BFM Module A, (Q & A) UNIT 1. Exchange Rate and Forex Business

 

BFM Module A

(Question-Answer)

UNIT 1. Exchange Rate and Forex Business

 

Fill in the blanks:

1. The term Foreign Exchange is used to denote ______ as well as the _______ of one currency into another.

2. The exchange rates of major currencies fluctuate every______ seconds.

3. Main factors affecting exchange rates are technical, _________ and speculation.

 4. In a spot contract, settlement of funds takes place on the_________ working day following the date of contract.

 5. If the currency is costlier in forward, it is said to be at a _________

 6. If the forward value of the currency is cheaper, it is said to be at a_________.

 7. The date of settlement of funds is known as_________ date.

 8. The rate at which the quoting party is ready to buy the currency is called_________ rate.

9. The dealers are officials, who are actually involved in the ________and________ of currencies.

10.  The section which handles processing of deals, reconciliation, etc., is called________ office.

11. Banks permitted to deal in foreign exchange are called ________ persons.

12. Unpaid Import bills drawn under Letters of Credit must be crystallized into Rupees as per the policy of the________.

13. In terms of FEDAI rules, besides, Japanese Yen, _______, and________ are the other currencies which are quoted as 100 units = so much Rupee

14. Exchange rate denotes a__________ at which one currency exchanged for another.

15. Foreign Exchange Markets are__________ Markets, with no barriers.

16. The currency appreciates due to inflow of overseas capital, if local interest rates are__________

17.  __________ deals provide depth and liquidity to the market.

18. Direct quotes are also called__________ currency quotations.

19.  The part of dealing room operations, which deals with risk management is called__________ office.

20. Risk of loss arising due to inability or unwillingness of the counter party to meet its obligations is called__________ risk.

21.  __________ guidelines prescribe code of conduct for dealers’ brokers.

 

State True or False:

1. The FOREX markets are dynamic and round the clock markets.

2. FOREX markets are not affected by government policies.  

3. A large part of the total global FOREX turnover results from global commodities trade

 

Terminal Questions.

1. Foreign Exchange markets are

 (a) regional markets.

(b) domestic markets.

(c) global markets.

(d) localized exchange traded markets.

 

2. Foreign exchange does not include:

(a) Deposits payable in foreign currency.

(b) Instruments drawn in foreign currency and payable in a foreign currency.

(c) instruments drawn in Indian rupees on a checking account of the drawer and payable abroad.

(d) instruments drawn in Indian rupees on a current account of an Indian company and payable in India.

 

3. Out of the several factors, the following factor does not have an effect in the movement of exchange rates:

(a) Political instability

(b) Increase in domestic interest rates

(c) Change in Taxation policy

(d) Increase in domestic tourism

 

4. Spot dealing in FX market means:

(a) Delivery of funds is on the 30th working day from the date of deal.

(b) Delivery of funds is on the second working day from the date of deal.

(c) Delivery of funds is next date from the date of deal.

(d) Delivery of funds is one week after the date of deal.

 

5. The rate at which the quoting bank is ready to sell the currency is called-

(a) Bid rate.

(b) Offer Rate.

(c) TT Buying Rate.

(d) Swap rate.

 

6. Operational Risk does not include:

(a) movement in exchange rates.

(b) Human errors.

(c) Technical Faults.

(d) Systemic failures.

 

7. Cancellation of forward contacts is to be done at:

(a) Opposite Bill rate.

(b) Opposite Cash rate.

(c) Opposite TT rate.

(d) Opposite TC rate.

 

8. Crystallization of export bills is to be done:

(a) On the 10th day from the due date of the bills.

(b) Before the due date.

(c) As per the policy of the Bank.

(d) On the due date itself.

