Unit-1PAYMENT INSTRUMENTSPayment instruments are an essential part of payment systems. Payment cards, credit transfers, di...
StandbyLetters ofCreditPowerful instrument withsimple languageIncreasingly popular in U.S. andabroadForeign bank risk can ...
2. Letters of CreditAn Exporter if dealing with an unknown customer at the other end may not have any prior exposure tothe...
7. Counter Trade / Counter Purchase / Barter TradeIn yet another case of business arrangement called counter trade, export...
Unit-2Concept of Foreign Exchange RateWe have an expert understanding of domestic trading. When you are in Germany and you...
Under the direct quotation, the variation of the exchange rates are inversely related to the changes inthe value of the do...
SPREAD RATEConstant difference between the average rate and the buying rate, or between the average rate and thebank selli...
requirements, unlike futures, which have fixed contract sizes and expiry dates and thereforecannot be customized.In the co...
that the interest rate for one month is 8% in the UK and 5% in the United States and the spot rate andforward rate were th...
Unit-3CURRENCY FUTUREA currency future, also FX future or foreign exchange future, is a futures contract to exchange onecu...
expensive than alternative derivatives (and thus rarely used) as a method to fix shorter termforward exchange rates. Howev...
2nd Example of Currency SwapSuppose one USA company wants to start his factory in India. For this it gets $10 billion doll...
While quoting rates for customers, the rate is called Merchant Rate and normally quoted either as a saleor purchase transa...
Unit-4Foreign currency exposure is the extent to which the future cash flows of an enterprise, arising fromdomestic and fo...
the actual cash flow in the domestic currency and the cash flow as calculated at the time the transactionwas initiated, i....
TECHNIQUES OF EXPOSER MANAGEMENTThe following are the methods/techniques of hedging a currency transaction exposure.Intern...
Currency with a good forward marketA seller may also have a healthy interest in a foreign currency in which there is defin...
Similarly, suppose that a company expects to receive ∈ 700,000 in three month’s time, when it alsoexpects to incur payment...
with a forward contract, the company also closes any opportunity to benefit from afavorable change inthe spot rate.(a) Hed...
To work out how to use the money markets to hedge, you need to go back to the basic question of whatis the exposure, and w...
The cash flows are fixed because the cost in domestic currency is the cost of buying foreign currencyspot to put on deposi...
A currency swap is a foreign-exchange agreement between two institute to exchange aspects (namelythe principal and/or inte...
Unit-6INTERNATIONAL LIQUIDITYThe concept of international liquidity is associated with international payments. These payme...
countries and from international organisations. Thus, it is not easy to determine the adequacy ofinternational liquidity w...
The overnight interest rate swap segment also saw a sharp downfall in the second quarter of 2004although it had experience...
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Foreign exchange management notes

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  1. 1. Unit-1PAYMENT INSTRUMENTSPayment instruments are an essential part of payment systems. Payment cards, credit transfers, directdebits and cheques are non-cash payment instruments with which end-users of payment systemstransfer funds between accounts at banks or other financial institutions.The safety and efficiency of payment instruments are important for both maintaining confidence in thecurrency and keeping the economy running smoothly. The risks in the provision and use of paymentinstruments have not generally been considered to be of systemic concern.International Payment InstrumentsPaymentMethodFeatures Advantages DisadvantagesWire Transfer Fully electronic means ofpaymentUses correspondent bankaccounts and Fed WireU.S. Dollars and foreigncurrenciesSame convenience and securityas domestic wiresPin numbers for each authorizedindividualRepetitive codes for frequenttransfers to same BeneficiariesFastest way for Beneficiaryto receive good fundsEasy to trace movement offunds from bank to bankCost is usually more thanother means of paymentFunds can be hard to recoverif payment goes astrayIntermediary banks deductcharges from the proceedsDetails needed to applyfunds received for creditmanagement purposes areoften lacking/insufficientImpossible to stop paymentafter executionForeign Checks Paper instrument that must besent to Beneficiary and ispayable in Beneficiarys countryUses account relationships withforeign correspondent banksAvailable in U.S. Dollars and allmajor foreign currenciesConvenient whenBeneficiarys bank detailsare not knownUseful when information/documentation mustaccompany payment(subscriptions,registrations, reservations,etc.)Relatively easy to stoppayment if necessaryMail or courier delivery canbe slowGood funds must still becollected from the draweebankIf payable in foreigncurrency, value may changeduring the collection periodStale dating rules differ invarious countriesCommercialLetters ofCreditBanks credit replaces BuyerscreditPayment made againstcompliant documentsForeign bank risk can beeliminated via confirmation of abank in Beneficiarys countryAcceptance credits offer built-infinancing opportunityRights and risks of Buyerand Seller are balancedSeller is assured ofpayment when conditionsare metBuyer is reasonablyassured of receiving thegoods orderedConfirmation eliminatescountry risk andcommercial riskMore costly than otherpayment alternativesIssuance and ammendmentscan take timeStrict documentarycompliance by Seller isrequiredReduces applicants creditfacilities
  2. 2. StandbyLetters ofCreditPowerful instrument withsimple languageIncreasingly popular in U.S. andabroadForeign bank risk can beeliminated via confirmation of abank in Beneficiarys country"Evergreen" clauses shift expiryrisk from Beneficiary to issuerMay be cheaper thanCommercial Letter ofCreditMore secure than openaccount or DocumentaryCollectionDiscrepancies less likelythan under CommercialL/CConfirmation eliminatescountry risk andcommercial riskWeak language can giveBeneficiary unintendedadvantagesMore costly thanDocumentary CollectionsReduces Buyers creditfacilitiesDocumentaryCollectionsSeller uses banks as agents topresent shipping documents toBuyer against Buyers paymentor promise to payWith Direct Collection Letter(DCL), Seller ships and sendsshipping documents directly toBuyers bank, which collects andremits funds to Sellers bankSomewhat more securethan open accountCheaper and less rigid thanCommercial L/CNo strict compliance rulesapplyNo credit facilities requiredCountry risk and commercialrisk existNo guaranty of payment byany bankNo protection against ordercancellationNo built-in financingopportunity as withCommercial L/CPAYMENT MECHANISMSetting up International Trade Mechanisms involves inter disciplinary processes including Finance,Logistics, Taxation and Supply Chain disciplines. Every Business Manager would need to know thenuances of the trade even though he may or may not be involved in the micro management of theprocesses.Any Import or Export entails commercial transaction and payment. When an import is made into the US,the foreign supplier would have to be paid in the currency in which he has raised the invoice. Normallyinternational transactions are made using USD as the currency. However in many cases of transactionswith Europe, the Euro Dollar is used as the currency too.When an Export originates out of US to another country, the Exporter would have to receive paymentfrom the End Customer.In Exports we have several types of trade or export transactions and the nature of the businessdetermines the payment terms.1. Advance PaymentWhen a new customer approaches and places an order on the Exporter, normally might insist onadvance payment for executing the order. This method normally continues for a few times until mutualtrust is built between the two parties and they get to know each other.
