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Foreign exchange market and it's structure in india
1. F i E h M k tForeign Exchange Market
&
It’s Structure
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2009
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2. What is Foreign Exchange ?
• In narrow terms, Forex simply means foreign currency or
money other than the domestic currency or money
• In Broader Terms, Forex Means
Study of all the currencies of the different countriesy
How they are exchanged or traded with each other
Exchange rates and how they are set
Th E h k tThe Exchange markets
The Participants
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2009
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3. Function of a Forex Department
Exports
Pre/post
Imports
Opening of LC
shipment
Advance
Export
Advance bills
Bills for
collection
Exchange Dealings
Rate Computation
Nostro / Vostro accounts
Forward Contracts
Guarantees,LC’
S & bills for
collection
Import loan and
guarantees
Forward Contracts
Derivatives
Exchange position and
cover position
Remittances
Issue of DD,MT,TT
Statistics
Submission of
returns
, ,
Cheques,sale of
Foreign currency
notes,NR deposits
returns,
collection of
credit
information
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4. Foreign Exchange Market-World View
• Globally, operations in the foreign exchange market startedy, p g g
in a major way after the breakdown of the Bretton Woods
system in 1971, which also marked the beginning of
floating exchange rate regimes in several countriesfloating exchange rate regimes in several countries.
• Over the years, the foreign exchange market has emerged
as the largest market in the worldas the largest market in the world.
• The decade of the 1990s witnessed a perceptible policy shift
in many emerging markets towards reorientation of theirin many emerging markets towards reorientation of their
financial markets in terms of new products and
instruments, development of institutional and market
infrastructure and realignment of regulatory structure
consistent with the liberalised operational framework.
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5. Foreign Exchange Market in India
• The changing contours were mirrored in a rapid expansiong g
of foreign exchange market in terms of participants,
transaction volumes, decline in transaction costs and
more efficient mechanisms of risk transfer.
• The origin of the foreign exchange market in India could be
traced to the year 1978 when banks in India were permittedtraced to the year 1978 when banks in India were permitted
to undertake intra-day trade in foreign exchange.
• However, it was in the 1990s that the Indian foreign
exchange market witnessed far reaching changes along
with the shifts in the currency regime in India.
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2009
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6. Foreign Exchange Management Act
Structure of Forex Market in India
Foreign Exchange Management Act
Central Govt.
R.B.I.
Authorized Persons
F.E.D.A.I.
Authorized Money Changes Authorized Dealers
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2009
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Full Fledged Restricted
7. Authorised Persons
Authorised Dealers
Commercial Banks -84
State Co-op Banks – 1
Financial institutions
FI -4
Factoring Agencies -5
Full Fledged
Money Changers
Department of Post
Others
Th C kState Co-op Banks – 1
Urban Co-op Banks -2
Factoring Agencies -5
UCB,FFMC
Thomos Cook
India Ltd.
Activities
All Permissible current
and capital account
Activities
Activities related to
financing of
Activities
Sale/Purchase of
foreign
exchange for
Activities
Specified nonand capital account
transactions
financing of
international trade
undertaken by these
institutions
exchange for
private and
business visits
abroad
p
trade related
current
account
transactions
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transactions
8. Authorised Persons
R t i t d A th i dAuthorised Dealers
Commercial Banks -84
State Co-op Banks – 1
Restricted Authorised
Dealers
Category – I - FI
Full Fledged
Money Changers
Department of Post
State Co-op Banks – 1
Urban Co-op Banks -2
Activities
Activities incidental to financing
of international trade related
activities undertaken by these
UCB,FFMC
Activities
All Permissible current
and capital account
activities undertaken by these
institutions.
