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Banking Diploma Reading Material

Important Short Notes on International Trade & Foreign Exchange

Collected & Edited by বয্াংিকং িনউজ বাংলােদশ

Email: [email protected]
www.bankingnewsbd.com

Foreign exchange market:

The foreign exchange market (forex, FX, or currency market) is a global decentralized
market for the trading of currencies. The main participants in this market are the larger
international banks. Financial centers around the world function as anchors of trading
between a wide range of different types of buyers and sellers around the clock, with the
exception of weekends. The foreign exchange market determines the relative values of
different currencies.

The foreign exchange market works through financial institutions, and it operates on several
levels. Behind the scenes banks turn to a smaller number of financial firms known as
“dealers,” who are actively involved in large quantities of foreign exchange trading. Most
foreign exchange dealers are banks, so this behind-the-scenes market is sometimes called the
“interbank market”, although a few insurance companies and other kinds of financial firms
are involved. Trades between foreign exchange dealers can be very large, involving hundreds
of millions of dollars.[citation needed] Because of the sovereignty issue when involving two
currencies, Forex has little (if any) supervisory entity regulating its actions.

The foreign exchange market assists international trade and investment by enabling currency
conversion. For example, it permits a business in the United States to import goods from the
European Union member states, especially Eurozone members, and pay euros, even though
its income is in United States dollars. It also supports direct speculation in the value of
currencies, and the carry trade, speculation based on the interest rate differential between two
currencies.

Money laundering:

Money laundering is the process of concealing sources of money. Money evidently gained
through crime is "dirty" money, and money that has been "laundered" to appear as if it came
from a legitimate source is "clean" money. Money can be laundered by many methods, which
vary in complexity and sophistication.

Different countries may or may not treat tax evasion or payments in breach of international
sanctions as money laundering. Some jurisdictions differentiate these for definition purposes,
and others do not. Some jurisdictions define money laundering as obfuscating sources of
money, either intentionally or by merely using financial systems or services that do not
identify or track sources or destinations.

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Other jurisdictions define money laundering to include money from activity that would have
been a crime in that jurisdiction, even if it was legal where the actual conduct occurred.

This broad brush of applying money laundering to incidental, extraterritorial or simply

privacy-seeking behaviors has led some to label it financial thought crime.

Many regulatory and governmental authorities issue estimates each year for the amount of
money laundered, either worldwide or within their national economy. In 1996, the
International Monetary Fund estimated that two to five percent of the worldwide global
economy involved laundered money. The Financial Action Task Force on Money Laundering
(FATF), an intergovernmental body set up to combat money laundering, stated, "Overall, it is
absolutely impossible to produce a reliable estimate of the amount of money laundered and
therefore the FATF does not publish any figures in this regard." Academic commentators have
likewise been unable to estimate the volume of money with any degree of assurance. Various
estimates of the scale of global money laundering are sometimes repeated often enough to
make some people regard them as factual—but no researcher has overcome the inherent
difficulty of measuring an actively concealed practice.

Balance of trade:

The difference between a country's imports and its exports. Balance of trade is the largest
component of a country's balance of payments. Debit items include imports, foreign aid,
domestic spending abroad and domestic investments abroad. Credit items include exports,
foreign spending in the domestic economy and foreign investments in the domestic economy.
A country has a trade deficit if it imports more than it exports; the opposite scenario is a trade
surplus.

Charter party:

Charter party (Latin: charta partita; a legal paper or instrument, divided, i.e. written in
duplicate so that each party retains half), a written, or partly written and partly printed,
contract between a shipowner and a merchant, by which a ship is let or hired for the
conveyance of goods on a specified voyage, or for a defined period. A vessel might also be
chartered to carry passengers on a journey. Also, a written contract between shipowner and
charterer whereby a ship is hired; all terms, conditions and exceptions are stated in the
contract or incorporated by reference.