 

 

Answer Key
Fill in the Blanks
1	Foreign currency, Exchange	8	Bid	15	Communication System based
2	Four	9	Buying & Selling	16	High
3	Fundamental	10	Back office	17	Speculative
4	Second	11	Authorized	18	Home
5	Premium	12	Bank	19	Credit
6	Discount	13	Indonesian Rupiah/Kenyan Shilling	20	FEDAI
7	Value	14	Price/Ratio/Value	21
True & False
1	True	2	False	3	False
Terminal Question
1	c	4	b	7	c
2	d	5	b	8	d
3	d	6	a

 

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BANK FINANCIAL MANAGEMENT

BANK FINANCIAL MANAGEMENT

Module A: International Banking

v  Exchange Rate and Forex Business

v  Basic of Forex Derivative
v  Correspondent Banking and NRI Account
v  Documentary Letter of Credit
v  Facilities of Exporter and Importer
v  Risk in Foreign Trade – Role of ECGC
v  Role of Exim Bank, Reserve Bank of India, Exchange Control in India - FEMA & FEDAI & other

Module B: Risk Management

v  Risk & Basic Management Framework

v  Risk in Banking Business
v  Risk in Regulation in Banking Industry
v  Market Risk
v  Credit Risk
v Operational Risk & Integrated Risk Management

Module C: Treasury Management

v  Introduction to Treasury Management

v  Treasury Product
v  Funding & Regulatory Aspects
v  Treasury Risk Management
v  Derivative Products
v  Treasury and Asset-liability Management

Module D: Balance Sheet Management

v  Component of Assets and Liability in Bank’s Balance Sheet and Their Management

v  Banking Regulation and Capital
v  Capital Adequacy – The Basel – II Overview
v  Supervisory Review
v  Pillar 3 – Market Discipline
v  Asset Classification and Provisioning Norms
v  Liquidity Management
v  Interest Rate Risk Management
v  RAROC and Profit Planning    

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Exchange Rate Mechanism

There is two type of Exchange Rate Mechanism:

A. Direct quotation

B. Indirect quotation

a. Direct quotations:

Under a system of Direct Quotations, the exchange rates are quoted where the unit(s) of

Foreign currency remains constant, whereas the home currency units fluctuates : i.e.

USD 1 = Rs. 66.65

b. Indirect Quotations:

Under a system of Indirect Quotations, the exchange rates are quoted where the unit(s) of

home currency remains constant against variable units of foreign currency. i.e.

Rs. 100/- = USD 1.52

In India we follow the direct method of quoting exchange rates since August 1993.

Types of Rates:

(i) Cash / Ready:

When the deal is entered into and its settlement is done on the very same day then it is known as Cash / Ready Rate.(T + 0)

(II) TOM:

When the deal is entered into but the settlement is done on the next working day then it is known as TOM.(T + 1)

(iii) Spot Rate :

Where the settlement is to take place after two working days from the date of contract. It is termed as "SPOT RATE." (T + 2)

(iv) FORWARD RATES:

All exchange rates quoted, where the settlement is to take place after the spot rate are termed as "FORWARD RATES" (T + > 2).

Forward Rates are generally quoted as a margin against the spot rate for currency concerned. The margin may represent either "PREMIUM" or "DISCOUNT". There is a facility of settlement of forward contract either on a fixed date or with an option of settlement within a period agreed which can be maximum one months period.

Premium:

Premium is a value of exchange in excess of spot rate. In relation to forward exchange rate, it means that the currency is dearer for future delivery than for the spot delivery i.e. currency is dearer for forward purchase than the spot purchase.

Discount:

Discount is a value of exchange below spot rate. In relation to forward exchange rate, it means that the currency is cheaper for future delivery than for the spot delivery i.e. cheaper for forward purchase than the spot purchase.

LIBOR (London Inter-Bank Offered Rate):

LIBOR is a daily reference rate based on the interest rates at which banks offer to lend funds to other banks in the London inter-bank market. LIBOR is published by the British Bankers Association (BBA) at 11:00 A.M London time , every day, and is a filtered average of interbank deposit rates offered by designated contributor banks, for maturities ranging from overnight to one year.

