fx exchange[1]

7/26/2019 Fx Exchange[1]

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24-4-2016

* Exchange rate mechanism:time zones involved- settlement time- determining contractways of settlement- spot basis: T+2 , eg if on monday settlement date on wednesday

- ready/cash basis: same day

- Tom basis: T+1

- Forward : settlment takes place on futute date

* Exchange rates and forex businessFEDAI : foreign exchaneg dealers association of India-guidelines: underlying exposure, definite amt date specified,option period specified delivery not greater than month

- other restriction (banks)-allowed to open/close rupee a/c, foreing a/c, invest inmoney market/ debt instrument (less than one year), allowclient to book forward to hedge their risk

* Markets

- individuals (student persuing study abroad)- business enttites-commercial (accpeting deposti lending/invest) and investment banks(advisory services, exotic derivatvie products, merger & eval)

- central banks (rbi,- investor (fx denomited bonds, debentures, equit)- arbritators- price diferen in two market- speculaors:-forex brokers ( on behalf of bank purc/sale of fx currency)- hedge funds- electronic form- over the counter

- price discover- Majors: USD, EUR, JPY, CHF (swiss francs), AUD, GBP

* Sampling methodswhen these terms descirbe population - parametersdescirp sample - statistics

* when sd is high curver is short and widewhen sd is small curve is tall and narrow

- skewnessin sys distri - mean, median, mode are equalin positive skyew dis - mean mode

in negativ ske dis - mean< median < mode- 4 trillion daily turnover- highly liquid

* risks relating to forex operations-transaction - normal operations- translation - revaluation inhome currency, eg bank statement- operating - external factorssettlement risk : counterparty risk- receipts and payments on individual basis


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- pre settlement - bankruptcy,- call risk

* country risk:

* Non-resident accounts

* PIO other then banglades and pakistan

* Nro deposit rates can't be more than resident interest

* Export Decalaration forms:1. GR other than post2. PP by post parcel3. softex form4. necessary docs - sdf with shipping bills

Exemptions:regulation 4 : 23/2000 date 3.5.2000 fema- free samples, persoanl effe, deffective goods for repairsreturns

* Faciliteis for exporters and importers:- Agency commison : reduction in invoice value of exports -GR form

- reduction in invoice val:conditions to be met for redution by AD- reduction < 25%- not subject to export quota/ floor price restriction- the exporter is not on exporter's caution list of RBI

- Claims against export- refund of export proceeds- exetension of time limit: ext form- extension of time and self write-off

- Effective date of realization: date of credit in nostro ac

- Foreign currency accounts: overseas foreign currency a/csdiamon dollar account (track record of 2 year and 3 cr turnover)

* Export Finance- Preshipment finance- Postshipment finance

Preshipment finance- packing credit- advance against dutydrawback ( goverenment receviables)

Post-shipment finance- export bill purchased/negoticated/collection basis/

consignment basis/ undrawn balance/ duty drawbacks

- method of packing credt- Firm Order- lC:

Broad guidlinsPresanction: cutomer, IEC, rbi list, ECGC list (not), capacityexpected turnover, duration of packing credit 180/360


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Post sanction: No PC for same LC from any bank- Stock statement, regulattion, Inform ECGC, advise liquidatedincase exports do not take place after PCL advance traetedadvance treated as local, locat penalinterst rate charges

- Special CasesPacking credit advance exteded EOH and manufacture of goodsBanks autorhised to grant pre-shipment advance running acoutfacility

* Post- Shipment financeadvance against recivable in form of export doccuments-involves handling of export douccment and send to foriengbank/buyer

different types of post-shipment finance- Export bills - purchased/discounted- negotiated- collective bases- consignment basis- Undrawn balance- advance against claims of dutydrawback

bill collection - sending doccuemnts to buyer bankbill disocounting - get amt while submitting doccuments

Duty drawback: inhouse concession is given if cost ofprodcut> greater the international market price

* FactoringServices:Debt administration - managing sales ledger fo clietncredit protection : factors assess credit risk and advisefacotor financing : advacne about 75-80% outstandin debts

Facotroring mechanism : exporter- export factor - import factro

importerif non-payment of dues import facotr makes the payment

* systems in which factoring can be done:sigle/two factor/ dicre export/ direc import

* features of factoringdiscouting, fixed rate, debt in form of bill of exce, promissorynote, without recourse to seller

* Exchange trade guidelines for importers:- export-import code number

* Advance remmittance for import of goodspermitted to allow advance remmitance without any ceilingfor import of goods- amt upt usd 200000- exceeds usd 200000 a gurantee/irrovacable LC internatl reput bank- eceeds usd 100000 a gurantee/ standby Lc international/domestic- gurantee not insisste if BOD approves (2-3 lakh$)- above > 500000 sent to rbi- docc evidence indicating cost of goods and advance pay


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- Section: FERA 165/95-RB exemption on gifting of f exc held inindia/abrad

* Risk Management:risks in banking business:the banking book includes all advances,dep, borrwrisk - liquidity, interest, default, credit, operational risk

Trading book: profit or loss is the diffrerenc betweenthe market price and book valuerisk - market risk, market liquidity risk, default/ creditrisk, operational risk

-Market risk:equity risk: change in stokc priceinterest rate risk: currency risk, commodity rissk

-interest rate riskreasons:

*types of bonds- government bonds: issued by national govt denominated incountry's own currency; 5-30 years; (sovereing bonds);safe = (collect tax, create additional currency)

