Foreign Exchange

FOREIGN EXCHANGE (23/06/2022)
Difference between domestic and foreign market:
Domestic market-
• Deals only in rupee

• Price is one (single currency)
• Subject to domestic regulations
• Culture, sentiments and style of domestic market only
• Subject to domestic regulations
• Role of derivatives is less
• Price subject to control by govt.
Forex market:
• One leg is in different currency

• Less liquid since it consists of more than 1 currency
• Subject to domestic and importing/exporting country regulations.
• *Have to adapt to culture sentiments and style of other countries.
• Subject to World Trade Organisation norms
• Role of derivatives is more.
• Price cannot be effectively controlled by the government.
Golden Rules of Foreign Exchange.
1. The goods and services have to go out of India or come into India with the permission of the
customs department.
2. The foreign currency has to go outside the country or come within the country with the
permission of the Reserve Bank India or its approved channel.
Factors affecting production:
• Land & building – Rent

• Labour – Wages/Salary
• Capital – Dividend/Interest
• Organisation / enterprise (entrepreneurship)- Profit
Foreign Capital Inflow:
• FDI- Foreign Direct Investment

• FPI – Foreign Portfolio Investors
These are subject to limits and not policies.

BOP (Balance of Payment)
• External balance sheet is called Balance payment.

• Balance of payment is the external balance of a country consisting mainly of inflows and
outflows of cash.
• Inflows are seen as Imports and Outflows as Exports in a country.
• Balance of payments consists of 4 accounts:
i. Balance of trade/visible/tangibles.
ii. Balance of services/invisible/intangible.
iii. Current account: Balance of services + balance of services
iv. Balance in capital account
2 types of routes for Foreign Direct Investment
• Automatic route
• Approved route
External Commercial Borrowings
All corporates instead of raising their loan from India can raise loan from abroad so when they raise
this kind of loan it’s called external commercial Borrowings.
Inflows can come in the form of FDI, FPI, ECB.
External Commercial Borrowings are to be paid in the form of EMI’s
Inflows > outflows = capital surplus
Net worth = total assets – external liabilities.
IMPORTANT QUESTIONS
❖ Gustav Kasel research on Purchasing Power Parity (PPP)

❖ How do leads and lags affect the market conditions?
❖ Where is the Wholesale market of Forex?
❖ Ans: Treasury of the bank.
❖ Deals take place in the dealing room.
- Treasury room has 3 categories.

✓ A category: currency conversion
✓ B category: scrutiny of documents/ account maintenance of traders. Hub and Spokes
Model.
✓ C category: here we don’t know what is Forex.
- Types of import rates:

• Interbank import rate: base rate or the rate before adjusting the margins
• Merchant import rate: it is the interbank rate or the base rate after adjusting the
margins.
HOMEWORK
Q1. Today’s interbank rate is 78.40/42 per Rupee, export is $500,000 Margin loaded by the bank is
0.03 rupee per $. Imports = 300,000
-Calculate interbank export rate
Ans.=78.40
-calculate merchant export rate
Ans. = 78.37
-how much of rupee will be credited to the account of the exporter by the B category
branch(bank)?
Ans. =39185000
-calculate interbank import rate
Ans. =78.42
-calculate merchant import rate
Ans.78.42+0.05
=78.47
-how much of rupee will be debited by B category branch from the account of the importer?
Ans. 2,34,51,000
-what is the total margin earned by the B category branch on the above 2 transactions?
Ans .0.03+0.05=0.08
Q2. Interbank Rate – 78.58/59
Export - $600,000 Margin – 0.12%
Import - $400,000 Margin – 0.15%
Ans. 78.58
Ans. 78.485
branch(bank)?
Ans. 4,70,88,000
Ans. 78.59
Ans. 78.5+0.12= 78.70
Ans. 78.70*400,000
= 8,14,80,000
Ans. 0.09*600,000 + 0.12 * 400,000
= 54,000 + 48,000
= 1,02,000
Interbank Rate – $78.4010/20
Export - $1,200,000 Margin – 0.05%
Import - $1,100,000 Margin – 0.07%
Ans. 78.4010
Ans. 78.3618
branch(bank)?
Ans. 94034160
Ans. 78.4020
Ans. 78.951
Ans. 8,68,46,100
Ans. 0.0392*12,00,000 + 0.0549 * 11,00,000
= 47,040+60,390
= 107430
In case of foreign control, it is controlled by RBI whereas goods are controlled by customs.
THREE markets RBI controls:
1 Forex
2. Money Market
3. Over the counter derivatives (OTC)
RBI has 2 Self-Regulatory organisations:
-FEDAI – Foreign Exchange Dealers Association of India
-FIMMDA- Fixed Income Money Market and Derivatives Association.
MEMBERS UNDER FEDAI ARE:
- ADS (Authorised Dealers): anybody authorised to deal In Foreign Exchange by RBI.

