1. Foreign Exchange ExposureEXECUTIVE SUMMARYTechniquesof Foreign Exchange Exposure used in Banks andin Trading FirmsIn a floating exchange rate regime, the value of a currency changes frequently.Such changes influence the value of those firms that are involved in internationaltransactions.Foreign exchange exposure is into 2 classes. One is known as accounting ortranslation exposure, while the other is known as economic exposure. The economicexposure is further divided into transaction exposure and real operating exposure.If such exposure results in loss to a firm, it needs to manage these exposures. Forthis purpose they use some techniques like: Forward Market Hedges Hedging through currency futures Hedging through currency options. Money Market Hedge. Leads and Lags Cross Hedging Currency diversification Risk Sharing Pricing of transactionIf such exposure arises, then firms use some documents for reducing these exposures through banks like: Letter of Credit Draft Bill of Exchange Pre-Shipment Credit Post-Shipment Credit Medium-term Credit Credit under duty draw-back scheme Factoring ForfeitingBABASAB PATIL 1

2. Foreign Exchange ExposureSub Objectives:1. What are the techniques available to reduce the exposure involved in foreign market?2. What are the procedures for forecasting the future currency rates?3. What are the procedures, banks are following in foreign currency market?4. What are the practical issues used in Banks and in firms i.e., who are actual traders?5. What traders are expecting from banks, other than their regular Forex trading?6. What restrictions are involved in foreign currency market by government or other concerns?Data Collection for the Study:Primary Data: Questionnaire Bank Officials in the Forex DepartmentSecondary Data: Internet Newspaper MagazineSignificance of the StudyThe objectives of the project is two-fold A)To provide the guidelines/help lines to traders through the banks for avoiding and minimizing the exposure.BABASAB PATIL 2 3. Foreign Exchange Exposure"The government is concerned over the rapid appreciation of the rupee against the USdollar and the central bank may have to intervene if there is disorderly movement in theexchange rate."3- P Chidambaram, Finance Minister of India, in September, 2007"The objective of the exchange rate management has been to ensure that the externalvalue of the rupee is realistic and credible as evidenced by a sustainable current accountdeficit and manageable foreign exchange situation. Subject to this predominantobjective, the exchange rate policy is guided by the need to reduce excess volatility,prevent the emergence of destabilizing speculation activities, help maintain adequatelevel of reserves, and develop an orderly foreign exchange market."4- RBIs Policy in the Foreign Exchange Market"I expect the rupee to appreciate vis-a-vis the dollar through 2008. However, theappreciation will be gradual and perhaps, not as rapid as it has been in the last fewmonths," ABN AMRO Banks newly-appointed India chief Meera H Sanyal told mediahere on Thursday.IN 1975, about 80% of foreign exchange transactions (where one national currency isexchanged for another) were to conduct business in the real economy. For instance,currencies change hands to import oil, export cars, buy corporations, invest in portfolios,or build factories. Real transactions actually produce or trade goods and services. Theremaining 20% of transactions in 1975 were speculative, which means that the solepurpose was an expected profit from buying and selling currencies themselves, based ontheir changing values. So, even in the days when the real economy was dominant, somecurrency speculation was going on. There had always been that little bit of frosting on thecake.Foreign exchange riskIn considering the viewpoint of so-called real businesses (those that make cars, mine,produce electronics, etc.), the foreign exchange risk has by far become the largest risk ininternational business today, often larger than political or market risk. For example, if aGerman chemical company invests in a plant in India, it makes the investment in deutsch-marks. The chemical products sold locally from that plant are paid in rupees, Indiascurrency. If the value of the rupee then drops in terms of the deutschmark, the return onthe original investment will drop as well. In short, the biggest risk of such investments isnot whether Indians will buy the chemicals (market risk) or whether the Indiangovernment will nationalise the plant (political risk), but the changes in the values of thecurrencies involved (foreign exchange risk).BABASAB PATIL3 4. Foreign Exchange ExposureBABASAB PATIL 4 5. Foreign Exchange Exposure COMPANY PROFILELate Sri. Ammembal Subba Rao PaiOur beloved Founder Founded as Canara Bank Hindu Permanent Fund in 1906, by late Sri. Ammembal Subba Rao Pai, a philanthropist, this small seed blossomed into a limited company as Canara Bank Ltd. in 1910 and became Canara Bank in 1969 after nationalisation."A good bank is not only the financial heart of the community, but also one withan obligation of helping in every possible manner to improve the economicconditions of the common people" - A. Subba Rao Pai.Founding Principles 1. To remove Superstition and ignorance. 2. To spread education among all to sub-serve the first principle. 3. To inculcate the habit of thrift and savings. 4. To transform the financial institution not only as the financial heart of thecommunity but the social heart as well. 5. To assist the needy. 6. To work with sense of service and dedication. 7. To develop a concern for fellow human being and sensitivity to the surroundingswith a view to make changes/remove hardships and sufferings.Sound founding principles, enlightened leadership, unique work culture and remarkableadaptability to changing banking environment have enabled Canara Bank to be afrontline banking institution of global standards.BABASAB PATIL5 6. Foreign Exchange ExposureVisionTo emerge as a Best Practices Bank by pursuing global benchmarks in profitability,operational efficiency, asset quality, risk management and expanding the global reach.MissionTo provide quality-banking services with enhanced customer orientation, higher valuecreation for stakeholders and to continue as a responsive corporate social citizen byeffectively blending commercial pursuits with social banking. BRAND STORYThe new brand identity for Canara Bank is based on the idea of a bond and is arepresentation of the close ties between the Bank and its many stakeholders fromcustomers and employees to investors, institutions and society at large. With its richheritage of banking expertise, dedicated customer service and corporate socialresponsibility, Canara Bank is a powerful enabler who helps its stakeholdersachieve their goals. The two seamlessly connected links capture the essence of thispartnership.Canara Bank has more than 45,800 employees and serves over 31 million customersthrough a network of over 2600 branches spread across the country. The simple,memorable symbol can be easily recalled and decoded by all of the Banks diverseaudiences.BABASAB PATIL 6 7. Foreign Exchange ExposureThe colour palette and typography have been carefully chosen. The rich bluerepresents stability, scale and depth. This contrasts with accents of bright yellowthat evoke optimism, warmth and energy. The Canara Bank logotype has beenhand-crafted. Its classic, serif letterforms communicate heritage and stature.BABASAB PATIL 7 8. Foreign Exchange Exposure Significant Milestones1st July Canara Hindu Permanent Fund Ltd. formally registered with a capital of 20001906 shares of Rs.50/- each, with 4 employees.1910 Canara Hindu Permanent Fund renamed as Canara Bank Limited1969 14 major banks in the country, including Canara Bank, nationalized on July 191976 1000th branch inaugurated Overseas branch at London inaugurated1983 Cancard (the Banks credit card) launched1984 Merger with the Laksmi Commercial Bank Limited1985 Commissioning of Indo Hong Kong International Finance Limited1987 Canbank Mutual Fund & Canfin Homes, launched1989 Canbank Venture Capital Fund started1989-90Canbank Factors Limited, the factoring subsidiary launched Became the first Bank to articulate and adopt the directive principles of Good1992-93 Banking. Became the first Bank to be conferred with ISO 9002 certification for one of1995-96 its branches in Bangalore Opened a Mahila Banking Branch, first of its kind at Bangalore, for catering2001-02 exclusively to the financial requirements of women clientele.2002-03Maiden IPO of the Bank2003-04Launched Internet & Mobile Banking Services2004-05100% Branch computerization Entered 100th Year in Banking Service2005-06Launched Core Banking Solution in select branches Number One Position in Aggregate Business among Nationalized Banks Notched up the highest ever net profit since its inception Retained Number One Position in Aggregate Business among Nationalized2006-07Banks Singed MoUs for Commissioning Two JVs in Insurance and Asset Management with international majors.As at march 2007 the total business of the bank was over Rs.2,40,000 crores.BABASAB PATIL8 9. Foreign Exchange ExposureAWARDS & ACHIEVEMENTS Canara Bank was awarded the "First National Award" instituted by the Ministry of Micro, Small & Medium Enterprises, Govt. of India for excellence in "Micro & Small Enterprises (MSE) Lending" for 2006-07. Adjudged the Best Public Sector Bank in India under the Best Banks Survey conducted by Financial Express-Ernst and Young for 2005-06. Conferred with Employer Branding Awards 2007 by Indiatimes Mindscape and ITM Business School, for excellence in human resources. Canara Bank was the first Public sector Bank to bag this award. Won the maiden award of Best Performing Bank under solar water heater finance for the year 2005-06, instituted by the Ministry of New and Renewable Energy, Govt. of India. Received Niryat Bandhu Gold Trophy for outstanding performance under export finance.As a premier commercial bank in India, Canara Banks track record in the service of the CHAIRMANS MESSAGEnation for over 100 years is both striking and impressive. Today, Canara Bank has astrong pan India presence with over 2600 branches and 1500 ATMs, catering to allBABASAB PATIL 9 10. Foreign Exchange Exposuresegments of an ever growing clientele base of exceeding 31 million. Canara Bank isrecognized as a leading financial conglomerate in India, with as many as ninesubsidiaries/sponsored institutions/joint ventures in India and abroad. As the Bank stepsinto the second century, it aspires to emerge as a Global Bank with Best Practices in itsendeavour to become a Speciality Financial Supermarket. Introduction to TopicThe foreign exchange (also known as "forex" or "FX") market is the place wherecurrencies are traded. The overall forex market is the largest, most liquid market in theworld with an average traded value that exceeds $1.9 trillion per day and includes all ofthe currencies in the world. There is no central marketplace for currency exchange, rather, trade is conductedover-the-counter. The forex market is open 24 hours a day, five days a week, withcurrencies being