  3. 3. 2. Letters of CreditAn Exporter if dealing with an unknown customer at the other end may not have any prior exposure tothe credit worthiness of the Customer and would normally insist on Confirmed Letter of Credit to beopened by the Customer before shipping the goods. In such cases the Exporter may not be extendingany credit. Also in case of high value transactions with known customers too; exporters prefer to getpaid through Letter of Credit.While dealing with a customer, the Exporter can check seek a credit worthiness rating from thecustomer’s bank to be able to ascertain the authenticity and credibility of the Customer. Normally LargeMulti Nationals demand such credit worthiness reports as a part of their policy.3. Bill of Exchange of Documentary DraftsWhen there has been sufficient relation between an Exporter and the Customer (Importer) and thecustomer’s credit worthiness is known through previous records, the Exporter might decide to extendcredit and accept payment on bill of exchange basis. This system is also called as Documentary Drafts.Documentary drafts are of two types namely Sight Drafts and Date and Time Drafts.4. Open or Ongoing AccountWhen there is a huge volume of continuous business transactions between the Exporter and Importerand exports continue to happen on ongoing basis, the Exporter can simply export on the basis of apurchase order and expect the Importer to pay promptly on due date. This is the usual method adoptedby most of the Multi National Companies as well as the large organizations that have sufficient importvolumes spread across various countries and are dealing with multiple vendors on ongoing basis. In suchcases they just determine the annual volumes to be supplied by each vendor, issue an open purchaseorder and keep reviewing only the delivery schedule. They offer standard payment commitment on aparticular date to all vendors as a global policy. The payment process will be set and determined as apart of their business agreement.5. Other Types of Trade and Related Payment MechanismsBesides the above types of payment mechanisms based on normal Exports and Imports, there are othertypes of business models which work on various other modes of payment terms too.6. Consignment SaleAn exporter might sign up a contractor with a distributor overseas to import, hold stock and sell thegoods on his behalf. In such a situation, the distributor may not own the stocks and the ownership mightcontinue to lie with the exporter. The distributor would only be an intermediary to sell the stocks andrepatriate the money realized back to the exporter and get remunerated in terms of service charges orcommission. In such cases there may be a business agreement in place but no fixed payment mechanismmay be adopted.
  4. 4. 7. Counter Trade / Counter Purchase / Barter TradeIn yet another case of business arrangement called counter trade, exports may be linked with returnpurchase of some other items from the importer or from another source in the country. The paymentmay also involve services other than products. This kind of trade becomes a necessity while dealing withcountries that do not have sufficient foreign currency. There is also another system of internationalbarter which is not very commonly practiced in the commercial world.EXCHANGE RATE MECHANISMSystem established in March 1979 for controlling exchange rates within the European Monetary Systemof the European Union (EU) that was intended to prepare the way for a single currency. The membercurrencies of the ERM were fixed against each other within a narrow band of fluctuation based on acentral European Currency Unit (ECU) rate, but floating against non-member countries. If a currencydeviated significantly from the central ECU rate, the European Monetary Cooperation Fund and thecentral banks concerned stepped in to stabilize the currency.The ERM was revised from 1 January 1999, with the launch of the single European currency (euro), andGreece and Denmark became members of ERM II (a structure linking the currencies of some non-participating member states to the euro). Greece then became a full member of the eurozone on 1January 2001. The United Kingdom (which had withdrawn from the mechanism in turbulentcircumstances in October 1992) and Sweden were, in 2001, not members of the ERM.
  5. 5. Unit-2Concept of Foreign Exchange RateWe have an expert understanding of domestic trading. When you are in Germany and you buy rice froma shop, you will naturally pay in Euros, and of course, the shop will be willing to accept Euros. This tradecan be conducted in Euros. Trading of goods within a country is relatively simple.However, things get complicated if you want to buy a US-made computer. You might have paid in Eurosat the shop. However, through transactions in banks and financial institutions, the final payment will bemade in US dollars and not Euros. Similarly, when Americans want to buy German products, they willhave to eventually pay in Euros.From this example of international trading, we introduce the concept of foreign exchange rate. Foreignexchange rate is the value at which a country’s currency unit is exchanged for another country’scurrency unit. For example, the current foreign exchange rate for Euros is: 100 EUR = USD 130.2. World Currency SymbolsUSD : US DollarHKD : Hong Kong DollarEUR : European Union EuroJPY : Japanese YenGBP : British PoundCHF : Swiss FrancCAD : Canadian DollarSGD : Singapore DollarAUD : Australian DollarRMB : Chinese Renminbi3. Methods of Quoting Foreign Exchange RatesCurrently, domestic banks will determine their exchange rates based on international financial markets.There are two common ways to quote exchange rates, direct and indirect quotation.Direct quotation: This is also known as price quotation. The exchange rate of the domestic currency isexpressed as equivalent to a certain number of units of a foreign currency. It is usually expressed as theamount of domestic currency that can be exchanged for 1 unit or 100 units of a foreign currency. Themore valuable the domestic currency, the smaller the amount of domestic currency needed to exchangefor a foreign currency unit and this gives a lower exchange rate. When the domestic currency becomesless valuable, a greater amount is needed to exchange for a foreign currency unit and the exchange ratebecomes higher.
