Foreign exchange management

1
Foreign exchange management
2
Background

• Volume of international trade (exports and
  imports) increased manifold
• Emergence of MNCs
• International lending and borrowing (IMF, World
  Bank, ADB)
• Transnational services
• Outsourcing of financial services
• Software development, ITES, BPO
• There is large scale flow of funds across nations
• Flow of funds in different currencies

3
Study areas

• Understanding of foreign exchange is integral
  part of modern commerce/management
• Exchange rate mechanism
• Foreign exchange market
• Foreign exchange risk and its management

4
Foreign exchange

• Each country has its own currency
• Home currency and other currencies
• Any currency other than home currency is foreign
  exchange

5
Exchange rate mechanism

• Exchange rate ratio of exchange between two
  currencies
• Exchange rate quotations
• Direct quote home currency price of a foreign
  currency
• Example Rs.46/USD Rs.58/Euro
• Indirect quote value of one unit of home
  currency in terms of a foreign currency
• Example Re USD 0.0217 Re Euro 0.0172

6
Currency appreciation/depreciation

• Increase in foreign currency price
• From Rs.46 to Rs.48/ USD
• Foreign currency appreciation
• Home currency depreciation
• From USD 0.0217 to USD 0.0208/ Re

7
Buying and selling rates

• Buying rate Bid rate
• Selling rate Offer rate /Ask rate
• Examples Rs.46.15 46.45/ USD Rs. 58.00
  58.40/ Euro
• Bid-offer spread profit of the dealer
• Size of spread depends on quantity traded,
  demand for currency, type of customer

8
Spot and forward rates

• Spot rate rate for cash transactions (Buying and
  selling)
• Forward rate rate for delivery on a future date
  (Buying and selling)
• Examples
• Spot Rs.46.15 46.45 / USD
• 1 month Rs.46.27 46.56 / USD
• 2 months Rs.46.28 46.60 / USD
• 3 months Rs.46.30 46.64 / USD

9
Forward rate differential

• difference between spot and forward rates
• Forward premium forward gt spot
• Forward discount forward lt spot