traded worldwide among the major financial centers of London, NewYork, Tokyo, Zrich, Frankfurt, Hong Kong, Singapore, Paris and Sydney - spanningmost time zones. The forex is the largest market in the world in terms of the total cash valuetraded, and any person, firm, or country may participate in this market.Meaning of Foreign Exchange Market (Forex Market): The foreign exchange market is the "place" where currencies are traded.Currencies are important to most people around the world, whether they realize it or not,because currencies need to be exchanged in order to conduct foreign trade and businessForeign Exchange as a Financial MarketCurrency exchange is very attractive for both the corporate and individual traders whomake money on the Forex - a special financial market assigned for the foreign exchange.The following features make this market different in compare to all other sectors of theworld financial system:Heightened sensibility to a large and continuously changing number of factors; Accessibility to all traders in the major currencies; Guaranteed quantity and liquidity of the major currencies; Increased consideration for several currencies, round-the clock business hours which enable traders to deal after normal hours or during national holidays in their country finding markets abroad open and Extremely high efficiency relative to other financial markets.BABASAB PATIL10 11. Foreign Exchange ExposureThis goal of this manual is to introduce beginning traders to all the essential aspects offoreign exchange in a practical manner and to be a source of best answers on the typicalquestions as why are currencies being traded, who are the traders, what currencies dothey trade, what makes rates move, what instruments are used for the trade, how acurrency behavior can be forecasted and where the pertinent information may be obtainedfrom. Mastering the content of an appropriate section the user will be able to makehis/her own decisions, test them, and ultimately use recommended tools and approachesfor his/her own benefit.Foreign Exchange in a Historical PerspectiveCurrency trading has a long history and can be traced back to the ancient Middle East andMiddle Ages when foreign exchange started to take shape after the international merchantbankers devised bills of exchange, which were transferable third-party payments thatallowed flexibility and growth in foreign exchange dealings.The modern foreign exchange market characterized by the consequent periods ofincreased volatility and relative stability formed itself in the twentieth century. By themid-1930s London became to be the leading center for foreign exchange and the Britishpound served as the currency to trade and to keep as a reserve currency. Because in theold times foreign exchange was traded on the telex machines, or cable, the pound hasgenerally the nickname cable. In 1930, the Bank for International Settlements wasestablished in Basel, Switzerland, to oversee the financial efforts of the newlyindependent countries, emerged after the World War I, and to provide monetary relief tocountries experiencing temporary balance of payments difficulties.After the World War II, where the British economy was destroyed and the UnitedStates was the only country unscarred by war, U.S. dollar became the prominent currencyof the entire globe. Nowadays, currencies all over the world are generally quoted againstthe U.S. dollar.Reading a QuoteWhen a currency is quoted, it is done in relation to another currency, so that the value ofone is reflected through the value of another. Therefore, if you are trying to determine theexchange rate between the U.S. dollar (USD) and the Japanese yen (JPY), the quotewould look like this: USD/JPY = 119.50BABASAB PATIL 11 12. Foreign Exchange ExposureThis is referred to as a currency pair. The currency to the left of the slash is the basecurrency, while the currency on the right is called the quote or counter currency. The basecurrency (in this case, the U.S. dollar) is always equal to one unit (in this case, US$1),and the quoted currency (in this case, the Japanese yen) is what that one base unit isequivalent to in the other currency. The quote means that US$1 = 119.50 Japanese yen. Inother words, US$1 can buy 119.50 Japanese yen.Direct Quote vs. Indirect QuoteThere are two ways to quote a currency pair, either directly or indirectly. A direct quote issimply a currency pair in which the domestic currency is the base currency; while anindirect quote, is a currency pair where the domestic currency is the quoted currency. Soif you were looking at the Canadian dollar as the domestic currency and U.S. dollar as theforeign currency, a direct quote would be CAD/USD, while an indirect quote would beUSD/CAD. The direct quote varies the foreign currency, and the quoted, or domesticcurrency, remains fixed at one unit. In the indirect quote, on the other hand, the domesticcurrency is variable and the foreign currency is fixed at one unit.For example, if Canada is the domestic currency, a direct quote would be 0.85CAD/USD, which means with C$1, you can purchase US$0.85. The indirect quote forthis would be the inverse (1/0.85), which is 1.18 USD/CAD and means that USD$1 willpurchase C$1.18.In the forex spot market, most currencies are traded against the U.S. dollar, and the U.S.dollar is frequently the base currency in the currency pair. In these cases, it is called adirect quote. This would apply to the above USD/JPY currency pair, which indicates thatUS$1 is equal to 119.50 Japanese yen.However, not all currencies have the U.S. dollar as the base. The Queens currencies -those currencies that historically have had a tie with Britain, such as the British pound,Australian Dollar and New Zealand dollar - are all quoted as the base currency againstthe U.S. dollar. The euro, which is relatively new, is quoted the same way as well. Inthese cases, the U.S. dollar is the counter currency, and the exchange rate is referred to asan indirect quote. This is why the EUR/USD quote is given as 1.25, for example, becauseit means that one euro is the equivalent of 1.25 U.S. dollars.BABASAB PATIL12 13. Foreign Exchange ExposureMost currency exchange rates are quoted out to four digits after the decimal place, withthe exception of the Japanese yen (JPY), which is quoted out to two decimal places.Cross CurrencyWhen a currency quote is given without the U.S. dollar as one of its components, this iscalled a cross currency. The most common cross currency pairs are the EUR/GBP, EUR/CHF and EUR/JPY. These currency pairs expand the trading possibilities in the forexmarket, but it is important to note that they do not have as much of a following (forexample, not as actively traded) as pairs that include the U.S. dollar, which also are calledthe majors.Bid and AskAs with most trading in the financial markets, when you are trading a currency pair thereis a bid price (buy) and an ask price (sell). Again, these are in relation to the basecurrency. When buying a currency pair (going long), the ask price refers to the amount ofquoted currency that has to be paid in order to buy one unit of the base currency, or howmuch the market will sell one unit of the base currency for in relation to the quotedcurrency.The bid price is used when selling a currency pair (going short) and reflects how much ofthe quoted currency will be obtained when selling one unit of the base currency, or howmuch the market will pay for the quoted currency in relation to the base currency.The quote before the slash is the bid price, and the two digits after the slash represent theask price (only the last two digits of the full price are typically quoted). Note that the bidprice is always smaller than the ask price. Lets look at an example: USD/CAD = 1.2000/05 Bid = 1.2000 Ask= 1.2005If you want to buy this currency pair, this means that you intend to buy the base currencyand are therefore looking at the ask price to see how much (in Canadian dollars) themarket will charge for U.S. dollars. According to the ask price, you can buy one U.S.dollar with 1.2005 Canadian dollars.However, in order to sell this currency pair, or sell the base currency in exchangefor the quoted currency, you would look at the bid price. It tells you that the market willbuy US$1 base currency (you will be selling the market the base currency) for a priceequivalent to 1.2000 Canadian dollars, which is the quoted currency.BABASAB PATIL13 14. Foreign Exchange Exposure Whichever currency is quoted first (the base currency) is always the one in which the transaction is being conducted. You either buy or sell the base currency. Depending on what currency you want to use to buy or sell the base with, you refer to the corresponding currency pair spot exchange rate to determine the price. Spreads and Pips The difference between the bid price and the ask price is called a spread. If we were to look at the following quote: EUR/USD = 1.2500/03, the spread would be 0.0003 or 3 pips, also known as points. Although these movements may seem insignificant, even the smallest point change can result in thousands of dollars being made or lost due to leverage. Again, this is one of the reasons that speculators are so attracted to the forex market; even the tiniest price movement can result in huge profit. The pip is the smallest amount a price can move in any currency quote. In the case of the U.S. dollar, euro, British pound or Swiss franc, one pip would be 0.0001. With the Japanese yen, one pip would be 0.01, because this currency is quoted to two decimal places. So, in a forex quote of USD/CHF, the pip would be 0.0001 Swiss francs. Most currencies trade within a range of 100 to 150 pips a day.Currency Quote OverviewUSD/CAD = 1.2232/37Base CurrencyCurrency to the left (USD)Quote/Counter Currency to the right (CAD)Currency Price for which the market makerBid Price1.2232will buy the base currency. Bid is always smaller than ask. Price for which the market makerAsk Price1.2237 will sell the base currency. One point move, in USD/CAD it The pip/point is the smallestPipis .0001 and 1 point change would movement a price can make. be from 1.2231 to 1.2232 Spread in this case is 5 pips/points;Spread difference between bid and ask price (1.2237-1.2232). Spot Market and the Forwards and Futures Markets There are actually three ways that institutions, corporations and individuals trade forex: the spot market, the forwards market and the futures market. The spot market always has been the largest market because it is the "underlying" real asset that the BABASAB PATIL 14 15. Foreign Exchange Exposureforwards and futures markets are based on. In the past, the futures market was the mostpopular venue for traders because it was available to individual investors for a longerperiod of time. However, with the advent of electronic trading, the spot market haswitnessed a huge surge in activity and now surpasses the futures market as the preferredtrading market for individual investors and speculators. When people refer to the forexmarket, they usually are referring to the spot market. The forwards and futures marketstend to be more popular with companies that need to