SWIFT:

Society for Worldwide Interbank Financial Telecommunication is a co operative society created under Belgian law and having its corporate office at Brussels. It operates computer – guided communication system for transmission of international payment transfers messages in a secured system driven environment. Only authorized officials can access and decode the data / information / message

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Letter Of Credit (LC)

A letter of credit (LC) can be define as a signed or an authenticated instrument issue by the buyer's banker, embodying an undertaking to pay to seller a certain amount of money, upon presentation of documents, evidencing shipment of goods, as specified and compliance of other terms and conditions.

In other words an LC is an undertaking issued by bank, on behalf of the importer or the buyer, in favour of exporter or the seller.

So if the specified documents, showing that a shipment has taken place, or a service has been supplied, are presented to the issuing bank or its nominated bank, within the stipulated time, the exporter/seller will be paid the amount specified.

Following parties are involved in LC transaction -
1. The buyer/Importer/Applicant - on whose behalf LC is opened
2. The Seller/Exporters - Beneficiary of LC
3. The Opening/Buyer bank - Who establishes the LC
4. The Advising bank (in seller country) - Agent of issuing bank & authenticate the LC
5. The confirming Bank - who undertake to pay on behalf of the issuing bank.
6. The negotiating bank - seller bank or bank nominated by the opening bank.
7. The reimbursing bank - who reimburses the negotiating or confirming bank.  

Note: Advising bank, Confirming bank & Negotiating bank could be the same.

Types of Letters of Credit:

1. Revocable LC
LC which can be amended or cancelled at any moment by the issuing bank without the consent of any other party
Value of this LC is limited & very rarely issued.

2. Irrevocable LC
Which hold the commitment by the issuing bank to pay or reimburse the negotiating bank, provide conditions of the LC are complied with.
Can't be cancelled without previous consent of all parties.
Unconditional undertaking
All LCs issued, unless and otherwise specified.

3. Irrevocable confirmed LC
Which has been confirmed by a bank, other than the issuing bank, usually situated in the country of exporter

4. Transferable LC
LC which is available for the transfer in full or in part, in favour of any party other than the beneficiary, by the advising bank at the request of the issuing bank.
Here more than one second beneficiary, but such second beneficiary can't transfer to another third party.

5. "Red clause" LC
LC enable the beneficiary to avail pre-shipment credit from the nominated/advising bank.
Such LC bears a "Red Letter" authorizing the nominated bank to grant advance to beneficiary, prior to shipment of goods.

6. Sight LC
The beneficiary is able to get the payment on presentation of document confirming to the term and condition of LC at the nominated bank counters.

7. Acceptance Credit LC
Bill of exchange or draft, Payable upon acceptance, at the future date, subject to receipt of document confirming to the term and conditions of LC.

8. Deferred payment LC
 Similar to acceptance credit, except that there is no bill of exchange or draft

9. Negotiation Credit LC
Issuing bank undertake to make payment to the bank, which has negotiated the document.

10. Back to back LC
When an exporter arranges to issue an LC in favour of local supplier to procure goods on the strength of export LC received in his favour.

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NRI Banking

NRI ( Non Resident Indian)

As per the FEMA 1999, a Non-Resident Indian means-

A.      A person resident outside India who is a citizen of India, i.e  –

Ø  Indian citizens who proceed abroad for employment or for carrying or for carrying on any business or vocation or for any other purpose

Ø  Indian citizens working abroad

Ø  Officials of Central and State Government and Public Sector Undertaking deputed abroad on assignment with Foreign Govt

B.      A person of Indian origin who is a citizen of any other country other than Bangladesh or Pakistan, if

Ø  He, at any time, held the Indian Passport

Ø  He or either of his parents or any of its grandparents was a citizen of India.

Ø  The person is a spouse of an Indian citizen or a person referred in sub clause b(i) or (ii) above  

Thus, an NRI is a person of Indian nationality or origin, who resides abroad for business or vocation or employment, or intention of employment or vocation, and the period of stay abroad is infinite.

A person is of Indian origin if he has held an Indian passport, or he/she or any of his/hers parents or grandparents was a citizen of India.