Category – II
Activities
Sale/Purchase of
foreign
exchange forand capital account
transactions Upgraded FFMC, Selected
UCB & RRB Thomos Cook
Activities
Private Visits Business Travel
exchange for
private and
business visits
abroad
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2009
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Private Visits, Business Travel
9. F.E.D.A.I
Foreign Exchange Dealer's Association of India (FEDAI)
was set up in 1958 as an Association of banks dealing in
foreign exchange in India (typically called Authorizedforeign exchange in India (typically called Authorized
Dealers - ADs) as a self regulatory body and is incorporated
under Section 25 of The Companies Act, 1956.
It's major activities include framing of rules governing the
conduct of inter-bank foreign exchange business amongconduct of inter bank foreign exchange business among
banks vis-à-vis public and liaison with RBI for reforms and
development of Forex market.
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10. Functions of F.E.D.A.I
• Guidelines and rules for the forex business
• Training of bank personnel in the areas of Forex business
Accreditation of brokers• Accreditation of brokers
• Advising / Assisting member banks in settling issuesAdvising / Assisting member banks in settling issues,
matters in their dealings
• Represent member banks on Govt, R.B.I. and other bodies
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11. Functions of F.E.D.A.I
• Announcement of daily and periodical rates to member
banks
• Prescribing margin for calculating exchange rates for
various merchant transactionsvarious merchant transactions
• Formulating code of conduct for dealers working in banks
exchange brokers for dealing between each other
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12. Members of F.E.D.A.I.
• Public and private sector banksPublic and private sector banks
• Foreign banksg
• Co-operative banks
• Financial institutions such as EXIM bank, I.D.B.I.,I.F.C.I.
and S I D B I and others such as Thomas Cook (I) Ltdand S.I.D.B.I. and others such as Thomas Cook (I) Ltd.
• As on May 2008 F.E.D.A.I. has 89 membersAs on May 2008 F.E.D.A.I. has 89 members
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13. Authorized Dealers
Commercial Banks, Co-Op Banks & Financial Institutions
Category A
Category –B
Category CCategory –A
It can
undertake all
types of Forex
These are
branches of the
bank ,handling all
Category –C
These
branches can
undertake onlytypes of Forex
Transactions
Can set up
dealing room to
types of Forex
transactions and
reporting to dealing
room of their bank.
undertake only
limited type of
transactions
like sale and
dealing room to
handle such
transactions
room of their bank.
These branches
cannot undertake
dealing room
purchase of
foreign
currency TC’s
and Currency
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dealing room
operations
and Currency
14. Forex Market - Features
• The Market Has No Physical Presence.y
• It Is The Largest Market On The Planet “ Earth ”.
• It Is Mostly Speculative In Nature.
• It Is A 24 – Hour Market.
• Some New York banks maintain 2 shifts (one arriving at
office at 3 am when London and Frankfurt are open)office at 3 am when London and Frankfurt are open).
Large New York banks also have branches in Tokyo,
Frankfurt, and London. Thus, they are in contact with all
financial centers 24 hours.
• Daily Turn Over – 2.75 To 3.00 Trillion Dollar Per Day
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17. Forex Market - Features
• It Is A Market Connected By Advanced Communication• It Is A Market Connected By Advanced Communication
Channels Like S.W.I.F.T.
• It Is An Extremely Active And Also An Unpredictabley p
Market.
• The Market Is Truly Global As Trades Take Place Across
ContinentsContinents.
• Most Deals Are On Spot Basis.
• The Market Is Deep, Liquid And Efficient.p, q
• Deals Are Screen Based.