  6. 6. Under the direct quotation, the variation of the exchange rates are inversely related to the changes inthe value of the domestic currency. When the value of the domestic currency rises, the exchange ratesfall; and when the value of the domestic currency falls, the exchange rates rise. Most countries usesdirect quotation. Most of the exchange rates in the market such as USD/JPY, USD/HKD and USD/RMDare also quoted using direct quotation.Indirect quotation: This is also known as the quantity quotation. The exchange rate of a foreign currencyis expressed as equivalent to a certain number of units of the domestic currency. This is usuallyexpressed as the amount of foreign currency needed to exchange for 1 unit or 100 units of domesticcurrency. The more valuable the domestic currency, the greater the amount of foreign currency it canexchange for and the lower the exchange rate. When the domestic currency becomes less valuable, itcan exchange for a smaller amount of foreign currency and the exchange rate drops.Under indirect quotation, the rise and fall of exchange rates are directly related to the changes in valueof the domestic currency. When the value of the domestic currency rises, the exchange rates also rise;and when the value of the domestic currency falls, the exchange rates fall as well.Most Commonwealth countries such as the United Kingdom, Australia and New Zealand use indirectquotation. Exchange rates such as GBP/USD and AUD/USD are quoted indirectly.Direct Quotation Indirect QuotationUSD/JPY = 134.56/61 EUR/USD = 0.8750/55USD/HKD = 7.7940/50 GBP/USD = 1.4143/50USD/CHF = 1.1580/90 AUD/USD = 0.5102/09There are two implications for the above quotations:(1) Currency A/Currency B means the units of Currency B needed to exchange for 1 unit of Currency A.(2) Value A/Value B refers to the quoted buy price and sell price. Since the difference between the buyprice and sell price is not large, only the last 2 digits of the sell price are shown. The two digits in frontare the same as the buy price.4. Defintion of “pip” in foreign exchange rates quotationBased on the market practice, foreign exchange rates quotation normally consists of 5 significantfigures. Starting from right to left, the first digit, is known as the “pip”. This is the smallest unit ofmovement in the exchange rate. The second digit is known as “10 pips”, so on and so forth.For example: 1 EUR = 1.1011 USD; 1 USD = JPY 120.55 If EUR/USD changes from 1.1010 to 1.1015, wesay that the EUR/USD has risen by 5 pips.If USD/JPY changes from 120.50 to 120.00, we say thatUSD/JPY has dropped by 50 pips.
  7. 7. SPREAD RATEConstant difference between the average rate and the buying rate, or between the average rate and thebank selling rate.For exchange rate types, you can define fixed exchange rate spreads between average rate and buyingrate, as well as between average rate and bank selling rate.You then only have to enter exchange rates for the average rate. The system then calculates theexchange rates for the buying rate and bank selling rate by adding and subtracting the exchange ratespread for the average rate.OFFICIAL RATEOfficial exchange rate refers to the exchange rate determined by national authorities or to the ratedetermined in the legally sanctioned exchange market. It is calculated as an annual average based onmonthly averages (local currency units relative to the U.S. dollar).CROSS RATEThe currency exchange rate between two currencies, both of which are not the official currencies of thecountry in which the exchange rate quote is given in. This phrase is also sometimes used to refer tocurrency quotes which do not involve the U.S. dollar, regardless of which country the quote is providedin.For example, if an exchange rate between the Euro and the Japanese Yen was quoted in an Americannewspaper, this would be considered a cross rate in this context, because neither the euro or the yen isthe standard currency of the U.S. However, if the exchange rate between the euro and the U.S. dollarwere quoted in that same newspaper, it would not be considered a cross rate because the quoteinvolves the U.S. official currency.FORWARD RATEA rate applicable to a financial transaction that will take place in the future. Forward rates are based onthe spot rate, adjusted for the cost of carry and refer to the rate that will be used to deliver a currency,bond or commodity at some future time. It may also refer to the rate fixed for a future financialobligation, such as the interest rate on a loan payment.In forex, the forward rate specified in an agreement is a contractual obligation that must behonored by the parties involved. For example, consider an American exporter with a large exportorder pending for Europe, and undertakes to sell 10 million euros in exchange for dollars at a rateof 1.35 euros per U.S. dollar in six months time. The exporter is obligated to deliver 10 millioneuros at the specified rate on the specified date, regardless of the status of the export order or theexchange rate prevailing in the spot market at that time. Forward rates are widely used forhedging purposes in the currency markets, since currency forwards can be tailored for specific
  8. 8. requirements, unlike futures, which have fixed contract sizes and expiry dates and thereforecannot be customized.In the context of bonds, forward rates are calculated to determine future values. For example, aninvestor can purchase a one-year Treasury bill or buy a six-month bill and roll it into another six-month bill once it matures. The investor will be indifferent if they both produce the same result.The investor will know the spot rate for the six-month bill and the one-year bond, but he or shewill not know the value of a six-month bill that is purchased six months from now. Given thesetwo rates though, the forward rate on a six-month bill will be the rate that equalizes the dollarreturn between the two types of investments mentioned earlier.Forward rate calculationTo extract the forward rate, one needs the zero-couponyield curve. The general formula used tocalculate the forward rate is:is the forward rate between term and term ,is the time length between time 0 and term (in years),is the time length between time 0 and term (in years),is the zero-coupon yield for the time period ,is the zero-coupon yield for the time period ,QUOTING FOREX FORWARD RATEA forex forward rate reflects in pips the interest differential between the currencies of the currencypair for the period the forward is being quoted for.Introduction:Future risks are hedged using the forward foreign exchange markets. There is in reality only one motivefor an institution to use forex forwards and that is to hedge a foreign currency exposure. Hence theforward markets have become an essential constituent of risk management to all categories of users ofthe currency markets who are the market makers or banks, the large corporations who are the hedgersand the speculators.Quoting Forex Forward Rates:Theoretically there is not any reason why the spot rate and the forward rate should not be the same.However, in reality they seldom are since interest rates vary between different countries. If we assume
  9. 9. that the interest rate for one month is 8% in the UK and 5% in the United States and the spot rate andforward rate were the same at 1.5600.Seeing this investors would want to invest in the pound sterling which has higher interest rates than thedollar interest rate. There would follow a series of events that would restore the imbalance betweeninterest rates and spot and forward rates.· Investors purchasing spot sterling to take advantage of the higher interest rates would putpressure on the sterling exchange rate in spot to appreciate.· At the same time as more investors put their money into 1 month Sterling deposits therewould be pressure for the 1 month rate to decrease.· Likewise investors fleeing the dollar would pressure the 1 month Eurodollar rate to rise.· The act of many investors entering into sterling1 month forward contracts would pressure thesterling 1month forward exchange rate to depreciate.So to avoid the above in balance in the markets and to take away the opportunity for arbitrage betweencurrencies forex forward rate are calculated by taking the spot rate and either adding a premium in pipswhich reflects the interest rate differential between the two currencies (the interest rate is lower) orsubtracting a discount (the interest rate is higher) which also reflects the interest rate differentialbetween the two currencies.Forex forward rates are always quoted in pips. These pips are either added or subtracted from the spotrate. As an example let us take a one year forward forex quote for GBP/USD as say 260/250 and thecurrent spot rate is 1.5150-55. We already recognize that the forward rate should be at a discountforward since the sterling interest rate for the same period is higher than the dollar interest rate for oneyear. Therefore we will subtract the pips from the spot rate.Spot GBP/USD is 1.5150 – 1.51551 year forward 260 – 250Therefore the 1 year GBP/USD forward outright is 1.4890 - 1.4905 because we subtracted the forwardpips from the spot rate. We should always subtract the pips if the bid (left) side pips are higher than theoffer (right) side pips and conversely add the pips if the bid (left) side pips are lower than the offer(right) side pips.