- RBI member
- Brokers
MEMBERS OF FIMMDA ARE:
- DFI (Development financial institutions)

- Banks
- Primary dealers: market makers in Government Securities
- Brokers
- RBI member
QUOTE SHOULD BE IN 4 DIGITS AND IN MULTIPLES OF 25 TO THE NEAREST RUPPEE.

Export - $2,200,000 Margin – 0.03% = 0.0235
Import - $1,800,000 Margin – 0.04% = 0.0313
Apply FEDAI quote
Ans. 78.2820
Ans. 78.2575
branch(bank)?
Ans. 78.2575*2,200,000
= 17,21,66,500
Ans. 78.2830
Ans. 78.3150
Ans. 78.313*1800000
= 14,09,67,000
Ans. 0.0245*(22,00,000) +0.313 *(18,00,000)
=53900 +57600
= 1,11,500
Export - $3,300,000 Margin – 0.02% = 0.0157
Import - $2,800,000 Margin – 0.03% = 0.0236
Apply FEDAI quote
Ans. 78.6130
Ans. 78.6130-0.0157
= 78.5973
branch(bank)?
Ans. 78.6125*3,300,000
= 25,93,71,090
Ans. 78.6140
Ans. 78.6140+0.0236
=78.6375
Ans. 78.6375*2800000
= 22,01,85,000
Ans. 0.0155*(33,00,000) +0.235*(28,00,000)
=51,150+65,800
= 1,16,950
Interbank rate- 1$=78.3010/3020
Export - $2,100,000 Margin – 0.02% = 0.0157
Import - $1,800,000 Margin – 0.03% = 0.0235
Apply FEDAI quote
Ans. 78.3010
Ans. 78.3010-0.0157
= 78.2853
branch(bank)?
Ans. 78.2850*2,100,000
= 16,43,98,500
Ans. 78.3025
Ans. 78.3020+0.0235
=78.3250
Ans. 78.3250*1800000
= 14,09,85,000
Ans. 0.016*(21,00,000) +0.023*(18,00,000)
=33,600+41,400
= 75,000
CROSS CURRENCY
1$=78.5030/40
1$=135.26/36 YEN
1$=0.9594/96 CHF
1$=7.8467/69 HKD
1$=1.3950/55 SGD
1$=1.2883/85 CAD
--------------------------------------------------------------------------------------------------------------------------------------
Q. Banks export client has tendered export bill for SGD 500,000 margin to be loaded is 0.1%
1$=78.5030/40 R
1$=1.3950/55 SGD
LOGIC
B CATEGORY DEALING ROOM
1. SELL SGD BUY SGD

BUY $ SELL $
2. SELL $ BUY $
BUY ₹ SELL ₹
Q. Bank customer wants to clear import bill for CAD 500,000 margin to be loaded is 0.12%, 2-digit
code to be given.
1$=1.2883/85 CAD
1$=78.5030/40 ₹
78.5040/1.2883 = 60.94
60.94+0.07 = 61.01
61.01*500,000 = 3,05,05,000
0.07*500,000= 35,000
Q. Export 200 million Yen
Margin – 1 %
(Four-digit quote)
1$=78.5030/40 ₹
1$=135.26/36 YEN
78.5030/135.36 = 0.5800
0.5800-1%=0.5742
0.5742*20,00,00,000 = 11,48,40,000
0.5800*20,00,00,000= 11,60,000
Q. 1$ = 78.5030/40 R
1Euro= 1.0430/35 $
Export Euro 500,000
Margin = 0.05%
1$ = 78.5030/40 R
1$ = 1.2883/85 CAD
1AUD = 0.6838/40 $
Export: CAD 600,000
Margin: 0.1%
Import: AUD 500,000
Margin: 0.06%
2 Digit Quote
LOGIC
Base Currency = $
1. SELL CAD BUY CAD 1$= 1.2883/85 CAD

