Black book pooja (1)


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Black book pooja (1)

  1. 1. FOREIGN EXCHANGE MANAGEMENT EXECUTIVE SUMMARYA Foreign exchange market is worldwide network of banks,brokers, Multinationals corporations and central banks, all of whobuys and sells currencies. These markets participants are linkedby communications system that allow instant knowledge of factorsthat affect the market and of rates as they are quoted around theworld. The market functions practically on 24-hour basis and is notrestricted to the opening and closing hours in one particular center.The foreign exchange market is centered around the interbankmarket- a large group of international commercial bank whosetransactions form the major part of the daily turnover. Centralbanks occupy a key place in the market as they implement theforeign exchange policies of the government.Major issues confronting the market are: Could new system satisfactorily replace floating? Should the market remain basically unregulated or should central bank exert more control? Will the trend towards free trade and unrestricted capital flows continue? 1
  2. 2. FOREIGN EXCHANGE MANAGEMENT OBJECTIVE OF THE STUDYMAIN OBJECTIVEThis project attempt to study the intricacies of the foreignexchange market. The main purpose of this study is to get a betteridea and the comprehensive details of foreign exchange riskmanagement.SUB OBJECTIVES To know about the various concept and technicalities inforeign exchange. To know the various functions of forex market. To get the knowledge about the hedging tools used in foreignexchange.LIMITATIONS OF THE STUDY Time constraint. Resource constraint.DATA COLLECTION The data was collected from books, newspapers, otherpublications and internet.DATA ANALYSISThe data analysis was done on the basis of the informationavailable from various sources and brainstorming. 2
  3. 3. FOREIGN EXCHANGE MANAGEMENT INTRODUCTIONTaking cue from the rise in popularity of forex trading the worldover, the Indian foreign exchange market is also growing in leapsand bounds. At present, the annual turnover of foreign exchangetrading in India exceeds a whopping $400 billion. The volumesincluded inter banking trading as well as futures and forwardtrading in foreign exchange. Transactions are also made on thebasis of swapping currencies and interest rates as well.MumbaiThe principal place where forex is transacted in big volumes isMumbai. The market involves intermediaries, buyers, sellers andthe monetary authority of India. Apart from Mumbai, the othercenters where forex is also traded are Kolkata, Chennai, NewDelhi, Cochin, Pondicherry and Bangalore. Even though themarkets are not linked as they are in other parts of the world, theydo perform collectively.Authorized dealersThe Reserve Bank of India or India‟s central bank regulates themarket using the help of the exchange control department of thebank. Only the authorized dealers in foreign exchange are allowedto participate in trading which also included accredited brokers aswell. The entire transactions are governed by FEMA or the ForeignExchange Management Act of 1999, which is an updated versionof the Foreign Exchange Regulation Act or FERA. 3
  4. 4. FOREIGN EXCHANGE MANAGEMENT NEED FOR FOREIGN EXCHANGELet us consider a case where Indian company exports cottonfabrics to USA and invoices the goods in US dollar. The Americanimporter will pay the amount in US dollar, as the same is his homecurrency. However the Indian exporter requires rupees means hishome currency for procuring raw materials and for payment to thelabor charges etc. Thus he would need exchanging US dollar forrupee. If the Indian exporters invoice their goods in rupees, thenimporter in USA will get his dollar converted in rupee and pay theexporter.From the above example we can infer that in case goods arebought or sold outside the country, exchange of currency isnecessary.Sometimes it also happens that the transactions between twocountries will be settled in the currency of third country. In thatcase both the countries that are transacting will require convertingtheir respective currencies in the currency of third country. For thatalso the foreign exchange is required. 4
  5. 5. FOREIGN EXCHANGE MANAGEMENT ABOUT FOREIGN EXCHANGE MARKET.Particularly for foreign exchange market there is no market placecalled the foreign exchange market. It is mechanism through whichone country‟s currency can be exchange i.e. bought or sold for thecurrency of another country. The foreign exchange market doesnot have any geographic location.Foreign exchange market is described as an OTC (over thecounter) market as there is no physical place where the participantmeets to execute the deals, as we see in the case of stockexchange. The largest foreign exchange market is in London,followed by the New York, Tokyo, Zurich and Frankfurt. Themarket is situated throughout the different time zone of the globe insuch a way that one market is closing the other is beginning itsoperation. Therefore it is stated that foreign exchange market isfunctioning throughout 24 hours a day.In most market US dollar is the vehicle currency, viz., the currencysued to dominate international transaction. In India, foreignexchange has been given a statutory definition. Section 2 (b) offoreign exchange regulation ACT, 1973 states Foreign exchange means foreign currency and includes:  All deposits, credits and balance payable in any foreign currency and any draft, traveler‟s cheques, letter of credit and bills of exchange. Expressed or drawn in India currency but payable in any foreign currency. 5
  6. 6. FOREIGN EXCHANGE MANAGEMENT  Any instrument payable, at the option of drawee or holder thereof or any other party thereto, either in Indian currency or in foreign currency or partly in one and partly in the other.In order to provide facilities to members of the public andforeigners visiting India, for exchange of foreign currency intoIndian currency and vice-versa. RBI has granted to various firmsand individuals, license to undertake money-changing business atseas/airport and tourism place of tourist interest in India. Besidescertain authorized dealers in foreign exchange (banks) have alsobeen permitted to open exchange bureaus.Following are the major bifurcations: Full fledge moneychangers – they are the firms andindividuals who have been authorized to take both, purchase andsale transaction with the public. Restricted moneychanger – they are shops, emporia andhotels etc. that have been authorized only to purchase foreigncurrency towards cost of goods supplied or services rendered bythem or for conversion into rupees. Authorized dealers – they are one who can undertake all typesof foreign exchange transaction. Bank are only the authorizeddealers. The only exceptions are Thomas cook, western union,UAE exchange which though, and not a bank is an AD. 6
  7. 7. FOREIGN EXCHANGE MANAGEMENTEven among the banks RBI has categorized them as follows‟: Branch A – They are the branches that have nostro and vostroaccount. Branch B – The branch that can deal in all other transaction butdo not maintain nostro and vostro a/c‟s fall under this category.Nostro a/c:-Bank in India is permitted to open foreign currency accounts withbanks abroad. Indian overseas bank‟s account with ChaseManhattan Bank, New York is a nostro a/c. It is “our account withu”. When an Indian bank issues a foreign currency draft payableabroad drawn on a correspondent bank, the nostro account of thebank maintained with the correspondent id debited and the amountis paid beneficiary. When an export bill is sent for realizationabroad, the realized exporter bill proceeds is credited to the nostroaccount.Vostro account:It is the account in India in Indian rupee maintained by an overseasbank. If Chase Manhattan Bank, New York opens an account withIndian overseas bank in India, it is a vostro account .it is “youraccount with us. Any draft, issued by overseas correspondents inIndian rupees is paid in India, to the debit of vostro account.Loro account:This terminology is used when one bank refers to the „nostro‟account of another bank. If Indian Overseas bank and state bankof India maintain nostro account with Chase Manhattan Bank, New 7
