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    International Financial Management

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    vaeshnavikanukuntla
    The foreign exchange market allows currencies to be bought and sold against each other between banks and other participants. It has two segments - the retail market for individuals and the wholesale interbank market. There are three major components: transactions between the public and banks involving foreign currency, transactions between domestic and foreign banks, and transactions between banks and central banks like the RBI. Authorized dealers like commercial banks deal in foreign exchange under the RBI's authority. Key players include the FEDAI which frames rules for foreign exchange conduct. Exchange rates are quoted directly or indirectly, and various instruments like telegraphic transfers, drafts, and bills of exchange are used to facilitate currency conversion between countries.

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    International Financial Management

    Uploaded by

    vaeshnavikanukuntla
    86 views4 pages
    The foreign exchange market allows currencies to be bought and sold against each other between banks and other participants. It has two segments - the retail market for individuals and the wholesale interbank market. There are three major components: transactions between the public and banks involving foreign currency, transactions between domestic and foreign banks, and transactions between banks and central banks like the RBI. Authorized dealers like commercial banks deal in foreign exchange under the RBI's authority. Key players include the FEDAI which frames rules for foreign exchange conduct. Exchange rates are quoted directly or indirectly, and various instruments like telegraphic transfers, drafts, and bills of exchange are used to facilitate currency conversion between countries.

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    Notes on the chapter 2

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    international financial management

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    The foreign exchange market allows currencies to be bought and sold against each other between banks and other participants. It has two segments - the retail market for individuals and the wholesale interbank market. There are three major components: transactions between the public and banks involving foreign currency, transactions between domestic and foreign banks, and transactions between banks and central banks like the RBI. Authorized dealers like commercial banks deal in foreign exchange under the RBI's authority. Key players include the FEDAI which frames rules for foreign exchange conduct. Exchange rates are quoted directly or indirectly, and various instruments like telegraphic transfers, drafts, and bills of exchange are used to facilitate currency conversion between countries.

    Copyright:

    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    86 views4 pages

    International Financial Management

    Uploaded by

    vaeshnavikanukuntla
    The foreign exchange market allows currencies to be bought and sold against each other between banks and other participants. It has two segments - the retail market for individuals and the wholesale interbank market. There are three major components: transactions between the public and banks involving foreign currency, transactions between domestic and foreign banks, and transactions between banks and central banks like the RBI. Authorized dealers like commercial banks deal in foreign exchange under the RBI's authority. Key players include the FEDAI which frames rules for foreign exchange conduct. Exchange rates are quoted directly or indirectly, and various instruments like telegraphic transfers, drafts, and bills of exchange are used to facilitate currency conversion between countries.

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    of 4

    UNIT II

    FOREIGN EXCHANGE MARKET

    THE FOREIGN EXCHANGE MARKET:


    The foreign exchange market is the market in which currencies of various countries
    are bought and sold against each other. It is the informal arrangements among the banks and
    brokers operating in financial center purchasing and selling currencies connected to each other
    by telecommunication like telephones, satellite communication network.
    It is divided into 2 segments:
    1. The retail market for foreign exchange deals with transactions involving travelers and
    tourists exchanging one currency for another in the form of currency notes or travelers
    cheques.
    2. The wholesale market often referred to as the interbank market is entirely different and
    the participants in this market are commercial banks, corporations and central banks.

    COMPONENTS OF FOREIGN EXCHANGE MARKET:


    There are 3 major components of Foreign Exchange Market:
    i.

    Transaction between public and foreign: In this the purchase of foreign currency from
    public and sale of foreign currency to the public.

    ii.

    Transaction between the banks: In this transactions are taken between branches of the
    domestic banks, between the agents banks abroad.

    iii.

    Transaction between banks and central banks: The transactions are taken between the
    banks and their central banks like RBI to the local banks.

