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Foreign Exchange Management


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Published in: Economy & Finance, Technology

Foreign Exchange Management

  1. 1. Foreign exchange management 06/06/09 Foreign exchange - Kevin
  2. 2. Background <ul><li>Volume of international trade (exports and imports) increased manifold </li></ul><ul><li>Emergence of MNCs </li></ul><ul><li>International lending and borrowing (IMF, World Bank, ADB) </li></ul><ul><li>Transnational services </li></ul><ul><ul><li>Outsourcing of financial services </li></ul></ul><ul><ul><li>Software development, ITES, BPO </li></ul></ul><ul><li>There is large scale flow of funds across nations </li></ul><ul><li>Flow of funds in different currencies </li></ul>06/06/09 Foreign exchange - Kevin
  3. 3. Study areas <ul><li>Understanding of foreign exchange is integral part of modern commerce/management </li></ul><ul><li>Exchange rate mechanism </li></ul><ul><li>Foreign exchange market </li></ul><ul><li>Foreign exchange risk and its management </li></ul>06/06/09 Foreign exchange - Kevin
  4. 4. Foreign exchange <ul><li>Each country has its own currency </li></ul><ul><li>Home currency and other currencies </li></ul><ul><li>Any currency other than home currency is foreign exchange </li></ul>06/06/09 Foreign exchange - Kevin
  5. 5. Exchange rate mechanism <ul><li>Exchange rate: ratio of exchange between two currencies </li></ul><ul><li>Exchange rate quotations </li></ul><ul><ul><li>Direct quote: home currency price of a foreign currency </li></ul></ul><ul><ul><li>Example: Rs.46/USD; Rs.58/Euro </li></ul></ul><ul><ul><li>Indirect quote: value of one unit of home currency in terms of a foreign currency </li></ul></ul><ul><ul><li>Example: Re= USD 0.0217; Re= Euro 0.0172 </li></ul></ul>06/06/09 Foreign exchange - Kevin
  6. 6. Currency appreciation/depreciation <ul><li>Increase in foreign currency price </li></ul><ul><li>From Rs.46 to Rs.48/ USD </li></ul><ul><li>Foreign currency appreciation </li></ul><ul><li>Home currency depreciation </li></ul><ul><li>From USD 0.0217 to USD 0.0208/ Re </li></ul>06/06/09 Foreign exchange - Kevin
  7. 7. Buying and selling rates <ul><li>Buying rate – Bid rate </li></ul><ul><li>Selling rate – Offer rate /Ask rate </li></ul><ul><li>Examples: Rs.46.15 – 46.45/ USD; Rs. 58.00 – 58.40/ Euro </li></ul><ul><li>Bid-offer spread: profit of the dealer </li></ul><ul><li>Size of spread: depends on quantity traded, demand for currency, type of customer </li></ul>06/06/09 Foreign exchange - Kevin
  8. 8. Spot and forward rates <ul><li>Spot rate: rate for cash transactions (Buying and selling) </li></ul><ul><li>Forward rate: rate for delivery on a future date (Buying and selling) </li></ul><ul><li>Examples: </li></ul><ul><ul><li>Spot: Rs.46.15 – 46.45 / USD </li></ul></ul><ul><ul><li>1 month: Rs.46.27 – 46.56 / USD </li></ul></ul><ul><ul><li>2 months: Rs.46.28 – 46.60 / USD </li></ul></ul><ul><ul><li>3 months: Rs.46.30 – 46.64 / USD </li></ul></ul>06/06/09 Foreign exchange - Kevin
  9. 9. Forward rate differential <ul><li>difference between spot and forward rates </li></ul><ul><li>Forward premium: forward > spot </li></ul><ul><li>Forward discount: forward < spot </li></ul>06/06/09 Foreign exchange - Kevin