BUY $ SELL $
2. SELL $ BUY $ 1$= 78.5030/40 R
BUY ₹ SELL ₹
1$ = 78.5030R 1 CAD = ?
1$= 1.2885 CAD 70.5030 R = 1$
1$ = 1.2885
1.2885 CAD = 78.50 R
1 CAD = ?
78.50/1.2885 = 60.93
Less (-) O.1% = 0.06
-------------
60.87
0.06 * 600,000 = R 36,000

LOGIC IMPORT
Base Currency = $
1. SELL USD BUY USD 1$= 1.2883/85 CAD

BUY $ SELL $
2. SELL $ BUY $ 1
BUY AUD SELL AUD = 0.6836/40
0.6840 = 1AUD
53.70= 1AUD
53.70*0.06% = 53.73* 500,000 = 2,68,65,000
Q.
1$=78.5030/40 R
1$=7.8467/69 HKD
1NZD= 0.6210/13 $ = export 500,000 NZD = 0.07%
1$ = 7.8467/69 HKD Import 1,000,000 HKD= 1%
LOGIC EXPORT
Base Currency = $
1. BUY $ SELL USD 1NZD= 0.6210/13 $

SELL NZD BUY $
2. SELL $ BUY $
BUY R SELL R 1$=78.5030/40 R

1 NZD = R
78.5030 = 1$
0.6210 = 1 NZD
= 48.75
LESS(-) 0.07%
= 48.68
48.68*500,000
= 2,43,40,000
------------------------------------------------ -----------------------------------------------------------
IMPORT
LOGIC IMPORT
Base Currency = $
1. SELL INR BUY INR

2. BUY $ SELL $
3. SELL $ BUY $
BUY HKD SELL HKD 1$=7.8467/69 HKD
7.8467= 78.5040
HKD = 78.5040/7.8467
10.00
10% + 0.01%
10.01%
10.01% * 10,00,00,000
1,01,00,000
Q. WHY EXPORTERS ARE MORE BENEFICIAL TO THE ECONOMY.
- Balance of trade is always in negative to the extent we want to improve exports. Hence,
we can finance expenses such as purchase of oil.
- Any export gives local employment. Higher the export higher the Gross Domestic Product
(GDP)
- Domestic market is affected. Higher the import, lesser are the sales in the domestic
market.
- Interest rates are less for the exporters than the importers.
- Tax exemption for exporters.
- Duty exemption scheme: for exporters once the goods are exported i.e., once the good are
exported the entire tax amount is refunded.
- Any dollar that comes to the country as a result of exports is counted as Permanent
Income.
Working Capital Loan/Pre shipment Loan/ packing credit: any loan given by the bank to the
exporter before the shipment of the products to procure the required material to manufacture is
called Pre-Shipment Loan.
Post shipment loan: when any loan is given subsequent to the shipping of the goods, they’re called
post shipment loan.
Working Capital: Net working capital is total Current Assets – Current Liabilities
CASH
RAW
DEBTER
MATERIAL
SEMI
FINISHED
FINISHED
GOODS
GOODS
WORKING CAPITAL CYCLE

Forward contract:
- In India the forward contract is available up to 1 year.
- All forward contracts are quoted on month ends (Ex. 31/12/22)
DATE OF SETTLEMENT AND DATE OF CONTRACT:
1. If the date of contract and settlement is on the same day the contract is called
Cash Contract or T+0 Contract.
2. If the date of settlement is the next day of the date of contract it is called TOM
(Tomorrow) contract or T+1 Contract
3. If the date of settlement is 22 days after the date of contract it is called Spot
Contract
4. Anything beyond 2 days is called Forward Contract if through Bank.
5. Anything beyond 2 days it is called Futures Contract if through Exchange.
6. Default option when the date is not mentioned in the contract it becomes a
Spot contract i.e., T+2.
7. Spot is the most common type of contract. (90-95%).
Q. A Forex Contract is carried out at T+2 basis on 15th July, 2022 arrives at the date of
settlement.
Ans. 19th July,2022.
Q. A contract is carried out on 15th July,2022 with funds delivery on 20th July,2022. What is
the type of this contract?
Ans. Forward contract
Q. What are the factors that affect the exchange rates in India.
Ans. - inflation Differential
When the inflation affects the cash market then the forward market is affected by the
interest rate differential.
- Demand and Supply of Dollar will move the market in the short term.
Q. Import: December end (31/12/22)