A charter party is the contract between the owner of a vessel and the charterer for the use of a
vessel. The charterer takes over the vessel for either a certain amount of time (a time charter)
or for a certain point-to-point voyage (a voyage charter), giving rise to these two main types
of charter agreement. There is a sub type of time charter called the demise or bare boat
charter.

In a time charter, the vessel is hired for a specific amount of time. The owner still manages
the vessel but the charterer gives orders for the employment of the vessel, and may sub-
charter the vessel on a time charter or voyage charter basis.

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The demise or bare boat charter is a sub type of time charter in which the charterer takes
responsibility for the crewing and maintenance of the ship during the time of the charter,
assuming the legal responsibilities of the owner and is known as a disponent owner.

In a voyage charter, the charterer hires the vessel for a single voyage, and the vessel's owner
(or disponent owner) provides the master, crew, bunkers and supplies.

Incoterms:

The Incoterms rules or International Commercial Terms are a series of pre-defined

commercial terms published by the International Chamber of Commerce (ICC) that are
widely used in International commercial transactions or procurement processes. A series of
three-letter trade terms related to common contractual sales practices, the Incoterms rules are
intended primarily to clearly communicate the tasks, costs, and risks associated with the
transportation and delivery of goods.

The Incoterms rules are accepted by governments, legal authorities, and practitioners
worldwide for the interpretation of most commonly used terms in international trade. They
are intended to reduce or remove altogether uncertainties arising from different interpretation
of the rules in different countries. As such they are regularly incorporated into sales contracts
worldwide.

Open Position:

In investing, any trade that has been established, or entered, that has yet to be closed with an
opposing trade. An open position can exist following a buy (long) position, or a sell (short)
position. In either case, the position will remain open until an opposing trade has taken place.

For example, an investor who owns 500 shares of a certain stock is said to have an open
position in that stock. When the investor sells those 500 shares, the position will be closed.

Buy-and-hold investors generally have one or more open positions at any given time. Short-
term traders may execute "round-trip" trades; a position is opened and closed within a
relatively short period of time. Day traders and scalpers may even open and close a position
within a few seconds, trying the catch very small, but frequent, price movements throughout
the day.

Derivative:

A derivative is a financial contract which derives its value from the performance of another
entity such as an asset, index, or interest rate, called the "underlying". Derivatives are one of
the three main categories of financial instruments, the other two being equities (i.e. stocks)
and debt (i.e. bonds and mortgages). Derivatives include a variety of financial contracts,
including futures, forwards, swaps, options, and variations of these such as caps, floors,
collars, and credit default swaps. Most derivatives are marketed through over-the-counter
(off-exchange) or through an exchange such as the Chicago Mercantile Exchange; while most
insurance contracts have developed into a separate industry.

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Consular Invoice:

A consular invoice is a commercial invoice that has been reviewed by the consulate of the
buyerʹs country for the purpose of determining the value and quantity of the shipment and to
ensure that no indigenous laws or regulations governing imports are being broken. This
process must be completed before the goods are exported.

Consular invoices may be required by various countries to facilitate customs at the

destination as well as to facilitate the collection of taxes. Consular invoices include the
owner’s declaration of the value of the shipment and a full description of the goods exported
as well as all discounts or rebates being offered. They generally include a sworn statement
not only to the accuracy of the declarations made but also that there are no other invoices for
the same shipment.

Gold Standard:

Gold Standard is a monetary system in which a country's government allows its currency unit
to be freely converted into fixed amounts of gold and vice versa. The exchange rate under the
gold standard monetary system is determined by the economic difference for an ounce of
gold between two currencies. The gold standard was mainly used from 1875 to 1914 and also
during the interwar years.

The use of the gold standard would mark the first use of formalized exchange rates in history.
However, the system was flawed because countries needed to hold large gold reserves in
order to keep up with the volatile nature of supply and demand for currency. After World War
II, a modified version of the gold standard monetary system, the Bretton Woods monetary
system created as its successor. This successor system was initially successful, but because it
also depended heavily on gold reserves, it was abandoned in 1971 when U.S President Nixon
"closed the gold window."