  8. 8. FOREIGN EXCHANGE MANAGEMENTYork, IOB refers SBI account with Chase Manhattan Bank as loroaccount. It is „their account with you‟.Mirror account:The banks in India maintain the replica of the Nostro account theyhave with the foreign banks and these accounts are called asmirror accounts. The mirror account mainly helps in reconciliationof the statement of account sent by the foreign bank. 8
  9. 9. FOREIGN EXCHANGE MANAGEMENT FOREIGN EXCHANGE MARKET:There are three types of market: Merchant market: it is the retail market, which involves thetransaction of customers with authorized dealers. Inter-bank market: it is the market where transaction takesplace between authorized dealers. International market: it is the market where transactiontakes place between banks in different countries.The base for all these types/layers of market is the need forsquaring up the position of Ads. Ads are permitted to retainexchange only up to a certain level that means any purchase offoreign exchange has to be disposed of and sale of foreignexchange has to be covered by purchase.Any AD will try to match the position. If it is not possible to match,it has to go to another AD for purchase and sale of foreignexchange and the market is the inter-bank market.ADs in India move to forex markets and do the purchase / saletransaction. This market is called as international market.For Indian we can conclude that foreign exchange refers to foreignmoney, which includes notes, cheques, bills of exchange, bankbalance and deposits in foreign currencies. 9
  10. 10. FOREIGN EXCHANGE MANAGEMENT PARTICIPANTS IN FOREIGN EXCHANGE MARKET CUSTOMERS COMMERCIAL SPECULATORS BANK PARTICIPANTS OVERSEAS CENTRAL BANK FOREX MARKET EXCHANGE BROKERSThe main players in foreign exchange market are as follows:1. Customers The customers who are engaged in foreign trade participate inforeign exchange market by availing of the services of banks.Exporters require converting the dollars in to rupee and imporetersrequire converting rupee in to the dollars, as they have to pay indollars for the goods/services they have imported. 2. COMMERCIAL BANK They are most active players in the forex market. Commercialbank dealing with international transaction offer services forconversion of one currency in to another. They have wide network 10
  11. 11. FOREIGN EXCHANGE MANAGEMENTof branches. Typically banks buy foreign exchange from exportersand sells foreign exchange to the importers of goods. As everytime the foreign exchange bought or oversold position. Thebalance amount is sold or bought from the market. 3. CENTRAL BANK In all countries Central bank have been charged with theresponsibility of maintaining the external value of the domesticcurrency. Generally this is achieved by the intervention of thebank. Here the Reserve Bank of India (RBI) plays a vital role inforeign exchange management. It has laid down some rules andregulations to carry out foreign exchange.4. EXCHANGE BROKERSForex brokers play very important role in the foreign exchangemarket. However the extent to which services of foreign brokersare utilized depends on the tradition and practice prevailing at aparticular forex market center. In India as per FEDAI guideline theAds are free to deal directly among themselves without goingthrough brokers. The brokers are not among to allowed to deal intheir own account all over the world and also in India.5. OVERSEAS FOREX MARKET Today the daily global turnover is estimated to be more than US$ 1.5 trillion a day. The international trade however constituteshardly 5 to 7 % of this total turnover. The rest of trading in worldforex market is constituted of financial transaction and speculation.As we know that the forex market is 24-hour market, the day 11
  12. 12. FOREIGN EXCHANGE MANAGEMENTbegins with Tokyo and thereafter Singapore opens, thereafterIndia, followed by Bahrain, Frankfurt, Paris, London, New York,Sydney, and back to Tokyo.6. SPECULATORS The speculators are the major players in the forex market. Bank dealing are the major speculators in the forex market witha view to make profit on account of favorable movement inexchange rate, take position i.e. if they feel that rate of particularcurrency is likely to go up in short term. They buy that currencyand sell it as soon as they are able to make quick profit. Corporation‟s particularly multinational corporation andtransnational corporation having business operation beyond theirnational frontiers and on account of their cash flows being largeand in multi currencies get in to foreign exchange exposures. Witha view to make advantage of exchange rate movement in theirfavor they either delay covering exposures or do not cover untilcash flow materialize. Individual like share dealing also undertake the activity ofbuying and selling of foreign exchange for booking short termprofits. They also buy foreign currency stocks, bonds and otherassets without covering the foreign exchange exposure risk. Thisalso results in speculations. 12
  13. 13. FOREIGN EXCHANGE MANAGEMENT TYPES OF TRANSACTIONSThere are different types of transaction under each market.Merchant Market SPOT FORWARD Rates quoted for the Rates quoted for transaction on the same transaction at a future day. date.Spot transaction in the merchant market is one where the rates arebeing quoted and the transactions are being routed on the sameday. In forward transactions the rate are being quoted today forfuture transactions.INTER BANK MARKET & INTERNATIONAL MARKETCASH VALUE SPOT FORWARD TOMORROWRate today Rate today & Rate Rate today && settlement on settlement Today &Settlement the first from third settlementon the succeeding succeeding on secondsame working day. working day. succeedingday/working workingday day. 13
  14. 14. FOREIGN EXCHANGE MANAGEMENT Permitted currency: It is the foreign currency which is freely convertible to major currencies like USD (us dollar), GDP (Great Britain pounds) etc. and for which a fairly active market exists. Authorized dealers may open and maintain balance and position in any permitted currency and in euro of the European currency area. Authorized dealer may open and maintains freely accounts with their branches and correspondents abroad in any permitted currency. Opening of such accounts should be reported to RBI in the “R” return. EURO: the single currencies of the European Union were born In the name of „EURO‟ with effect from 1-1-1999. 11 out of the 15 members‟ countries accepted the single currency. four countries that were unable to fulfill the set of conditions (U.K, SWEDEN, DENMARK AND GREECE) were not participating. Currency notes and coins in the participating countries continue to be the legal tender for an interim period up to 30-6-2002. Notes and coins in euro started circulating from 1-1-2002 and the participating currency ceased to be legal tender 6 months later. All the transaction between the member countries will be done at the fixed exchange rates or at „‟EURO‟ until it replaces the national currencies as the legal tender. The no of participating countries have gone up. 14