hedge their foreign exchange risksout to a specific date in the future.Spot MarketMore specifically, the spot market is where currencies are bought and sold according tothe current price. That price, determined by supply and demand, is a reflection of manythings, including current interest rates, economic performance, sentiment towardsongoing political situations (both locally and internationally), as well as the perception ofthe future performance of one currency against another. When a deal is finalized, this isknown as a "spot deal". It is a bilateral transaction by which one party delivers an agreed-upon currency amount to the counter party and receives a specified amount of anothercurrency at the agreed-upon exchange rate value. After a position is closed, the settlementis in cash. Although the spot market is commonly known as one that deals withtransactions in the present (rather than the future), these trades actually take two days forsettlement.Forwards and Futures MarketsUnlike the spot market, the forwards and futures markets do not trade actual currencies.Instead they deal in contracts that represent claims to a certain currency type, a specificprice per unit and a future date for settlement.In the forwards market, contracts are bought and sold OTC between two parties, whodetermine the terms of the agreement between themselves.In the futures market, futures contracts are bought and sold based upon a standard sizeand settlement date on public commodities markets, such as the Chicago MercantileExchange. In the U.S., the National Futures Association regulates the futures market.Futures contracts have specific details, including the number of units being traded,delivery and settlement dates, and minimum price increments that cannot be customized.The exchange acts as a counterpart to the trader, providing clearance and settlement.Both types of contracts are binding and are typically settled for cash for the exchange inquestion upon expiry, although contracts can also be bought and sold before they expire.The forwards and futures markets can offer protection against risk when tradingcurrencies. Usually, big international corporations use these markets in order to hedgeagainst future exchange rate fluctuations, but speculators take part in these markets aswell.Two types of analysis are used for the market movements forecasting:BABASAB PATIL15 16. Foreign Exchange Exposurefundamental, and technical (the chart study of past behavior of commodity prices). Thefundamental one focuses on the theoretical models of exchange rate determination and onthe major economic factors and their likelihood of affecting the foreign exchange rates.The main economic theories found in the foreign exchange deal with parity conditions. Aparity condition is an economic explanation of the price at which two currencies shouldbe exchanged, based on factors such as inflation and interest rates. The economic theoriessuggest that when the parity condition does not hold, an arbitrage opportunity exists formarket participants. However, arbitrage opportunities, as in many other markets, arequickly discovered and eliminated before even giving the individual investor anopportunity to capitalize on them. Other theories are based on economic factors such astrade, capital flows and the way a country runs its operations. We review each of thembriefly below.Major Theories: Purchasing Power ParityPurchasing Power Parity (PPP) is the economic theory that price levels between twocountries should be equivalent to one another after exchange-rate adjustment. The basisof this theory is the law of one price, where the cost of an identical good should be thesame around the world. Based on the theory, if there is a large difference in price betweentwo countries for the same product after exchange rate adjustment, an arbitrageopportunity is created, because the product can be obtained from the country that sells itfor the lowest priceInterest Rate ParityThe concept of Interest Rate Parity (IRP) is similar to PPP, in that it suggests that forthere to be no arbitrage opportunities, two assets in two different countries should havesimilar interest rates, as long as the risk for each is the same. The basis for this parity isalso the law of one price, in that the purchase of one investment asset in one countryshould yield the same return as the exact same asset in another country; otherwiseexchange rates would have to adjust to make up for the difference.Balance of Payments TheoryA countrys balance of payments is comprised of two segments - the current account andthe capital account - which measure the inflows and outflows of goods and capital for acountry. The balance of payments theory looks at the current account, which is theaccount dealing with trade of tangible goods, to get an idea of exchange-rate directions.If a country is running a large current account surplus or deficit, it is a sign that acountrys exchange rate is out of equilibrium. To bring the current account back intoequilibrium, the exchange rate will need to adjust over time. If a country is running alarge deficit (more imports than exports), the domestic currency will depreciate. On theother hand, a surplus would lead to currency appreciation.BABASAB PATIL16 17. Foreign Exchange ExposureReal Interest Rate Differentiation ModelThe Real Interest Rate Differential Model simply suggests that countries with higher realinterest rates will see their currencies appreciate against countries with lower interestrates. The reason for this is that investors around the world will move their money tocountries with higher real rates to earn higher returns, which bids up the price of thehigher real rate currency.Asset Market ModelThe Asset Market Model looks at the inflow of money into a country by foreign investorsfor the purpose of purchasing assets such as stocks, bonds and other financialinstruments. If a country is seeing large inflows by foreign investors, the price of itscurrency is expected to increase, as the domestic currency needs to be purchased by theseforeign investors. This theory considers the capital account of the balance of tradecompared to the current account in the prior theory. This model has gained moreacceptance as the capital accounts of countries are starting to greatly outpace the currentaccount as international money flow increases.Monetary ModelThe Monetary Model focuses on a countrys monetary policy to help determine theexchange rate. A countrys monetary policy deals with the money supply of that country,which is determined by both the interest rate set by central banks and the amount ofmoney printed by the treasury. Countries that adopt a monetary policy that rapidly growsits monetary supply will see inflationary pressure due to the increased amount of moneyin circulation. This leads to a devaluation of the currency.These economic theories, which are based on assumptions and perfect situations, help toillustrate the basic fundamentals of currencies and how they are impacted by economicfactors. However, the fact that there are so many conflicting theories indicates thedifficulty in any one of them being 100% accurate in predicting currency fluctuations.Their importance will likely vary by the different market environment, but it is stillimportant to know the fundamental basis behind each of the theories.Economic DataEconomic theories may move currencies in the long term, but on a shorter-term, day-to-day or week-to-week basis, economic data has a more significant impact. It is often saidthe biggest companies in the world are actually countries and that their currency isessentially shares in that country. Economic data, such as the latest gross domesticproduct (GDP) numbers, are often considered to be like a companys latest earnings data.In the same way that financial news and current events can affect a companys stockprice, news and information about a country can have a major impact on the direction ofthat countrys currency. Changes in interest rates, inflation, unemployment, consumerconfidence, GDP, political stability etc. can all lead to extremely large gains/lossesdepending on the nature of the announcement and the current state of the country.The number of economic announcements made each day from around the world can beintimidating, but as one spends more time learning about the forex market it becomesBABASAB PATIL 17 18. Foreign Exchange Exposureclear which announcements have the greatest influence. Listed below are a number ofeconomic indicators that are generally considered to have the greatest influence -regardless of which country the announcement comes from.Employment DataMost countries release data about the number of people that currently are employedwithin that economy. In the U.S., this data is known as non-farm payrolls and is releasedthe first Friday of the month by the Bureau of Labor Statistics. In most cases, strongincreases in employment signal that a country enjoys a prosperous economy, whiledecreases are a sign of potential contraction. If a country has gone recently througheconomic troubles, strong employment data could send the currency higher because it is asign of economic health and recovery. On the other hand, high employment can also leadto inflation, so this data could send the currency downward. In other words, economicdata and the movement of currency will often depend on the circumstances that existwhen the data is released.Interest RatesAs was seen with some of the economic theories, interest rates are a major focus in theforex market. The most focus by market participants, in terms of interest rates, is placedon the countrys central bank changes of its bank rate, which is used to adjust monetarysupply and institute the countrys monetary policy. In the U.S., the Federal Open MarketCommittee (FOMC) determines the bank rate, or the rate at which commercial banks canborrow and lend to the U.S. Treasury. The FOMC meets eight times a year to makedecisions on whether to raise, lower or leave the bank rate the same; and each meeting,along with the minutes, is a point of focus.InflationInflation data measures the increases and decreases of price levels over a period of time.Due to the sheer amount of goods and services within an economy, a basket of goods andservices is used to measure changes in prices. Price increases are a sign of inflation,which suggests that the country will see its currency depreciate. In the U.S., inflation datais shown in the Consumer Price Index, which is released on a monthly basis by theBureau of Labor Statistics.Gross Domestic ProductThe gross domestic product of a country is a measure of all of the finished goods andservices that a country generated during a given period. The GDP calculation is split intofour categories: private consumption, government spending, business spending and totalnet exports. GDP is considered the best overall measure of the health of a countryseconomy, with GDP increases signaling economic growth. The healthier a countryseconomy is, the more attractive it is to foreign investors, which in turn can often lead toincreases in the value of its currency, as money moves into the