SWIFT:

Society of Worldwide Interbank Financial Telecommunications. It is a dedicated computer

network that is set up to support fund transfer messages between member banks worldwide.

The majority of international interbank messages use the SWIFT network.

SWIFT transports financial messages in a highly secure way, but does not hold accounts for
its members and does not perform any form of clearing or settlement.

SWIFT does not facilitate funds transfer, rather, it sends payment orders, which must be
settled via correspondent accounts that the institutions have with each other. Each financial
institution, to exchange banking transactions, must have a banking relationship by either
being a bank or affiliating itself with one (or more) so as to enjoy those particular business
features.

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Cross Rate:

The currency exchange rate between two currencies, both of which are not the official
currencies of the country in which the exchange rate quote is given in. This phrase is also
sometimes used to refer to currency quotes which do not involve the U.S. dollar, regardless of
which country the quote is provided in.

Bill of Entry:

Bill of Entry is a declaration by an importer or exporter of the exact nature, precise quantity
and value of goods that have landed or are being shipped out. Prepared by a qualified
customs clerk or broker, it is examined by customs authorities for its accuracy and conformity
with the tariff and regulations.

Balance of Payment (BOP):

• Balance of payments (BOP) accounts are an accounting record of all monetary transactions
between a country and the rest of the world.

• These transactions include payments and receipts for the country's exports and imports of
goods, services, financial capital, and financial transfers.

• The BOP accounts summarize international transactions for a specific period, usually a year,
and are prepared in a single currency, typically the domestic currency for the country
concerned.

• Sources of funds for a nation, such as exports or the receipts of loans and investments, are
recorded as positive or surplus items.

• Uses of funds, such as for imports or to invest in foreign countries, are recorded as negative
or deficit items.

• When all components of the BOP accounts are included they must sum to zero with no
overall surplus or deficit. For example, if a country is importing more than it exports, its trade
balance will be in deficit, but the shortfall will have to be counter-balanced in other ways –
such as by funds earned from its foreign investments, by running down central bank reserves
or by receiving loans from other countries.

Value Date:

Value date in finance is the date when the value of an asset that fluctuates in price is
determined. The value date is used when there is a possibility for discrepancies due to
differences in the timing of asset valuation. It usually applies to forward currency contracts,
options and other derivatives, interest payable or receivable. In accounting, value date is the
date when the entry to an account is considered effective.

In banking, value date is the delivery date of funds traded. For spot transactions it is the
future date on which the trade is settled. In the case of a spot foreign exchange trade it is

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normally two days after a transaction is agreed upon. A future date used in determining the
value of a product that fluctuates in price. Typically, you will see the use of value dates in
determining the payment of products and accounts where there is a possibility for
discrepancies due to differences in the timing of valuation. Such products include forward
currency contracts, option contracts, and the interest payable or receivable on personal
accounts. Also referred to as "valuta".

An offshore bank is a bank located outside the country of residence of the depositor, typically
in a low tax jurisdiction (or tax haven) that provides financial and legal advantages. These
advantages typically include:

greater privacy (see also bank secrecy, a principle born with the 1934 Swiss Banking Act)

low or no taxation (i.e. tax havens)

easy access to deposits (at least in terms of regulation)

protection against local, political, or financial instability

While the term originates from the Channel Islands being "offshore" from the United
Kingdom, and most offshore banks are located in island nations to this day, the term is used
figuratively to refer to such banks regardless of location, including Swiss banks and those of
other landlocked nations such as Luxembourg and Andorra.

