1. SWIFT- Society for Worldwide Interbank Financial
Telecommunication
It’s an organization that was founded in Brussels in 1973 to establish some common processes and
standards for financial transactions.
SWIFT is just one of the organizations and systems that have changed modern banking for
ever. And it’s worth it to do your homework to make sure you know what you’re getting.
SWIFT provides a secure network that allows more than 10,000 financial institutions in 212
different countries to send and receive information about financial transactions to each other.
Before the SWIFT network was put in place, banks and financial institutions relied on a system
called TELEX to make money transfers. TELEX was slow, and the system lacked the security
necessary for a time when technology was making rapid progress.
2. The Society for Worldwide Interbank Financial Telecommunication (SWIFT), legally
S.W.I.F.T. SCRL, provides a network that enables financial institutions worldwide to send and
receive information about financial transactions in a secure, standardized and reliable
environment. SWIFT also sells software and services to financial institutions, much of it for use
on the SWIFTNet network, and ISO 9362. Business Identifier Codes (BICs, previously Bank
Identifier Codes)
Type : Cooperative
Industry :Telecommunications
Founded : 1973
Headquarters : La Hulpe, Belgium
Key people Javier Perez-Tasso (CEO) Alan Raes Rosemary Stone
Products : Financial Telecommunication
Number of employees : >3000
3. How does the SWIFT system work?
On the consumer end, you can think of the SWIFT network a bit
like travelling from one airport to another. It’s not always possible
to take a direct flight. Which means you may need to travel from
one city to another via several connecting flights. SWIFT works
essentially the same way. Your money will travel from one
country to another, but to do that there are often
intermediary/correspondent banks involved.
The SWIFT network doesn’t actually transfer funds, but instead it
sends payment orders between institutions’ accounts, using
SWIFT codes. It was SWIFT that standardized IBAN
(International Bank Account Numbers) and BIC (Bank Identifier
Codes) formats. SWIFT owns and administers the BIC system,
meaning that it can quickly identify a bank and send a payment
there securely.
4. As of 2018, around half all high-value cross-border payments worldwide used the
SWIFT network.[1] As of 2015, SWIFT linked more than 11,000 financial institutions
in more than 200 countries and territories, who were exchanging an average of over 32
million messages per day (compared to an average of 2.4 million daily messages in
1995).
SWIFT transports financial messages in a highly secure way but does not hold accounts
for Website www.swift.com its members and does not perform any form of clearing or
settlement. SWIFT does not facilitate funds transfer: rather, it sends payment orders,
which must be settled by correspondent accounts that the institutions have with each
other. Each financial institution, to exchange banking transactions, must have a banking
relationship by either being a bank or affiliating itself with one (or more) so as to enjoy
those particular business features
5. Who uses the SWIFT network?
The majority of SWIFT system members are banks, but it’s also
used by many other businesses:
1. money brokers and security broker dealers
2. clearing systems
3.corporates, non-bank financial institutions and more
6. ROLE OF SWIFT
SWIFT has a broad role to play in helping to de?ne and
implement the next generation of generic standards for the FX
market.
At one level SWIFT plays an 'active' role in developing new
standards and is currently focusing on building business and
logical message models for FX orders, confirmations and options
for the treasury market.
At another level, its role is entirely 'proactive', bringing disparate
parties together to achieve, at a very minimum, a convergence of
purpose – not to mention, an economy of effort - in mapping out a
standards approach across the FX community.
SWIFT is working proactively with its members to overcome
message incompatibility between different industry segments.
7. Advantages of SWIFT
Improved cash forecasting, liquidity management and internal control
integration with existing systems, for example with TMS and enterprise resource
planning (ERP) systems, especially in a multi-bank situation.
The cash management service gives the ability to move money around securely and
efficiently.
Information: the corporate has the ability to query where the payment is in a situation
where the beneficiary claims non-receipt.
Implementing SWIFT is becoming less expensive resulting in savings to be realized on
compliance costs and banking fees and the reduction in number of potential errors.
8.
9. Factors Determining Spot Exchange Rates
1. Balance of Payments: Balance of Payments represents the demand for and supply of
foreign exchange which ultimately determine the value of the currency. Exports, both
visible and invisible, represent the supply side for foreign exchange. Imports, visible
and invisible, create demand for foreign exchange. Put differently, export from the
country creates demand for the currency of the country in the foreign exchange market.
(2) Inflation: Inflation in the country would increase the domestic prices of the
commodities. With increase in prices exports may dwindle because the price may not be
competitive. With the decrease in exports the demand for the currency would also
decline; this in turn would result in the decline of external value of the currency.
10. Interest rate: The interest rate has a great influence on the short – term movement of
capital. When the interest rate at a center rises, it attracts short term funds from other
centers.
Money Supply An increase in money supply in the country will affect the exchange
rate through causing inflation in the country. It can also affect the exchange rate
directly.
National Income: An increase in national income reflects increase in the income of the
residents of the country. This increase in the income increases the demand for goods in
the country.