  10. 10. Unit-3CURRENCY FUTUREA currency future, also FX future or foreign exchange future, is a futures contract to exchange onecurrency for another at a specified date in the future at a price (exchange rate) that is fixed on thepurchase date; see Foreign exchange derivative. Typically, one of the currencies is the US dollar. Theprice of a future is then in terms of US dollars per unit of other currency. This can be different from thestandard way of quoting in the spot foreign exchange markets. The trade unit of each contract is then acertain amount of other currency, for instance €125,000. Most contracts have physical delivery, so forthose held at the end of the last trading day, actual payments are made in each currency. However,most contracts are closed out before that. Investors can close out the contract at any time prior to thecontracts delivery date.CURRENCY OPTIONA Currency option (also FX, or FOREX option) is a financial product called a derivative where the value isbased off an underlying instrument, which in this case is a foreign currency. FX options are call or putoptions that give the buyer the right (not the obligation) to buy (call) or sell (put) a currency pair at theagreed strike price on the stated expiration date.FOREX option trading was initially conducted only by large institutions where fund managers, portfoliomanagers and corporate treasurers would offload risk by hedging their currency exposure in the FXoption market. However, currency options are now very popular amount retail investors as electronictrading and market access is now so widely available.CURRENCY SWAPA currency swap is a foreign-exchange agreement between two institute to exchange aspects (namelythe principal and/or interest payments) of a loan in one currency for equivalent aspects of an equal innet present value loan in another currency; see foreign exchange derivative. Currency swaps aremotivated by comparative advantage. A currency swap should be distinguished from a central bankliquidity swap.StructureCurrency swaps are over-the-counter derivatives, and are closely related to interest rate swaps.However, unlike interest rate swaps, currency swaps can involve the exchange of the principal.There are three different ways in which currency swaps can exchange loans:1. The simplest currency swap structure is to exchange only the principal with the counterparty ata specified point in the future at a rate agreed now. Such an agreement performs a functionequivalent to a forward contract or futures. The cost of finding a counterparty (either directly orthrough an intermediary), and drawing up an agreement with them, makes swaps more
  11. 11. expensive than alternative derivatives (and thus rarely used) as a method to fix shorter termforward exchange rates. However for the longer term future, commonly up to 10 years, wherespreads are wider for alternative derivatives, principal-only currency swaps are often used as acost-effective way to fix forward rates. This type of currency swap is also known as an FX-swap.2. Another currency swap structure is to combine the exchange of loan principal, as above, with aninterest rate swap. In such a swap, interest cash flows are not netted before they are paid to thecounterparty (as they would be in a vanilla interest rate swap) because they are denominated indifferent currencies. As each party effectively borrows on the others behalf, this type of swap isalso known as a back-to-back loan.3. Last here, but certainly not least important, is to swap only interest payment cash flows on loansof the same size and term. Again, as this is a currency swap, the exchanged cash flows are indifferent denominations and so are not netted. An example of such a swap is the exchange offixed-rate US dollar interest payments for floating-rate interest payments in Euro. This type ofswap is also known as a cross-currency interest rate swap, or cross currency swap.Currency swaps have two main uses:To secure cheaper debt (by borrowing at the best available rate regardless of currency and thenswapping for debt in desired currency using a back-to-back-loan).To hedge against (reduce exposure to) exchange rate fluctuations.Hedging exampleFor instance, a US-based company needing to borrow Swiss francs, and a Swiss-based company needingto borrow a similar present value in US dollars, could both reduce their exposure to exchange ratefluctuations by arranging any one of the following:If the companies have already borrowed in the currencies each needs the principal in, then exposure isreduced by swapping cash flows only, so that each companys finance cost is in that companys domesticcurrency.Alternatively, the companies could borrow in their own domestic currencies (and may well each havecomparative advantage when doing so), and then get the principal in the currency they desire with aprincipal-only swap.1st Example of Currency SwapCompany A is doing business in USA and it has issued bond of $ 20 Million to bondholders that has beennominated in US $. Other company B is doing business in Europe. It has issued bond of $ 10 MillionEuros. Now, both companys directors sit in one room and agreed for exchanging the principle andinterest of both bonds. Company A will get $ 10 million Euros Bonds with its interest payment andCompany B will get $ 20 million bond for exchanging his principle and interest. This is the simpleexample of currency swap.
  12. 12. 2nd Example of Currency SwapSuppose one USA company wants to start his factory in India. For this it gets $10 billion dollar in theform of loan from USA market and Exchanges this amount from India company B. Now company A hasIndian currency for doing business in India and company B which is Indian company has USA currencyand it can getForex earning. It means that both are benefited with single deal of currency swap.3rd Example of Currency SwapCurrency Swap is very useful for multinational companies who have many branches in differentcountries. Suppose, A companys head office in UK and it is doing business in USA. A company has1,00,000 pounds in bank which it got from public loan for doing business. But UKs one branch in USAwhich needs 50,000 USA dollars for 2 months because we can do business in USA with dollars not withpounds. Now, with the help of currency swap, UK company can use his 100000 pounds for covering theneed of 50,000 $ of USA branch. Currency swap allows you to get any foreign currency with theexchange of own currency on the basis of exchange rate on any future date without taking foreignexchange risk. Again same currency buy back by currency buy back swap. Company of UK did same andwith the help of Financial Intermediary, it get 50,000$ for its USA branch for 2 months.FOREIGN EXCHANGE ARITHMATICA foreign exchange transaction has two aspects – Purchase (Buy) and Sell.The Foreign exchange transaction is always talked from the Bank’s point of view and the item referredto is the foreign currency.Hence when we say “Purchase”, it means that the bank has purchased and it has purchased foreigncurrency & when we say “Sale”, the bank has sold and sold the foreign currency.In purchase transaction, the Bank acquires the foreign currency and parts with home currency.In a sale transaction the Bank parts with the foreign currency and acquires home currency.The Exchange rate is quoted as “Direct Quotation” and / or “Indirect Quotation”.In a “ Direct Quotation “, the foreign currency is fixed and the home currency is variable.For example, USD – Rs. 46.In a “ Indirect Quotation “, the home currency is fixed and the foreign currency is variable.For example, Rs. 100 = USD 2.20.Except in London Market, the direct quotations are only used.In India all quotes are on “Direct Method.”.There are three markets, where foreign exchange rates are quoted.
