Here are the key differences between FERA and FEMA: - FERA (Foreign Exchange Regulation Act) was introduced in 1973 to regulate foreign exchange transactions in India. It was replaced by FEMA (Foreign Exchange Management Act) in 2000. - FERA had a restrictive approach and sought to control foreign exchange transactions. FEMA introduced a liberalized framework in line with India's economic reforms and opening up of the economy. - Under FERA, foreign exchange transactions could only be carried out through authorized dealers like banks. FEMA allows residents greater current account transaction freedom through authorized persons like money changers. - FERA classified foreign exchange transactions into current and capital accounts, while FEMA distingu

1. International Trade Finance
Unit III
FOREX MANAGEMENT
B. Velmurugan

2. Topics
 Foreign Exchange Markets – Spot
Prices and Forward Prices – Factors
influencing Exchange rates – The
effects of Exchange rates in Foreign
Trade – Tools for hedging against
Exchange rate variations – Forward,
Futures and Currency options – FEMA
– Determination of Foreign Exchange
rate and Forecasting.

3.  The Foreign Exchange Market
(FOREX, FX, or currency market) is a
global decentralized market for the
trading of currencies. The main
participants in this market are the larger
international banks. The foreign
exchange market works through financial
institutions, and it operates on several
levels. The foreign exchange market
assists international trade and
investment by enabling currency

4. FOREIGN EXCHANGE MARKETS -
MEANING
 Foreign exchange market is a market
in which foreign currencies are
bought and sold. Foreign exchange
market is a system facilitating
mechanism through which one
country currencies can be
exchanged for the currencies of
another country.”

5. NATURE OF FOREIGN EXCHANGE MARKET
 Foreign exchange market refers to the market in which
participants are able to buy, sell, exchange and
speculate on currencies.
 Foreign exchange markets are made up of banks,
commercial companies, central banks, investment
management firms, hedge funds, and retail foreign
exchange brokers and investors.
 The foreign exchange market is considered to be the
largest financial market in the world.
 The foreign exchange market is a global, worldwide-
decentralized financial market for trading currencies.
 The foreign exchange market determines the relative
values of different currencies.
 The foreign exchange market assists international trade
and investment by enabling currency conversion.

6. PARTICIPANTS of FOREX MARKET

7. Speculators
 Speculators seek to profit from
changes in foreign exchange rates
based upon their expectations. This
class of participants, actively expose
themselves to currency risk by buying
and selling currencies in the forward
market to profit from exchange rate
fluctuations.

8. FOREX BROKER
 A FOREX broker, also known as a
retail FOREX broker, or currency
trading broker, in modern financial and
commercial trading means an
intermediary who buys and sells a
particular asset or assets for a
commission.

9. MULTINATIONAL CORPORATION (MNC)
 An enterprise operating in several
countries but managed from one
(home) country. Generally, any
company or group that derives a
quarter of its revenue from operations
outside of its home country is
considered a multinational
corporation.

10. Arbitrators
 This class of participants seeks to
earn risk-free profits by seeking
advantage of differences in the prices
of currencies, in interest rates among
various countries. they use forward
contract to hedge risk.

11. Hedgers
 Many MNCs engage themselves in
forward contract to protect the home
currency values of F.C. denominated
assets and liabilities on their balance
sheet that are not to be realized over
the life of contract. They also hedge
receivables and payables.

12. Others….
 Travelers and tourists
 Exchanges companies and individual
 All Scheduled Commercial Banks
 Central Banks

13. Organization of the FOREX
Market
Spot Prices / Spot Market
The spot market refers to that segment of the
foreign exchange market in which sale and
purchase transactions are settled within two
days of the deal.
i.e. when buyers and sellers of a currency
settle their transaction within two days of the
deal is called as spot transaction.
Forward Market
The forward exchange market refers to the
foreign exchange deals for sale and
purchase of foreign currency at some
future date, normally after 90 days of the deal.

14. Factors Influencing Exchange Rate

15. International Trade
 Trade of goods and services between
countries is the major reason for the demand
and supply of foreign currencies. The value or
strength or weakness of a country‘s currency
in terms of other currencies depends on its
trade with those countries. If a country’s
import is higher, the demand for foreign
currency will be high.
Strength of the Economy
 The strength of the economy affects the
demand and supply of foreign currency. If an
economy is growing fast and is strong it
will attract foreign currency thereby
strengthening its own.

16. Balance of Payment
 It is the total number of transactions
including its exports, imports, debt, etc.
that a country deals with, in comparison
to other countries determining the
amount it has to pay or receive. A
country that is in a position to receive
more than pay will have a higher value
for its currency and vice versa.
Government policies and measures
 A country prone to political turmoil and
continuous clashes will deter the
investor‘s confidence lowering the value
of the currency.

17. Sentiment
 The way, market perceives our economy as
an investment destination, is essential. If it
confides in our policies and believes that we
are on the right track, paving way for an
unprecedented growth, it will express its
interest by investing with the expectation of
receiving lucrative returns.
Inflation
 A country with lower inflation will have an
upper-hand in the market and have a higher
currency value. On the other hand, countries
with high inflation will consequently witness
depreciation in their currency in comparison
to the currencies of their global Counterparts.