Margin: 5%
79.51
-0.89
--------
80.40
+0.05
-------
80.45
Q. your banks export customer is expecting his dollars 500,000 on

1 more import customer wants to book forward contract for $400,000 valued at 31/3/23
Load your margin of 0.1% on export and 0.15% on import
-Calculate interbank export forward rate
Ans.80.52
-calculate merchant export forward rate
Ans.80.44
branch(bank)?
Ans. 40220000
-calculate interbank import forward rate
Ans. 80.88
-calculate merchant import forward rate
Ans.81
Ans. 3,24,00,000
Ans.48,000
- Broken Delivery
EXPORT: 1.2 MIL DEL: 11/02/23 MARGIN: 0.05%
IMPORT: 1.1 MIL DEL: 23/3/23 MARGIN: 0.07%
FEDAI QUOTE
EXPORT
1$ = 79.49/51
= 79.4910 + 1.03
= 80.5786 – 0.05%
= 80.521
= 80.5375
80.5375 * 1.2MN
9,66,48,000
IMPORT
80.900 *1.1MN
= 8,89,90,000
(80.9000*0.07*1.1MN)
MARGIN = 80.9000- 80.8425
= 0.0575*1.1MN
=63,250
In case of exporters with forward contracts with option period, FEDAI permits booking of
forward contracts with option delivery.
In case of fixed – date delivery the exporters and importers may not be able to perform the
contract due to unavoidable circumstances such as strikes, lockdowns etc, to overcome this
problem FEDAI permits booking of forward contracts with option period.
The maximum option period permitted is 1 month or 30 days.
Contracts can be booked as per the examples given:
1. Full month of march
2. 10/4 – 9/5
3. 1/10-10/10
In case of fixed date deliveries, the customer should get the best price but they run the risk
of not performing the contract on due date
If the customers ask for maximum option period of 1 month, they will not get best price but
their risk comes down considerably. So, customers have to take a trade off in such a way,
they get price efficiency well as they reduce their risk by narrowing down their option
period.
EXPORT: 1.2 MIL DEL: 11/01/23 MARGIN: 0.05%