  13. 13. While quoting rates for customers, the rate is called Merchant Rate and normally quoted either as a saleor purchase transaction.A customer wants a demand draft for USD 100. It implies that the customer wants to purchase USD 100from the Bank and will sell him foreign currency by acquiring rupees.The rate quoted will be a “ Sale Rate” say USD 1 = 45.00. It means that Bank will take Rs.45 from thecustomer for each dollar sold to him.The exchange rate is always quoted in four decimals in multiples of 0.0025. The rates quoted will be USD1 – 45.2525. The last two digits will be rounded off to quarter. All currencies are quoted in the units of “One”, meaning thereby USD 1 = Rs. 45.2525, GBP 1 = Rs. 80.55.Following currencies are however, quoted in the units of “100”. Japanese Yen, Belgian Franc, Italian Lira,Indonesian Rupiah, Kenyan Shilling, Spanish Peseta and currencies of Asian Clearing Union countries (Bangladesh Taka, Myanmar Kyat, Iranian Riyal, Pakistani Rupee and Sri Lankan Rupee).In India, rupee amount received or paid to the customer on account of exchange transaction should berounded off to the nearest rupee. ieupto 49 paise ignored and 50 to 99 paise rounded off to higher Rs.Transactions In Interbank MarketWhile the rates quoted to the customers by their Banks are called merchant rates, the rates quoted bythe Bank to another Bank is called interbank rate. Inter Bank Rates are always quoted two – way. Themarket maker bank, ie who is quoting a rate will express his intention either to buy or sell foreigncurrency.For example, a Bank in Mumbai quotes a rate as under : USD 1 = Rs. 48.1525 / 1650More often the rate would be quoted as USD 1 = 1525/1650 as the market players understand the bignumber ie 48. It indicates that the quoting Bank is willing to buy USD 1 from the other party by givingthe other Bank Rs. 48.1525 for each Dollar. (It is also called Bid rate or purchase rate).It also indicates that the quoting Bank is willing to sell USD 1 from the other party by taking Rs. 48.1650for each USD it will be selling.If the Bank buys dollars in the market at Rs. 48.1525 and sells each dollar at Rs. 48.1650, the differenceof Rs.0.0125 is spread or profit of the Bank.
  14. 14. Unit-4Foreign currency exposure is the extent to which the future cash flows of an enterprise, arising fromdomestic and foreign currency denominated transactions involving assets and liabilities, and generatingrevenues and expenses are susceptible to variations in foreign currency exchange rates. It involves theidentification of existing and/or potential currency relationships which arise from the activities of anenterprise, including hedging and other risk management activities.Types of ExposureTranslation ExposureTranslation exposure is also referred to as accounting exposure or balance sheet exposure. Therestatement of foreign currency financial statements in terms of a reporting currency is termedtranslation. The exposure arises from the periodic need to report consolidated worldwide operations ofa group in one reporting currency and to give some indication of the financial position of that group atthose times in that currency.Translation exposure is measured at the time of translating foreign financial statements for reportingpurposes and indicates or exposes the possibility that the foreign currency denominated financialstatement elements can change and give rise to further translation gains or losses, depending on themovement that takes place in the currencies concerned after the reporting date. Such translation gainsand losses may well reverse in future accounting periods but do not, in themselves, represent realizedcash flows unless, and until, the assets and liabilities are settled or liquidated in whole or in part. Thistype of exposure does not, therefore, require management action unless there are particular covenants,e.g., regarding gearing profiles in a loan agreement, that may be breached by the translated domesticcurrency position, or if management believes that translation gains or losses will materially affect thevalue of the business. International Accounting Standards set out best practice.Transaction ExposureThis is also referred to as conversion exposure or cash flow exposure. It concerns the actual cash flowsinvolved in setting transactions denominated in a foreign currency. These could include, for example:1. sales receipts2. payments for goods and services3. receipt and/or payment of dividends4. servicing loan arrangements as regards interest and capitalThe existence of an exposure alerts one to the fact that any change in currency rates, between the timethe transaction is initiated and the time it is settled, will most likely alter the originally perceivedfinancial result of the transaction. It is, for example, important to commence monitoring the exposurefrom the time a foreign currency commitment becomes a possibility, not merely when an order isinitiated or when delivery takes place. The financial or conversion gain or loss is the difference between
  15. 15. the actual cash flow in the domestic currency and the cash flow as calculated at the time the transactionwas initiated, i.e., the date when the transaction clearly transferred the risks and rewards of ownership.Where financing of a transaction takes place, such as a loan obligation, there are also gains/losses whichmay result.Economic ExposureEconomic exposure or operational exposure moves outside of the accounting context and has to do withthe strategic evaluation of foreign transactions and relationships. It concerns the implications of anychanges in future cash flows which may arise on particular transactions of an enterprise because ofchanges in exchange rates, or on its operating position within its chosen markets. Its determinationrequires an understanding of the structure of the markets in which an enterprise and its competitorsobtain capital, labour, materials, services and customers. Identification of this exposure focusesattention on that component of an enterprises value that is dependent on or vulnerable to futureexchange rate movements. This has bearing on a corporations commitment, competitiveness andviability in its involvement in both foreign and domestic markets. Thus, economic exposure refers to thepossibility that the value of the enterprise, defined as the net present value of future after tax cashflows, will change when exchange rates change.Economic exposure will almost certainly be many times more significant than either transaction ortranslation exposure for the long term well-being of the enterprise. By its very nature, it is subjectiveand variable, due in part to the need to estimate future cash flows in foreign currencies. The enterpriseneeds to plan its strategy, and to make operational decisions in the best way possible, to optimize itsposition in anticipation of changes in economic conditions.ALTERNATIVE DEFINITION OF FOREIGN EXCHANGE RISKForeign currency risk is the net potential gains or losses which can arise from exchange rate changes tothe foreign currency exposures of an enterprise. It is a subjective concept and concerns anticipated orforecasted rate fluctuations together with the assessment of the vulnerability of an enterprise to suchfluctuations. The element of uncertainty gives rise to the risk and creates an opportunity for profitableaction.Currency risk may be usefully classified as recurring or nonrecurring. Recurring risks may arise from thefinancial structure of the enterprise and are directly attributable to the exchange rate movementsarising from an enterprises currency composition. Or they may result from the enterprises specific lineof business and hence are related to an enterprises operating activities. Nonrecurring risks result fromone-off transactions and relate to transaction exposure.The solutions to currency risk differ depending on whether the risk is nonrecurring or ongoing. Short-term strategies are more appropriate for nonrecurring risks, whereas ongoing risks should be dealt withusing long-term strategies. An analysis of the frequency of the risk determines the appropriate methodof managing that risk.
