INTERNATIONAL BANKING General Bank Management (Module-A) C.S.BALAKRISHNAN FACULTY MEMBER SIR SPBT COLLEGE 18.04.2007 Live Interactive Learning Session-

INTERNATIONAL BANKINGINTERNATIONAL BANKING

General Bank Management General Bank Management (Module-A)(Module-A)

C.S.BALAKRISHNANC.S.BALAKRISHNAN

FACULTY MEMBERFACULTY MEMBER

SIR SPBT COLLEGESIR SPBT COLLEGE

18.04.200718.04.2007

Live Interactive Learning Session-

Forex MarketForex Market

The total turnover in Forex Market apprx. US The total turnover in Forex Market apprx. US dollar 1.5 trillion per day. Indian Market USD dollar 1.5 trillion per day. Indian Market USD 1.20 BN per day.1.20 BN per day.

Round the clock market starting from Round the clock market starting from Sydney and Tokyo in the east through Hong Sydney and Tokyo in the east through Hong Kong, Singapore, Bahrain, London and New Kong, Singapore, Bahrain, London and New York.York.

participants are –central banks , commercial participants are –central banks , commercial banks, investment funds, corporates, banks, investment funds, corporates, individuals and brokers.individuals and brokers.

Over the counter market Over the counter market

FEMA ACT 1999 Defines Foreign Exchange as FEMA ACT 1999 Defines Foreign Exchange as “Foreign Exchange means & includes:“Foreign Exchange means & includes:

a) All deposits,credits and balances a) All deposits,credits and balances payable in foreign currency,and any payable in foreign currency,and any drafts,traveller’s cheques,letters of credit drafts,traveller’s cheques,letters of credit and bills of exchange,expressed or and bills of exchange,expressed or drawn in Indian currency and payable in drawn in Indian currency and payable in any foreign currency. any foreign currency.

b) Any instrument payable at the option of b) Any instrument payable at the option of the drawee or holder,thereof or any other the drawee or holder,thereof or any other party thereto,either in Indian currency or in party thereto,either in Indian currency or in foreign currency,or partly in one and partly in foreign currency,or partly in one and partly in the other”.the other”.

FX RatesFX Rates

What is Exchange Rate ?What is Exchange Rate ? Exchange Rate is a rate at which one Exchange Rate is a rate at which one

currency can be exchanged into currency can be exchanged into another currency. In other words it is another currency. In other words it is value one currency in terms of other.value one currency in terms of other.say:say:

US $ 1 = Rs.45.18US $ 1 = Rs.45.18This rate is the conversion rate of This rate is the conversion rate of every US $ 1 to Rs. 45.18every US $ 1 to Rs. 45.18

Factors Determining Exchange Factors Determining Exchange RatesRates

(a). Fundamental Reasons:(a). Fundamental Reasons:- Balance of Payment – surplus leads to stronger currency.- Balance of Payment – surplus leads to stronger currency.- Economic Growth Rates –High/Low growth rate.- Economic Growth Rates –High/Low growth rate.- Fiscal / Monetary Policy- deficit financing leads to - Fiscal / Monetary Policy- deficit financing leads to depreciation of currency.depreciation of currency.- Interest Rates –currency with higher interest will - Interest Rates –currency with higher interest will appreciate in the short term.appreciate in the short term.- Political Issues –Political stability leads to stable rates- Political Issues –Political stability leads to stable rates

(b). Technical Reasons(b). Technical Reasons- Government Control can lead to unrealistic value. - Government Control can lead to unrealistic value. - Free flow of Capital from lower interest rate to - Free flow of Capital from lower interest rate to

higher higher interest rates.interest rates.(c). Speculation – higher the speculation higher the volatility in (c). Speculation – higher the speculation higher the volatility in

rates rates

Methods of QuotationMethods of Quotation

Method – IMethod – I One Orange = Rs 2One Orange = Rs 2 One Apple = Rs One Apple = Rs

2.502.50

Method – IIMethod – II Rs. 10 = 5 OrangesRs. 10 = 5 Oranges Rs. 10 = 4 ApplesRs. 10 = 4 Apples

Price under both the methods is the same though expressed differentlyPrice under both the methods is the same though expressed differently