IMPORT: 1.1 MIL DEL: 20/10 MARGIN: 0.07%
30/10
FEDAI QUOTE
EXPORT
79.410+0.87 = 80.3610
+ margin 0.0402
= 80.3261
Credit – 80.3208*1.2mn
= 9,63,84,960
Margin = 48,240
IMPORT
Difference between currency forwards and currency futures
CURRENCY FORWARD
1. The trade is between customers and banks (authorised dealers)
2. Forward contract is also called OTC and the price is negotiable.
3. KYC is the responsibility of the bank.
4. The rate is given by the bank
5. Transparency is less.
6. Contracts are Taylor-made or customisable
7. Settlements are month ends
8. Forex inflows and outflows can be hedged as per the requirement of the customer. Even the
customers are not aware of the exact date of forex inflows and outflows, they are permitted
to book forward contract with maximum 30 days option period
9. Forward is not a standalone product for the banks. Forward contracts are given by the banks
as extension of export credit facility or import credit facility.
10. For taking forward contracts underlying exposures such as export contract, import contract
are to be shown to the bank as evidences.
11. Forward contracts are more suited for hedging the genuine export and import transactions.
12. On due date exporters and importers perform the contract by delivering the respective
documents to B category branch.
13. The loses arising out of the forward contract will be adjusted out of the collateral securities
given by the customers for availing export and import credit facilities.
14. Normally positions are not subjected to MTM exercise.
15. Banks normally do not insist for initial margin component from the customers because the
collateral securities given by the customers for availing export and import credit facilities to
take care of the losses arising out of extending forward contracts.
16. No leverage available under forward contract as exporters and importers can book forward
contracts based on genuine export and import transactions
CURRENCY FUTURES
1. The contract is between traders and the exchange
2. Is called as exchange traded, exchange driven, NO price negotiation
3. KYC is the responsibility of the broker attached to the exchange
4. Traders can trade on the screen Quote.
5. Transparency is more.
6. 1 contract is 1000
7. Futures are standardised as a result customers may not get a perfect fit.
8. Forex inflows and outflows arising in between the months cannot be hedged
9. Futures are standalone products
10. for taking currency futures underlying exposures are not required
11. currency futures are more suited for speculative trading.
12. Currency futures are Net settled on due date in Rupees by taking the RBI reference rate.
13. The loses arising out of currency futures will be adjusted out of the margin kept by the
customers with the exchange.
14. The positions of the customers are subjected to daily mark to market adjustments, profit
arising out of MTM will be credited to the customer and the loss will be recovered from
the customer.
15. For taking position in currency futures, customers have to contribute initial margin to
the exchange.
16. Customers are getting very good leverage in taking currency futures by contributing a
small initial margin they’re allowed to take big positions.
17. Currency futures available in India since August 2008.
LIMITATIONS OF FORWARD CONTRACTS:
• For the exporters as the rupee depreciates more than the forward contract rate the
exporters are losing the benefit of getting the ongoing market rate as they have to deliver
the dollars at forward contract rate only
• In case of importers the rupee appreciates more than the forward contract rate, the
importer is not allowed to take the ongoing market rate as he has to purchase the dollar
from the bank at the forward contract rate only, it means forward contract throws 50%
responsibility and 50% right on both the banks and customers.
• To overcome the above limitations customers, have to go for currency Options or keep the
exposure open.
EXPORT: 1.50 MIL DEL: Full month April 2023 MARGIN: 0.05%
IMPORT: 1.20 MIL DEL: 15/1 MARGIN: 0.07%
31/1
2 Digit Quote
EXPORT:
79.4910 + 1.35 +[0.16*1/30]
80.81+1.5mn = 12,12,15,000
Margin = [80.85 – 80.81] * 1.5mn
= 80,000
IMPORT
79.51 + [1.05+0.16]
= 80.56
= 80.56 + 0.072
= 80.62
= 80.62*1.2MN
= 9,67,44,000
MARGIN = [80.62-80.56]*1.2MN
=72,000
PROCEDURE FOR HANDLING EXPORT DOCUMENTS [FIXING RATE]
• Exporter would have given export bill for $1.5mn to b category branch
• B category branch would have sold $1.5mn to dealing room at the interbank rate of 1$=
80.85r.
• In turn dealing room would have given r 12 ,12,75,000 to b category branch (80.85 * 1.5mn)
• B category branch will deduct a margin of rupees 60,000 and credit the exporters account by
12,12,15,000 (12,12,15,000/1.5mn)
PROCEDURE FOR HANDLING IMPORT DOCUMENTS [FIXING RATE]
• The B category branch will debit the account of the importer by 9,67,44,000 at the rate of
Rupees 88.60 per $ from this figure an amount of Rupees 72,000 will be deducted as Margin
by B category branch the balance amount Rupees 9,66,72,000 will be paid to dealing room
who in turn will hand over $1.2mn to the B category Branch [9,66,72,000/1.2mn = 80.56
interbank import rate]
• The $ received from dealing room will be handed over to the importer, who in turn will
import the commodity/goods from abroad
Q. A trader has gone Long in near month in contracts by taking 100 contracts @80.05/$ on due date
RBI reference rate is Rupees 80 per $.
Q. Arrive at the impact for the trader by taking the currency futures contract.
Total profit/ loss on the purchase of the contract is:
80-80.05
= (0.05)
Since the contract is bought in a loss of 0.05 per dollar hence,
Total Loss Incurred in Rupees = 100,000*0.05
= 5000 Rupees
Q. A trader went short in the near month currency exchange program at the rate of 80.10Rupees per