NRIs have been provided with various schemes to open accounts and invest in India. The types of account facilities available at present are –

1.       Non-Resident (External ) Rupee Account  {NRE}

2.       Non-Resident Ordinary  Rupee Account  {NRO}

3.       Foreign Currency (Non-Resident) Account (Bank) { FCNR (B) }

Non-Resident (External ) Rupee Account  {NRE}

Ø  Accounts are maintained in Indian rupees.

Ø  Can be opened and maintained by NRI during the temporary visit to India.

Ø  Account can be as Saving Bank Account, Current Account, Recurring Account or term deposit with a minimum period of one year.

Ø  Account can be opened as Joint Account, in the name of two or more non-resident individuals

Ø  Jointly with a person resident in India is not permitted

Ø  Nomination facility is permitted either resident or non-resident

Ø  Income by way of interest on balance held in NRE account is exempted from income tax, gift tax and wealth tax.

Ø  Allowing temporary overdrawing up to Rs 50,000 in NRE saving account however such overdraft must be cleared within two week by remittance from abroad or from any other NRE account

Ø  NRE term deposits can be made for a minimum period of one year, with a maximum up to 3 years.

Non-Resident Ordinary Rupee Account { NRO}

Ø  Account are maintained in Indian rupees.

Ø  Open and maintained by any person resident outside India and also by Foreign Tourists, who visit to India on tourist visa.

Ø  When a resident becomes a Non-Resident, his domestic Rupee account has to be re-designated as an NRO account

Ø  NRO account can be opened as Joint Accounts, with resident Indians

Ø  An amount up to USD 1 million can be repatriated out of funds held n NRO account for permissible transactions, subject to payment of income tax at applicable rates.

Ø  Nomination facility is available in NRO account.   

Foreign Currency (Non-Resident) Account (Bank) { FCNR (B) }

Ø  These are foreign currency account

Ø  Opened and maintained by Non-Resident Indians in designated currencies only viz. US Dollor, EURO, Great Britain Pounds and Japanese Yen, CAD and AUD.

Ø  NRI can open these account only in the form of Term Deposit, with minimum period of one year and maximum period of five years.

Ø  Joint account can be opened in the name of two or more non-Resident Individuals, who are persons of Indian nationality or Indian origins.

Ø  Interest paid on the basis of 360 days to a year, cumulative on half-yearly intervals of 180 days

Ø  Income earned by way of interest is exempted by income tax .

Ø  Nomination facility is available.

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Electronic mode of Transdaction/Payment gateway

There are many type of payment gateway through which we payment and transfers fund from one bank to another, one country to another.

1.       SWIFT

Ø  It is a society, stands for Society for Worldwide Interbank Financial Telecommunications.

Ø  Owned by member banks and financial institutions

Ø  Built in security system with an automatic authentication of financial message, through Bilateral Key Exchange (BKE) , 24 hour & 365 day.

Ø  Authentication key exchange between themselves through RMA ( Relationship Management Application) or BIC ( Bank Identification Code)

Ø  Comprised of 8 or 11 alphanumeric character  

2.       CHIPS

Ø  Stands for Clearing House Interbank Payment System.

Ø  The system uses CHIP participant code to identify the participants and UID numbers to identify the beneficiary account.

Ø  It is operative only in New York and mainly used for foreign exchange Interbank settlement and Euro dollar settlement.

3.       FEDWIRE

Ø  Another US payment system operated by Federal Reserve Bank

Ø  All US banks maintain account with Federal Reserve Bank and allotted an “ABA number” to identify and receivers of payments

4.       CHAPS

Ø  Clearing House Automated Payment System (CHAPS) , is a British equivalent to CHIPS.

Ø  Payment in London with 16 member bank

5.       TARGET

Ø  Trans-European Automated Real-time Gross Settlement Express Transfer system is an EURO payment system comprising 15 national RTGS system working in EUROPE.

6.       RTGS-plus and EBA

Ø  Euro clearing system with RTGS plus

7.       RTGS/NEFT in India

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