Offshore banking has often been associated with the underground economy and organized
crime, via tax evasion and money laundering; however, legally, offshore banking does not
prevent assets from being subject to personal income tax on interest. Except for certain
persons who meet fairly complex requirements, the personal income tax of many countries
makes no distinction between interest earned in local banks and those earned abroad. Persons
subject to US income tax, for example, are required to declare on penalty of perjury, any
offshore bank accounts—which may or may not renumbered bank accounts—they may have.
Although offshore banks may decide not to report income to other tax authorities, and have
no legal obligation to do so as they are protected by bank secrecy, this does not make the non-
declaration of the income by the tax-payer or the evasion of the tax on that income legal.
Following September 11, 2001, there have been many calls for more regulation on
international finance, in particular concerning offshore banks, tax havens, and clearing houses
such as Clear stream, based in Luxembourg, being possible crossroads for major illegal
money flows.

Bill of Exchange / Draft:

A bill of exchange, or draft, is a negotiable instrument that is both drawn upby and made
payable to the exporter/seller. Although written by the seller, it has the equivalent effect of a
check written by the buyer.

It is generally a three-party instrument consisting of a:

1. Drawer – the party issuing the bill of exchange; usually the exporter/seller.

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2. Drawee – the recipient of the bill of exchange for payment or acceptance; usually the
buyer.

3. Payee – the party to whom the bill is payable; usually the seller’s bank.

Bills of exchange are either payable at sight (sight drafts) where the bank pays the full
amount upon presentation, or payable at some future date (time or term drafts).

Here’s how they work with Documents Against Payment (D/P) and Documents Against
Acceptance (D/A) transactions. (Click to view a PDF process map of the D/A and D/P
process.)

D/P -- Documents Against Payment:

The D/P transaction utilizes a sight draft. Payment is on demand.

After the goods are shipped, the exporter sends the sight draft to the clearing bank, along with
documents necessary for the importer/buyer to obtain the goods from customs. The buyer has
to settle the payment with the bank before the documents are released and he can take
delivery of the goods. If the buyer fails or refuses to pay, the exporter has the right to recover
the goods and resell them.

On the surface, D/P transactions seem fairly safe from the seller’s perspective. However, in
practice there are risks involved.

The buyer can refuse to honor payment on any grounds.

When the goods are shipped long distances, say from Hong Kong to the United States, it is
usually impractical and too expensive for the seller to ship them back home. Thus, the seller
is forced to sell the goods in the original country of destination at what is usually a heavy
discount.

In cases of shipments by air freight, it is possible that the buyer will actually receive the
goods before going to the bank and paying for them.

D/A – Documents Against Acceptance:

The D/A transaction utilizes a term or time draft. In this case, the documents required to take
possession of the goods are released by the clearing bank only after the buyer accepts a time
draft drawn upon him. In essence, this is a deferred payment or credit arrangement. The
buyer’s assent is referred to as a trade acceptance.

D/A terms are usually after sight, for instance “at 90 days sight”, or after a specific date, such
as “at 150 days bill of lading date.”

As with open account terms, there are some inherent risks in selling on D/A:

As with a D/P, the importer can refuse to accept the goods for any reason, even if they are in
good condition.

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The buyer can default on the payment of a trade acceptance. Unless it has been guaranteed by
the clearing bank, the seller will need to institute collection procedures and/or legal action.

GSP:

The Generalized System of Preferences, or GSP, is a formal system of exemption from the
more general rules of the World Trade Organization (WTO), (formerly, the General
Agreement on Tariffs and Trade or GATT). Specifically, it's a system of exemption from the
most favored nation principle (MFN) that obliges WTO member countries to treat the imports
of all other WTO member countries no worse than they treat the imports of their "most
favored" trading partner. In essence, MFN requires WTO member countries to treat imports
coming from all other WTO member countries equally, that is, by imposing equal tariffs on
them, etc.

GSP exempts WTO member countries from MFN for the purpose of lowering tariffs for the
least developed countries, without also lowering tariffs for rich countries.

