all about foreign exchange information.

1. Welcome
to our
presentation

2. Presentation
on
Foreign Exchange
Submitted By:
Team Finance Crew
Submitted To:
Dr. Jannat Ara Parveen
Professor
Department of Finance
University of Chittagong

3. Foreign Exchange
Foreign
Exchange:
is the conversion of one country’s
currency into another.
For example: One can swap the Rupee for the
Taka.
As easily Foreign exchange is
important because it helps a
country to pay its import bills
towards imported goods and
services from the other foreign
countries.
Significance of Foreign
Exchange:

4. Fundamentals of foreign
exchange
There are three fundamentals:
1.Every country Has its own currency
2.Conversion is occurred by bank, by book keeping entry
3.Exchange are effected by means of credit instrument
such as draft , mail transfer

5. Rate of exchange
• The price at which a currency can be exchanged for
money in terms of another currency.

6. Rate of exchange
system
1.Fixed exchange rate; the rate of exchange between two or more currencies does not vary.
2.Flexible exchange rate; the exchange rate is fixed but in subject to frequent adjustment
depending upon market condition.
3.Free exchange rate; the currency is determined by the condition of supply and demand of
the market.
4.Managed float; to avoid the extreme of pegging and floating rate , the managed float has
been innovated.

7. Supply and
Demand
Interest and
inflation rate
Balance of
trade
Government
Debt
Political and
economical
stability
Factors influence foreign exchange
rate

8. Types of foreign exchange
rates
1.Direct quotation
2.Indirect quotation
3.Spot rate
4.Forward rate

9. Theories of Exchange Rate Determination
 Some of the prominent theories includes –
 1. The Mint Parity Theory
 2. The Purchasing Power Parity Theory
 3. The Balance of Payments Theory
 4. The Monetary Approach to Foreign Exchange
 5. Portfolio Balance Approach

10. 1.The Mint Parity Theory
 Mint Parity: Rate of exchange determined on weight-to-weight basis of the metallic
contents of currencies of the two countries.
 Criticisms:• International Gold Standard has been abandoned.
• Free buying and selling of gold internationally is no more permitted.
•Countries having inconvertible paper currencies.

11. 2.The Purchasing Power Parity
 The determination of rate of exchange between two inconvertible paper
currencies on the basis of purchasing power.
2 versions of The Purchasing Power Parity-
2(a). The Absolute Version
2(b). The Relative Version

12. 2(A) The Absolute Version:
Exchange Rate R = (Unit of Currency A/Unit of Currency B) × (Internal purchasing
power of A/Internal purchasing power of B)
2(B) The Relative Version:
R1 = R0 × ((PB1/PB0) / (PA1/PA0)
here,
R1= Equilibrium rate of exchange in current period
R0= Rate of exchange in the base period
PA1 and PA0 is the price indices of country A respectively in the current and the base period.
PB1 and PB0 is the price indices of country B respectively in the current and the base period.

13. 3.The Balance of Payments Theory
 The rate of exchange of the currency of one country with the other is determined by the
factors which are autonomous of internal price level and money supply.
At a given rate of exchange-
•Deficit in BOP = Demand for foreign exchange > Supply of foreign exchange.
• Surplus in BOP = Supply of Foreign exchange > Demand for foreign exchange.
> Advantages and disadvantages of BOP : BOP theory is superior to both the PPP theory and
Mint Parity theory from the policy point of view. But, the theory is based on the assumptions of
perfect competition in the market. According to it, there is no casual connection between rate of
exchange and the price level, so it neglects the basic value of currency

14. Foreign exchange transaction
Means;
currency transaction that involves two countries.
Types of foreign exchange transaction;
1.Spot transaction; the exchange of the currencies by buyer
and seller within two days without a contract.
2.Forward transaction ; are future transaction the buyer and seller
enter an agreement to purchase are sell after 90 days.
3.Swap transaction; simultaneous lending and borrowing of
two different currencies.
4.Future transaction ; the contracts will occurred at future
dates , features and size should be followed.

15. Foreign exchange transaction
Means;
The exchange of currency that involves two country.
The conversion of currency in a foreign exchange transaction can be performed
through ;
1. Buying and selling of goods and services on credit
2. Borrowing and lending of funds

16. Foreign exchange transaction control in
Bangladesh
Foreign exchange law;
though Bangladeshi currency is freely convertible , transaction of
foreign exchange is highly regulated . Remittance of money outside
Bangladesh is allowed only for specific situation and is required to be
supported by appropriate documentation.
Foreign exchange regulation act 1947 is the basic law in this regard and
provides the legal basis for regulating certain payments .
Bangladesh bank is responsible for administering foreign exchange
transaction in Bangladesh .Bangladesh bank directive main issues for
foreign exchange named as GUIDELINE FOR FOREIGN EXCHANGE
TRANSACTIONS.

