6895151 Currency Market

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Currency MarketCurrency Market

An introductionAn introduction

Debasish MitraDebasish Mitra

Sr. Manager Finance, PSL LTDSr. Manager Finance, PSL LTD


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It is a 24 hrs MarketIt is a 24 hrs Market

Moves from one centre to anotherMoves from one centre to another


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It moves as sun moves round the worldIt moves as sun moves round the world It starts from Tokyo to Hong KongIt starts from Tokyo to Hong Kong

to Singapore to Kuwaitto Singapore to Kuwait

to London to New Yorkto London to New York to San Francisco to Sydneyto San Francisco to Sydney

and again moves to Tokyo.and again moves to Tokyo.


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In short exchange rate is theIn short exchange rate is theratio used to convert oneratio used to convert one

currency into anothercurrency into another


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Exchange rates are quotedExchange rates are quoted

under two methodsunder two methods

11.. DirectDirect methodmethod 22.. IndirectIndirect methodmethod


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DIRECT QUOTATIONSDIRECT QUOTATIONS

IfIf thethe unitunit ofof foreignforeign currencycurrency isis keptkept constantconstantandand itsits valuevalue isis expressedexpressed inin termsterms ofof variablevariablehomehome currencycurrency thethe methodmethod of of quotingquoting

exchangeexchange raterate isis knownknown asas DirectDirect QuotationQuotation..

ii..ee USDUSD 11 == RsRs.. 4646..15001500

EffectiveEffective fromfrom August,August, 66,,19931993 wewe havehavechangedchanged ourour systemsystem ofof quotingquoting exchangeexchangeratesrates toto directdirect quotationsquotations..


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INDIRECT QUOTATIONSINDIRECT QUOTATIONS

WhenWhen thethe unitunit of of homehome currencycurrency isis keptkeptconstantconstant andand thethe unitunit of of homehome currencycurrency isisexpressedexpressed inin termsterms ofof variablevariable unitsunits foreignforeign

currency,currency, thenthen thisthis methodmethod of of quotingquotingexchangeexchange raterate isis calledcalled IndirectIndirect QuotationQuotation..

PriorPrior toto AugustAugust 19931993 wewe werewere followingfollowing thisthis

systemsystem forfor quotingquoting exchangeexchange ratesrates..

EE..gg..,, RsRs..100100//-- == USDUSD 22..24002400


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Example:Example:

if,if,

USDUSD 11 == RsRs..4747..97259725//5050

ICICIICICI BankBank isis preparedprepared

toto buybuy USDUSD atat RsRs..4747..97259725 (Bid)(Bid)

andand sellsell atat 4747..97509750 (Offer/Ask)(Offer/Ask)

ThisThis methodmethod ofof quotingquoting bothboth buyingbuying andand sellingsellingratesrates isis knownknown asas "TWO"TWO WAYWAY QUOTATION"QUOTATION"..


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BUY LOWBUY LOW -- SELL HIGHSELL HIGH

ForFor allall practicalpractical purposespurposes ifif wewe treattreatForeignForeign ExchangeExchange asas aa commodity,commodity,

a trader always wants to buy aa trader always wants to buy acommodity at a lower pricecommodity at a lower price

andand sellsell atat aa higherhigher priceprice..


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SELLING RATESELLING RATE TT Selling RateTT Selling Rate..

Transaction involving outward remittance inTransaction involving outward remittance inforeign currency (TT, MT,DD)foreign currency (TT, MT,DD)

Bill Selling RateBill Selling Rate..

TransactionTransaction involvinginvolving remittanceremittance ofof proceedsproceedsofof importimport billbill


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BUYING RATESBUYING RATES

TT Buying RateTT Buying Rate::

Transaction involving inward remittanceTransaction involving inward remittance

(TT, MT, and DD)(TT, MT, and DD)Bill Buying RateBill Buying Rate::

Purchase/ negotiation/ discounting ofPurchase/ negotiation/ discounting of

export bills and other instrumentsexport bills and other instruments


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CALCU

LATION OF EXCHANGE RATESCALCU

LATION OF EXCHANGE RATESSTEP 1STEP 1

TheThe raterate atat whichwhich ADsADs willwill covercover thethe

transactiontransaction (either(either salesale or or buybuytransaction)transaction) inin thethe marketmarket immediatelyimmediatelythethe customercustomer deliversdelivers thethe instrumentinstrument..


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STEP 2STEP 2

Load the prescribed profit marginLoad the prescribed profit margin

EXCHANGE MARGIN:EXCHANGE MARGIN:

FEDAIFEDAI hashas leftleft thethe discretiondiscretion ofof loadingloading profitprofit marginmargintoto thethe individualindividual banksbanks..

ItIt isis nownow purelypurely atat thethe discretiondiscretion ofof thethe individualindividualbankersbankers toto loadload thethe appropriateappropriate exchangeexchange marginmargin andandimproveimprove thethe exchangeexchange raterate dependingdepending uponupon thethe

volumevolume andand naturenature ofof thethe transactiontransaction..


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STEP 3STEP 3..