  16. 16. TECHNIQUES OF EXPOSER MANAGEMENTThe following are the methods/techniques of hedging a currency transaction exposure.Internal TechniquesInvoicing in home currencyLeading and laggingMultilateral netting and matchingExternal TechniquesForward contractsMoney market hedgesCurrency futuresCurrency optionsCurrency swapsInternal Techniques(i) Invoicing in home currency: The currency of invoice decisionA company exporting goods or services has to decide whether to invoice in its own currency, the buyer’scurrency or another acceptable currency. For, example, a Tanzanian company exporting goods to Kenyacan decide to invoice its customers in Tshs. In doing so, it avoids an exposure to a risk of fall in the valueof the Kshs (which it would have if it invoiced in Kshs). The currency risk is shifted to the Kenyancustomers.Drawback to invoicing in domestic currency is that foreign customers might go to a different supplierwho is willing to invoice them in their domestic currency. As always with sales-related decisions,marketing and financing arguments must be balanced.So, although invoicing in the home currency has the advantage of eliminating exchange differences, thecompany is unlikely to compare well with a competitor who invoices in the buyer’s currency. It is alsonecessary to revise prices frequently in response to currency movements, to ensure that the pricesremain competitive.Invoicing in the buyer’s currency should promote sales and speed up payment and currency movementscan be hedged using forward cover. How ever, this is only available for the world’s major tradedcurrencies.A seller’s ideal currency, in order of preference, isHome currencyCurrency stable relative to home currencyMarket leader’s currency
  17. 17. Currency with a good forward marketA seller may also have a healthy interest in a foreign currency in which there is definitely, or likely, to befuture expenditure.A buyer’s ideal currency is: -Own currencyCurrency stable relative to own currencyCurrency other suppliers sell in (for convenience and the ease of justifying a purchase)(ii) Leading and lagging‘Leading’ and ‘Lagging’ are terms relating to the speed of settlement of debts.Leading refers to an immediate payment or the granting of very short-term credit. This isbeneficial to a payer whose currency (used to settle) is weakening against the payee’s currencyLagging refers to granting (or taking) of long-term credit.It is beneficial to a payer if he is to pay payee’s weakening currency.In relation to foreign currency settlements, additional can be obtained by the use of these techniqueswhen currency exchange rates are fluctuating (assuming one can forecast the changes)If the settlement were in the payer’s currency, then ‘leading’ would be beneficial to the payer if thiscurrency were weakening against the payee’s currency. ‘Lagging’ would be beneficial for the payer if thepayer’s currency were strengthening against the payee’s.If the settlement were to be made in the payee’s currency, the ‘lagging’ would be benefit the payerwhen the currency is weakening against the payee’s currency. ‘Leading’ would benefit the payer if thepayee’s currency were strengthening against the payer’s.Note: in either case, the payee’s view would be the opposite.(iii) Multilateral netting and matchingMatching - involves the use of receipts in particular currency to meet payment obligations in the samecurrency.For example, suppose that a company expects to make payments of USS$470,000 in two months time,and also expects to receive income of USS$250,000 in two months. The company can use its income of$250,000 to meet some of the payments of $470,000.This reduces to $220,000 (i.e. 470,000-250,000) its exposure to a rise in the value of the dollar over thenext two months.
  18. 18. Similarly, suppose that a company expects to receive ∈ 700,000 in three month’s time, when it alsoexpects to incur payments of ∈ 300,000. It can use some of its income in euros to make the payments,so that its net exposure is to income of just ∈ 400,000 (700,000-300,000).Matching receipts and expenditures is very useful way of partially hedging currency exposures. It can beorganized at group level by the treasury team, so that currency income for one subsidiary can bematched with expenditures in the same currency by another subsidiary. This is most easily managedwhen all subsidiaries are required to pay their income into a ‘group bank account’ and all payments aremade out of this central account.Successful matching, however, depends on reliable forecasts of amounts and timing of future inflow andoutflows of currencies.Netting - involves offsetting the group’s debtors and creditors in the same currency and only coveringthe net position. This reduces the amount to be hedged by the group. For example, there is no point inone subsidiary hedging a $1 million debt receivable at same time as another subsidiary is hedging a $ 1million debt payable.If the subsidiaries use different functional currencies, a currency of conversion is agreed in which allinter- group debts are converted before canceling them to remain only with net amount to be hedgedby the group.The parent company treasury department can assess the overall group position and only cover thegroup’s net exposure.External Techniques(iv) Hedging with forward contracts (forward market hedge)Forward contracts are an important method of hedging currency risks. This is because a forwardcontactcan be used now to fix an exchange rate for a future receipt or payment in currency. Ifhe exchange rateis fixed now, there is no need to worry about how the spot rate might change,because the future cashflow in domestic currency is now known with certainty.To hedge with forward contract, we need to: -Establish what the future cash flow will be in the foreign currencyFix the rate now for buying or selling this foreign currency by entering into a forwardexchangetransaction with a bankA forward contract is a binding contract on both parties. This means that having made aforwardcontract; a company must carry out the agreement, and buy or sell the foreign currency ontheagreed date and at the rate of exchange fixed by the agreement. If the spot rate moves inthecompany’s favor, that is too bad. By hedging against the risk of an adverse exchange ratemovement
  19. 19. with a forward contract, the company also closes any opportunity to benefit from afavorable change inthe spot rate.(a) Hedging foreign receivableIt concerns the exporters when fear a possible depreciation of the foreign currency up on exchangingthe foreign currency for domestic currency.Hedging foreign receivables involves selling the foreign currency forward, this means fixing the rate atwhich the foreign currency will be exchanged in the future. Specifically the process involves thefollowing stepsSell the foreign currency amount forward at the forward rate/ enter forward contractReceive the foreign currency amount from the customer; deliver the amount to the bank inexchange for domestic currency.(b) Hedging foreign payablesImporters would hedge foreign payable when they fear a possible appreciation of the foreign currency.It involves the purchasing of foreign currency forward.This means fixing the exchange rate at which the customer will purchase the foreign currency.Specifically the process involvesPurchase the foreign currency amount forward at a forward rateWhen the payment falls due deliver domestic currency amount to the bank, in exchange forforeign currency amount and pay the supplies.(V) MONEY MARKET HEDGE (HEDGING IN MONEY MARKETS)The money markets are markets for wholesale (large-scale) lending and borrowing, or trading inshort-term financial instruments. Many companies are able to borrow or deposit funds through their bank inthe money markets.Instead of hedging a currency exposure with a forward contract, a company could use themoneymarkets to lend or borrow, and achieve a similar result.Since forward exchange rates are derived from spot rates and money market interest rates, the endresult from hedging should be roughly the same by either method.Objective of money market.Borrow or lend to lock in home currency value of cash flowEstablishing a money market hedge