  15. 15. FOREIGN EXCHANGE MANAGEMENT EXCHANGE RATE SYSTEM : Countries of the world have been exchanging goods and services amongst themselves. This has been going on from time immemorial. The world has come a long way from the days of barter trade. With the invention of money the figures and problems of barter trade have disappeared. The barter trade has given way to exchanged of goods and services for currencies instead of goods and services. The rupee was historically linked with pound sterling. India was a founder member of the IMF. During the existence of the fixed exchange rate system, the intervention currency of the Reserve Bank of India (RBI) was the British pound, the RBI ensured maintenance of the exchange rate by selling and buying pound against rupees at fixed rates. The interbank rate therefore ruled the RBI band. During the fixed exchange rate era, there was only one major change in the parity of the rupee- devaluation in June 1966. Different countries have adopted different exchange rate system at different time. The following are some of the exchange rate system followed by various countries. THE GOLD STANDARD Many countries have adopted gold standard as their monetary system during the last two decades of the 19th century. This system was in vogue till the outbreak of world war 1. under this system the parties of currencies were fixed in term of gold. There were two main types of gold standard: 15
  16. 16. FOREIGN EXCHANGE MANAGEMENT1.Gold piece standard Gold was recognized as means of international settlement forreceipts and payments amongst countries. Gold coins were anaccepted mode of payment and medium of exchange in domesticmarket also. A country was stated to be on gold standard if thefollowing condition were satisfied: Monetary authority, generally the central bank of the country, guaranteed to buy and sell gold in unrestricted amounts at the fixed price. Melting gold including gold coins, and putting it to different uses was freely allowed. Import and export of gold was freely allowed. The total money supply in the country was determined by the quantum of gold available for monetary purpose.2.Gold Bullion StandardUnder this system, the money in circulation was either partly ofentirely paper and gold served as reserve asset for the moneysupply.. However, paper money could be exchanged for gold atany time. The exchange rate varied depending upon the goldcontent of currencies. This was also known as “Mint ParityTheory“ of exchange rates.The gold bullion standard prevailed from about 1870 until 1914,and intermittently thereafter until 1944. World War I brought an endto the gold standard. 16
  17. 17. FOREIGN EXCHANGE MANAGEMENTBRETTON WOODS SYSTEMDuring the world wars, economies of almost all the countriessuffered. In order to correct the balance of paymentsdisequilibrium, many countries devalued their currencies.Consequently, the international trade suffered a deathblow. In1944, following World War II, the United States and most of itsallies ratified the Bretton Woods Agreement, which set up anadjustable parity exchange-rate system under which exchangerates were fixed (Pegged) within narrow intervention limits (pegs)by the United States and foreign central banks buying and sellingforeign currencies. This agreement, fostered by a new spirit ofinternational cooperation, was in response to financial chaos thathad reigned before and during the war.In addition to setting up fixed exchange parities (par values) ofcurrencies in relationship to gold, the agreement established theInternational Monetary Fund (IMF) to act as the “custodian” of thesystem.Under this system there were uncontrollable capital flows, whichlead to major countries suspending their obligation to intervene inthe market and the Bretton Wood System, with its fixed parities,was effectively buried. Thus, the world economy has been livingthrough an era of floating exchange rates since the early 1970.FLOATING RATE SYSTEMIn a truly floating exchange rate regime, the relative prices ofcurrencies are decided entirely by the market forces of demandand supply. There is no attempt by the authorities to influence 17
  18. 18. FOREIGN EXCHANGE MANAGEMENTexchange rate. Where government interferes‟ directly or throughvarious monetary and fiscal measures in determining theexchange rate, it is known as managed of dirty float.PURCHASING POWER PARITY (PPP)Professor Gustav Cassel, a Swedish economist, introduced thissystem. The theory, to put in simple terms states that currenciesare valued for what they can buy and the currencies have nointrinsic value attached to it. Therefore, under this theory theexchange rate was to be determined and the sole criterion beingthe purchasing power of the countries. As per this theory if therewere no trade controls, then the balance of payments equilibriumwould always be maintained. Thus if 150 INR buy a fountain penand the seamen fountain pen can be bought for USD 2, it can beinferred that since 2 USD or 150 INR can buy the same fountainpen, therefore USD 2 = INR 150.For example India has a higher rate of inflation as compared tocountry US then goods produced in India would become costlier ascompared to goods produced in US. This would induce imports inIndia and also the goods produced in India being costlier wouldlose in international competition to goods produced in US. Thisdecrease in exports of India as compared to exports from USwould lead to demand for the currency of US and excess supply ofcurrency of India. This in turn, cause currency of India todepreciate in comparison of currency of us that is having relativelymore exports. 18
  19. 19. FOREIGN EXCHANGE MANAGEMENT EXCHANGE RATE MECHANISMIn international transaction, if we export goods to other countries,our exporter in India would like to be paid in Indian rupees whereas the foreign buyers would like to pay in his home currency.If the buyer is in United States, he will pay only in US Dollars. Thusit becomes necessary to convert this US Dollars into Indian rupeesand the rate at which this conversion is done is called “ExchangeRate.”Exchange Rates are quoted in two methods:1. Direct method.2. Indirect method. DIRECT QUOTATIONSWhile quoting the exchange rate for a currency if the foreigncurrency is kept constant and its value is expressed in terms ofhome currency it is known as direct quotation. In this case, theunits of home currency will b varying for every unit of foreigncurrency.Example;USD 1 = RS 45.7500GBP 1=RS 67.8500Effective from august 6, 1993 we have changed our system ofquoting exchange rates to direct quotation. By adopting thissystem we have fallen in line with the international practice. It has 19
  20. 20. FOREIGN EXCHANGE MANAGEMENTbecome more transparent for the dealing public and it will beeasier for them to follow up the movement of exchange rates. INDIRECT QUOTATIONS:When we keep the unit of home currency constant and the value offoreign currency is expressed in variable units then this method ofquoting exchange rate is called indirect quotation.Prior to august 1993 we were following this system for quotingexchange rates.Example:RS 100/- = USD 2.1200RS 100/- = GBP 1.4200 TWO WAY QUOTATION:In any other commercial transaction whenever we enquire the rateof the commodity the seller will immediately quote the selling price.If we enquire the rate for fruits with the fruit seller he will quote hisselling price.But in foreign exchange market always both the rates will bequoted that is one rate for buying and the other for selling.Example: if the bank X calls for the rates from bank Y for USD/INRbank will quote:RS 45.7200/50It means that the Bank Y is prepared to buy USD at RS 45.7200and sell at 45.7250. This method of quoting both buying andselling rates is known as “TWO WAY QUOTATIONS.”For all practical purposes if we treat foreign exchange as acommodity the logic and application of this two –way quotationscan be understood easily that is a trader will always be willing tobuy a commodity at a lesser price and sell at a higher price. 20
