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FOREIGN EXCHANGE
VARIOUS TERMINOLOGIES RELATING TO FOREIGN EXCHANGE
Foreign trade is extremely essential in todays scenario. It takes place through foreign exchange market. the participants in the foreign exchange market include central banks,commercial banks, brokers etc. RBI is the controller of foreign exchange market. The rules prescribed by FEDAI i.e. foreign exchange dealers and association of india are being followed. the function of buying and selling of foreign currencies in india is performed by authorized dealers appointed by RBI. The foreign exchange department of major banks are linked across the world on a 24 hour basis. Major commercial centres are in London, Paris , New York, Hong kong etc. The foreign exchange market acts as a central focal point wherein prices of various currencies are discovered.It enables the investors to hedge or minimize their risks. It enables the investors to arbitrage any inequalities It provides an investment/trading avenue to entities who are willing to expose themselves to this risk.
In context of india, any currency other than indian rupees is foreign currency. Foreign exchange includes currency, drafts,bills,letters of credits and traveller cheques which are denominated and ultimately payable in foreign currency .
In foreign exchange market market user can only buy at highest quote and sell at lowest quote. When market user banks do this activity for their customers then it is called covered transaction or squaring off the merchant transaction. The user bank then would make adjustment for exchange margin which is called merchant profit. When banks do this transaction for their own purpose in interbank market then it is called trading(or speculation).Initial buy or sell creates foreign position and subsequent reversal (opposite transaction) is called squaring off interbank position. Foreign exchange rate is effected by many factors like interest rates, inflation , taxes, BOP position etc. In India all buy and sell transactions are routed through US$. Hence all deals involving any other currency would necessarily involve converting in US$ and then converting US$ in INR. Thus if an indian importer wishes to buy YEN ,he would first have to sell rupees and buy dollar,then he would sell dollar and buy YEN. The banker would obtain the YEN/$ rate from Singapore or Tokyo and then apply the Rs./$ rate to determine the amount of rupees required to buy the desired YEN. There are two ways in which currency can be quoted: 1)DIRECT QUOTES: It refers to no. of units of domestic currency per unit of foreign currency.For example 1$=Rs. 49.50 is direct quote for indian rupees,however it would be an indirect quote for america. 2)INDIRECT QUOTE:It refers to no. of units of foreign currency per unit of home currency. for example: Rs.100=$0.2245 is indirect quote for indian. There are two types of prices: BID PRICE and ASK PRICE.BID price is the price at which dealer is willing to buy another currency and offer rate is the rate at which he is willing to sell the currency. eg.E.g. a quote of Rs /$ is Rs42,50 / 42.55 it means that the dealer will buy $ at Rs 42.50 and sell dollar at 42.55 .
Spreads : Spread is the difference between the bid rate and the offer rate and usually represents the profit margins that a dealer expects to make.
SPOT RATE,FORWARD RATE,CASH RATE AND TOM RATE:
1. Spot rate : Rate quoted for transactions that will settled two business days from the transaction date (T+2)
2. Forward rate : Rate quoted for transactions that will be settled beyond two business days at a mutually agreed rate and date.
3. Cash rate : Rate quoted for transactions that will settled on the same day (T+0) 4. Tom rate : Rate quoted for transactions that will be settled in one business day form the date of transaction (T+1)
Appreciation and depreciation of currency :
(A) Appreciation: A currency is said to have appreciated if it is able to purchase more of the other currency. • E.g. if Rs /$ is 1$ = Rs45 and it changes to 1$ = Rs46 then dollar is said to have appreciated. (B) Depreciation : A currency is said to have depreciated if it is able to purchase less of the other currency. • E.g. if Rs /$ is 1$ = Rs45 and it changes to 1$ = Rs44 then dollar is said to have depreciated and rupee appreciated
Premium and discount :
• Premium : A currency is said to be at a premium if it is more expensive in the forward than in the spot
. If Rs / $ spot is 44.95/45.00 and 3 month forward is 45.2045.25 we say that dollar is at a premium
Discount : A currency is said to be at a discount when it is quoting higher in the spot and cheaper in the forward.
Various foreign currency accounts maintained by Banks : 1. Nostro Account : Nostro means “our account with you” Nostro account is the account maintained by the Bank in India with the bank abroad. E.g. PNB ma
The project was bit about foreign exchange market like what is foreign exchange who are the participants in the foreign exchange market. what are the determinants of foreign exchange rate, about appreciation and depreciation of currency, about various bank accounts like NOSTRO,VOSTRO AND LORO account. The rate at which banks can buy and sell foreign currency. The direct and Indirect quote. price at which banks can buy is the BID price and at which banks can sell is the ASK price. User bank can always BUY AT HIGHER PRICE AND SELL AT THE LOWER PRICE. Difference between bid and ask rate is called SPREAD. Likewise Spot rate, forward rate.cash rate and TOM rate also being explained above.When the currency is said to be at Premium and when it is said to be at discount. After introduction of globalisation a country cannot ignore foreign exchange trade. In order to be more successful trading with other countries is extremely crucial.
28 Feb, 2018
NIMS offers a diverse and vibrant community where students can not only excel academically but also grow personally through engaging experiences and supportive networks. Help other students by share your experiences at NIMS.