Foreign Exchange Management

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Information about Foreign Exchange Management

Published on November 26, 2008

Author: senthil.G

Source: slideshare.net

Foreign exchange management 06/06/09 Foreign exchange - Kevin

Background Volume of international trade (exports and imports) increased manifold Emergence of MNCs International lending and borrowing (IMF, World Bank, ADB) Transnational services Outsourcing of financial services Software development, ITES, BPO There is large scale flow of funds across nations Flow of funds in different currencies 06/06/09 Foreign exchange - Kevin

Volume of international trade (exports and imports) increased manifold

Emergence of MNCs

International lending and borrowing (IMF, World Bank, ADB)

Transnational services

Outsourcing of financial services

Software development, ITES, BPO

There is large scale flow of funds across nations

Flow of funds in different currencies

Study areas Understanding of foreign exchange is integral part of modern commerce/management Exchange rate mechanism Foreign exchange market Foreign exchange risk and its management 06/06/09 Foreign exchange - Kevin

Understanding of foreign exchange is integral part of modern commerce/management

Exchange rate mechanism

Foreign exchange market

Foreign exchange risk and its management

Foreign exchange Each country has its own currency Home currency and other currencies Any currency other than home currency is foreign exchange 06/06/09 Foreign exchange - Kevin

Each country has its own currency

Home currency and other currencies

Any currency other than home currency is foreign exchange

Exchange rate mechanism Exchange rate: ratio of exchange between two currencies Exchange rate quotations Direct quote: home currency price of a foreign currency Example: Rs.46/USD; Rs.58/Euro Indirect quote: value of one unit of home currency in terms of a foreign currency Example: Re= USD 0.0217; Re= Euro 0.0172 06/06/09 Foreign exchange - Kevin

Exchange rate: ratio of exchange between two currencies

Exchange rate quotations

Direct quote: home currency price of a foreign currency

Example: Rs.46/USD; Rs.58/Euro

Indirect quote: value of one unit of home currency in terms of a foreign currency

Example: Re= USD 0.0217; Re= Euro 0.0172

Currency appreciation/depreciation Increase in foreign currency price From Rs.46 to Rs.48/ USD Foreign currency appreciation Home currency depreciation From USD 0.0217 to USD 0.0208/ Re 06/06/09 Foreign exchange - Kevin

Increase in foreign currency price

From Rs.46 to Rs.48/ USD

Foreign currency appreciation

Home currency depreciation

From USD 0.0217 to USD 0.0208/ Re

Buying and selling rates Buying rate – Bid rate Selling rate – Offer rate /Ask rate Examples: Rs.46.15 – 46.45/ USD; Rs. 58.00 – 58.40/ Euro Bid-offer spread: profit of the dealer Size of spread: depends on quantity traded, demand for currency, type of customer 06/06/09 Foreign exchange - Kevin

Buying rate – Bid rate

Selling rate – Offer rate /Ask rate

Examples: Rs.46.15 – 46.45/ USD; Rs. 58.00 – 58.40/ Euro

Bid-offer spread: profit of the dealer

Size of spread: depends on quantity traded, demand for currency, type of customer

Spot and forward rates Spot rate: rate for cash transactions (Buying and selling) Forward rate: rate for delivery on a future date (Buying and selling) Examples: Spot: Rs.46.15 – 46.45 / USD 1 month: Rs.46.27 – 46.56 / USD 2 months: Rs.46.28 – 46.60 / USD 3 months: Rs.46.30 – 46.64 / USD 06/06/09 Foreign exchange - Kevin

Spot rate: rate for cash transactions (Buying and selling)

Forward rate: rate for delivery on a future date (Buying and selling)

Examples:

Spot: Rs.46.15 – 46.45 / USD

1 month: Rs.46.27 – 46.56 / USD

2 months: Rs.46.28 – 46.60 / USD

3 months: Rs.46.30 – 46.64 / USD

Forward rate differential difference between spot and forward rates Forward premium: forward > spot Forward discount: forward < spot 06/06/09 Foreign exchange - Kevin

difference between spot and forward rates

Forward premium: forward > spot

Forward discount: forward < spot

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