$ . on due date RBI reference rate is R80.08.
Total profit/ loss on the purchase of the contract is:
80.10-80.08
= 0.02
Since the contract is bought in a profit of 0.02 per dollar hence,
Total Loss Incurred in Rupees = 200,000*0.02
= 4000 Rupees
CURRENCY OPTIONS
- when the currency option is sold by the bank to the customer, the seller will have 100%
responsibility to perform the contract on due date, whereas the buyer (customer) will have
100% right on the bank demanding the performance of the contract by the bank.
- For taking currency option customers have to pay upfront premium to the seller.
- It is the duty of the customer to ask for the forward rate, which is called as strike price. It
means customers select the strike price.
- The bank which is selling the currency option is called as Seller of the Option or Underwriter
of the option, the customer is called as Buyer of the option or Holder of the option.
- Exporter has got the right to sell the foreign currency to the bank on due date and this right
is called as Put Option. Importer has got the right to buy the dollar or foreign currency and
this right is called as Call Option.
- In currency option there are 3 types of option available:
- EUROPEAN OPTION which can be exercised only on due date by the holder/buyer/customer.
- AMERICAN OPTION it is exercisable from the next day of the option contract till due date.
- BERMUDAN OPTION at the time of taking the option contract the buyer of the option can
specify an option period and, in that period, specified he can come and exercise the option.
- Of the 3 options, AMERICAN OPTION is highly risky for the seller and hence the option
premium payable by the buyer of the option will be more compared to the same size
EUROPEAN OPTION.
- When the forward contract rate and the strike price demanded by the customer are same it
is called as at the money option (ATM). In case of exporters if they ask for a strike price
which is more than the forward contract rate, it is called as Out of the money (OTM) for the
bank and in the money (ITM) for the customer.
- When the export is asking for a lesser strike price than compared to the forward contract it
is called as out of the money (OTM) for the exporter and in the money (ITM) for the bank.In
case of the importer when he’s asking for a lesser strike price than compared to the forward
contract, it is called as out of the money (OTM) for the bank and in the money (ITM) for the
customer.
- When the importer is asking for the strike price which is more than the forward contract rate
it is called as ITM for the bank and OTM for the customer. For OTM contracts Bank can
charge Option premium which will be more than the ATM contracts and bank will charge
lesser premium for ITM contracts which will be less than when compared to the ATM
contracts
CURRENCY FORWARDS
- Currency forward gives 50% responsibility and 50% right on both the bank and the customer.
- No concept of premium in forward contract
- Customers take the forward rate given by the bank which is subject to loading of margin by
the bank it means it is the duty of the bank to work out the rate and offer to the customer.
Q. An importer is asking for strike price of Rupees 80.50 delivery 31/12/2022 for his import of
$700,000 he is paying a premium of 0.40 per dollar on due date the market price is 82Rupees per
dollar.
Arrive at the impact for the importer by virtue of taking the currency option contract.
From importers angle what type of currency option he has taken.
Q. Exporter of your bank is asking for a strike price of 80.20 delivery 28/2/23 and pays a premium of
Rupees 0.40/$ for his order receiving of 900,000. On due date 81.50
Q. An exporter has taken ATM contract delivery 31/01/2023 for his dollar receivable of 1.1Mn
He pays a premium of 0.50p/$ the cost per product is Rs. 78 on due date the market rate is Rs.82/$.
Exporter is pricing his product @ 1$/unit
- What is the impact for the exporter by virtue of taking the currency option vis-a-viz the
market price?
- What is the impact for the exporter by virtue of taking the currency option vis-a-viz his cost
price?
- In case the exporter would have taken a forward contract delivery 31/1/23 instead of the
currency option what would be the impact for the exporter when compared the cost price
- Load your margin of 0.2p/$
Ans. 1$= 79.4910/5110
1. Since maximum loss in this case can be 0.50p/$
Total loss = 0.50*1.1Mn
=5,50,000------------total premium paid
2. Export 79.4910
+ 1.03
-------------------
80.521 ---- forward rate
-0.50 ------ premium
------------
80.0210-------breakdown
-82
--------------
0.9790--------- profit/unit
*1.1Mn
--------------
10,76,900
3. Market price – 82
Less premium price –78
---------
4
Premium - 0.5
--------
3.50
*1.1Mn
---------
38,50,000
Forward: 80.5210 – 0.02
=80.5010- 78 = 2.5010 *1.1Mn
= 23,51,100
CONCEPT OF INTERGRATED TREASURY
A banks treasury will have 3 departments:
1. Front office – it is where treasury dealings are taking place, such transactions are called as
Deals. The staff who are conducting the deals are called as Dealers, all the dealers would be
headed by a Chief Dealer. Since deals are taking place in the front office, the front office is
also called as Dealing Room. For every transaction carried out in the dealing room the
dealers have to prepare a Deal Slip. For the treasury the risk is getting opened through
Dealing Room Operations.
2. Back office – The back office is also called as Accounts and Settlement Section, for all the
deals carried out in the dealing room the back office has to pass suitable journal entries and
if any such transactions lead to fund settlement, back office has to diarise the deals and
settle the funds on due dates. For all the deals carried out by dealers the back office has to