• Market Is Volatile Because Of Floating Nature Of
Exchange RatesExchange Rates
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18. Foreign Exchange Market
Interbank Market-Whole sale Market
Central Banks, Commercial Banks, Financial Institutions
& Corporate (Union States)& Corporate (Union States)
The Average Lot Size - USD 1 - 5 Mn
Indian Lot Size - USD 0.25 – 1.0 Mn
Retail Market
TouristsTourists
Individual needs Forex in the form of TC, Drafts
Importer
ExportersExporters
The amount is small in this market
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2009
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22. Types of Exchange Rate
• Floating Rate – A completely floating exchange rate is
one whose level is determined exclusively by underlying
balance of supply and demand for the currenciesbalance of supply and demand for the currencies
involved with no outside intervention i.e. Cable, Euro/$
• Fixed Rate – A fixed exchange rate is one in which case
the government guarantees a stable price for foreign
currency This achieved through interventions by centralcurrency. This achieved through interventions by central
bank whenever exchange rate varies from a stated %
from fixed rate i.e. Kuwaiti Dinar
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23. Types of Exchange Rate
• Managed Float – It is a system where the authorities
manipulate the exchange rate to suit their ownp g
objectives, sometimes intervening to fix the rate
sometimes staying on the sidelines. This type of
compromise is known as a Managed or Dirty floatcompromise is known as a Managed or Dirty float
i.e. Chinese Yuan, Indian Rupee ,(Yen )
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24. Forex Terms
• SWIFT-Society for world wide Interbank Financial
Telecommunication. It is replaces paper by electronic
fund transfer by secure SWIFT Codes ,thereby reduces
Transaction costs. It is supported by 6500 professional
organizations throughout the world
• CHIPS-Clearing House for Interbank Payment system is
a US Based electronic payment system
• CHAPS-Clearing House for Automated payment system
is a UK based electronic payment system
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25. SWIFT Codes
USD United States Dollar
INR Indian Rupee
JPY Japanese Yen
GBP Great Britain Pound
CHF Swiss Franc
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26. Forex Terms
• Reuters- Reuter is a London based organization• Reuters- Reuter is a London based organization
established in the year 1851.First Electronic trading
screen which gives real time quotes was established in
the year 1973 by Reutersthe year 1973 by Reuters
• Telrate- Telrate is an American organization established
in 1969 to deal in screen based trading for foreign
exchange
• Fedwire – The transactions at NY-Forex market
ultimately get settled through Fedwire.It is a
communication network that links the computers of aboutcommunication network that links the computers of about
7000 banks to the computers of Federal Reserve Banks
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2009
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27. Foreign Currency Accounts
• Nostro Account
Nostro account is an account maintained by a bank in IndiaNostro account is an account maintained by a bank in India
with a bank abroad i.e.S.B.I. may maintain an account with
Citi-Bank New York or with HSBC in London ,for $
operations and £ operations respectively.
While corresponding with the Citi or HSBC SBI would refer
its account with former two as Nostro account means ourits account with former two as Nostro account, means our
account with you. All foreign exchange transactions are
routed through Nostro accounts.
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28. Foreign Currency Accounts
• Vostro Account
A foreign bank may open rupee account with an IndianA foreign bank may open rupee account with an Indian
bank. while corresponding with the foreign bank
maintaining an account with it, the Indian bank would refer
to the account as Vostro account meaning your account
with us .Bank of Baharin and Kuwait may open an account
with State Bank of India and draw drafts on the accountwith State Bank of India and draw drafts on the account.
On presentation of drafts, the Indian bank would pay to the
debit of the foreign bank’s account with it. For exchange
control purposes such accounts are known as “non-
resident bank accounts”
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29. One way Quotes - Spot
Exchange Rates
One way Quotes - Spot Big Figure
Big Figure
1 USD = 48.85 INR
Pips
1 USD = 93.8150 JPY1 USD = 93.8150 JPY
Big Figure
Pips
1 GBP = 1.6250 USD
g g
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Pips
30. Exchange Rates
Two-way Quotes - Spot
Offer
Bank sells USD
Corporate buys USD
USD / INR = 48.38/ 40
Offer
Bid
Bank buys USD Spread=Offer-Bid
Corporate sells USD
p
=2 Paise /USD
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31. Quotes – Spot
BOB ask Quote (USD/INR 5) to BOIBOB ask Quote (USD/INR 5) to BOI
Offer/Ask
BOI sells USD
BOB buys USD
USD / INR = 48.38/ 40
Offer/Ask
Bid
BOI buys USD Spread=Offer-Bid
BOB sells USD
p
=2 Paise /USD
BOB says Your’s 5 USD,BOI
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2009
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y ,
32. Foreign Exchange Transaction
BOB CITI CITI
BOB’s Nostro.