  21. 21. FOREIGN EXCHANGE MANAGEMENTThe principle or maxim involved in this method of quotations is:“BUY LOW – SELL HIGH “ (under DIECT QUOTATION)The advantage of two–way quote is as under The market continuously makes available price for buyers or sellers Two way prices limit the profit margin of the quoting bank and comparison of one quote with another quote can be done instantaneously. As it is not necessary any player in the market to indicate whether he intends to buy or sale foreign currency, this ensures that the quoting bank cannot take advantage by manipulating the prices. It automatically insures that alignment of rates with market rates. Two way quotes lend depth and liquidity to the market, which is so very essential for efficient market.In two way quotes the first rate is the rate for buying and anotherfor selling. We should understand here that, in India the banks,which are authorized dealer, always quote rates. So the ratesquoted- buying and selling is for banks point of view only. It meansthat if exporters want to sell the dollars then the bank will buy thedollars from him so while calculation the first rate will be usedwhich is buying rate, as the bank is buying the dollars fromexporter. The same case will happen inversely with importer as hewill buy dollars from the bank and bank will sell dollars to importer. 21
  22. 22. FOREIGN EXCHANGE MANAGEMENT DIFFERENT TYPES OF TRANSACTIONWe have different types of transactions in foreign exchange: It may be remittance Representing payment of subscription to a foreign journal. It can be an import payment relating to retirement of an import bill. It may be an inward remittance received by a resident/non- resident Indian. It may be an export bill, which will be presented to the overseas buyer for payment.Depending upon the nature and involvement of labour differentexchange rate are quoted for different transaction.DIFFERENT TRANSACTION AND RELEVANT EXCHANGERATEOn an outward remittance does not involve any labour. Bank willbe recovering the rupee equivalent from the customer and issue adraft in foreign currency drawn on their correspondent as per theirdrawing arrangements. If it is a remittance relating to an import bill,as a banker, bank will verify the documents entering them in theirregister, presenting the bill to the importer for the payments andalso check whether all the conditions stipulated by thecorrespondent bank are complied with. For this the labour bank iseligible for some compensation. This compensation will be loadedor adjusted while quoting the exchange rate for this importtransaction. In other words, the exchange rate for importtransaction will be costlier to the customers when compared to the 22
  23. 23. FOREIGN EXCHANGE MANAGEMENTexchange rate for clean outward remittance. The different ratesquoted for these two transactions are TT (Telegraphic transfer)and bill selling.Likewise bank will quote different buying rates for export bills andfor other clean inward remittance.Following are the different rates, which are quoted to thecustomers depending upon the nature of transaction. BUYING RATES SELLING RATESTT BUYING BILLS BUYING TT SELLING BILLSSELLING(A.1) (A.2) (B.1) (B.2)A. BUYING RATESA.1. TT BUYING RATE (nature of transaction) Clean inward remittance for which cover has already been provided in ADs Nostro account abroad. Conversation of proceeds of instruments sent on collection basis [ when collection are credited to Nostro account]. Cancellation of outward TT, DD,PO etc Cancellation of forward sale contract. Undrawn portion of an export bill realized. 23
  24. 24. FOREIGN EXCHANGE MANAGEMENTA.2. BILL BUYING RATE (nature of transaction) Purchase/ negotiations/discounting of export bills.( and other instruments).B. SELLING RATEB.1. TT SELLING RATE (nature of transaction) Outward remittance in foreign currency. Cancellation of purchase that is;a. Bill purchased earlier is returned unpaid.b. Bill purchased earlier is transferred to collection accountc. Inward remittance received earlier (converted into rupees) is refunded to the remitting bank. Forward purchase contract is cancelled. Remittances relating to payment of import bills which are directly received by the importer. Crystallization of overdue export bills.NOTE:If the remittance that is no documents is to be handled by thebanks TT selling rate will be applied.B.2. BILL SELLING RATE (nature of transaction) Transaction involving remittance of proceeds of import bill. Even if the proceeds of the import bills are to be remitted in foreign currency by the way of DD, TT rate to be applied will be bill selling rate Crystallization of overdue import bills. 24
  25. 25. FOREIGN EXCHANGE MANAGEMENT Apart from the above, separate rates will be quoted for selling and buying of travelers Cheques and foreign currency notes.CROSS RATES:If a person wants to purchase Swiss Francs (CHF) since thiscurrency is not normally quoted in India, ADs will procure USDollarsFrom interbank market and will contact any of the overseas marketto get CHF by selling the US Dollars in the overseas market.Example: a customer‟s wants to retire an import bill for CHF 50000and the Inter Bank rate for USD/INR is at 45.75/78 and theoverseas market for USD/CHF is 1.7084/94. In order to arrive atthe CHF/INR rate bank will be applying Chain rule method. 25
  26. 26. FOREIGN EXCHANGE MANAGEMENT FACTOR AFFECTINGN EXCHANGE RATESIn free market, it is the demand and supply of the currency whichshould determine the exchange rates but demand and supply isthe dependent on many factors, which are ultimately the cause ofthe exchange rate fluctuation, sometimes wild.The volatility of exchange rates cannot be traced to the singlereason and consequently, it becomes difficult to precisely definethe factors that affect exchange rates. However, the moreimportant among them are as follows: STRENGTH OF ECONOMYEconomic factors affecting exchange rates include hedgingactivities, interest rates, inflationary pressures, trade imbalance,and euro market activities. Irving fisher, an American economist,developed a theory relating exchange rates to interest rates. Thisproposition, known as the fisher effect, states that interest ratedifferentials tend to reflect exchange rate expectation.On the other hand, the purchasing- power parity theory relatesexchange rates to inflationary pressures. In its absolute version,this theory states that the equilibrium exchange rate equals theratio of domestic to foreign prices. The relative version of thetheory relates changes in the exchange rate to changes in priceratios. 26