Resource Discoveries when the country is able to discover key resources, its currency
gains in value
Capital Movements there are many factors that influence movement of capital from
one country to another. Short term movement of capital may be influenced buy the offer
of higher interest in a country
Political factors Political stability induced confidence in the investors and encourages
capital inflow into the country
11. Determining Forward Prices
In principle, the forward price for an asset would be equal to the spot or the case price
at the time of the transaction and the cost of carry. The cost of carry includes all the
costs to be incurred for carrying the asset forward in time. Depending upon the type of
asset or commodity, the cost of carry takes into account the payments and receipts for
storage, transport costs, interest payments, dividend receipts, capital appreciation etc.
Thus
Forward price = Spot or the Cash Price + Cost of Carry
12. ⋄The forward quotations for a currency will be quoted with the following information viz., the spot rate and the
forward margin. Given this the forward rate has to be Example: On 25th January in the Inter bank market the
US dollar is quoted as follows:
Spot US$1=Rs. 42.40/.021 Spot/February .20/.21 Spot/March .35/.36
calculated by loading the forward margin into the spot rate.
Example: Buying rate Selling rate
February March February March
Spot rate 42.40 42.40 42.42 42.42
Add: Premium 0.20 0.35 0.21 0.36
Forward rates 42.60 42.75 42.63 42.78
Now we got from the above calculation the outright rates.
Buying selling
Spot delivery USD 1 = Rs.42.40 42.42
Forward delivery February 42.60 42.63
Forward delivery March 42.75 42.78
13. Potential Exchange Rate Determinants
Potential foreign exchange rate determinants can be categorized into clusters that are also
influenced by exchange rates. They are: 1) parity conditions;
2) infrastructure; 3) speculation; 4) cross-border investment; and 5) political risk.
14.
15. Arbitrage
Arbitrage is the simultaneous buying and selling of foreign currencies with intention of making profits from the difference
between the exchange rate prevailing at the same time in different markets .
It involves no risk and no capital of your own. It is an activity that takes advantages of pricing mistakes in financial instruments
in one or more markets. That is, arbitrage involves
(1) Pricing mistake
(2) No own capital
(3) No Risk
1. Local Arbitrage (One good, one market)
It sets the price of one good in one market. Law of one price: the same good should trade for the same price in the same market.
Example: Suppose two banks have the following bid-ask FX quotes:
Bank A Bank B
USD/GBP 1.50 1.51 1.53 1.55
Taking both quotes together, Bank A sells the GBP too low relative to Bank B’s prices. (Or,
conversely, Bank B buys the GBP too high relative to Bank A’s prices). This is the pricing mistake!
16. 2. Triangular Arbitrage (Two related goods, one market)
Triangular arbitrage is a process where two related goods set a third price. In the FX
Market, triangular arbitrage sets FX cross rates. Cross rates are exchange rates that do not
involve the USD. Most currencies are quoted against the USD. Thus, cross-rates are
calculated from USD quotations –i.e., the most liquid quotes.
The cross-rates are calculated in such a way that arbitrageurs cannot take advantage of the
quoted prices. Otherwise, triangular arbitrage strategies would be possible.
(1)Borrow USD 1
(2) Sell USD/Buy JPY at SJPY/USD,t = 100 JPY/USD –i,e, sell the USD for JPY 100.
(3) Sell JPY/Buy GBP at SJPY/GBP,t = 140 JPY/GBP –i.e., sell JPY 100 for GBP
0.7143
(4) Sell GBP/Buy USD at SUSD/GBP,t = 1.60 USD/GBP –i.e., sell the GPB 0.7143 for
USD 1.1429
(5) Return loan, keep profits: π: USD 0.1429 (14.29% per USD borrowed).
17. Parity Conditions
Parity refers to the condition where two (or more) things are equal to each other.
Parity can refer to two securities having equal value, such as a convertible bond and the value of the stock if the
bondholder chooses to convert into common stock.
Parity can also be found in the foreign exchange markets whereby currencies that are at parity have an exchange rate
relationship of one to one.
18. Balance of Payments: A financial statement summarizing the flow of goods, services, and
investment funds between residents of a given country and residents of the rest of the world.
Capital account: A section of the balance of payments accounts. Under the revised format of the IMF, the
capital account measures capital transfers and the acquisition and disposal of non-produced and non-financial
assets.
Covering: A transaction in the forward foreign exchange market or money market which protects the value of
future cash flows.
Current account: In the balance of payments, the net flow of goods, services, and unilateral transfers such as
gifts between a country and all foreign countries.
Devaluation: A drop in the spot foreign exchange value of a currency that is pegged to other currencies or to
gold.
Flexible exchange rates: The opposite of fixed exchange rate is adjusted periodically by the country‘s
monetary authorities in accordance with their judgement and/or an external set of economic indicators.
Floating Exchange rates: Foreign exchange rates determined by demand and supply in an open market that is
presumably free of government interference.
Revaluation: A rise in the foreign exchange value of a currency that is pegged to other currencies or gold. Also
called ―appreciation‖.