country. In the U.S., thisdata is released by the Bureau of Economic Analysis once a month in the third or fourthquarter of the month.BABASAB PATIL18 19. Foreign Exchange ExposureRetail SalesRetail sales data measures the amount of sales that retailers make during the period,reflecting consumer spending. The measure itself doesnt look at all stores, but, similar toGDP, uses a group of stores of varying types to get an idea of consumer spending. Thismeasure also gives market participants an idea of the strength of the economy, whereincreased spending signals a strong economy. In the U.S., the Department of Commercereleases data on retail sales around the middle of the month.Technical analysisA method of evaluating securities by analyzing statistics generated by market activity,such as past prices and volume. Technical analyst does not attempt to measure asecuritys intrinsic value, but instead use charts to identify patterns that can suggest futureactivity. Technical analysts believe that the historical performance of stocks and marketsare indications of future performance.Technical analysis has become increasingly popular over the past several years, as moreand more people believe that the historical performance of a stock is a strong indicationof future performance. People using fundamental analysis have always looked at the pastperformance of companies by comparing fiscal data from previous quarters and years todetermine future growth. The deference lies in the technical analysts beliefs thatsecurities move according to very predictable trends and patterns. These trends continueuntil something happens to change the trend, and until this change occurs, price levels arepredictable.TECHNICAL ANALYSIS Identification of the current trend i.e. the direction of price movement and spotting any trend reversal as early as possible. Historical price and volume data analyzed with the help of charts. For currencies, shares and commodities traded on exchanges, such data is usually available but in the case of interbank currency market, volume data is not available and the analyst makes use of different indicators, which are derived from the price data. Many of these indicators have become so popular that they are used extensively even for financial assets and instruments traded on exchanges. Applicable only when prices fluctuate freely in response to market forces of demand and supply for the underlying assets. Obviously not applicable for say a pegged exchange rate like USD/HKD. Our focus hereafter will be on floating exchange rates though the principles of technical analysis apply to other assets such as commodities, stock market indices, certain heavily traded stocks, etc. More reliable in case of broad and very liquid markets than thin and shallow markets.BABASAB PATIL 19 20. Foreign Exchange Exposure Helps to judge the emotional state of the market. The market has its own collective consciousness distinct from the individual consciousness of the participants.Technical Analysis in Contrast with Fundamental Analysis Fundamental analysis is concerned with all the fundamental factors. In the case of an exchange rate, the concerned factors are the present and expected interest rates, inflation rates, GDP growth rates, international trade and current account balance, exchange rate policies of the two countries in question, state of capital markets, etc. After analysis of all these factors, the fundamental analyst attempts to ascertain whether a currency is undervalued or overvalued and consequently whether it is likely to appreciate or depreciate. Technical analysis, on the other hand, assumes that the price at any given time is the result of not only the fundamental factors but also the markets collective response to all the factors. At the extreme, technical analysts dont even want to read newspapers lest the popular news bias their chart analysis! For the same reasons. some even dont want to know the identity of the underlying asset!! Often, economists focus on certain fundamentals and prescribe how the market ought to behave when the market behaviour is linked to some other factors. A classic example is the euros persistent decline since its launch. The market is labelled as crazy when it doesnt behave in the prescribed manner. However, those who are exposed to risk cant afford to go against the market even if they think it is crazy. Hence, the importance of technical analysis or proper understanding of market psychology.Assumptions in technical analysis The market discounts everything All known information about amarket is reflected in the price. In other words, all the present political,economic, psychological and any other type of information pertinent to themarket price, is already discounted or priced in. In electronic age,information travels at the speed of light and any new information getsdisseminated and discounted quickly whereafter it ceases to be of furtherrelevance to the process of forecasting. Prices move in trends - When a price moves in a particular direction, beit up or down, it will continue to trend in that direction till some newschanges market perception of future direction and reverses the trend itself.To sum up the markets move in the path of least resistance. History repeats itself - This assumption arises from the fact that masspsychology does not change. Markets overextend because of the herdinstinct leading to panic and euphoria time and again.BABASAB PATIL20 21. Foreign Exchange ExposureSome of the Important terms used in the Technical AnalysisSupport and resistance are price levels at which movement should stop and reversedirection. Think of support/resistance as levels that act as a floor or a ceiling to futureprice movements.Supports-A price level below the current market price, at which buying interestshould be able to overcome selling pressure and thus keep the price from going anylower.Resistance - A price level above the current market price, at which selling pressureshould be strong enough to overcome buying pressure and thus keep the price from goingany higher.Concepts of trendTrend is nothing but the direction of movement of price. Logically the share price canether be rising or falling or moving narrowly (flat). Thus there are three directions inwhich the price can move these three directions give rise to the three types of trend whenprices are moving upwards, the trend is said to be rising. When prices are movingdownwards it is called a falling trend. And when prices are moving in a narrow range,the trend can be said to be flat or choppy. Thus, the trend itself has three directions.Upward TrendIf the market makes a high and then comes down and after that cuts the previous highmakes a new high, it means that the market is in an uptrend and it is making a higherbottom higher top.Downward TrendIf the market is falling and making a lower bottom lower top it is said to be a downtrendSideways Trend (flat)If the market is just drifting and has no clear move it is laid to be a sideways trend.Trend lineBABASAB PATIL21 22. Foreign Exchange ExposureTrend lines are straight lines drawn by connecting either the tops or bottoms. To draw astraight line, one requires two points. Similarly to draw trend lines, one requires at leasttow tops or bottoms. This however, does not mean that there cannot be more than towtops or bottoms that can be connected to draw a trend line, infect the more the number oftops or bottoms that are touched or connected by the trend line, the better or morepowerful the trend line.Trend lines are the simplest, yet the most effective way of riding the trend. Just as trendhas three directions rising, falling and flat, there are three types of trend lines to representeach of the directions of trendUp ward trend lineAn uptrend line has a positive slope and is formed by connecting two or more low points.The second low must be higher than the first for the line to have a positive slope. Uptrendline act as support and indicate that net-demand (demand less supply) is increasing evenas the price rises. A rising price combined with increasing demand is bullish.Down trend linesA downtrend line has a negative slope and is formed by connecting two or more highpoints. The second high must be lower than the first for the line to have a negative slope.Downtrend lines act as resistance, and indicate that net-supply (supply less demand) isincreasing even as the price declines. A declining price combined with increasing supplyis very bearish, and shows the strong resolve of the sellers. As long as prices remainbelow the downtrend line, the downtrend is solid and intact. A break above thedowntrend line indicates that net-supply is decreasing and that a change of trend could beimminent.Moving AveragesMoving averages are one of the most popular and easy to use tools available to thetechnical analyst. They smooth a data series and make it easier to spot trends, somethingthat is especially helpful in volatile markets. They also form the building blocks for manyother technical indicators and overlays.There are three types of moving averages, namely simple moving average, exponentialmoving average and weighted moving average. But the most popular types of movingaverages are the Simple Moving Average (SMA) and the Exponential MovingAverage (EMA). They are described in more detail below.Simple Moving AverageBABASAB PATIL 22 23. Foreign Exchange ExposureA simple moving average is formed by computing the average (mean) price of a securityover a specified number of periods. While it is possible to create moving averages fromthe Open, the High, and the Low data points, most moving averages are created using theclosing price. For example: a 5-day simple moving average is calculated by adding theclosing prices for the last 5 days and dividing the total by 5.Ex: if the closing prices are as follows: 10, 11, 12, 13, 14, 17, 1210+11+12+13+14=60(60/5)=12Here 12 is a first moving average obtained from the given closing prices, next movingaverage can be calculated by deducting first cl price i.e 10 and adding next cl. Price i.e 17and again dividing it by 5.Exponential Moving Average (EMA)In order to reduce the lag in SMA, technicians often use EMA. EMAs reduce the lag byapplying more weight to recent prices relative to older prices. The weighting applied tothe most recent price depends on the specified period of the moving average. The shorterthe EMAs period, the more weight that will be applied to the most recent price. Forexample: a 10-period EMA weighs the most recent price 18.18% while a 20-period EMAweighs the most recent price 9.52%. As such, it will react quicker to recent price changesthan a SMA. Heres the calculation formulaEMA (current) = ((price (current)-EMA (prev)) x multiplier+EMA(prev)Where, Multiplier 2/n+1n- Number of days for which EMA is calculatedIf we take the same example of SMA 5 day EMA is calculated as follows.EMA= (12-11) X 0.666 + 11 = 11.66Where multiplier = 2/ (5 +1) = 0.666For next EMA 11.66 acts as previous EMA and so on A comparison of a 50-day EMA and a 50-day SMA for a script shows that theEMA picks up on the trend quicker than the SMA. The blue arrows mark points