18. Interest Rates
 When interest rate for a particular
currency rises, it will have a consequent
effect on the yields for the assets
denominated in that particular currency,
nudging way for an increase in demand
by investors and hence, increase the
value of currency
Capital Movements
 Capital movements of foreign currency
are usually more than connected with
international trade. This occurs due to a
variety of reasons – both positive and
negative

19. Speculation
 Speculation in a currency raises or lowers the
exchange rate. For instance, the foreign
exchange market in India is very shallow. If a
speculator enters and buys US $1 million, it will
raise the value of the US dollar significantly. If a
few others do so too, the price of the US dollar
will rise even further against the Indian rupees
Exchange Rate Policy and Intervention
 Exchange rates are also influenced, in no small
measure, by expectation of change in regulations
relating to exchange markets and official
intervention. Official intervention can smoothen
an otherwise disorderly market. As explained
before, intervention is the buying or selling of
foreign currency to increase or decrease its
supply..

20. Economic Expectations
 Exchange rates move on economic
expectations. After the 1999 budget in
India there was an expectation that the
rupee would fall by 7% to 9%. Since
such expectations affect the external
value of the rupee, all economic data –
the balance of payments, export growth,
inflation rates and the likes – are
analysed and its likely effect on
exchange rates is examined
Stock exchange operations
 Stock exchange operations in foreign
securities, debentures, stocks and
shares influence the demand and supply
of related currencies, thus influencing
their exchange rate.

21. Political factors
 Political scenario of the country
ultimately decides the strength of the
country. Stable efficient government at
the centre will encourage positive
development in the country, creating
investor confidence and a good image
in the international market

22. FOREIGN EXCHANGE RISK
 Foreign exchange risk (also known as
exchange rate risk or currency risk) is a
financial risk posed by an exposure to
unanticipated changes in the exchange
rate between two currencies.
 Investors and multinational businesses
exporting or importing goods and
services or making foreign investments
throughout the global economy are faced with
an exchange rate risk which can have severe
financial consequences if not managed
appropriately.

23. Types of Risk/Exposure
 Transaction risk
Transaction exposure is the effect
of an exchange rate change on
outstanding obligations, such as
imports and exports.
 A firm has transaction exposure
whenever it has contractual cash flows
(receivables and payables) whose
values are subject to unanticipated
changes in exchange rates due to a
contract being denominated in a foreign
currency.

24. Types of Risk/Exposure
 Economic risk
A firm has economic exposure (also
known as operating exposure) to the
degree that its market value is influenced
by unexpected exchange rate
fluctuations. Such exchange rate
adjustments can severely affect the
firm's market share | position with
regards to its competitors, the firm's
future cash flows, and ultimately the
firm's value. Economic exposure can
affect the present value of future cash
flows.

25. Types of Risk/Exposure
 Translation risk
A firm's translation exposure is the
extent to which its financial reporting is
affected by exchange rate movements.
As all firms generally must prepare
consolidated financial statements for
reporting purposes, the consolidation
process for multinationals entails
translating foreign assets and liabilities
or the financial statements of foreign
subsidiary /subsidiaries from foreign to
domestic currency.

26. HEDGING TECHNIQUES
 In simple language, a hedge is a
technique used to reduce any
substantial losses/gains suffered by
an individual or an organization
 A hedge is an investment position
intended to offset potential
losses/gains that may be incurred by
a companion investment.

27. Hedging Techniques Types

29. FOREIGN EXCHANGE MANAGEMENT ACT
(FEMA), 1999
 Threplaced the Foreign Exchange Regulation Act
(FERA), 1973 which regulated the foreign exchange
transactions in India and which sought to control certain
aspects of the conduct of business outside the country
by Indian companies and in India by foreign companies.
 The FEMA, which came into effect from 1st January,
2000 extends to the whole of India and also applies to
all branches, offices, and agencies outside India, owned
or controlled by a person resident in India.
 Foreign Exchange Management Act or in short (FEMA)
is an act that provides guidelines for the free flow of
foreign exchange in India. It has brought a new
management regime of foreign exchange consistent
with the emerging frame work of the World Trade
Organisation e Foreign Exchange Management Act
(FEMA), 1999 (WTO). Foreign Exchange Management
Act was earlier known as FERA (Foreign Exchange
Regulation Act), which has been found to be
unsuccessful with the pro liberalisation policies of the
Government of India.

30. Objectives of FEMA
 To facilitate external trade and
payments
 To promote the orderly development
and maintenance of foreign exchange
market

31. Scope of FEMA
 Free transactions on current account
subject to reasonable restrictions that
may be imposed
 RBI controls over capital account
transactions
 Control over realization of export
procees Dealing in foreign exchange
through authorized persons like
authorized dealer/money changer / off
shore banking unit

32. Highlights of FEMA
 It prohibits foreign exchange dealing undertaken
other than an authorised person
 It also makes it clear that if any person residing
in India, received any Forex payment
 There are 7 types of current account
transactions, which are totally prohibited, and
therefore no transaction can be undertaken
relating to them
 Similar freedom is also given to a resident who
inherits such security or immovable property from
an ROI.
 The exchange drawn can also be used for
purpose other than for which it is drawn provided
drawl of exchange is otherwise permitted for
such purpose.

33. Structure of FEMA
 FEMA contains 7 chapters divided into 49
sections (Supreme Legislation)
 sets of Rules made by Ministry under section
46 of FEMA. (Delegated legislations)
 23 sets of regulations made by RBI under
section 47 of FEMA (Subordinate
Legislations).
 Master circular issued by RBI every year.
 Foreign Direct Investment (FDI) policy issued
by Department of Industrial policy and
Promotion (DIPP) time to time.
 Notifications and circulars issued by RBI.
 Enforcement Directorate

34. Authorities responsible for
various aspect of FEMA
 Enforcement Directorate
 Adjudicating Authorities
 Special Director (Appeals)
 Appellate Tribunal

35. Distinguish between FERA and
FEMA.