  27. 27. FOREIGN EXCHANGE MANAGEMENT POLITICAL FACTORThe political factor influencing exchange rates include theestablished monetary policy along with government action onitems such as the money supply, inflation, taxes, and deficitfinancing. Active government intervention or manipulations, suchas central bank activity in the foreign currency market, also havean impact. Other political factors influencing exchange ratesinclude the political stability of a country and its relative economicexposure (the perceived need for certain levels and types ofimports). Finally, there is also the influence of the internationalmonetary fund. EXPACTATION OF THE FOREIGN EXCHANGE MARKETPsychological factors also influence exchange rates. These factorsinclude market anticipation, speculative pressures, and futureexpectations.A few financial experts are of the opinion that in today‟senvironment, the only „trustworthy‟ method of predicting exchangerates by gut feel. Bob Eveling, vice president of financial marketsat SG, is corporate finance‟s top foreign exchange forecaster for1999. eveling‟s gut feeling has, defined convention, and hismethod proved uncannily accurate in foreign exchange forecastingin 1998.SG ended the corporate finance forecasting year with a2.66% error overall, the most accurate among 19 banks. Thesecret to eveling‟s intuition on any currency is keeping abreast ofworld events. Any event, from a declaration of war to a faintingpolitical leader, can take its toll on a currency‟s value. Today, 27
  28. 28. FOREIGN EXCHANGE MANAGEMENTinstead of formal modals, most forecasters rely on an amalgamthat is part economic fundamentals, part model and part judgment. Fiscal policy Interest rates Monetary policy Balance of payment Exchange control Central bank intervention Speculation. Technical. 28
  29. 29. FOREIGN EXCHANGE MANAGEMENT HYPOTHETICAL SITUATIONConsider a hypothetical situation in which ABC trading co. has toimport a raw material for manufacturing goods. But this rawmaterial is required only after three months. However, in threemonths the price of raw material may go up or go down due toforeign exchange fluctuations and at this point of time it cannot bepredicted whether the price would go up or come down. Thus he isexposed to risks with fluctuations in forex rate. If he buys thegoods in advance then he will incur heavy interest and storagecharges. However, the availability of derivatives solves theproblem of importer. He can buy currency derivatives. Now anyloss due to rise in raw material price would be offset by profits onthe futures contract and vice versa. Hence, the derivatives are thehedging tools that are available to companies to cover the foreignexchange exposure faced by them.Definition of DerivativesDerivatives are financial contracts of predetermined fixed duration,whose values are derived from the value of an underlying primaryfinancial instrument, commodity or index, such as: interest rate,exchange rates, commodities, and equities.Derivatives are risk shifting instruments. Initially, they were used toreduce exposure to changes in foreign exchange rates, interestrates, or stock indexes or commonly known as risk hedging.Hedging is the most important aspect of derivatives and also its 29
  30. 30. FOREIGN EXCHANGE MANAGEMENTbasic economic purpose. There has to be counter party to hedgersand they are speculators.Derivatives have come into existence because of the prevalence ofrisk in every business. This risk could be physical, operating,investment and credit risk.Derivatives provide a means of managing such a risk. The need tomanage external risk is thus one pillar of the derivative market.Parties wishing to manage their risk are called hedgers.The common derivative products are forwards, options, swaps andfutures.1. Forward Contracts Forward exchange contract is a firm and binding contract,entered into by the bank and its customers, for purchase ofspecified amount of foreign currency at an agreed rate ofexchange for delivery and payment at a future date or periodagreed upon at the time of entering into forward deal. The bank on its part will cover itself either in the interbankmarket or by matching a contract to sell with a contract to buy. Thecontract between customer and bank is essentially writtenagreement and bank generally stands to make a loss if thecustomer defaults in fulfilling his commitment to sell foreigncurrency. A foreign exchange forward contract is a contract under whichthe bank agrees to sell or buy a fixed amount of currency to orfrom the company on an agreed future date in exchange for a fixed 30
  31. 31. FOREIGN EXCHANGE MANAGEMENTamount of another currency. No money is exchanged until thefuture date. A company will usually enter into forward contract when it knowsthere will be a need to buy or sell for a currency on a certain datein the future. It may believe that today‟s forward rate will prove tobe more favorable than the spot rate prevailing on that future date.Alternatively, the company may just want to eliminate theuncertainty associated with foreign exchange rate movements. The forward contract commits both parties to carrying out theexchange of currencies at the agreed rate, irrespective of whateverhappens to the exchange rate. The rate quoted for a forward contract is not an estimate of whatthe exchange rate will be on the agreed future date. It reflects theinterest rate differential between the two currencies involved. Theforward rate may be higher or lower than the market exchange rateon the day the contract is entered into.Forward rate has two components. Spot rate Forward points Forward points, also called as forward differentials, reflect theinterest differential between the pair of currencies provided capitalflow are freely allowed. This is not true in case of US $ / rupee rateas there is exchange control regulations prohibiting free movementof capital from / into India. In case of US $ / rupee it is puredemand and supply which determines forward differential. 31
  32. 32. FOREIGN EXCHANGE MANAGEMENTForward rates are quoted by indicating spot rate and premium /discount.In direct rate, Forward rate = spot rate + premium / - discount.Various options available in forward contracts :A forward contract once booked can be cancelled, rolled over,extended and even early delivery can be made. ROLL OVER FORWARD CONTRACTSRollover forward contracts are one where forward exchangecontract is initially booked for the total amount of loan etc. to be re-paid. As and when installment falls due, the same is paid by thecustomer at the exchange rate fixed in forward exchange contract.The balance amount of the contract rolled over till the date for thenext installment. The process of extension continues till the loanamount has been re-paid. But the extension is available subject tothe cost being paid by the customer. Thus, under the mechanismof roll over contracts, the exchange rate protection is provided forthe entire period of the contract and the customer has to bear theroll over charges. The cost of extension (rollover) is dependentupon the forward differentials prevailing on the date of extension.Thus, the customer effectively protects himself against the adversespot exchange rates but he takes a risk on the forward 32
  33. 33. FOREIGN EXCHANGE MANAGEMENTdifferentials. (i.e. premium/discount). Although spot exchange ratesand forward differentials are prone to fluctuations, yet the spotexchange rates being more volatile the customer gets theprotection against the adverse movements of the exchange rates.A corporate can book with the Authorised Dealer a forward coveron roll-over basis as necessitated by the maturity dates of theunderlying transactions, market conditions and the need to reducethe cost to the customer.A corporate can freely cancel a forward contract booked if desiredby it. It can again cover the exposure with the same or otherAuthorised Dealer. However contracts relating to non-tradetransactionimports with one leg in Indian rupees once cancelledcould not be rebooked till now. This regulation was imposed tostem bolatility in the foreign exchange market, which was drivingdown the rupee. Thus the whole objective behind this was to stallspeculation in the currency.But now the RBI has lifted the 4-year-old ban on companies re-booking the forward transactions for imports and non-tradedtransactions. It has been decided to extend the freedom of re-booking the import forward contract up to 100% of un-hedgedexposures falling due within one year, subject to a capital of $ 100Millions in a financial year per corporate.The removal of this ban would give freedom to corporateTreasurers who should be in opposition to reduce their foreignexchange risks by canceling their existing forward transactions and 33