when thestock started a strong trend. By giving more weight to recent prices, the EMA reactedquicker than the SMA and remained closer to the actual price.BABASAB PATIL23 24. Foreign Exchange ExposureUses of moving averagesThere are many uses for moving averages, but three basic uses stand out:1. Trend identification/confirmation2. Support and Resistance level identification/confirmation3. Trading SystemsMoving Average Convergence and Divergence In this system analyst uses a combination of two moving averages one is a shortterm averages and other is long term averages. Also combination of SMA and EMA ofsame period is frequently used for identification of selling and buying points in the graph.Elliot wave theoryR. N. Elliott believed markets had well-define wave that could be used to predict marketdirection. In 1939, Elliott detailed the Elliott Wave Theory, which states that stock pricesare governed by cycles founded upon the Fibonacci series (1-2-3-5-8-13-21...).According to the Elliott Wave Theory, stock prices tend to move in a predeterminednumber of waves consistent with the Fibonacci series. Specifically, Elliott believed themarket moved in five distinct wave on the upside and three distinct on the downside. Thebasic shape of the wave is shown below.BABASAB PATIL 24 25. Foreign Exchange Exposure waves one, three and five represent the impulse, or minor up-wave in a major bull move. Waves two and four represent the corrective, or minor down-waves in the major bull move. The waves lettered A and C represents the minor down-wave in a major bear move, while B represents the one up-wave in a minor bear wave Elliott proposed that the waves existed at many levels, meaning there could be waves within waves. To clarify, this means that the chart above not only represents the primary wave pattern, but it could also represent what occurs just between points 2 and 4. Elliott wave theory ascribes names to the waves in order of descending size:1. Grand Supercycle2. Supercycle3. Cycle4. Primary5. Intermediate6. Minor7. Minute8. Minuette9. Sub-Minuette BABASAB PATIL25 26. Foreign Exchange Exposure The major waves determine the major trend of the market, and minor waves determine minor trends. This is similar to the Dow theory postulates primary and secondary trends. Elliott provided numerous variations on the main wave, and placed particular importance on the golden mean, 0.618, as a significant percentage for retracement. Trading using Elliott wave patterns is quite simple. The trader identifies the main wave or Supercycle, enters long, and then sells or shorts, as the reversal is determined. This continues in progressively shorter cycles until the cycle completes and the main wave resurfaces. The caution to this is that much of the wave identification is taken in hindsight and disagreements arise between Elliott wave technicians as to which cycle the market is in. Chart Patterns The vast majority of chart patterns fall into two main groups: reversal and continuation. Reversal patterns indicate a change of trend and can be broken down into top and bottom formations. Continuation patterns indicate a pause in trend and indicate that the previous direction will resume after a period of time. Just because a pattern forms after a significant advance or decline does not mean it is a reversal pattern. Many patterns, such as a rectangle, can be classified as either reversal or continuation. Much depends on the previous price action, volume and other indicators as the pattern evolves. This is where the science of technical analysis becomes the art of technical analysis. Below is a list of common chart patterns that can be useful in Technical Analysis. Double Top (Reversal) Double Bottom (Reversal) Head and Shoulders Top (Reversal) Head and Shoulders Bottom (Reversal) Falling Wedge (Reversal) Rising Wedge (Reversal) Rounding Bottom (Reversal) Triple Top (Reversal) Triple Bottom (Reversal) Bump and Run Reversal (Reversal) Flag, Pennant (Continuation) Symmetrical Triangle (Continuation) BABASAB PATIL26 27. Foreign Exchange Exposure Ascending Triangle (Continuation) Descending Triangle (Continuation) Rectangle (Continuation) Price Channel (Continuation) Measured Move - Bullish (Continuation) Measured Move - Bearish (Continuation) Cup with Handle (Continuation)We shall discus some of these patternsDouble top (reversal)The double top is a major reversal pattern that forms after an extended uptrend. As itsname implies, the pattern is made up of two consecutive peaks that are roughly equal,with a moderate trough in-between. The double top looks like the letter "M". The twicetouched high is considered a resistance level. Although there can be variations, the classic double top marks at least an intermediate change, ifnot long-term change, in trend from bullish to bearish. Many potential double tops canform along the way up, but until key support is broken, a reversal cannot be confirmed.Double bottom (reversal)The double bottom is a major reversal pattern that forms after an extended downtrend. Asits name implies, the pattern is made up of two consecutive troughs that are roughlyequal, with a moderate peak in-between. The double bottom looks like the letter "W". Thetwice touched low is considered a support level.Most technical analysts believe that the advance off of the first bottom should be 10-20%.The second bottom should form within 3-4% of the previous low, and volume on theensuing advance should increase.Although there can be variations, the classic double bottom usually marks anintermediate or long-term change in trend. Many potential double bottoms can formalong the way down, but until key resistance is broken, a reversal cannot be confirmed.Head and sholder top (reversal)BABASAB PATIL 27 28. Foreign Exchange ExposureA Head and Shoulders reversal pattern forms after an uptrend, and its completion marks atrend reversal. The pattern contains three successive peaks with the middle peak (head)being the highest and the two outside peaks (shoulders) being low and roughly equal. Thereaction lows of each peak can be connected to form support, or a neckline.As its name implies, the Head and Shoulders reversal pattern is made up of a leftshoulder, a head, a right shoulder, and a neckline. Other parts playing a role in the patternare volume, the breakout, price target and support turned resistance.Important words used in Technical Market:The Bulls:A bull market is when everything in the economy is great, people are finding jobs, GDPis growing, and stocks are rising. Pecking stocks during the bull market is easier becauseeverything is going up. Bull market cannot last forever, sometime they can lead todangerous situations if stocks become overvalued. If a person is optimistic, believing thatstocks will go up, he or she is called a bull and said to have a bullish outlook.The Bears: A bear market I when the economy is bad, recession is looming, and stock prices arefalling. Bear market make it though for investors to pick profitable stocks. One solutionto this is to make money when stocks are falling using a technique called short selling.Another strategy is to wait on until you feel that the bear market is over, and to buy againin anticipation of a bull market. If a person is pessimistic, believing that stocks are goingto drop, he or she is called a bear and said to have a bearish outlook.Other animal on the farm- chickens and pigsChickens are afraid to lose anything. Their fear overrides their need to make profits andso they turn only to money market securities or get out of the markets altogether.Pigs are high-risk investors looking for the one big score in a short period of time. Pigsbuy on hot tips and invest in hot companies without doing their due diligence. They getimpatient, greedy, and emotional about their investments, and they are drawn to high risksecurities without putting in the proper time or money to learn about these investmentvehicles. Professional traders love the pigs. As its often from their losses that the bullsand bears reap their profits.Short Selling The selling of a security that the seller does not own, Short sellers assume thatthey will be able to buy the stock at a lower amount than the price at which they soldshort.BABASAB PATIL28 29. Foreign Exchange ExposureBear An investor who believes that a particular security or market is headeddownward. Bears attempt to profit from a decline in prices. Bears aregenerally pessimistic about the state of a given market.IntradayAnother way of saying "within the day". Intraday price movements areparticularly important to short-term traders looking to make many trades over the courseof a single trading session. The term intraday is occasionally used to describesecurities that trade on the markets during regular business hours, such as stocks andETFs, as opposed to mutual funds, which must be bought from a dealer.Day TraderA stock trader who holds positions for a very short time (from minutes to hours)and makes numerous trades each day. Most trades are entered and closed out within thesame daySpeculatorA person who trades with a higher-than-average risk, in return for a higher-than-average profit potential. Speculators take large risks, especially with respectto anticipating future price movements, or gambling, in the hopes of making quick, largegains.Going LongHolding the security for an extended period of time. Depending on the type ofsecurity, a long-term asset can be held for as little as one year or more.Going shortSelling the existing security immediately to protect the profit made or tominimizing the lose.Short CoveringThe act of purchasing securities in order to close an open short position. This isdone by buying the same type and number of securities that were sold short. Most often,traders cover their shorts whenever they speculate that the securities will rise. In order tomake a profit, a short seller must cover the shorts by purchasing the security below theoriginal selling price.Squaring off Its an intra day trading where in the trader first sells or buys the shares and thenreverse the process (buying/selling) within the closing of market on the same day andpays off difference amount if he has lost or gains profit. So by doing so at the end of theday he owns no shares in his account.BABASAB PATIL29 30. Foreign Exchange ExposureANALYSIS PARTStructure of Forex Market Transaction in IndiaRBINOSTROAuthorizedDealerA Category(AD)VOSTRODesignatedBranchB Category(D-Branch)MoneyChangeC Category (MC) ADs are fully pledge ADs, means these ADs are having Accounts in their ownname. Vostro in the sense Foreign Bank opens its Account in Indian Bank. WhereasNostro means our Indian Bank opens Account in any Foreign Banks. So Canara Bank ishaving both types of accounts. Details about Canara Bank we will see in further pages. Designated Branches are those branches, where these branches will not trade inthe name of their own account, but in the name of ADs. They can act individually, eventhough they dont have accounts in their own name.Money Change (MC)s, are comes under C category. This category people areneither having accounts in their own name nor fully authorized to act