17. Foreign trade involves movement of goods from one country to
another country.
A large number of documents are used in foreign exchange
operation.
These documents can be classified into following categories:
1.Commercial Documents.
2.Official Documents.
3.Insurance Documents.
4.Transport Documents.
5.Financial and Financing Documents.
DOCUMENTS USED IN FOREIGN EXCHANGE
OPERATION IN BANGLADESH

18. 1.Commercial Documents
-INVOICE
-CERTIFICATE OF ORIGIN
-WEIGHT NOTES
-PACKING LIST

19. 2.Official Documents
-CONSULAR INVOICE
-LEGALIZED INVOICE
-BLACK LISTED CERTIFICATE

20. 3.Insurance Documents
-MARINE INSURANCE
1.MECHINERY INSURANCE
2.LIABILITY INSURANCE
3.MARINE CARGO INSURANCE

21. 4.Transport Documents
-AIRWAY BILL
-MATE RECEIPT
-BILL OF LADING

22. 5.Financial and Financing Documents
-Bill of exchange
-Promissory notes
-Trust receipt

23. Sale And Payment Terms In Foreign Exchange
In today’s marketplace and win sales against foreign competitors,
exporters must offer their customers attractive sales terms
supported by appropriate payment method.
For exporters, any sale is a gift until payment is received.
For importers, any payment is a donation until the goods are
received.

24. Cash-In-Advance
Letter of credit(L/C)
Documentary Collections
Open Account

25. Cash-In-Advance
 Buyer pays before shipment
Used in new relationship
Transactions are small and buyer has no choice
Maximum security to sellers
No guarantee that goods are shipped

26. Letter Of Credit
What is L/C ?
- A document issued by a bank stating its commitment to pay someone (seller or
exporter) a stated amount provided the seller or exporter meets specific terms and
conditions.
Most common payment method in international trade
Also protects the buyers

27. Documentary Collections
A documentary collection (D/C) is a transaction whereby the exporter
entrusts the collection of a payment to the remitting bank (exporter’s
bank) , which sends documents to a collecting bank (importer’s banks),
along with instructions for payment.
D/Cs involve a drafts that requires the importers to pay the face amount
either at sight(document against payment) or ana specified
date(document against acceptance)

28. Open Account
Most advantageous option to the importers
Goods available to buyer
- Before payment
Time of payment
-As agreed; i.e. 30 days
Highest risk option for an importer

29. Balance of Trade
THE BALANCE OF TRADE IS THE
DIFFERENCE BETWEEN THE VALUE OF
A COUNTRY’S IMPORTS AND EXPORTS
FOR A GIVEN PERIOD. IT IS THE
LARGEST COMPONENT OF A
COUNTRY’S BALANCE OF PAYMENTS.

30. Favorable vs. Unfavorable trade
balance:
1. A favorable trade balance created when a country exports more
than it imports. On contrary, an unfavorable trade balance is
created when a country imports more than it exports.
2. Favorable trade balance helps to strengthen the economy of a
country .Unfavorable trade balance creates problem for the
economy.
3. In recession ,favorable trade balance is necessary for the
economy .But in boom period ,unfavorable trade balance helps in
growth rate .
4. Favorable BOT = Export>Import
Unfavorable BOT= Export<Import

31. Is negative trade balance always
bad for the economy?
No, not specially .Negative trade balance invites
investment .It facilitates the cheaper sources of goods
from abroad . In a boom stage ,negative trade balance
show growth rate in economy .Hence whether it is
good or bad for an economy it depends on the
business cycle.
For example , Hong Kong has a large trade deficit .But
it imports mainly of raw materials and exports finished
goods .It gives competitive advantages in the world
market.

32. Is favorable trade balance always show positive
scene for the economy?
No, a trade surplus is not always a viable indicator of an
economy’s health and it must be considered in the context
business cycle and other economic indicators .A positive
trade balance is not good enough when it exports mainly of
raw materials and imports capital goods .In
2017,USA,UK,CANADA had the largest trade deficit .But
they were mainly of raw material importers. In times of
economic expansion, countries prefer to import more to
promote price competition ,which limits inflation.

33. Foreign exchange act 1947
( amended)
1. Currency
2. Foreign currency
3. Foreign exchange
4. Foreign security
5. Transfer
6. Gold
7. Good
8. Import
9. Current account transaction

34. Thank You All
Any Question?