Foreign Exchange Management
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Foreign Exchange Management

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Foreign Exchange Management Foreign Exchange Management Presentation Transcript

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