EPZ:

Free trade zone (FTZ) or export processing zone (EPZ), also called foreign-trade zone,
formerly free port is an area within which goods may be landed, handled, manufactured or
reconfigured, and reexported without the intervention of the customs authorities. Only when
the goods are moved to consumers within the country in which the zone is located do they
become subject to the prevailing customs duties. Free-trade zones are organized around major
seaports, international airports, and national frontiers—areas with many geographic
advantages for trade. It is a region where a group of countries has agreed to reduce or
eliminate trade barriers. Free trade zones can be defined as labor intensive manufacturing
centers that involve the import of raw materials or components and the export of factory
products. The world's first Free Trade Zone was established in Shannon, County Clare,
Shannon Free Zone. This was an attempt by the Irish Government to promote employment
within a rural area, make use of a small regional airport and generate revenue for the Irish
economy. It was hugely successful, and is still in operation today.

The World Trade Organization (WTO):

is an organization that intends to supervise and liberalize international trade. The organization
officially commenced on 1 January 1995 under the Marrakech Agreement, replacing the
General Agreement on Tariffs and Trade (GATT), which commenced in 1948. The
organization deals with regulation of trade between participating countries; it provides a
framework for negotiating and formalizing trade agreements, and a dispute resolution process
aimed at enforcing participants' adherence to WTO agreements, which are signed by
representatives of member governments: fol.9–10 and ratified by their parliaments. Most of
the issues that the WTO focuses on derive from previous trade negotiations, especially from
the Uruguay Round (1986–1994).

The organization is attempting to complete negotiations on the Doha Development Round,

which was launched in 2001 with an explicit focus on addressing the needs of developing

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countries. As of June 2012, the future of the Doha Round remains uncertain: the work
programme lists 21 subjects in which the original deadline of 1 January 2005 was missed, and
the round is still incomplete. The conflict between free trade on industrial goods and services
but retention of protectionism on farm subsidies to domestic agricultural sector (requested by
developed countries) and the substantiation of the international liberalization of fair trade on
agricultural products (requested by developing countries) remain the major obstacles. These
points of contention have hindered any progress to launch new WTO negotiations beyond the
Doha Development Round. As a result of this impasse, there has been an increasing number
of bilateral free trade agreements signed. As of July 2012, there are various negotiation
groups in the WTO system for the current agricultural trade negotiation which is in the
condition of stalemate.

WTO's current Director-General is Pascal Lamy, who leads a staff of over 600 people in
Geneva, Switzerland.

Major areas of frauds in International Trade:

a) Commodity frauds: The foreign seller ( exporter) may not send the goods ordered by the
buyer ( importer). The seller may stuff the container with rubbish in the container and cover
the top with little quantity of the material ordered. The seller may send the goods of inferior
quality. He may send goods of lesser quantity.

Frauds of this nature happen mostly because of the buyer's greed to get goods cheaply. The
buyers fall prey to advertisements like, "bargain offer, unbelievable, but true, cancelled
orders, ship on high seas" etc. The buyers do not bother to get proof of the product, do not
check on the seller, do not ask the banker for advice, do not show the contract to lawyer.

b) Documentation frauds: The seller may forge documents like, Bill of lading, airway bill,
insurance policy and certificate of origin etc ( cargo being non existent). In case cargo is
shipped, the seller may alter the essential particulars in the documents to suit his purpose. He
may create multiple transport documents in respect of a single shipment and cheat several
buyers.

c) Documentary Credit frauds: Some times, the Letter of credit instrument itself may be
forged by the importer and sent to the supplier's bankers. Forged letters of credit from Nigeria
are common.

d) Insurance frauds: Marine insurance documents are forged by the supplier. Sometimes,
essential particulars like description of goods and the amount of cover etc may be
surreptitiously altered by the supplier in a genuine document.

e) Maritime or cargo frauds: These are frauds committed by the Captain or crew of the
ship. They may change the painting of the ship, change the name of the vessel and deviate
from the intended voyage, embark on a remote port and sell the cargo for throw away prices
and flee.

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Almost 90% of the international trade is managed by ship, which has being dominated the
international transportation over hundreds of years. The role of Documents in international
trade, has turned the “money and goods” transaction into later “money and documents”
transaction and in the process of improving international trade, a lot of by-products have
formed at the mean time, one such being documentary fraud.