Rounding off the transaction to theRounding off the transaction to the

nearest 4 decimals i.e. .0025/50/75/00.nearest 4 decimals i.e. .0025/50/75/00.


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EXAMPLEEXAMPLE

Exporter has submitted a bill for USDExporter has submitted a bill for USD100,000.100,000.

Inter bank exchange rate 45.95/96Inter bank exchange rate 45.95/96 Profit margin 1.5 paiseProfit margin 1.5 paise


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STEP 1STEP 1

InIn thisthis casecase BankBank maymay disposedispose offoff USDUSD100000100000 atat RsRs 4545..9595 inin thethe InterInter bankbank

marketmarket atat thethe marketmarket--buyingbuying raterate..


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STEP 2STEP 2..

Load the prescribed profit margin (Spread)Load the prescribed profit margin (Spread)

Base rate.... Rs.45.95Base rate.... Rs.45.95

Deduct the profit margin:Deduct the profit margin:

Rs.45.9500Rs.45.9500 -- 0.0150 = Rs.45.93500.0150 = Rs.45.9350

SinceSince bankbank willwill paypay IndianIndian RupeesRupees toto exporterexporter(customer),(customer), BankBank willwill deductdeduct theirtheir profitprofit marginmargin fromfromthethe rupeerupee proceedsproceeds..


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STEP 3.STEP 3.

Round off to the nearest 4 decimals.Round off to the nearest 4 decimals.

In the above transaction Bank will quoteIn the above transaction Bank will quote

the rate as 45.9350 to the customer.the rate as 45.9350 to the customer.


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Cross RateCross Rate

Example:Example: --

An Importer wants to honour his importAn Importer wants to honour his import

liability in EURO.liability in EURO. In India direct quotation on USD = INR isIn India direct quotation on USD = INR is

available.available.


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CROSS RATESCROSS RATES

FirstFirst legleg of of thethe transactiontransaction is,is, ImporterImporter willwill gogo totoAuthorisedAuthorised DealerDealer toto procuresprocures USDUSD againstagainst IndianIndianRupeesRupees..

If inter bank $ =Rs exchange rate is 45.95/96If inter bank $ =Rs exchange rate is 45.95/96

to procure US$ 1, AD will quote Rs.45.96to procure US$ 1, AD will quote Rs.45.96

With this USD, AD of the importer will go to LondonWith this USD, AD of the importer will go to Londonmarket and procure EUR paying 1 EUR = USDmarket and procure EUR paying 1 EUR = USD1.25901.2590


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ExampleExample

Then 1 EUR will be equivalent toThen 1 EUR will be equivalent to1.2590*45.96 = INR 57.86361.2590*45.96 = INR 57.8636

Rounding off to 4 decimals = Rs.57.8650Rounding off to 4 decimals = Rs.57.8650


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There are four rates are availableThere are four rates are available

CashCash -- PricePrice for for thethe datedate of oftransactiontransaction..

TomTom -- PricePrice forfor thethe nextnext dayday of of thethe

transactiontransaction..SpotSpot -- PricePrice forfor thethe 22ndnd workingworking dayday

ofof transactiontransaction..afterafter thethe dayday

ofof transactiontransaction

ForwardForward -- Price for any day after the spotPrice for any day after the spotdate uptodate upto 365365daysdays


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Premium of currencyPremium of currency

WhenWhen aa currencycurrency isis costliercostlier inin futurefuture(forward)(forward) asas comparedcompared toto spotspot..

PremiumPremium isis alwaysalways addedadded toto bothbothbuyingbuying andand sellingselling raterate..


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Discount of currencyDiscount of currency

WhenWhen aa currencycurrency isis cheapercheaper inin futurefuture(forward)(forward) asas comparedcompared toto spotspot

DiscountDiscount isis alwaysalways deducteddeducted fromfrom bothbothbuyingbuying andand sellingselling raterate..


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Factors affecting forwardFactors affecting forward

SupplySupply andand DemandDemand forfor thethe currencycurrency forfor aaparticularparticular settlementsettlement datedate

MarketMarket ExpectationExpectation

InterestInterest raterate differentialdifferential


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Interest rate differentialInterest rate differential

ExampleExample ::--

USDUSD 11 == INRINR 4646..00000000

InterestInterest raterate inin USUS @@ 55%% pp..aa

InterestInterest raterate inin India@India@ 1010%% pp..aa ConditionCondition::

ExchangeExchange ratesrates remainremain thethe samesame forfor aa periodperiod ofof oneoneyearyear


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What will happen ?What will happen ?

MrMrXX willwill borrowborrow USDUSD 100100 forfor oneone yearyear@@ 55%% pp..aa fromfrom USUS market,market, andand convertconvertthethe samesame intointo IndianIndian RupeeRupee andand placeplacethethe samesame asas depositdeposit forfor oneone yearyear @@1010%%inin IndianIndian marketmarket..


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What will be the situation?What will be the situation?

StepStep 11::

MrMrXX willwill borrowborrow USDUSD 100100 atat 55%% andandsellsell againstagainst RupeesRupees @@ 4646 perper USDUSD..