  34. 34. FOREIGN EXCHANGE MANAGEMENTre-booking them at better rates. Thus this in not liberalization, but itis restoration of the status quotient.Also the Details of cancelled forward contracts are no morerequired to be reported to the RBI.The following are the guidelines that have to be followed in case ofcancellation of a forward contract In case of cancellation of a contract by the client (the request should be made on or before the maturity date) the Authorised Dealer shall recover/pay the, as the case may be, the difference between the contracted rate and the rate at which the cancellation is effected. The recovery/payment of exchange difference on canceling the contract may be up front or back – ended in the discretion of banks.Rate at which the cancellation is to be effected :  Purchase contracts shall be cancelled at the contracting Authorised Dealers spot T.T. selling rate current on the date of cancellation.  Sale contract shall be cancelled at the contracting Authorised Dealers spot T.T. selling rate current on the date of cancellation.  Where the contract is cancelled before maturity, the appropriate forward T.T. rate shall be applied. Exchange difference not exceeding Rs. 100 is being ignored by the contracting Bank. 34
  35. 35. FOREIGN EXCHANGE MANAGEMENT In the absence of any instructions from the client, the contracts, which have matured, shall be automatically cancelled on 15th day falls on a Saturday or holiday, the contract shall be cancelled on the next succeeding working day.In case of cancellation of the contract: Swap, cost if any shall be paid by the client under advice to him When the contract is cancelled after the due date, the client is not entitled to the exchange difference, if any in his favor, since the contract is cancelled on account of his default. He shall however, be liable to pay the exchange difference, against him.Substitution of OrdersThe substitution of forward contracts is allowed. In case shipmentunder a particular import or export order in respect of whichforward cover has been booked does not take place, the corporatecan be permitted to substitute another order under the sameforward contract, provided that the proof of the genuineness of thetransaction is given. OPTIONSAn option is a Contractual agreement that gives the option buyerthe right, but not the obligation, to purchase (in the case of a calloption) or to sell (in the case of put option) a specified instrumentat a specified price at any time of the option buyer‟s choosing by orbefore a fixed date in the future. Upon exercise of the right by theoption holder, and option seller is obliged to deliver the specifiedinstrument at a specified price. 35
  36. 36. FOREIGN EXCHANGE MANAGEMENT The option is sold by the seller (writer) To the buyer (holder) In return for a payment (premium) Option lasts for a certain period of time – the right expires at its maturityOptions are of two kinds  Put Options  Call Options PUT OPTIONSThe buyer (holder) has the right, but not an obligation, to sell theunderlying asset to the seller (writer) of the option. CALL OPTIONSThe buyer (holder) has the right, but not the obligation to buy theunderlying asset from the seller (writer) of the option.STRIKE PRICEStrike price is the price at which calls & puts are to be exercised(or walked away from)AMERICAN & EUROPEAN OPTIONSAmerican OptionsThe buyer has the right (but no obligation) to exercise the option atany time between purchase of the option and its maturity.European Options 36
  37. 37. FOREIGN EXCHANGE MANAGEMENTThe buyer has the right (but no obligations) to exercise the optionat maturity only.UNDERLYING ASSETS : Physical commodities, agriculture products like wheat, plus metal, oil. Currencies. Stock (Equities)CURRENCY OPTIONSA currency option is a contract that gives the holder the right (butnot the obligation) to buy or sell a fixed amount of a currency at agiven rate on or before a certain date. The agreed exchange rateis known as the strike rate or exercise rate.An option is usually purchased for an up front payment known as apremium. The option then gives the company the flexibility to buyor sell at the rate agreed in the contract, or to buy or sell at marketrates if they are more favorable, i.e. not to exercise the option.How are Currency Options are different from Forward Contracts ? A Forward Contract is a legal commitment to buy or sell a fixed amount of a currency at a fixed rate on a given future date. A Currency Option, on the other hand, offers protection against unfavorable changes in exchange raters without sacrificing the chance of benefiting from more favorable rates. 37
  38. 38. FOREIGN EXCHANGE MANAGEMENTTYPES OF OPTIONS : A Call Option is an option to buy a fixed amount of currency. A Put Option is an option to sell a fixed amount of currency. Both types of options are available in two styles :  The American style option is an option that can be exercised at any time before its expiry date.  The European style option is an option that can only be exercised at the specific expiry date of the option.OPTION PREMIUMS :By buying an option, a company acquires greater flexibility and atthe same time receives protection against unfavorable changes inexchange rates. The protection is paid for in the form of apremium.SPOT RATE AND FORWARD RATESWe have some background about exchange rate as, it is the priceat which one currency can be bought or sold for an of othercurrency.The data on which currencies are exchanged can be any date fromthe date starting from the date of transaction. Transaction may beeither Spot or forward depending upon the delivery of the foreignexchange.Under spot we have CASH-SPOT, TOM-SPOT. If the exchange ofcurrencies takes place on the same day of transaction it is knownas CASH DEAL. If the exchange of currencies take place on the 38
  39. 39. FOREIGN EXCHANGE MANAGEMENTnext working day that is tomorrow, it is known as deal as TOM-DEAL.If the exchange of currencies takes place on the second workingday after the date of transaction it is known as SPOT DEAL.Normally exchange rate are quoted on spot basis that is thesettlement will take place on the second working day after the dateof transaction. Wherever foreign exchange will be delivered afterSPOT date it is known as Forward transactions.Going back to the above import transaction, if the importer gets theinformation that his shipment will be reaching India only after 3months it is possible that due to exchange fluctuations he mayhave to pay more in rupees term. If he feels that the exchange rateon the month at the time if retirement of import bill will not befavorable to him, he may like to fix an assured rate for his futuretransaction. This type of fixing the exchange rate for the futuretransaction, at a favorable time earlier to the date of actualtransaction is known as forward contracts. 39