Since we know, after the document-oriented trading system formed, the documentary fraud
has appeared accordingly. Under documentary fraud, the letter of credit is always involved
since now it has also become one of most essential method for payment in international
transaction.

It is clearly that currently, there is increasing number of documentary fraud which has
already, to some extent, blocked the normal order of international trade. Under such
environment, lots of international participants are involved in it as victims. Thus, in the
middle of searching a better remedy, the voice for developing current letter of credit system
has been proposed by international society.

The International Monetary Fund (IMF):

IMF is an international organization that was initiated in 1944 at the Bretton Woods
Conference and formally created in 1945 by 29 member countries. The IMF's stated goal was
to assist in the reconstruction of the world’s international payment system post-World War II.
Countries contribute money to a pool through a quota system from which countries with
payment imbalances can borrow funds temporarily. Through this activity and others such as
surveillance of its members' economies and the demand for self-correcting policies, the IMF
works to improve the economies of its member countries.

The IMF describes itself as “an organization of 188 countries, working to foster global
monetary cooperation, secure financial stability, facilitate international trade, promote high
employment and sustainable economic growth, and reduce poverty around the world.” The
organization's stated objectives are to promote international economic cooperation,
international trade, employment, and exchange rate stability, including by making financial
resources available to member countries to meet balance of payments needs. Its headquarters
are in Washington, D.C., United States.

Interest Arbitrage: A transaction involving the simultaneous purchase of interest-bearing

notes on different exchanges to exploit a temporary disparity in rates. Transactions often
involve the trading of currencies from two different countries in which the trader must
assume the risks associated with the exchange of foreign currencies.

Packing Credit:

A borrowing facility provided by a financial institution to help an exporter finance the costs
of buying or making a set of products, and then packing and transporting them before
shipment occurs. A packing credit loan will often be extended if a letter of credit has been
issued by a purchaser of the products that is based in another country or a confirmed order for
exporting the goods exists.

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Definition of 'Short (or Short Position)':

1. The sale of a borrowed security, commodity or currency with the expectation that the asset
will fall in value.

2. In the context of options, it is the sale (also known as "writing") of an options contract.
For example, an investor who borrows shares of stock from a broker and sells them on the
open market is said to have a short position in the stock. The investor must eventually return
the borrowed stock by buying it back from the open market. If the stock falls in price, the
investor buys it for less than he or she sold it, thus making a profit. Definition of 'Long (or
Long Position)'

1. The buying of a security such as a stock, commodity or currency, with the expectation that
the asset will rise in value.

2. In the context of options, the buying of an options contract.

For example, buying a call (or put) options contract from an options writer entitles you the
right, not the obligation to buy (or sell) a specific commodity or asset for a specified amount
at a specified date.

Special drawing rights (SDRs):

SDRs are supplementary foreign exchange reserve assets defined and maintained by the
International Monetary Fund (IMF). Not a currency, SDRs instead represent a claim to
currency held by IMF member countries for which they may be exchanged. As they can only
be exchanged for euros, Japanese yen, pounds sterling, or US dollars, SDRs may actually
represent a potential claim on IMF member countries' non gold foreign exchange reserve
assets, which are usually held in those currencies. While they may appear to have a far more
important part to play, or, perhaps, an important future role, being the unit of account for the
IMF has long been the main function of the SDR.

Created in 1969 to supplement a shortfall of preferred foreign exchange reserve assets,

namely gold and the US dollar, the value of a SDR is defined by a weighted currency basket
of four major currencies: the US dollar, the euro, the British pound, and the Japanese yen.
SDRs are denoted with the ISO 4217 currency code XDR.