a/c Dr
S
W
I
CITI
C
H
I
F
E
D
W
CITI
CITI a/c Dr $5 mn
Sells 5 mn $
I
F
T
I
P
S
W
I
R
E AMEX
C a/c $5
Amex a/c Cr $5 Mn
BOI AMEX
E AMEX
BOI’s Nostro.BOI s Nostro.
a/c Cr
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33. Basis for Merchant Rates
• When the bank buys FE from the customer, it expects to
sell the same in the interbank market at a better rate and
thus make a profit out of the deal In the interbankthus make a profit out of the deal. In the interbank
market, the bank will accept the rate as dictated by the
market.
• It can,therefore,sell foreign exchange in the market at
the market buying rate for the currency concerned Thusthe market buying rate for the currency concerned. Thus
the interbank buying rate forms the basis for quotation of
buying rate by the bank to its customer.
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34. Basis for Merchant Rates
• When the bank sells FE to the customer, it meets the
commitment by purchasing the required foreign
h f th i t b k k t It i FEexchange from the interbank market. It can acquire FE
from the market at the market selling rate.Therefore,the
interbank selling rate forms the basis for quotation of
selling rate to the customer by the bank.
Th i t b k t th b i f hi h th b k• The interbank rate on the basis of which the bank
quotes its merchant rate is known as base rate
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35. Merchant Buying Rates
Interbank Market Rate
48.3800/4000Bank first sell
to Market
Market will buy
at 48.3800
Bank will $ sell
high to market
at Market
b i tBank
Bank will deduct their
margin and give quote
to customer
buying rate
hence buy $
low from
customer
C stomer
Customer wants to
sells FE
(Applicable rate will be
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Customer (Applicable rate will be
48.3800 less margin)
36. Merchant Selling Rates
Interbank Market Rate
48.3800/4000Bank first buys
from Market
Market will sell
at 48.4000
Bank will buy
low from
market at
Bank
Bank will add their
margin and give quote
to customer
market at
market selling
rate and sell to
customer at
hi h t
C stomer
Customer wants to
buy FE
higher rate
( Applicable rate will be
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2009
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Customer ( Applicable rate will be
48.4000 plus margin)
37. Cross Currency Rates
• We know that USD being the currency of intervention
only USD/INR exchange rate is available in the Indian
F M k t d h t f ith ll thForex Market and exchange rates of rupee with all other
foreign currencies are derived from this rate
• Suppose MBT earned £ 1mio in Briton ,now they want toSuppose MBT earned £ 1mio in Briton ,now they want to
remit the same to India then first they have to sell these
£ 1mio in London against the $ and those $ will be sold
in Mumbai against INRin Mumbai against INR
• Suppose London quotes1£=1.6000 USD and Mumbai
quotes 1$= 48.8000 INRq
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38. Chain Rule
How Many INR = 1£ ?
If 1£ = 1.6000 $
A d if 1$ 48 8000 INRAnd if 1$ = 48.8000 INR
Then 1£ = 1.6000 $ = (1$ *1.6000)=48.8000*1.6000 INR
Hence 1£ = 78.0800 INR
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39. Chain Rule
How Many INR = 1 CAD $ ?
If 1.0880 CAD $ = 1 $
A d if 1$ 48 8000 INRAnd if 1$ = 48.8000 INR
$ $Then 1.0880 CAD $ = 1 $ = 48.8000 INR
Then
1 CAD $ =48.8000/1.0880=44.8530 INR
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2009
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$
40. Chain Rule
How Many INR = ¥100 ?
If 93.10 ¥ = 1 $
A d if 1$ 48 8300 INRAnd if 1$ = 48.8300 INR
$Then 93.10 ¥ = 1 $ = 48.8300 INR
Then
¥100 =48.8300/93.10*100=52.44 INR
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2009
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