individually. Sothese are comes reports to D-Branches or otherwise they directly related to ADs. Wecan see in Mangalore or in Goa or in Mumbai small export agencies all these agencies arecomes under C category.BABASAB PATIL 30 31. Foreign Exchange ExposureForeign Exchange Operations of Station Road Branch of Canara Bank:First we will see the Hierarchy of Foreign Exchange Operations in Canara Bank.First it starts with International Foreign Exchange. Under this International ForeignExchange, Forex Department (FD) has existing. FD is having its own Account in theirname. So they do not dependent on any other.In India around 13 departments are situated. In Karnataka there are only 2 FDsone is situated in Bangalore and another one is in Mangalore.Under this FD, Foreign Exchange Cell comes. There are 22 Foreign ExchangeCells situated in India. These Foreign Exchange Cells should report the daily report offoreign exchange operations to Foreign Department. Under this FD another branch also existed called it as Designated Branch (D-Branch). This D-Branch is not like a Foreign Exchange Cell. This branch is notdependent on any other Foreign Exchange Cells, but they have their own Account. Forinstance, for foreign exchange transaction purpose a customer approaches AvenueBranch of Bangalore. Avenue Branch is a D-Branch, so will not send this transaction toany other Foreign Exchange Cells but it operates in their own account under the name ofForeign Department.In Karnataka especially in Bangalore these D-Branches are situated viz., inAvenue Road Branch, Malleshwaram Branch etc.,Apart from all these, still another branch is there, it is called Overseas Branch.These Overseas Branches are Operate as branches or subsidiaries of the parent Bank.These branches are to seek deposits and grant loans in currencies other than the currencyof the host government.Diagrammatic way of Hierarchy of Foreign Exchange Operations in Canara BankINTERNATIONAL FOREIGN EXCHANGE Designated Branch Foreign Department Foreign Exchange CellBABASAB PATIL31 32. Foreign Exchange ExposureNow Let us see particularly of Hubli Branch:For entire North Karnataka there is only one Foreign Exchange Transaction Cell,is situated in Hubli. Hubli Foreign Exchange Transaction is a Foreign Exchange Cell.This is comes under Foreign Department from previous diagram we can clarify it.This Hubli Foreign Exchange Cell has been operating since from 1991. Till 2005Hubli Foreign Exchange Cell was under Mangaloe Foreign Department. But now it isshifted to Mumbai Foreign Department. This Hubli Foreign Exchange Cell reports daily foreign exchange operations toMumbai Foreign Department. So for this reporting purpose it is having a new computertechnology, by this they only press a key to submit or to send the report at the end of theday. So for this technology they have separate computer. Hubli Foreign Exchange Cell covers especially almost all Districts of NorthKarnataka (expect Hyderabad Karnataka). Viz., Districts of Dharwad, Belgaum, Bijapur,Baglkot, Gadag, Koppal, Haveri etc., Services has been Providing by Hubli Forex Cell IMPORT SERVICESEXPORTREMITTANCEBABASAB PATIL 32 33. Foreign Exchange Exposure EXPORT Collection of BillsPurchase Finance DiscountPre & PostShipmentNegotiation Cash in Advance Hubli Forex Cell gives service to Exporter in the name of Export Service. Herethey have made 3 types of categories, as in the above figure.Collection of Bills: Every document should be send through banks only. It iscompulsion made by RBI and also FEMA. Here exporter must submit some documentsare as follows: Invoice, Packing List, Bill of Lading (in case of Sea) / Airway Bill (in case ofAir), Certificate of Origin, Test Certificate etc., Statutory Declaration Form (SDF) andShipping Bill are very important documents where bank will check these documents verythoroughly. And combining these important documents, and they call it as GR Form. Exporter or consignor prepares SDF. It is a document where exporter declares theType of goods he is exporting, Quantity (Kg & No.s), Name of Importer, Name ofShipping Agency etc., This is made in 3 copies. One is sent to RBI, another one is toany commercial Forex traded Bank and remaining is for them. Superidentant of ExerciseCustom certifies all these copies.Finance: (Pre & Post Shipment loan): At Sight they purchase the document and makethe payment within 15 to 20 days. Bank may discount it as per the instruction by partylike Bill of Exchange. This may maturated at 90 days after or 90 or 120 days as peragreement between both parties. Negotiation also made by bank to get profits. Who takes the pre shipment loan they should compulsorily take post shipmentloan also. Because, if any one have taken pre shipment, when goods are ready toshipment, then bank convert this pre shipment into post shipment. For this purpose Bankshould require Purchase Order (PO), if New Importer / High value goods then opening ofL/c and Bank should take Inventory as a Hypothesis, Guarantee from Director/partner,some times Mortgage and some times pledge the finished goods. These loan sanctionsstage by stage. IMPORTBABASAB PATIL 33 Letter ofCredit FinanceAdvise, Conformance FLC 34. Foreign Exchange Exposure Here Bank gives service to importers also as an Import Service. Here importercan open Letter of credit, for this purpose Bank acts as a mediator between exporter andimporter. So bank will take some risks relating to export and import of goods.Bank also acts as advisor to importer. Incase new exporter or incase of high valuematerials or incase first time importing the materials, in all these cases banks will giveadvise to the importer that whether to go or not. If any RBIs prior permission is requiredor not if so require then what are the procedure all things may advise to importer. Some times for importer also it gives a loan called Foreign Letter of Credit (FLC).According to this if exporter fails to supply goods then Bank will take the responsibility.But some major responsibility will be on importer only. OutwardREMITTANCE Inward MoneyChange Remittance is nothing but receiving and paying of foreign currency in India.Outward is nothing but paying abroad. Inward means incoming payment from abroad.Money change means if a person wants to convert the one foreign currency into domesticcurrency.Here TT, DD, Bills, Travelers Cheques, Notes, Now recently Yatri Card etc., arethe major modes of transactions held in this type of service. For this purpose of service,any receiving / paying person should be a customer i.e., he should be an Account holderin that particular Bank. But this condition is not applicable to Tourist. For Tourist Bankonly looks out the Passport and Visa (According to FEMA).BABASAB PATIL 34 35. Foreign Exchange Exposure NRI DEPOSITSNON RESIDENT EXTERNAL RUPEE ACCOUNT (NRE) Types of account you can open are: Savings, Current or Term Deposit in Indian Rupees. You can open a NRE account by:o Remittance from abroad (through DD/SWIFT TRANSFER)o Transfer of funds from existing NRE/FCNR accounts with other banks in India or from other branches of our bank.o Foreign currency notes/travellers cheques brought in during temporary visit to India.o Personal cheques drawn on your account abroad Unique features of NRE deposits:o The entire credit balance inclusive of interest earned can be repatriated outside India without reference to RBI.o NRE accounts can be operated by Resident Indians on the basis of the Power of Attorney Or letter of Authority issued by the NRI account holder. However PA/LA holder can repatriate the funds abroad to the non resident depositor only.o Joint accounts can be opened along with other Non Resident Indians.o Local disbursements, purchase of units of UTI, Central and State Government securities and National Savings Certificates can be made from these accounts.o Sale/Maturity Proceeds/ repurchase proceeds of units of UTI, Securities or certificates originally purchased out of funds in these accounts can be credited without reference to RBI.BABASAB PATIL35 36. Foreign Exchange Exposureo Under term deposits accounts can be opened for a minimum period of 1year and a maximum period of 3 years.o Loans/overdrafts in India to deposit holders are available against securityof deposits.o Cheque book facility is available for NRE Savings Bank account.NON-RESIDENT (External) RUPEE ACCOUNT SCHEME (NRE Account) NRIs (Individuals of Bangladesh/PakistanWho can open an account nationality require prior approval of RBI) In the names of two or more non-residentJoint account individuals Subject to a maximum of 4 personsNomination PermittedCurrency in which account is Indian RupeesdenominatedRepatriability RepatriableType of AccountSavings, Current, Recurring, Fixed DepositPeriod for fixed depositsMinimum one year and maximum 3 years. Subject to RBI guidelines. The interest ratesRate of Interest are displayed on our web siteLoansa) In IndiaPermitted(i) to the Account holderPermitted(ii) to third partiesPermittedb) Abroad >(i) to the Account holderPermitted(ii) to third partiesPermittedc) Foreign Currency Loans In IndiaBABASAB PATIL 36 37. Foreign Exchange Exposure(i) to the account holder Not permitted(ii) to third parties Not permittedBABASAB PATIL 37 38. Foreign Exchange ExposurePurpose of Loana) In India i)Personal purposes or for carrying on business activities * ii) Direct investment in India on non-(i) to the Account holderrepatriation basis by way of contribution to the capital of Indian firms/ companies iii) Acquisition of flat/ house in India for his own residential use Fund based and/or non-fund based facilities(ii) to third partyfor personal purposes or for carrying on business activities.b) Abroad Fund based and/or non-fund based facilitiesTo the account holder and third party for bonafide purposes.