Method - IMethod - IDIRECT(FC fixed)DIRECT(FC fixed)USD 1 = Rs 45.18USD 1 = Rs 45.18GBP 1 = Rs.85.99GBP 1 = Rs.85.99EUR 1 = Rs 57.92EUR 1 = Rs 57.92

Method - IIMethod - IIINDIRECT( HC fixed)INDIRECT( HC fixed)Rs 100 = USD 2.2133Rs 100 = USD 2.2133Rs 100 = GBP 1.1629Rs 100 = GBP 1.1629Rs 100 = EUR 1.7265Rs 100 = EUR 1.7265

With Effect from 02.08.1993, all exchanges are quoted in Direct Method

Understanding Two Way Exchange Understanding Two Way Exchange QuotesQuotes

In Forex markets , there are two way quotes i.e. both buying and selling rates are given.

1 USD = INR 45.16/ 181 USD = INR 45.16/ 18 BUYING RATE $/RE = RE 45.16BUYING RATE $/RE = RE 45.16 SELLING RATE $/RE = RE 45.18SELLING RATE $/RE = RE 45.18

In the abovementioned quote, lowest is market buying rate and highest is market selling rate.

Understanding Two Way Exchange Understanding Two Way Exchange QuotesQuotes

B U Y IN G R A T E

C H F 1 .2 5 70

S E L L IN G R A TE

C H F 1 .2 5 73

U S D 1 = C H F 1 .25 7 0 /73

One of the features of the FX markets is that this is the nearest form of perfect markets existing today.

One of the reasons why this is so is that prices are alwaysQuoted as TWO WAY QUOTES

Understanding Exchange Rates Understanding Exchange Rates

Dollar/Swiss Francs -- USD/CHFDollar/Swiss Francs -- USD/CHF Note the order of the currenciesNote the order of the currencies ““USD” comes before the “CHF”USD” comes before the “CHF”

The first currency($) - Base currencyThe first currency($) - Base currency Second currency (CHF) - Terms Second currency (CHF) - Terms

currency currency It is important to remember that It is important to remember that

Bid & Offer in trading always refers to Bid & Offer in trading always refers to the BASE CURRENCYthe BASE CURRENCY..

Understanding Exchange QuotesUnderstanding Exchange Quotes In the FX market, Time is of great In the FX market, Time is of great

importance.importance. Therefore, there are short forms for Therefore, there are short forms for

everything.everything. While quoting, the dealers use While quoting, the dealers use only only

the third & fourth decimals.the third & fourth decimals. USD/CHF USD/CHF 1.251.254040 / / 45 45 USD/INR USD/INR 45.1645.167575 / / 0000 GBP/USD GBP/USD 1.801.800000 / / 1010 BIG FIGUREBIG FIGURE In a live dealing scenario dealers In a live dealing scenario dealers

would quote only would quote only 40/45 , 75/figure , 40/45 , 75/figure , figure/10figure/10 and the market assumes that and the market assumes that all players already know the all players already know the BIGBIG FIGURE FIGURE

Calculating Cross RatesCalculating Cross Rates India is a market maker for Indian RupeeIndia is a market maker for Indian Rupee Dollar/ Rupee trading ( the first quotes) start Dollar/ Rupee trading ( the first quotes) start

in the Mumbai Marketin the Mumbai Market BUT WHAT ABOUT OTHER CURRENCIES ?BUT WHAT ABOUT OTHER CURRENCIES ? WHERE DO RATES FOR CHF, GBP, EUR ETC WHERE DO RATES FOR CHF, GBP, EUR ETC

COME FROM? HOW ARE THEY CALCULATED?COME FROM? HOW ARE THEY CALCULATED?

A CHF/RUPEE RATE IS A CROSS OF A CHF/RUPEE RATE IS A CROSS OF DOLLAR/RUPEE & DOLLAR / CHF.DOLLAR/RUPEE & DOLLAR / CHF.