send Deal confirmations to the counter parties and ensure that deals are confirmed by the
counterparties. The deal confirmation process can ensure the treasury to overcome any
legal risk that may arise in the future. Back office is also responsible for reconciliation of
entries. Any funds that have not come on due date, the back office has to follow-up and get
the funds from the counter parties with the delayed interest. Back office has to periodically
close the accounts and prepare the financial statements and also arrive at profit or loss
made by the treasury and report the same to higher authorities. As per RBI directions the
treasury has to close the financial accounts every year in, June, September, December and
March. Back office has to attend the auditors who are auditing the treasury. As per RBI
norms the treasury should have a concurrent audit system. The daily transactions carried
out by the treasury are subjected to concurrent audit and any mistakes or errors committed
are to be rectified within 24Hrs of concurrent audit pointing out the irregularities. Beside
this Treasury is also subjected to yearly RBI audit, statutory audit and banks own audit
teams.
3. Mid office – The concept of Mid office was found necessary subsequent to the happening of
Nick Leeson Scam which occurred in the year 1994. The role of Mid office is ensuring risk
management of dealing room. Mid office should act as watch dog of Dealing room. All the
transactions carried out by dealing room should be scrutinized by mid office staff and those
deals which are exceeding the risk limit prescribed by RBI or Treasury Policy of the bank. The
dealing room and the back office would report to Treasury head of the bank. The staff of mid
office who are also sitting in treasury would report to Chef Risk officer of the bank
FUNCTIONS OF DEALING ROOM
The dealing room of the bank normally consist of 3 sections:
1. Domestic Section:
RBI LAF
Reverse
Repo MSF Bank Rate SDF
Repo
5). EQUITY DESK
2. Forex Section
3. Derivative Section
IS TREASURY A COST CENTRE OR A PROFIT CENTRE?
Till the year 1991 the treasuries of the bank were involved only in keeping CRR with RBI and SLR with
Govt. securities. Before 1991 India was almost a closed economy and forex transactions were far and
few. Hence, treasury was made a separate department in the head office structure of the bank.
Since treasury was a part of head office, it was not having independent structure and hence treasury
was called as a Cost Centre.
But subsequent to 1991 when our country adopted Liberalisation process, the market got opened to
foreign players. FDI and FPI were encouraged to invest in our capital markets the FERA Act 1972 was
repealed and in its place, Govt. introduced FEMA Act 1999 and Rules ,2000. FEMA Act liberalised the
forex transactions in India and with the result the volume of forex transactions has multiplied over
the years. Rupee was made convertible on current account transactions and restrictions on capital
account transactions are getting eased in phases over a period of time. With the result the Rupee
can now move from Domestic section to Forex and Derivative section and always looks for good
opportunities for making profits for the bank. This concept of rupee moving to all the three sections
in order to find its efficiency, is called as Integrated treasury Approach. Besides this RBI has also
permitted bank treasuries to take proprietary trading positions in all the 3 sections of the dealing
room. Banks have found out a new avenue for making profits in addition to their core function of
lending. Because of this every bank has opened an independent treasury structure with profits and
volume targets. The present-day treasuries of the bank are having independent structure with its
own profit and loss account and balance sheet. To conclude the present-day treasuries of the bank
acts in an integrated manner and is also called as profit centre for the bank.
The forex dealer or the treasury of a bank goes long on dollar at the rate of 80.10/$ and takes a
position of $1Mn today. The next day the dealer squares his position by sending the dollar at the
rate of 80.12/$. At the time of purchasing the dollar the call money desk funds the rupee-cash
outflow by borrowing from the market at 20%.
Q1. What is the absolute profit made by the forex dealer in absolute term as well as in percentage?
Ans. Absolute profit = 80.12-80.10
= 0.02*1Mn
= 20,000
= 0.025%
Q2. How much interest has the bank paid by borrowing in call money?
Ans. 43,890
Q3. What is the profit/loss made by the bank in the above transactions?
Ans. (23,890)
In the concept of integrated treasury, it should be ensured by the forex dealer that his trading
position comes in profit and banks position should also be in profit. When banks position is In loss
and forex dealer is making profit is not an ideal situation as the forex dealer banks interest should be
put ahead of his personal trading position. In the integrated treasury concept all the dealers should
ensure that they are not making profit at the cost of the bank the dealer should ensure a win-win
situation for himself as well as for the bank.
The dealer has borrowed Rs10Cr.from call money @6%. The forex dealer has converted this rupee
inflow into $ @80.11/$. The converted $ is invested in abroad market at an interest rate of
0.25%/day, next day the dollar is converted into rupee at 80.12/$ and the call money borrowing is
closed by the treasury.
In the above process
Q1. what is the profit earned by the forex dealer in absolute term as well as in annualised
percentage?
Ans. 10,00,00,000/80.11 =$ 12,48,283.61
= 12,48,283.61*0.25*1/360*100 = 8.67
Q2. What is the impact for the bank in the above transactions? Both in absolute amount and in
annualised percent?
Ans. = EXPENSE 16,438
--- 13,177
-----------
NET LOSS TO BANK 3,261/-