    FOREIGN EXCHANGE MARKET PLAYERS:


    The Reserve bank of India has the authority to administer foreign exchange in
    India. The commercial banks, cooperative banks and some selected financial Institutions has
    been authorized to deal in foreign exchange by Reserve bank of India are known as Authorized
    Dealers. An authorized dealer should follow the directions and instructions given by RBI from
    time-to- time. The most important player of foreign exchange market is FEDAI.
    Foreign Exchange Dealers Associations of India (FEDAI):
    FEDAI was established in 1958 as an Association of all Authorized dealers in
    India. It has its headquarters at Mumbai. The affairs of FEDAI are managed by a managing
    1

    committee at the head office and respect local committee at local offices. The committees are
    represented equally by banks incorporated in India and outside India. The principal functions of
    FEDAI are as follows:
    1. To frame rules for conducting of foreign Exchange business in India.
    2. To coordinate with RBI in proper administration of exchange control.
    3. To provide information likely to be of interest to its number.
    EXCHANGE RATE:
    The exchange rate is the rate at which one currency is converted into another
    currency. The rate of Exchange for a currency is known as Quotations in the foreign Exchange
    Market. There are two types of quotations:
    i.

    Direct quotations: Direct quotations are represented directly and no calculations are
    needed for representing.

    ii.

    Indirect quotation: In indirect quotation it is not directly represented but it undergoes


    the calculations.
    Quotations:

    USD1 = Rs.64.2781/2991
    Purchase price

    Sales price

    INSTRUMENTS USED FOR CONVERSION:


    A number of instruments are used for the effective conversion of a currency into
    another. The following are the different instruments:
    1. Telegraphic Transfer (TT): TT is a transfer of money by telegrams or fax from one
    center to another in a foreign currency. It is a method used by banks with their own codes
    and corresponding relations with bank abroad for transmission of funds.
    2. Mail Transfer (MT): It is a method in which cash is paid to 3 rd party sent by mail by
    bank to its branch or corresponding abroad.
    3. Bills of Exchange: It is an unconditional order in writing address by one person to
    another requesting the person to whom it is addressed to pay a certain sum on demand or
    within specified date.
    4. Drafts and cheques: Draft is a pay order issued by a bank on its own branch or
    corresponding bank abroad. It is an immediate payable (on spot). But there is always a
    time laps in the transit in the payment in case of cheques.
    2

    PROBLEMS IN EXCHANGE:
    Banks deals with exchange of currency. To deal with it there are 3 types of foreign
    exchange accounts.
    i.

    Nostro A/c: is an account maintained by bank in India with a foreign bank. Indian bank
    would refer its bank A/c with the foreigner as Nostro A/c.
    Meaning: Our A/c with you (punch line)

    ii.

    Vostro A/c: Foreign bank may open a rupee A/c with an Indian bank. Indian bank would
    refer to the vostro A/c.
    Meaning: Your A/c with us (punch line)

    iii.

    Loro A/c: People bank of India is having an A/c with bank of America, Newyork.
    Meaning: Their A/c with you (punch line)
    Example: SBI having A/c with foreign bank

    TYPES OF EXCHANGE RATE:


    The exchange rates are of 2 types: 1) Spot/Ready Exchange rate
    2) Forward Exchange rate
    1) Spot/Ready Exchange rate: In merchant business in which the contract with the customer to
    buy or sell foreign exchange is agreed to and executed on the same day.
    2) Forward Exchange rate: In such case the payments are paid in future for the contracts which
    is agreed today.
    PARAMETERS:
    To buy and sell we exchange the currencies of domestic and foreign currency.
    Foreign Exchange Transactions
    Purchase (Bid/buy)
    (To acquire foreign currencies we
    have to pay Home currency)
    Example:

    Sales (Ask)
    (To acquire Home currencies we
    have to pay Foreign currency)
    USD1 = Rs.64.2781/2991
    Purchase price

    Sales price

    BUYING AND SELLING RATES


    TT (Telegraphic transfer) Buying rate
    Buying rates

    2 types
    Bills buying rate
    TT selling rate

    Selling rate

    2 types
    Bills selling rate

    TT Buying Rate:
    This is the rate applied when the transactions does not involve any delaying realization of
    foreign exchange by the bank. The rate is calculated by deducting the exchange margin.
    Exchange Margin: Charges for banks for exchange i.e., brokerage charges.
    TT Buying rate

    0.025% to 0.080%

    Bills buying rate

    0.125% to 0.150%

    TT selling rate

    0.125% to 0.150%

    Bills selling rate

    0.175% to 0.200%

    Buying rates
    Selling rate

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