DOLLAR / RUPEE = 45.35/36DOLLAR / RUPEE = 45.35/36

DOLLAR / CHF = 1.3440 / 45DOLLAR / CHF = 1.3440 / 45

CHF / RUPEE = 33.73 / 75CHF / RUPEE = 33.73 / 75 In other words, In other words, 45.36 / 1.344045.36 / 1.3440 = 33.75 AND = 33.75 AND 45.35 / 1.344545.35 / 1.3445 = 33.73 = 33.73

Calculating Cross RatesCalculating Cross Rates India is a market maker for Indian RupeeIndia is a market maker for Indian Rupee Dollar/ Rupee trading ( the first quotes) start Dollar/ Rupee trading ( the first quotes) start

in the Mumbai Marketin the Mumbai Market BUT WHAT ABOUT OTHER CURRENCIES ?BUT WHAT ABOUT OTHER CURRENCIES ? WHERE DO RATES FOR CHF, GBP, EUR ETC WHERE DO RATES FOR CHF, GBP, EUR ETC

COME FROM? HOW ARE THEY CALCULATED?COME FROM? HOW ARE THEY CALCULATED?

A CHF/RUPEE RATE IS A CROSS OF A CHF/RUPEE RATE IS A CROSS OF DOLLAR/RUPEE & DOLLAR / CHF.DOLLAR/RUPEE & DOLLAR / CHF.

DOLLAR / RUPEE = 45.16/18DOLLAR / RUPEE = 45.16/18

DOLLAR / CHF = 1.2570 / 73DOLLAR / CHF = 1.2570 / 73

CHF / RUPEE = 35.92 / 94CHF / RUPEE = 35.92 / 94 In other words, In other words, 45.16 / 1.257045.16 / 1.2570 = 35.92 AND = 35.92 AND 45.18/ 1..257345.18/ 1..2573 = 35.94 = 35.94

Types of Transaction: Value Date ConceptTypes of Transaction: Value Date Concept

Due to vastness of the market and origin of transactions and settlements may take place at different time zones, most of times deal dates and settlement date differs. Market uses different terminology which are used universally to avoid conflict.

Type of TXNType of TXN Date of DealDate of Deal Value DateValue Date

Cash/ReadyCash/Ready 15.11.200615.11.2006

WednesdayWednesday15.11200615.112006

WednesdayWednesday

TOMTOM 15.11.200615.11.2006

WednesdayWednesday

16.11.0616.11.06

ThursdayThursday

SpotSpot 15.11.200615.11.2006

WednesdayWednesday17.11.0617.11.06

FridayFriday

ForwardForward 15.11.200615.11.2006

WednesdayWednesdayAny day after Any day after 17.11.0617.11.06

Types of Transaction: Value Date ConceptTypes of Transaction: Value Date ConceptDue to vastness of the market and origin of transactions and settlements may take place at different time zones, most of times deal dates and settlement date differs. Market uses different terminology which are used universally to avoid conflict.

Type of TXNType of TXN Date of DealDate of Deal Value DateValue Date

Cash/ReadyCash/Ready 17.11.0617.11.06

FridayFriday17.11.0617.11.06

FridayFriday

TOMTOM 17.11.0617.11.06

FridayFriday20.11.0620.11.06

MondayMonday

SpotSpot 17.11.0617.11.06

FridayFriday21.11.0621.11.06

TuesdayTuesday

ForwardForward 17.11.0617.11.06

FridayFridayAny day after Any day after

21.11.0621.11.06

Forward RatesForward Rates

What is a Forward Rate ?What is a Forward Rate ? Rate agreed for settlement on an Rate agreed for settlement on an

agreed date in the futureagreed date in the future All rates are derived from All rates are derived from Spot Spot

ratesrates Forward rate is the spot rate Forward rate is the spot rate

adjusted for the premium / discountadjusted for the premium / discount

Forward Rate = Spot Rate + / - Forward Rate = Spot Rate + / - premium or discountpremium or discount

Premium/DiscountPremium/Discount

Forward price = Spot price plus or minus Forward price = Spot price plus or minus forward margin.forward margin.

Premium –forward value of currency is higher Premium –forward value of currency is higher than spot rate. A currency with lower rate of than spot rate. A currency with lower rate of interest is said to be at premium in the interest is said to be at premium in the forwards. Forward margins added to spot forwards. Forward margins added to spot rate.rate.

Discount – forward value of currency is lower Discount – forward value of currency is lower than spot rate. A currency with higher rate of than spot rate. A currency with higher rate of interest is said to be at discount. Forward interest is said to be at discount. Forward margins deducted from spot rate.margins deducted from spot rate.