  40. 40. FOREIGN EXCHANGE MANAGEMENT PREMIUM/DISCOUNT ON DIRECT QUOTATIONSIf we are familiar with the commodity or share Market it would beknown that spot rate and forward rates are different and they neednot be the same. This is so because the anticipated demand andsupply and the cost situations at the forward date may notnecessarily be identical with that of the existing at present. Thecommodity/share could be quoted at a higher (premium) or lower(discount) rate for future deliveries.We shall illustrate this with the example: Spot interbank rate of USD 1 =Rs.45.75 3 months forward USD 1 =Rs.45.95If one has to buy Dollar three months forward against rupees, hehas to pay 20 paisa more for the same dollar, i.e. 3 months dollarwill be costlier by 20 paisa compared to spot rate. Therefore USDollar is at premium in forwards vis-à-vis Rupee. In directquotations premium is always added to both the buying and sellingspot rates.In another situation: Spot interbank rate of USD 1 =Rs.45.75 3 months forward USD 1 =Rs.45.45From the above illustration it will be seen that the dollar fot threemonth forward is available for lesser money as compared to spot.In other words USD is cheaper by 30 paisa in forward ascompared to spot. 40
  41. 41. FOREIGN EXCHANGE MANAGEMENTI.e. USD is at discount in forwards vis-à-vis Rupee in directquotations. Discount factor is always deducted from the buyingand selling spot rate.From the above it is now clear that if we compare spot and forwardrates we are able to arrive at the following three possibilities If the spot rate and forward rate are the same they are at par In direct quotation if forward rate is more than the spot rate the base currency is said to be at premium In direct quotation if forward rate is less than the spot rate the base currency is said to be at discount rate.Quoting forward rates:Forward differentials are always quoted in two figures like 15/20and 15/10. It will be either at ascending or descending order. If thefirst figure is less than the second figure then the base currency issaid to be at premium.In direct quotations premium is always is always added to both thebuying and selling rates .if it is a buying transaction for the bank,the quoting bank will add lesser of the two premium figure so as togive minimum Rupees. Likewise if it is a selling transaction, thequoting bank, will add higher of the two premium figures so as totake the maximum amount in rupees for selling a foreign currency.Example:Interbank market rates:Spot USD 1 =Rs 45.70/90 41
  42. 42. FOREIGN EXCHANGE MANAGEMENT1 month forward =14/16 We have a export bill buying transaction. Since the forward differentials are in ascending order the base currency USD is at premium. Hence it should be added with the spot rate to arrive at forward rate. Out of the two premium figures (14/16) since bank will be given Indian rupees, they will give minimum amount in rupees.Step 1 Spot buying rate USD 1 = Rs 45.70Step 2To arrive at the forward rate:Since the base currency is at premium and the bank has to giverupees, add the minimum premium that is adding 14 paisa to thespot rate. Spot buying rate USD 1 = Rs 45.70 Add premium = Rs 00.14 Rs 45.84Hence the forward rate for this export transaction will be 45.84 In an import transaction, while recovering rupees from importer customer, for one –month forward rate, bank will add t6he maximum premium that is 16 paisa and the forward rate for the bank‟s selling transaction would be: Spot buying rate USD 1 = Rs 45.90 Add premium = Rs 00.16 Rs 46.06 42
  43. 43. FOREIGN EXCHANGE MANAGEMENTIf the forward differentials are on the descending order that is25/20, the base currency is said to be at a discount.In direct quotations, if the base currency is at a discount, discountfactor is always deducted from the spot rate. When two discountfigures are quoted if it is buying transaction in which bank will begiving rupees, they will be deducting the higher of the two figuresand give minimum Rupees.Example: Interbank market spot USD 1 = Rs 45.70/90 I month forward = 25/20 (paisa)To arrive at the 1 month forward rates: Buying Selling Interbank Spot 45.70 45.90 Deduct the discount (0.25) (0.20) 1 month forward rate 45.45 45.70From the above examples, in direct quotations, in sellingtransactions lesser amount of discount is deducted so as to takemaximum Rupees for every Dollar. 43
  44. 44. FOREIGN EXCHANGE MANAGEMENT FERA TO FEMAIn India, all transactions that include foreign exchange wereregulated by Foreign Exchange Regulations Act (FERA), 1973.Due to the policy leaning toward nationalized economy the mainobjective of FERA was conservation and proper utilization of theforeign exchange resources of the country. It also sought to controlcertain aspects of the conduct of business outside the country byIndian companies and in India by foreign companies.Over the years as the economy opened up with steady pace ofreforms a need was felt for more, liberalized foreign exchangecontrols and restrictions on foreign investment. FERA wasreplaced by a new Act called the Foreign Exchange ManagementAct (FEMA), 1999.The Act applies to all branches, offices and agencies outside India,owned or controlled by a person resident in India. FEMA is now apurely a civil legislation in the sense that its violation implies onlypayment of monetary penalties and fines. However, under it, aperson will be liable to civil imprisonment only if he does not paythe prescribed fine within 90 days from the date of notice but thattoo happens after formalities of show cause notice and personalhearing. FEMA also provides for a two year sunset clause foroffences committed under FERA which may be taken as thetransition period granted for moving from one harsh law to theother industry friendly legislation. 44
  45. 45. FOREIGN EXCHANGE MANAGEMENTFEMA has been formulated with clear cut objective to: to facilitate external trade and payments; and to promote the orderly development and maintenance of foreign exchange market.The Act has assigned an important role to the Reserve Bank ofIndia (RBI) in the administration of FEMA. The rules, regulationsand norms pertaining to several sections of the Act are laid downby the Reserve Bank of India, in consultation with the CentralGovernment. The Act requires the Central Government to appointas many officers of the Central Government as AdjudicatingAuthorities for holding inquiries pertaining to contravention of theAct. There is also a provision for appointing one or more SpecialDirectors (Appeals) to hear appeals against the order of theAdjudicating authorities. The Central Government also establishesan Appellate Tribunal for Foreign Exchange to hear appealsagainst the orders of the Adjudicating Authorities and the SpecialDirector (Appeals). The FEMA provides for the establishment, bythe Central Government, of a Director of Enforcement with aDirector and such other officers or class of officers as it thinks fitfor taking up for investigation of the contraventions under this act.FEMA permits only authorized person to deal in foreign exchangeor foreign security. Such an authorized person, under the Act,means authorized dealer, money changer, off-shore banking unitor any other person for the time being authorized by ReserveBank. 45