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FOREIGN EXCHANGE (23/06/2022)

Difference between domestic and foreign market:

• Deals only in rupee

• One leg is in different currency

Golden Rules of Foreign Exchange.

Factors affecting production:

• Land & building – Rent

Foreign Capital Inflow:

• FDI- Foreign Direct Investment

These are subject to limits and not policies.

BOP (Balance of Payment)

• External balance sheet is called Balance payment.

2 types of routes for Foreign Direct Investment

External Commercial Borrowings

Inflows can come in the form of FDI, FPI, ECB.

External Commercial Borrowings are to be paid in the form of EMI’s

Inflows > outflows = capital surplus

Net worth = total assets – external liabilities.

❖ Gustav Kasel research on Purchasing Power Parity (PPP)

- Treasury room has 3 categories.

- Types of import rates:

-Calculate interbank export rate

-calculate merchant export rate

-calculate interbank import rate

-calculate merchant import rate

Q2. Interbank Rate – 78.58/59

Export - $600,000 Margin – 0.12%

Import - $400,000 Margin – 0.15%

-Calculate interbank export rate

-calculate merchant export rate

-calculate interbank import rate

-calculate merchant import rate

Ans. 78.5+0.12= 78.70

Ans. 0.09*600,000 + 0.12 * 400,000

Interbank Rate – $78.4010/20

Export - $1,200,000 Margin – 0.05%

Import - $1,100,000 Margin – 0.07%

-Calculate interbank export rate

-calculate merchant export rate

-calculate interbank import rate

-calculate merchant import rate

Ans. 0.0392*12,00,000 + 0.0549 * 11,00,000

THREE markets RBI controls:

3. Over the counter derivatives (OTC)

RBI has 2 Self-Regulatory organisations:

-FEDAI – Foreign Exchange Dealers Association of India

-FIMMDA- Fixed Income Money Market and Derivatives Association.

MEMBERS UNDER FEDAI ARE:

- ADS (Authorised Dealers): anybody authorised to deal In Foreign Exchange by RBI.

MEMBERS OF FIMMDA ARE:

- DFI (Development financial institutions)

QUOTE SHOULD BE IN 4 DIGITS AND IN MULTIPLES OF 25 TO THE NEAREST RUPPEE.

Interbank Rate – $78.2820/30

Export - $2,200,000 Margin – 0.03% = 0.0235

Import - $1,800,000 Margin – 0.04% = 0.0313

Apply FEDAI quote

-Calculate interbank export rate

-calculate merchant export rate

-calculate interbank import rate

-calculate merchant import rate

Ans. 0.09600,000 + 0.12 400,000

Ans. 0.039212,00,000 + 0.0549 11,00,000

Ans. 0.0245(22,00,000) +0.313 (18,00,000)

Ans. 0.0155(33,00,000) +0.235(28,00,000)

Ans. 0.016(21,00,000) +0.023(18,00,000)

53.700.06% = 53.73 500,000 = 2,68,65,000