  20. 20. To work out how to use the money markets to hedge, you need to go back to the basic question of whatis the exposure, and what is needed to hedge the exposure.There are basically two situations to consider:A company is expecting to receive income in a foreign currency at a future date, and intends toexchange it into domestic currencyA company is expecting to make a foreign currency payment at some time in the future, and usedomestic currency to buy the foreign currency it needs to make the paymentExposure: future income foreign currency (hedging receivables)When the exposure arises from future income receivable in foreign currency, a hedge can be created byfixing the value of that income now in domestic currency. In other word, we need to fix the effectiveexchange value of the future currency income.Ways of doing this is as follows:Borrow now in the foreign currency. The term of the loan should be from now until the currencyincome is receivable. Ideally, borrow just enough money so that the loan plus interest repayablewhen the loan matures equals the future income receivable in the currency. In this way, thecurrency income will pay off the loan plus interest, so that the currency income and currencypayment match each other.Exchange the borrowed currency immediately into domestic currency at the spot rate. Thedomestic currency can either be used immediately, or put on deposit to earn interest. Eitherway, the value of the future income in domestic currency is fixed.Exposure: future payment in foreign currency (hedging payables)A similar approach can be taken to create a money market hedge when there is an exposure to a futurepayment in a foreign currency. In this situation, a hedge can be created by exchanging domesticcurrency for foreign currency now (spot) and putting the currency on deposit until the future paymenthas to be made. The amount borrowed plus the interest earned in the deposit period should be exactlyenough to make the currency payment when it falls due.Specifically it involves the following steps: -Determine present value of the foreign currency to be paid ( using foreign currency interest rateas a discount rate)Borrow equivalent amount of home currency( considering spot exchange rate)Convert the home currency into PV equivalent of foreign currency( in spot market now) andmake a foreign currency depositOn payment day, withdraw the foreign currency deposit (which by the time equals the payableamount) and make payment.
  21. 21. The cash flows are fixed because the cost in domestic currency is the cost of buying foreign currencyspot to put on deposit.(V)Currency FutureA currency future, also FX future or foreign exchange future, is a futures contract to exchange onecurrency for another at a specified date in the future at a price (exchange rate) that is fixed on thepurchase date; see Foreign exchange derivative. Typically, one of the currencies is the US dollar. Theprice of a future is then in terms of US dollars per unit of other currency. This can be different from thestandard way of quoting in the spot foreign exchange markets. The trade unit of each contract is then acertain amount of other currency, for instance €125,000. Most contracts have physical delivery, so forthose held at the end of the last trading day, actual payments are made in each currency. However,most contracts are closed out before that. Investors can close out the contract at any time prior to thecontracts delivery date.(VI)Currency OptionIn finance, a foreign-exchange option (commonly shortened to just FX option or currency option) is aderivative financial instrument that gives the owner the right but not the obligation to exchange moneydenominated in one currency into another currency at a pre-agreed exchange rate on a specifieddate.[1] See Foreign exchange derivative.The foreign exchange options market is the deepest, largest and most liquid market for options of anykind. Most trading is over the counter (OTC) and is lightly regulated, but a fraction is traded onexchanges like the International Securities Exchange, Philadelphia Stock Exchange, or the ChicagoMercantile Exchange for options on futures contracts. The global market for exchange-traded currencyoptions was notionally valued by the Bank for International Settlements at $158.3 trillion in 2005.Example :For example a GBPUSD contract could give the owner the right to sell £1,000,000 and buy$2,000,000 on December 31. In this case the pre-agreed exchange rate, or strike price, is 2.0000 USD perGBP (or GBP/USD 2.00 as it is typically quoted) and the notional amounts (notionals) are £1,000,000 and$2,000,000.This type of contract is both a call on dollars and a put on sterling, and is typically called a GBPUSD put,as it is a put on the exchange rate; although it could equally be called a USDGBP call.If the rate is lower than 2.0000 on December 31 (say at 1.9000), meaning that the dollar is stronger andthe pound is weaker, then the option is exercised, allowing the owner to sell GBP at 2.0000 andimmediately buy it back in the spot market at 1.9000, making a profit of (2.0000 GBPUSD – 1.9000GBPUSD)*1,000,000 GBP = 100,000 USD in the process. If they immediately convert the profit into GBPthis amounts to 100,000/1.9000 = 52,631.58 GBP.(VII)Currency Swap
  22. 22. A currency swap is a foreign-exchange agreement between two institute to exchange aspects (namelythe principal and/or interest payments) of a loan in one currency for equivalent aspects of an equal innet present value loan in another currency; see foreign exchange derivative. Currency swaps aremotivated by comparative advantage.[1] A currency swap should be distinguished from a central bankliquidity swap.StructureCurrency swaps are over-the-counter derivatives, and are closely related to interest rate swaps.However, unlike interest rate swaps, currency swaps can involve the exchange of the principal.[1]There are three different ways in which currency swaps can exchange loans:The simplest currency swap structure is to exchange only the principal with the counterparty ata specified point in the future at a rate agreed now. Such an agreement performs a functionequivalent to a forward contract or futures. The cost of finding a counterparty (either directly orthrough an intermediary), and drawing up an agreement with them, makes swaps moreexpensive than alternative derivatives (and thus rarely used) as a method to fix shorter termforward exchange rates. However for the longer term future, commonly up to 10 years, wherespreads are wider for alternative derivatives, principal-only currency swaps are often used as acost-effective way to fix forward rates. This type of currency swap is also known as an FX-swap.[2]Another currency swap structure is to combine the exchange of loan principal, as above, with aninterest rate swap. In such a swap, interest cash flows are not netted before they are paid to thecounterparty (as they would be in a vanilla interest rate swap) because they are denominated indifferent currencies. As each party effectively borrows on the others behalf, this type of swap isalso known as a back-to-back loan.[2]Last here, but certainly not least important, is to swap only interest payment cash flows on loansof the same size and term. Again, as this is a currency swap, the exchanged cash flows are indifferent denominations and so are not netted. An example of such a swap is the exchange offixed-rate US dollar interest payments for floating-rate interest payments in Euro. This type ofswap is also known as a cross-currency interest rate swap, or cross currency swap.[3]UsesCurrency swaps have two main uses:To secure cheaper debt (by borrowing at the best available rate regardless of currency and thenswapping for debt in desired currency using a back-to-back-loan).To hedge against (reduce exposure to) exchange rate fluctuations.