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Step 2:Step 2:

Mr x will place the Rupee deposit of RsMr x will place the Rupee deposit of Rs

4600 @10% for one year and will enjoy4600 @10% for one year and will enjoyinterestinterest


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After one year.After one year.

StepStep 33::

MrMrXX

willwill getget RsRs 46004600+Rs+Rs 460460 == RsRs 50605060 (including(includinginterest)interest)

At the same time he will pay interest against USDAt the same time he will pay interest against USDborrowing.Total outflow in USD will be USD (borrowing.Total outflow in USD will be USD (--) 105) 105


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Where is the arbitrageWhere is the arbitrage

possibility?possibility? StepStep 44:: MrMrXX willwill convertconvert thethe totaltotal inflowinflow inin IndianIndian Rupee,Rupee, intointo

USDUSD @@ 4646..0000 andand willwill receivereceive USDUSD

ii..ee RsRs 50605060//4646 =USD=USD 110110

NetNet gaingain toto MrMrXX isis USDUSD 110110 USDUSD 105105 == USDUSD 55


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Person having Rs would not like to givePerson having Rs would not like to give

this opportunitythis opportunity

TheThe forwardforward exchangeexchange raterate ofof USD/INRUSD/INR willwillbebe adjustedadjusted byby marketmarket forcesforces toto eliminateeliminate thethearbitragearbitrage opportunityopportunity.. SoSo USD/INRUSD/INR raterate wouldwould

bebe

USDUSD 105105 == INRINR 50605060

11 USDUSD == INRINR 50605060//105105 == INRINR 4848..19041904 00rr4848..19001900


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Factors affecting exchange rateFactors affecting exchange rate Last couple of monthsLast couple of months

ChangeChange OfOf InterestInterest RateRate

InflowInflow OfOf ForeignForeign FundFund

PricePrice OfOf OilOil CommentsComments OfOf LeaderLeader

ReleaseRelease OfOfEconomicEconomic DataData

RBIRBI InterventionIntervention NaturalNatural CalamityCalamity


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Exchange Rate Fluctuation

41.5000

42.0000

42.5000

43.0000

43.5000

44.0000

44.5000

45.0000

45.5000

46.0000

46.5000

JULY'05

AUG'05

SEPT'05

OCT'0

5

NOV'05

DEC'05

JAN'06

FEB'06

MAR'06

APR'06

MAY'06

USD=

INR

ExchangeRate

Fluctuation


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VOSTRO ACCOUNTVOSTRO ACCOUNT

AccountAccount maintainedmaintained byby aa foreignforeign bankbank withwith aabankbank inin IndiaIndia

AccountAccount isis maintainedmaintained inin RupeeRupee..


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NOSTRO ACCOUNTNOSTRO ACCOUNT

WhenWhen anan IndianIndian BankBank maintainsmaintains ForeignForeignCurrencyCurrency A/CA/C abroadabroad

An Indian Bank can maintain many accountsAn Indian Bank can maintain many accountsin different currencies.in different currencies.


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Exchange Earner's ForeignExchange Earner's Foreign

Currency (EEFC) AccountCurrency (EEFC) Account

AnAn accountaccount expressedexpressed inin foreignforeign currencycurrency

MaintainedMaintained withwith anan AuthorizedAuthorized Dealer,Dealer,

ToTo creditcredit prescribedprescribed percentagepercentage ofof earningsearnings ininconvertibleconvertible foreignforeign currencycurrency..

NonNon--interestinterest bearingbearing currentcurrent accountaccount..

ChequeCheque facilityfacility availableavailable


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EEFC A/CEEFC A/C -- Permissible DebitsPermissible Debits

Travel,Travel, medical,medical, studiesstudies abroad,abroad, permissiblepermissibleimports,imports, commission,commission, customscustoms duty,duty, etcetc..

PaymentsPayments towardstowards permissiblepermissible capitalcapital accountaccounttransactionstransactions..

PaymentPayment inin IndiaIndia toto 100100%% ExportExport OrientedOrientedUnits/UnitsUnits/Units inin ExportExport ProcessingProcessing Zones/Zones/ SoftwareSoftware

TechnologyTechnology Parks/ElectronicParks/Electronic HardwareHardware TechnologyTechnologyParksParks towardstowards costcost of of goodsgoods andand servicesservicesprovidedprovided byby themthem..


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EEFC A/CEEFC A/C Permissible CREDITPermissible CREDIT

StatusStatus HolderHolder 100100 %%

100100%% ExportExport OrientedOriented Units/Units/ 100100%%

UnitsUnits inin ExportExport ProcessingProcessing ZonesZones

/Software/Software TechnologyTechnology ParksParks

/Electronic/Electronic HardwareHardware TechnologyTechnology ParksParks

OthersOthers 5050%% ofof earningsearnings


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At last.At last.

Continuous update of information andContinuous update of information andknowledge will give us a throughknowledge will give us a throughunderstanding of the currency market, whichunderstanding of the currency market, which

will ultimately help any corporate to take awill ultimately help any corporate to take acorrect position, to safeguard its interestcorrect position, to safeguard its interest

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6895151 Currency Market