* The loans cannot be utilized for the purpose of relending, or carrying on agriculture orplantation activities or for investment in real estate business.Note:a) When a person resident in India leaves India for Nepal and Bhutan for taking upemployment or for carrying on business or vocation or for any other purposes indicatinghis intention to stay in Nepal and Bhutan for an uncertain period, his existing account willcontinue as a resident account. Such account will not be designated as Non-resident(Ordinary) Rupee Account (NRO).b) We open and maintain NRE/FCNR(B) accounts of persons resident in Nepal andBhutan who are citizens of India or of Indian origin, provided the funds for opening theseaccounts are remitted in free foreign exchange. Interest earned in NRE/FCNR (B)accounts can be remitted only in Indian rupees to NRIs and PIO resident in Nepal andBhutan.c) We extend all types of rupee loans under the Retail lending scheme to NRIs.BABASAB PATIL 38 39. Foreign Exchange ExposureRESIDENT FOREIGN CURRENCY [DOMESTIC] ACCOUNT [RFCD]Types of account you can open: Non interest bearing Current Account in Foreign currency.A person resident in India can open an RFCD account out of foreign exchange acquired in the form of currency notes, bank notes and travelers cheques from the following sources: o Acquired while on a visit to any place outside India by way of payment for services not arising from any business in or anything done in India; or o Acquired from any person not resident in India and who is on a visit to India, as honorarium or gift or for services rendered or in settlement of any lawful obligation; or o Acquired by way of honorarium or gift while on a visit to any place outside India; or o Unspent amount of foreign exchange acquired by him from an authorised person for travel abroad; or o Unspent amount of foreign exchange received as allowance by Pilots/Crew Members/Mariners etc., of Indian Airline/Shipping companies o Foreign exchange earnings through export of goods and/or services, royalty/honorarium etc. by resident individuals; or o Insurance claims/maturity value settled in foreign currency. o Gifts received from close relatives viz., Husband and Wife Father/Mother (including step-mother) Fathers father/Fathers mother/Mothers mother/ Mothers father Son (including step-son)/Daughters (including step-daughter) Sons wife/Sons son/Sons sons wife/Sons daughter/Sons daughters husband Daughters husband/Daughters son/Daughters sons wife/Daughters daughter/Daughters daughters husband Brother (including step-brother)/Brothers wife Sister (including step-sister)/Sisters husband.RESIDENT FOREIGN CURRENCY [DOMESTIC] ACCOUNT [RFCD]BABASAB PATIL39 40. Foreign Exchange ExposureWho can open an accountPersons Resident in India.Joint accountIn the names of two or moreresident individuals with amaximum of 4 persons.NominationPermittedPermissible currenciesUSD, GBP & EURType of AccountNon interest bearing CurrentAccountBABASAB PATIL40 41. Foreign Exchange ExposureFacilities available to NRIs, PIO for investment in IndiaI. Bank Accounts and Depositsa) Non-Resident (External) Rupee (NRE) Accounts (Principal / InterestRepatriable) Savings - The interest rates on NRE Savings deposits shall be at the rate applicable to domestic savings deposits. Currently the interest rate is 3.5%. Term deposits For 1 year to 3 years, the interest rates on fresh repatriable Non- Resident (External) Rupee (NRE) Term deposits should not exceed the LIBOR/SWAP rates, as on the last working day of the previous month, for US dollar of corresponding maturity plus 50 basis points.The interest rates as determined above for three year deposits should also be applicable incase the maturity period exceeds three years.The changes in interest rates will also apply to NRE deposits renewed after their presentmaturity period.b) FCNR (B) (Principal/Interest Repatriable)Deposits of funds in the account may be accepted in such permissible currencies as maybe designated by the Reserve Bank from time to time. Presently the term deposit can be placed with ADs in India in 6 specific foreign currencies (US Dollar, Pound Sterling, EURO, Japanese Yen, Australian Dollar and Canadian Dollar). Rate of Interest - Fixed or floating within the ceiling rate of LIBOR/SWAP rates for the respective currency/corresponding term minus 25 basis points. Maturity of deposits: 1-5 years.c) NRO Accounts (Current earnings repatriable) Savings - Normally operated for crediting rupee earnings / income such as dividends, interest. Currently the interest rate is 3.5 per cent. Term Deposits - Banks are free to determine interest rates.d) Repatriation from NRO balancesAuthorised Dealers can allow remittance/s upto USD 1 million per financial year (April-March) for bonafide purposes, from balances in NRO accounts subject to payment ofapplicable taxes. The limit of USD 1 million per financial year includes sale proceeds ofimmovable properties held by NRIs/PIO.BABASAB PATIL 41 42. Foreign Exchange ExposureII. Other Investments on repatriation basis Government dated securities/treasury bills. Units of domestic mutual funds. Bonds issued by a public sector undertaking (PSU) in India. Non-convertible debentures of a company incorporated in India. Shares in Public Sector Enterprises being dis-invested by the Government of India, provided the purchase is in accordance with the terms and conditions stipulated in the notice inviting bids. Shares and convertible debentures of Indian companies under FDI scheme (including automatic route & FIPB). Shares and convertible debentures of Indian companies through stock exchange under Portfolio Investment Scheme. Perpetual debt instruments and debt capital instruments issued by banks in India.III. Other Investments on non-repatriation basis Government dated securities (other than bearer securities)/treasury bills. Units of domestic mutual funds. Units of Money Market Mutual Funds in India. Non-convertible debentures of a company incorporated in India. The capital of a firm or proprietary concern in India, not engaged in any agricultural or plantation activity or real estate business. Deposits with a company registered under the Companies Act, 1956 including NBFC registered with RBI, or a body corporate created under an Act of Parliament or State Legislature, a proprietorship concern or a firm out of rupee funds which do not represent inward remittances or transfer from NRE/FCNR(B) Accounts into the NRO Account. Commercial Paper issued by an Indian company. Shares and convertible debentures of Indian companies other than under Portfolio Investment Scheme.BABASAB PATIL 42 43. Foreign Exchange ExposureIV. Investment in immovable Property May acquire immovable property in India other than agricultural land/ plantation property or a farmhouse out of repatriable and non-repatriable funds.In respect of such investments NRIs are eligible to repatriate Sale proceeds of immovable property acquired in India to the extent of repatriable funds used for acquiring the property, up to two residential properties. The balance will be repatriable through NRO Account subject to conditions mentioned at item (I) (d). Refund of (a) application / earnest money / purchase consideration made by house-building agencies/seller on account of non-allotment of flats / plots and (b) cancellation of booking/deals for purchase of residential/commercial properties, together with interest, net of taxes, provided original payment is made out of NRE/FCNR(B) account/inward remittances. Housing Loan in rupees availed of by NRIs from ADs / Housing Financial Institutions can be repaid by the close relatives in India of the borrower.V. Facilities to returning NRIs/PIOReturning NRIs/ PIO May continue to hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India, if such currency, security or property was acquired, held or owned when resident outside India.May open, hold and maintain with an authorised dealer in India a Resident ForeignCurrency (RFC) Account to transfer balances held in NRE/FCNR(B) accounts. Proceedsof assets held outside India at the time of return, can be credited to RFC account. Thefunds in RFC accounts are free from all restrictions regarding utilisation of foreigncurrency balances including any restriction on investment in any form outside India.BABASAB PATIL 43 44. Foreign Exchange Exposure NRI REMITTANCE FACILITIESSAFE CUSTODY SERVICESThis subsidiary service is rendered by the Bank to most valued customers. Bankundertakes the responsibility of safe custody of articles entrusted by the customer under acontract and return the same according to terms agreed upon.SAFE DEPOSIT LOCKERSKeep your valuables in our lockers and have peace of mind.Lockers available at select branches where Safe Deposit Vaults are installed. Bank lets onhire safe deposit lockers to individuals (Singly or jointly), Firms, Companies, Associationor Clubs, Trustees on nominal rent.NOMINATIONSThis facility has been devised with an aim of minimising the hardships caused to thefamily members on the death of the depositor/s. Nominations can be made in respect ofall types of deposit accounts by the individual account holders in their own capacitysingly or jointly.CANBANK ELECTRONIC FUNDS TRANSFER SCHEMEWe have a high tech remittance product called Canbank EFT which at present isextended to the following exchange houses and banks 1. M/s Al Razouki International Exchange Co LLC, Dubai 2. M/s Eastern Exchange Est., Doha, Qatar 3. M/s Al Fardan Exchange Co., UAE 4. M/s Bahrain India International Exchange Co., Bahrain 5. M/s UAE Exchange Centre, Abu Dhabi, UAE 6. M/s Zenj Exchange Co., Bahrain 7. Laxmidas Tharia Ved Exchange 8. Musandam Exchange Oman 9. Arab National Bank Riyadh Saudi Arabia 10. Canara Bank LondonResidents of Dubai, Bahrain and Saudi Arabia can make use of the above product formaking remittances which enables the beneficiaries of the remittance in India to receivethe funds in their accounts with designated Canara Bank branches within 24 hours fromthe date of remittance. This facility is highly cost-effective and secured way ofremittance. At present the funds by way of EFT can be remitted to 1022 designatedbranches across the CountryBABASAB PATIL 44 45. Foreign Exchange Exposure Acquisition and Transfer of Immovable Property in India by a personresident outside IndiaI) Regulations/Directions issued by Reserve Bank of India 1.Regulations regarding acquisition and transfer of immovable property in India by a person resident outside India have been notified vide RBI Notification No. FEMA 21/2000-RB dated May 3, 2000 as amended by Notification No.FEMA 64/2002-RB dated June 29, 2002, Notification No.FEMA 65/2002- RB dated June 29, 2002, Notification No.FEMA 93/2003-RB dated June 6, 2003 and Notification No. 146/2006-RB dated 10/02/06 and relevant directions issued in the form of A.P. (DIR Series) Circulars. II)Acquisition of immovable property in India by way of purchase by aperson resident outside India. 2.General Permission is available to purchase only a residential/commercial property in India to a person resident outside India who is a citizen of India (NRI) or who is a Person of Indian Origin (PIO). 3.For the purpose of acquisition and transfer of immovable property in India, a PIO means an individual (not being a citizen of Pakistan or Bangladesh or Sri Lanka or Afghanistan or China or Iran or Nepal or Bhutan), who (i) at any time, held Indian passport; or (ii) who or either of whose father or grandfather was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 (57 of 1955). 4.NRI/PIO who has purchased residential/commercial property under general permission is not required to file any documents with the Reserve Bank. 5.There is no restriction on number of residential/commercial property that NRI/ PIO can purchase under the general permission available 6.No foreign national of non-Indian origin be added as a second holder to a residential/commercial property purchased by NRI/PIO 7.A foreign national of non-Indian origin resident outside India cannot acquire any immovable property in India by way of purchase. Sec 2 (ze)BABASAB PATIL 45 46. Foreign Exchange Exposure 8. Yes. A Foreign National of non-Indian origin including a citizen of Pakistanor Bangladesh or Sri Lanka or Afghanistan or China or Iran or Nepal orBhutan may acquire only residential accommodation on lease, not exceedingfive years for which he/she does not require prior permission of Reserve Bankof India. 