  46. 46. FOREIGN EXCHANGE MANAGEMENTWhen a business enterprise imports goods from other countries,exports its products to them or makes investments abroad, it dealsin foreign exchange. Foreign exchange means foreign currencyand includes: - deposits, credits and balances payable in any foreign currency; drafts, travelers‟ cheques, letters of credit or bills of exchange, expressed or drawn in Indian currency but payable in any foreign currency; and (iii) drafts, travellers cheques, letters of credit or bills of exchange drawn by banks, institution‟s or persons outside India, but payable in Indian Currency. The Act thus prohibits any person who:- Deal in or transfer any foreign exchange or foreign security to any person not being an authorized person; Make any payment to or for the credit of any person resident outside India in any manner; Receive otherwise through an authorized person, any payment by order or on behalf of any person resident outside India in any manner; Enter into any financial transaction in India as consideration for or in association with acquisition or creation or transfer of a right to acquire, any asset outside India by any person is resident in India which acquires, hold, own, possess or transfer any foreign exchange, foreign security or any immovable property situated outside India. The Act deals with two types of foreign exchange transactions. The basis of foreign exchange management is: 46
  47. 47. FOREIGN EXCHANGE MANAGEMENT FEMA 1999- act passed by government of India. Foreign exchange management rules 2000 – notifications by government of India. Foreign exchange management regulations 2000 – notifications by RBI. 47
  48. 48. FOREIGN EXCHANGE MANAGEMENT ROLE OF RESERVE BANK OF INDIARESERVE BANK OF INDIA is a central bank for india. Allcommercials and cooperative bank comes under the RBI.Therefore it is known as Apex bank.Authorized person shall comply with general are specific directionsor orders of RBI while dealing in foreign exchange. Failure to do sowill attract revocation of such authorization. RBI plays a vital role in the control and the management of forex in India. RBI is entrusted with the task of regulating and managing foreign exchange. Exchange control department of RBI is the sanctioning and administrative authority under FEMA1 999. Now this department is known as foreign exchange department by RBI. The instructions/guidelines of RBI operative through the authorized person in foreign exchange. RBI has been vested with the powers to regulate investments, trading and commercial activities in india of foreign companies and individuals. Holding of immovable property abroad and the trading, commercial and the industrial activities abroad by residents of India have been brought under the FEMA 1999 and hence under the purview of RBI The Directorate of enforcement is the investigating authority under the FEMA1999. 48
  49. 49. FOREIGN EXCHANGE MANAGEMENT ROLE OF FOREIGN EXCHANGE DEALERS ASSOCIATION OF INDIA(FEDEAI) It is a company registered under section 25 of the companies act 1956. It was established in 1958. It is an association of all ADs in forex who undertake to abide by the terms and conditions prescribed by FEDEAI for forex business/ transactions. The basic objective is to bring a uniformity bon forex transaction and to regulate the dealings among ADs. To regulate the dealings of ADs with the public, brokers, RBI and other bodies. To promote sound forex policy in Co-operation and consultation with RBI. The affairs of FEDEAI are managed by a managing committee, which is empowered to frame rules with prior RBI permission. FEDEAI is having its office at Mumbai. Local chapters at various places give the advisory services to all. The first edition of FEDEAI rules was effective from 1.6.1991.The second edition of rule as on 31.03.1999 replaced the first edition and it covers the following Rule1- hours of business. Rule2- export transaction. Rule 3- import transaction. Rule 4-machinating trade. Rule5-claen instruments. Rule6-gurantees. 49
  50. 50. FOREIGN EXCHANGE MANAGEMENT Rule 7-exchange contracts. Rule8-early delivery, extensions, cancellation of forward contract. The rules of FEDEAI are reviewed periodically and changes if any are informed to AD by way of circulation. The service chargers governing Forex transaction are left to the ADs.Balance of tradeIt refers to the net difference between the value of exports andimports or visible trade.Balance of paymentIt includes not only the visible trade but also the invisible items likeshipping, banking, tourism etc.if the inflow of forex is more, thebalance of payment if favorable and it is to be unfavorable oradverse when the outflow is more.Capital account:As pre FEMA1999 capital accounts transaction , which alters theasset and liabilities , including contingent liabilities outside India ofpersons resident outside India.Example:Any borrowing or lending in rupee between a person resident inIndia and person resident outside India. Deposits between personsresident in India and person outside India. Any borrowing orlending in foreign exchange etc. 50
  51. 51. FOREIGN EXCHANGE MANAGEMENTCurrent account:Current account transaction means a transaction other than acapital account transaction and includes: Payments due in connection with foreign tradew, other current business, services and short term banking and credit facilities in the ordinary course of business. Payments due as interest on loans and as net income from investments. Remittance for living expenses of parents, spouse and children residing abroad and Expenses in connection with foreign travel, education and medical care of parents, spouse and children etc. 51
  52. 52. FOREIGN EXCHANGE MANAGEMENT SODHANI COMMITTEE RECOMMENDATIONS The committee headed by shri O.P.Sodhani, the executive director of RBI has recommended sweeping changes to free forex control and to open up healthy speculation. RECOMMENDATIONS: Corporate are to be allowed to hedge genuine exposures on declaration. ADs to fix overnight position and aggregate Gap limit in tune with forex operations and risk taking capacity. ADs can initiate position abroad ( after satisfying capital adequency norms) within limits fixed by the management and approved by RBI. ADs are allowed to lend and borrow up to six months at market rates overseas upto specified limits. Increasing the number of players in forex market by removing the restrictions for institutions like IDBI, IFCI, and ICICI & FOREIGN TRADE bank who have larger forex commitments. ADs to be freed to fix interest rate, maturity period for FCNR deposit. Prospole for exemption of CRR/SLR on inter-bank deposits. Proposal to set up a forex clearing house at Mumbai. Proposal to retain 100% forex earnings of exporters in EEFC accounts Selective intervention by RBI and a separate swap window open to control forward rates in interbank market. 52
  53. 53. FOREIGN EXCHANGE MANAGEMENT CONCLUSIONNow a days foreign exchange market has expanded unbelievably.Earlier only Bombay stock exchange and national stock exchangewere seen trading in forex but now there are many privateorganizations working in these sector.Derivative use for hedging is only to increase due to the increasedglobal linkages and volatile exchange rates. Firms need to look atinstituting a sound risk management system and also need toformulate their hedging strategy that suits their specific firmcharacteristics and exposures.In India, regulation has been steadily eased and turnover andliquidity in the foreign currency derivative markets has increased,although the use is mainly in shorter maturity contracts of one yearor less. Forward and option contracts are the more popularinstruments. Regulators had initially only allowed certain banks todeal in this market however now corporate can also write optioncontracts. There are many variants of these derivatives whichinvestment banks across the world specialize in, and as theawareness and demand for these variants increases, RBI wouldhave to revise regulations. 53
  54. 54. FOREIGN EXCHANGE MANAGEMENT BIBLOGRAPHY:BOOKS REFFERD:  Foreign exchange management and  Foreign Exchange Management Act (FEMA) By-ICFAI UNIVERSITY  Banking transaction and finance By-WELINGKAR INSTITUTEINTERNET SOURCE:     54