A revolving letter of credit is a guaranteed payment arrangement with a bank that is used to
facilitate repeat sales transactions in international trade. In instances where importers and
exporters engage in repeat purchases of the same goods over the course of time, a revolving
letter of credit establishes an open draw in favor of the exporter so the importer does not have
to obtain a letter of credit for each individual transaction. The importer's bank, known as the
issuing bank, guarantees payment for every order under the letter for a specified length of
time, as long as the exporter provides the proof of shipping or other documentary evidence
required. Single L/C that covers multiple-shipments over a long period. Instead of arranging a
new L/C for each separate shipment, the buyer establishes a L/C that revolves either in value
(a fixed amount is available which is replenished when exhausted) or in time (an amount is

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available in fixed installments over a period such as week, month, or year). L/Cs revolving in
time are of two types: in the cumulative type, the sum unutilized in a period is carried over to
be utilized in the next period; whereas in the non-cumulative type, it is not carried over.

Asian Clearing Union (ACU):

Asian Clearing Union (ACU) is the simplest form of payment arrangements whereby the
participants settle payments for intro-regional transactions among the participating central
banks on a multilateral basis. The main objectives of a clearing union are to facilitate
payments among member countries for eligible transactions, thereby economizing on the use
of foreign exchange reserves and transfer costs, as well as promoting trade among the
participating countries. The ACU is a clearing houses/payments arrangements operating in
various regions of the world. The Asian Clearing Union (ACU), with headquarters in Tehran,
Iran, was established on December 9, 1974 at the initiative of the United Nations Economic
and Social Commission for Asia and the Pacific (ESCAP). The primary objective of ACU, at
the time of its establishment, was to secure regional co-operation as regards the settlement of
monetary transactions among the members of the Union and to provide a system for clearing
payments among the member countries on a multilateral basis.

Authorised Dealer:

An authorised dealer shall in all his dealings, in foreign exchange, comply with such general
or special directions or instructions as the Bangladesh Bank may from time to time think fit to
give, and, except with the previous permission of the Bangladesh Bank, an authorised dealer
shall not engage in any transaction involving any foreign exchange which is not in
conformity with the terms of his authorization under this section.

An authorized dealer shall, before undertaking any transaction in foreign exchange on behalf
of any person, require that person to make such declarations and to give such information as
will reasonably satisfy him that the transaction will not involve, and is not designed for the
purpose of, any contravention or evasion of the provisions of this Act or of any rules,
directions or orders made there under, and where the said person refuses to comply with any
such requirement or makes only unsatisfactory compliance therewith, the authorized dealer
shall refuse to undertake the transaction and shall, if he has reason to believe that any such
contravention or evasion as aforesaid is contemplated by the person, report the matter to the
Bangladesh Bank.

SWAP:

In finance, a swap is a derivative in which counter parties exchange cash flows of one party's
financial instrument for those of the other party's financial instrument. The benefits in
question depend on the type of financial instruments involved. For example, in the case of a
swap involving two bonds, the benefits in question can be the periodic interest (or coupon)
payments associated with the bonds. Specifically, the two counter parties agree to exchange
one stream of cash flows against another stream. These streams are called the legs of the
swap. The swap agreement defines the dates when the cash flows are to be paid and the way

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they are calculated. Usually at the time when the contract is initiated at least one of these
series of cash flows is determined by a random or uncertain variable such as an interest rate,
foreign exchange rate, equity price or commodity price.

The cash flows are calculated over a notional principal amount. Contrary to a future, a
forward or an option, the notional amount is usually not exchanged between counter parties.
Consequently, swaps can be in cash or collateral.

Swaps can be used to hedge certain risks such as interest rate risk, or to speculate on changes
in the expected direction of underlying prices.

Swaps were first introduced to the public in 1981 when IBM and the World Bank entered into
a swap agreement.[2] Today, swaps are among the most heavily traded financial contracts in
the world: the total amount of interest rates and currency swaps outstanding is more thаn
$347 trillion in 2010, according to Bank for International Settlements (BIS).

Collected & Edited by বয্াংিকং িনউজ বাংলােদশ, Email: [email protected], www.bankingnewsbd.com