- Zero coupon bond: not provide coupon till maturity

- floating r bond: variable coupon + spread

- convertible bond : can be converted into shart

- callable: issuer has the rightnot obligation to buy back bond

- when the coupon rate is same as interest rate bonds sellsat face value

* when bond purchased at discount YTM > coupon rate

* risk in bond investment- interest rate risk- default risk - differenc in the yield of a govt bondand corporate bond) - defualt premioum/ risk premium

* If bonds' YTM increases the ROR during the period will beless than the yield and if the yield decreases, the ROR willbe greater than the yield

*sampling methods:the graph of normal distribution depends upon 2 facotors

- kurtosis:measure of deviation of distribution

High kurtosis - less data concen toward mean-low kurtosis - more data conenctrate towar mean

three major diist typesleptokurtic: kurtos > normal diplatykuric : kurtosis < norma diskmesokurtic: zero excess kurtosis


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*sampling methods-judgmental sampling:non-probablity method, based on exprience

- biased sampling: sample do not truly represent population

-radno: simple, systmatic, strait, culustersimple: with replacement: items saples placed picked again populationwithou replace: not placed bankc can't be picked

- systematicc: every nth element is selected from sample

- central imite theorem based on with replacement

- pdf curves of stock returns negatively skewed

- when sampling the sample mean gives expected mean of pouplulation

- correlation between 2 evetns not assure one event cause ofanother

- scattehr diagram usually shows one of the six possiblecorrelation between the variables

- scatter diagrambest fit line has min residual error,coeficitn of correlation dentoted by r

* variation in time series:Secular trend:cyclic fluctation:seasonal variation:Irregular variation:

secular trend: expect to sustain over long termeg- steady increase in cost of living - effective increase

Irregular variati: tsunami, earth quakee

coding: susbstracting mean value from each period in seriescal varry depedning uopon observation even/odd

- seasonal variatio: repetive trend in one year or lesseffect of periodic variation in time-series

- sesonalit used to study regular priod effe (within year)cyclity for longer irregular moves

* Credit management

nationazliaion: 1969 - priority sector

- aspects inclued in loan policyexposure limits, individual, sector, discretionary powers,

- credit appraisal-delivery- creating charge over security, method of delivery,and the procedure for disbursal of term loan

- credit monitoring: optimum utilization of banks funds


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reduce default

-rehablilit & recoverygenuie/wilful, genuine - rehablitation, wilful - recover process

- refinance: nabard, sidbi, rbi

* role of rbi in credit management

11-05-16*analysis of financial statementsincase of banking companies bala shee & pf format - br actschedule 6th of companies act

* sample questions 2015 by murgan60% of samll entereprise advance to micro entrprise for foreignbanks

- equilibrium price- market clearing price

- returns on bond which are at premium > current yield

- as standered error decreases, value of sample mean closerto value of population mean

- decreasing standare erro increasing prec sample meancan be used to estimate the population mean

- the conduct of LC business is governed by UCPDC 600

- regulated interest rates of rbi, applicable to creditlimit 2 lakh

- priorty sector target for foregin banks - 32%

- if Market price < face valuef , ytm > CR

- job enrichment means higher responsibility

- rbi purchases govt bond - money injected into economy

- when rbi sells govt bons money is sucked from market

* Computation of GDP- Expenditure methodGDP = conusmption + gross invest + govt spending + (Ex-IM)consumption: peronsal expediture food,householdgross invest: construction, purcha machin, equipnot investment in financial prodcuts

- Income methodassuem to equal aggregate of incomes generated throughgoods manufacuturing and service renderment

GDP = compensation of empl(wages + property income (rent fromgoods/service generation activiites) + product tax and depon capital

compensation of employees: rep wages, salr and other supplproperty income: corporate profit, propteri income and


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interest and rentsmarket price is the economic price goods/servi offered

cal can yeild 2 diff no:- GDP at market price: value of o/p at market prices- gdp at factor cost: measures o/p in terms of factors ofproduction

- Prodcut-Wise method:Nominal gDpreal gdp - does not take inflation/deflation - real growth

* bfM

Crystallization of contigent liabilities called call risk

- in bal sheet of bank = liabilite: sources of fundasets application of funds

* components of bank's liabilitescapital: sharholders/owner's stake in captialreserves: statutory requirement

depostts: cheap source, current, saving, term, recurringborrowing: rbi, IDBI, NABARD, eximprovision: bills payable, sal payable, tax payable,interest accru

- bank's asset

cash and bal with rbi:cash in hand, balances with rbi, bal with banks, moneyat call and short notice

- investments: gov sec, apprvoe sec, shardes, debent

-Advances: cash credit, term loans, bills purchase anddiscounted

- profit loss acc of bank: Incomefee based: advisory servies;interest based income:trading income; other income

Expenses:- intest expen: interst income > interst expens

NII, when expressed as %age of assets called net int margin

- asset default when not paid inteste in last 180 days

- factors negatively effecting liquiditydecline earning, decrease in quality of assets,uncertainity in cash flows, downgrading by rating agencies

- liquidity riskfunding risk: uanticipated - liability in foreign currenciestiming mismatch:


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- measuerment of liqudity risk ma- stock approah:

- liquidity risk mitigation:

* interest rate risk management:earning losses: less NIM, NIM + but opeartional expenses high

economic losses:

* soucres of intersat rate risk:

- conession ROI post-ship financ valid: 90 days

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