9. A person resident outside India cannot acquire by way of purchaseagricultural land/plantation property/farm house in India. III) Acquisition of immovable property in India by way of gift by a personresident outside India 10.Yes. Under general permission available NRI/PIO may acquireresidential/commercial property by way of gift from a person resident in Indiaor a NRI or a PIO. 11.No. Under section 2 (ze) of the Foreign Exchange Management Act, 1999transfer includes among others, gift. Therefore, a foreign national of non-Indian originresident outsideIndiacannot acquireresidential/commercial property in India by way of gift. 12.No. A person resident outside India cannot acquire agricultural land/plantationproperty/farm house in India by way of gift. IV)Acquisition of immovable property in India by way of inheritance by aperson resident outside India 13.Yes. A person resident outside India can hold immovable property acquiredby way of inheritance from a person resident in India as per the provisions ofSection 6(5) of the Foreign Exchange Management Act, 1999. 14.With the specific approval of Reserve Bank a person resident outside Indiamay hold any immovable property in India acquired by way of inheritancefrom a person resident outside India, provided the bequeathor had acquiredsuch property in accordance with the provisions of foreign exchange law inforce at the time of acquisition or under FEMA regulations.BABASAB PATIL 46 47. Foreign Exchange Exposure V) Transfer of immovable property in India by way of sale by a personresident outside India 15. NRI can transfer by way of sale residential/commercial property in India to a person resident in India or to a NRI or a PIO. 16. PIO can transfer by way of sale residential/commercial property in India only to a person resident in India. 17. No. PIO would need to seek Reserve Bank prior approval for transfer by way of sale residential/commercial property in India to a NRI or a PIO. 18. No. A foreign national of non-Indian origin whether resident in India or outside India would need to seek prior approval of Reserve Bank for transfer by way of sale residential/property in India acquired with the specific permission of Reserve Bank to a person resident in India or outside India. 19. Under the general permission available NRI/PIO may transfer by way of sale his agricultural land/plantation property/farm house in India to a person resident in India who is a citizen of India. 20. A foreign national of non-Indian origin resident outside India would need to seek prior approval of Reserve Bank for transfer, by way of sale, agricultural land/plantation property/farm house acquired in India. VI)Transfer of immovable property in India by way of gift by a personresident outside India 21. Yes. NRI/PIO may transfer by way of gift residential/commercial property in India to a person resident in India or to a NRI or a PIO.BABASAB PATIL47 48. Foreign Exchange Exposure 22. Under the general permission available NRI/PIO may transfer by way of gift agricultural land/plantation property/farm house in India to a person resident in India who is a citizen of India. 23. No. A foreign national of non-Indian origin resident outside India would need to seek prior approval of Reserve Bank for transfer by way of gift agricultural land/plantation property/farm house acquired by him in India. VII)Transfer of residential/commercial property in India by way of mortgage by a person resident outside India 24. NRI/PIO, transfer by way of mortgage his residential/commercial property in India to a party abroad. He should seek prior approval of RBI. 25. No. He should seek prior approval of RBI. However, immovable property purchased by a person resident outside India who has established a Branch Office or other place of business for carrying on in India any activity in accordance with FERA/FEMA regulations, may under general permission available, mortgage such a property with an authorized dealer as a security for any borrowing. VIII) Mode of payment for purchase of residential/commercial property in India by NRI/PIO 26. Under the general permission available, NRI / PIO may purchase residential / commercial property in India out of funds remitted to India through normal banking channel or funds held in his NRE / FCNR (B) / NRO account. No consideration shall be paid outside India. However, payment for acquisition of immovable property in India by NRI/PIO cannot be made either by Travellers cheques or by foreign currency notes. 27. Provided original payment was made by way of inward remittance or by debit to NRE/FCNR (B) account. For this purpose no permission of Reserve Bank is required and they may approach the Authorised Dealer directly in the matter. (Please refer to A. P. (DIR Series Circular No. 46 dated November 12, 2002).BABASAB PATIL48 49. Foreign Exchange Exposure 28. Subject to certain terms and conditions (Please refer to Schedule 1 and Schedules 2 to Notification No. FEMA 5/2000-RB dated 3rd May 2000). 29. Loans can be repaid by the borrower by way of inward remittance through normal banking channel or by debit to his NRE/FCNR (B)/NRO account or out of rental income derived from renting out such property. Such loan can also be repaid by the borrowers close relatives through their account in India by crediting the borrowers loan account. (Please refer to Regulation 8 to Notification No. FEMA 4/2000-RB dated 3rd May 2000 and A.P. (DIR Series) Circular No.95 dated April 20, 2003 and A.P. (DIR Series) Circular No.94 dated May 25, 2003). 30. NRI avail of housing loan in rupees from his employer in India subject to certain terms and conditions (Please refer to Regulation 8A to Notification No. FEMA 4/2000-RB dated 3rd May 2000 and A.P. (DIR Series Circular No.27 dated October 10, 2003). IX)Repatriation of sale proceeds of residential/commercial propertypurchased by NRI/PIO 31. NRI / PIO may repatriate the sale proceeds of residential / commercial property in India acquired by way of inward remittance through normal banking channel or by debit to NRE /FCNR (B) account. The amount to be repatriated should not exceed the amount paid for acquisition of residential / commercial property (a) in foreign exchange received through normal banking channel or by debit to FCNR (B) account or (b) the foreign currency equivalent, as on the date of payment, of the amount paid by debit to NRE account. From out of balances in NRO account, he may remit upto USD one million per financial year for any bonafide purposes, eligible balances including the sale proceeds of immovable property. 32. Yes. Repayment of loan in foreign exchange is treated as equivalent to the foreign exchange received for purchase of residential accommodation. 33. No lock in period is applicable for sale of such property. 34. Yes. Repatriation of sale proceeds is restricted to not more than two residential properties.BABASAB PATIL 49 50. Foreign Exchange Exposure X) Remittance of sale proceeds of residential/commercial property receivedby way of gift by NRI/PIO 35. The sale proceeds of residential/commercial property received by way of gift by NRI/PIO should be credited to NRO account only. XI)Remittance of sale proceeds of immovable property inherited by aperson resident outside India 36. Yes. Amount not exceeding USD one million, per calendar year subject to production of documentary evidence in support of inheritance and Tax clearance certificate/no objection certificate from Income Tax authority to authorized dealer for remittances. However, if a PIO is a citizen of Pakistan or Bangladesh or Sri Lanka or Afghanistan or China or Iran he should seek prior approval of Reserve Bank with documentary evidence in support of inheritance and tax clearance/no objection certificate from Income Tax authority. This remittance facility is not available to a citizen of Nepal or Bhutan. (Please refer to Regulation 4 (3) to Notification No. FEMA 13/RB-2000 dated 3rd May 2000) 37. Yes. Amount not exceeding USD one million, per calendar year subject to production of documentary evidence in support of inheritance and Tax clearance certificate/no objection certificate from Income Tax authority to authorized dealer for remittances. However, a citizen of Pakistan or Bangladesh or Sri Lanka or Afghanistan or China or Iran shall seek prior approval of Reserve Bank with documentary evidence in support of inheritance and tax clearance/no objection certificate from Income Tax authority. This remittance facility is not available to a citizen of Nepal or Bhutan. (Please refer to Regulation 4 (2) (ii) to Notification No. FEMA 13/RB-2000 dated 3rd May 2000) 38. No. He needs to seek prior approval of Reserve Bank with documentary evidence in support of inheritance and tax clearance/no objection certificate from Income Tax authority.BABASAB PATIL 50 51. Foreign Exchange Exposure XII)Acquisition of immovable property for carrying on a permitted activity in India 39. No. A person resident outside India who has established a Liaison Office in India in accordance with FERA/FEMA regulations purchase immovable property 40. Yes, provided it is necessary for or incidental to carrying on such activity and all applicable laws, rules, regulations or directions are duly complied with. The purchase price should be paid by way of inward remittance through proper banking channel. A declaration in form IPI should be filed with Reserve Bank within ninety days from the date of acquisition of commercial/residential property. 41. Yes, a property referred to in No.41 (above) be mortgaged with an authorized dealer as a security for any borrowing. RBI has granted general permission for such a mortgage. 42. Yes, on winding up of the business the sale proceeds of such property be repatriated with prior approval of Reserve Bank. XIII) Acquisition/Transfer of immovable property in India by Foreign Embassies/Diplomats /Counsel Generals 43. Yes. Under general permission available Foreign Embassies / Diplomats / Consulate Generals may acquire any immovable property other than agricultural land / plantation property / farm house in India. Such property may be purchased / sold provided prior clearance from the Government of India, Ministry of External Affairs has been obtained for such purchase / sale. The consideration for purchase of such property should be paid by way of inward remittance through normal banking channel.BABASAB PATIL 51 52. Foreign Exchange Exposure Forex Facilities for Residents (Individuals)IntroductionThe legal framework for administration of foreign exchange transactions in India isprovided by the Foreign Exchange Management Act, 1999. Under the Act, freedom hasbeen granted for buying and selling of foreign exchange for undertaking current accounttransactions. The Government has issued Foreign Exchange Management (CurrentAccount Transactions) Rules, 2000 which have been notified vide Notifications GSR.381(E) dated May 3, 2000, S.O. 301(E) dated March 30, 2001 and GSR 608(E) datedSeptember 13, 2004 as amended from time to time. The last amendment to the G.S.R isviding Notification No. G.S.R. No.412 (E) dated July 10, 2006 notifying certainrelaxations on current account transactions in public interest.Under the Foreign Exchange Management Act