate: It is applied for purchase%discounting of eport bills resulting in foreignremittance to India after realization. It is worsethan $$ buying rate as there is delay between the
+ paying the eporter and itself getting paid onpresentation of bill to the foreign importer. +lsointerest is reco!ered from the eporter for suchperiod.
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• 1ills are of two types:
Sight% demand bills delay in!ol!ed in such billis only the transit period.
$ime% usance bills: delay in!ol!ed is transitperiod plus the usance period i.e. the creditperiod allowed to the importer.
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• 1ill 1uying "ate 0 1ase "ate 2 #orward8remium % #orward iscount change,argin.
• NOTE: The forward premium / discountis for transit usance period! in case of
• forward bill buying it is for transit 2 usance 2forward periods.
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• (9) 'ross "ates: It is an echange rate betweentwo foreign currenciesB for eg. in India ##"% C, %C are cross rates. + cross rate may be usedto ascertain the price of a foreign currency in
terms of I>" for which direct 5uotations are nota!ailable.
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• If ##" D.;9 0 C /
• +nd "s.AA.9= 0 C /
• $hen "s. (AA.9=%D.;9) 0 ##" /
• 6r "s..=7 0 ##" /
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• () Spot "ate: It is the pre!ailing market rate onthe day of transaction.
• (D) #orward "ate: It is the rate fied in ad!ance
for a transaction which will mature at a specifieddate or specified period in future. It is at apremium % discount to spot rate.
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• In case of direct 5uotes
• #orward "ate 0 Spot "ate 2 #orward 8remium%#orward iscount
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Types of Quotations:
• /. irect Euotation: It is the home currencyprice of one unit of foreign currency.
• g. "s.AA 0 C/
• 7. Indirect Euotation: It is the foreign currencyprice of one unit of home currency. .g. "e./ 0C/%AA 0 C.;77D
• irect 5uote 0 /% Indirect 5uote and !ice !ersa.
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• =. 1id % 6ffer: 1id is the purchase price of acurrency 5uoted .
• Fhereas offer ( or ask rate) is the selling priceof a currency 5uoted. 1id for one currency is
simultaneously an offer for another currency.• #or instance
• C/ 0 "s.AA.9;%AA.99 offer
• bid
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• +n authorized dealer gains by keeping his offerfor a currency higher than his bid for that
currency.• $hus his spread 0 offer @ bid.
• Two"wa# $uote: %s &&'() is bid for *+! atthe same time * + is offer for %s'&&'() or,*') is offer for %e'+