The document discusses various aspects of foreign exchange management including interbank deals, cover deals, trading, and funding of vostro accounts. Interbank deals refer to the purchase and sale of foreign currency between banks in the interbank market. Cover deals involve a bank purchasing or selling foreign currency to insure against exchange rate fluctuations from dealings with customers. Trading involves purchasing and selling currency in the market for potential exchange rate gains. Swap deals involve simultaneously buying and selling the same foreign currency for different maturities.

1. FOREIGN EXCHANGE
MANAGEMENT
Cover deals, Trading, Swap deals &
funding of vostrow accounts

2. INTERBANK DEALS
Interbank deals refer to purchase and sale of foreign exchange
between the banks. In other words it refers to the foreign exchange
dealings of a bank in the interbank markets. The interbank
market is the top-level foreign exchange market where banks
exchange different currencies. The banks can either deal with one
another directly, or through electronic brokering platforms. The
interbank market is an important segment of the foreign exchange
market. It is a wholesale market through which most currency
transactions are channeled. It is mainly used for trading among
bankers. The three main constituents of the interbank market are
•the spot market
•the forward market
•SWIFT (Society for World-Wide Interbank Financial
Telecommunications)

3. COVER DEALS
Purchase and sale of foreign currency in the market
undertaken to acquire or dispose of foreign exchange
required or acquired as a consequence of its dealings
with its customers is known as the ‘cover deal’. The
purpose of cover deal is to insure the bank against any
fluctuation in the exchange rates.
In quoting a rate to the customer the bank is guided by the
interbank rate to which it adds or deducts and arrives at
the rate it quotes to the customer. This is done on the
assumption that immediately on purchase from the
customer the bank would sell the foreign exchange to
interbank market at market buying rate.

4. TRADING
Trading refers to the purchase and sale of foreign exchange in the
market other than to cover bank’s transactions with the customers. The
purpose may be to gain on the expected changes in exchange rates. In India
the scope for trading although still subject to controls is getting wider the
relaxations being made in the control regulations.

5. Vostro means ‘your account with us’. Funding of nostro account of the
bank is done by realization of foreign exchange in the relevant currency
purchased by the bank. If sales exceed purchases to avoid overdraft in the
nostro account, the bank would purchase the requisite foreign exchange in
the interbank market and arrange for its credit to the nostro account.
Some of the foreign banks who maintain vostro accounts with the bank
may fund the account by arranging remittance through some other bank. Or
the foreign bank concerned may request the Indian bank to credit its rupee
account and in compensation credit the bank in India would quote the rate at
which it could margin may not be taken for such transactions.
FUNDING OF VOSTRO ACCOUNTS

6. SWAP DEALS
A swap deal is a transaction in which the bank buys and sells the specified
foreign currency simultaneously for different maturities. Thus a swap deal may
involve:
i) There should be simultaneous purchase and sale of the same foreign
currency of same value for different maturities and
ii) The deal should have been concluded with the distinct understanding
between the banks that is a swap deal.