  23. 23. Unit-6INTERNATIONAL LIQUIDITYThe concept of international liquidity is associated with international payments. These payments ariseout of international trade in goods and services and also in connection with capital movements betweenone country and another. International liquidity refers to the generally accepted official means ofsettling imbalances in international payments.In other words, the term international liquidity embraces all those assets which are internationallyacceptable without loss of value in discharge of debts (on external accounts).In its simplest form, international liquidity comprises of all reserves that are available to the monetaryauthorities of different countries for meeting their international disbursement. In short, the terminternational liquidity connotes the world supply of reserves of gold and currencies which are freelyusable internationally, such as dollars and sterling, plus facilities for borrowing these. Thus, internationalliquidity comprises two elements, viz., owned reserves and borrowing facilities.Under the present international monetary order, among the member countries of the IMF, the chiefcomponents of international liquidity structure are taken to be:1. Gold reserves with the national monetary authorities - central banks and with the IMF.2. Dollar reserves of countries other than the U.S.A.3. £-Sterling reserves of countries other than U.K.It should be noted that items (2) and (3) are regarded as key currencies of the world and their reservesheld by member countries constitute the respective liabilities of the U.S. and U.K. More recently Swissfrancs and German marks also have been regarded as key currencies.4. IMF tranche position which represents the drawing potential of the IMF members; and5. Credit arrangements (bilateral and multilateral credit) between countries such as swap agreementsand the Ten of the Paris Club.Of all these components, however gold and key currencies like dollar today entail greater significance indetermining the international liquidity of the world.However, it is difficult to measure international liquidity and assess its adequacy. This depends on goldand the foreign exchange holdings of a country, and also on the countrys ability to borrow from other
  24. 24. countries and from international organisations. Thus, it is not easy to determine the adequacy ofinternational liquidity whose composition is heterogeneous.Moreover, there is no exact relationship between the volume of international transactions and theamount of necessary reserves In fact, foreign exchange reserves (international liquidity) are necessary tofinance imbalances between international receipts and payments. International liquidity is needed toservice the regular How of payments among countries, to finance the shortfall when any particularcountrys out payments temporarily exceed its in-payments, and to meet large withdrawals caused byoutflows of capital.Thus, external or internal liquidity serves the same purpose as domestic liquidity, viz., to provide amedium of exchange and a store of value. And the primary function of external liquidity is to meetshort-term fluctuations in the balance of payments.EURO CURRENCY MARKET-Definition of Eurocurrency MarketThe money market in which Eurocurrency, currency held in banks outside of the country where it is legaltender, is borrowed and lent by banks in Europe. The Eurocurrency market is utilized by large firms andextremely wealthy individuals who wish to circumvent regulatory requirements, tax laws and interestrate caps that are often present in domestic banking, particularly in the United States.Investopedia explains Eurocurrency MarketRates on deposits in the Eurocurrency market are typically higher than in the domestic market, becausethe depositor is not protected by domestic banking laws and does not have governmental depositinsurance. Rates on loans in the Eurocurrency market are typically lower than those in the domesticmarket, because banks are not subject to reserve requirements on Eurocurrency and do not have topay deposit insurance premiums.The development of the money market in the euro area or the euro money market made its inceptionwith very low rates of interest.Turnover of the euro money marketThe total turnover of the euro money market was moribund in the second quarter of 2004 althoughthere was a huge surge in the turnover in the second quarter of 2003. Such developments werediscontinuous across the market. After this upturn in all the market segments in the second quarter of2003, there was a sharp downturn in the interest rate, cross currency and FX swaps in the secondquarter of 2004. This was contrasted by a rise in the turnover in the unsecured, secured and otherinterest rate swaps. The forward rate agreement and the short term securities also witnessed a rise. Thesecured segment happens to be the largest money market segment.
  25. 25. The overnight interest rate swap segment also saw a sharp downfall in the second quarter of 2004although it had experienced a strong rise in the second quarter of 2003. this change is attributed to theinterest rate speculation which was high in 2003 but low in 2004. The overnight interest rate swapsegment of the money market is provided impetus by the EUIRIBOR-ACI.The unsecured, secured and the overnight interest rate swap and the FX swap segments arecharacterized by activities that have very short term maturity periods. The instruments like the crosscurrency and other interest rate swaps are the money market instruments that are traded at longmaturities.Structure of the euro money marketIn regard to structure, the euro money market has been less concentrated over the past years. Butdifferences across the various money market segments continue to exist. The market that is leastconcentrated is the unsecured money market segment. The money market segments that are highlycondensed are the forward rate agreement, other interest rate agreement and the cross currency swapsegments. They constitute about 70% of the entire money market share.The euro money market products are short term deposits, repos, EONIA swaps and foreign exchangeswaps. There is an increase in the liquidity in these money market instruments that is projected by thethinning in the bid–offer spread.Transactions in the euro money marketTransactions in the euro money market occur mainly through the electronic mode. The secured marketsegment experiences that largest electronic mode of transaction.

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