Settlement Location

Settlement Location

The respective home Currency

Dealing Location

Location where other currency is handled other than home currency.

Settlement

Settlement can happen only through turnover of deposits.

Rate of Quotations

Different types of quotations are available.

Spot & Forward Market

Spot = T + 2

I.e When the rate is fixed today it should be delivered or closed within 2 business days.

And the countries with same time zone will have one business days.

If the settlement location is an holiday the transaction happens next day.

Value of Forward Market

The rate is fixed today and the transaction happens over a period of time.

For Eg. Rate is fixed on June 18 then the transaction happens as follows,

June 18 + 2 + One calendar Month = July 20th

Roll Forward is not possible and roll back is possible.

European Quote

No of units of other currency for One USD.

59.96 – 1 USD

American Quote

No of USD for Per unit of other currencies.

$2.12 – 100 INR

Direct Quote

No of units of foreign currency for One USD

45.16 INR – 1 USDIndirect Quote

No of dollars for One unit of Foreign Currency.

2.12 USD – 100 INR

Inter Bank Quotes

Are presented by Swift Codes, first three letters of the country represents the swift code.

Bid – Dealer willing to buy one unit of base currency

Ask – Dealer willing to sell one unit of Base currency.

59.55/59.60USD / INR

Dealer willing to buy 1 USD @ 59.55Dealer willing to sell 1 USD @ 59.60

Cross Rate

Linking transaction between two currencies other than US dollars.

Quote Representation

1.5060 – last 2 decimal are said to be PIP

Short Position

Bought and sold immediately.

Long PositionOnly buying and no selling happen.

Ware Housing

Buying and stocking with belief of making profit

Spot Market

Spread = Ask – Bid

Transaction Cost

It is used to calculate the transaction fee charge of the bank.

Percent Spread = (Ask – Bid)/Ask * 100

Currency Arbitrage

When the rates differ from one market to another market we can see the opportunity of arbitrage. Arbitrage can happen with Gain / Loss.

Buying less in one international market and selling high in another international market

Forward Market

An agreement between a bank and a customer to deliver a specified amount of currency with another currency at a specified date at specified fixed exchange rate of today.

Hedging

It is defined as the act of reducing the risk of fixed exchange rate.

Marginal Market

Hedging with Foreign Exchange Future

Letter of Credit

Settlement Location

The respective home currency

Dealing Location

Location where other currency are handled other than home currency.

Settlement

Settlement happens only through a turnover of deposits.

Rate of Quotations

Different types of quotations available.


Spot = T + 2

The rate is fixed for today and the transaction completes in 2 business days

If the two countries fall in the same time line the transaction gets completed in 1 Business day

All settlement location can be a dealing location but all dealing location may not be a settlement location


The rate is fixed for today and the delivery happen over a period of time.

For Eg. June 18th rate is fixed.

Delivery happens – June 18th + 2 + one Calendar Month = July 20th

Rollback is possible and Roll Forward is not possible.

European Quote

No. of Units of other country currency for 1 USD59.16 = 1 USd

American Quote

No of dollars per unit of other currency2.12 USD = 100 INR

Direct Quote

Units of the currency of the countries per unit of foreign currency.45.16 INR = 1 USD

Indirect Quote

Number of units of the foreign currency per units of home currency

2.16 USd = 100 INR

Inter Bank Quotes

Bank uses Swift Codes for transactions and they are separated by /

For Eg. USD / INR

1ST Currency – base currency2nd currency – quote currency.

BID / Ask

Bid is to buy and Ask is to sell

Bid Price - Prepared to buy one unit of base currencyAsk - Prepared to sell one unit of base currency.

Cross Rate

Linking of two currencies other than USD


1.5060 – Last 2 decimal is pip

Short Position

Selling and buying without possession

Long Position

Only buying and no selling

Ware Housing

Buying and stocking with the eye on the future to see profit

Spot Market

SPOT = Ask – BID

Transaction Cost

This is used to calculate the transaction fee charged by the bank.

Currency Arbitrage

When cross rates differs from one finance center to another finance center profit opportunity exists.

Buy less form one international market and sell high in another market

Forward Market

An agreement between a bank and a customer to deliver a specific amount of one currency against another currency at specified future date and at a fixed exchange rate of today.

HedgingIt can also be defined as the act of reducing the risk of exchange rate.

Marginal Market


Letter of Credit

Settlement Location

Dealing Location

Settlement

Rate of Quotations



European Quote

American Quote

Direct Quote

Indirect Quote

Inter Bank Quotes

Cross Rate


1.5060 –Short Position

Long Position

Ware Housing

Spot Market

Transaction Cost

Currency Arbitrage

Forward Market

Hedging

Marginal Market


Letter of Credit

The LC contains a certain set of terms and condition which will be defined by both the seller and buyer through phone calls / faxes / email and various other models of communication

Various departments from both side come into contacts.

Bank do not deal in merchandise, payment will be done if the terms and condition of the L/C is full filled.

An L/C once opened cannot be changed.

Types of L/C

ImportExportStandby

L/C A substitution of bank’s for the credit of the buyer. L/C Can be raised by Importer / Beneficiary. To create an L/C there must be 4 parties.

o Buyero Sellero Buyers Banko Sellers Bank

Buyer will always create an LC through his Issuing Bank

Essentials of L/C

Beneficiary Amount Validity Sellers Bank Type of Payment Desired Document Notification Address Description of Goods Order Confirmation

Buyer and seller agrees upon terms including means of transport, period of credit, last date of shipment International Commercial terms be used.

Buyer applies to the bank to issue L/C, bank will evaluate buyers credit standing and may require cash cover or reduction of other leading limits

Issuing banks send the L/c to Advising bank by Airmail or Swift Code Advising bank establishes the authenticity of letter of credit using

signature book or test code then inform seller. Advising bank may confirm L/C adding it’s own payment undertaking

Seller should check the L/C whether it matches all the commercial agreement and that all it’s terms and condition can be satisfied, if the seller feels that anything may cause problem an amendment should be requested.

Seller ships the goods and assembles the document like Invoice / Transport document, before presenting it to the bank the seller should check and verify the document for discrepancies with L/c and correct the document if it is necessary.

The document are presented to the bank most of the time Advising bank, the advising verifies the document and send it the issuing bank.

The issuing banks checks the document by itself and if the documents are in order it reimburses the sellers bank immediately.

The issuing banks debits the buyer and releases the document so that the buyer can claim the goods from the carrier.

Types of Letter of Credit.

Documents

Settlement Location