Derivative InstrumentsDerivative Instruments

Derivatives instruments are management tools derived from underlying exposures (Assets) such as Currency, Commodities, Shares, Bonds or any other indices, used to reduce or neutralize the exposure on the underlying contracts.

Derivatives could be Over the Counter (OTC) i.e. made to order or Exchange Traded Facilities which are standardized in terms of quantity, quality, start & ending dates.

What is an FX OptionWhat is an FX Option

An FX option contract gives the buyer (or An FX option contract gives the buyer (or holder) the right, but not the obligation, to:holder) the right, but not the obligation, to: Buy Rupees, in the case of a Rupee call/ Buy Rupees, in the case of a Rupee call/

Dollar put option, against Dollars (or sell Dollar put option, against Dollars (or sell Rupees against Dollars in the case of a Rupees against Dollars in the case of a Rupee put/Dollar call option);Rupee put/Dollar call option);

For a predetermined quantity of Rupees;For a predetermined quantity of Rupees; At a predetermined fixed price (the strike or At a predetermined fixed price (the strike or

exercise price);exercise price); On (if European style) or until (if American On (if European style) or until (if American

style) a fixed future date;style) a fixed future date; For a premium (option price) negotiated at For a premium (option price) negotiated at

the time of dealingthe time of dealing..

How does an FX Option Differ from a How does an FX Option Differ from a ForwardForward

Consider an exporter who expects to receive Consider an exporter who expects to receive $1MN in 3 months.$1MN in 3 months.

The exporter can go in forThe exporter can go in for Forward contract or Option contractForward contract or Option contract Forward contract – performance is obligatory on Forward contract – performance is obligatory on

the the for buyer and seller.*for buyer and seller.*• Option contract – performance is not obligatory for Option contract – performance is not obligatory for for option holder.for option holder. Suppose , exporter goes for option contract. He Suppose , exporter goes for option contract. He

will agree to sell $1 mn after 3 months. On due will agree to sell $1 mn after 3 months. On due date, depending upon $/RE rate, he will decide to date, depending upon $/RE rate, he will decide to exercise the option or not.exercise the option or not.

Q. Q. Option pricing would depend upon Option pricing would depend upon Which of the following aspects?Which of the following aspects?

(a) (a) Amount (Whether market lot or small Amount (Whether market lot or small lot)lot)

(b) (b) Strike PriceStrike Price

(c) (c) Spot RateSpot Rate

(d) Type- American or European(d) Type- American or European

(e) (e) All of the aboveAll of the above

Answer: (e)

Q. Q. Which of the following statement is Which of the following statement is false for a ‘Forward Contract’?false for a ‘Forward Contract’?

(a) (a) An OTC ProductAn OTC Product

(b) (b) Credit Risk on counter parties existsCredit Risk on counter parties exists

(c) (c) Can be for odd amountCan be for odd amount

(d) (d) Works on Margins requirementWorks on Margins requirement

Answer: (d)

Q. Q. An Irrevocable Letter of Credit can be An Irrevocable Letter of Credit can be amended with the consent of following amended with the consent of following parties.parties.

(a) (a) The Applicant (Buyer) and The The Applicant (Buyer) and The Beneficiary (Seller).Beneficiary (Seller).

(b) (b) Issuing Bank and Confirming Bank.Issuing Bank and Confirming Bank.

(c) The Advising Bank & Reimbursing (c) The Advising Bank & Reimbursing Bank.Bank.

(d) (d) (a) & (B) only(a) & (B) only

Answer: (d)

Q. Q. Issuing Bank has to point out Issuing Bank has to point out discrepancies in Documents negotiated discrepancies in Documents negotiated under L/C to the negotiating bank under L/C to the negotiating bank within a period of:within a period of:

(a) (a) 1 month 1 month

(b) (b) 2 weeks2 weeks

(c) (c) 7 days7 days

(d) (d) Only upon receipt of objections from Only upon receipt of objections from the applicant.the applicant.

Answer: (c)

Q. Q. A ‘Red Clause’ Letter of Credit enables A ‘Red Clause’ Letter of Credit enables the beneficiary to avail pre-shipment the beneficiary to avail pre-shipment credit fromcredit from

(a) (a) L/C Issuing Bank L/C Issuing Bank

(b) (b) L/C Confirming BankL/C Confirming Bank

(c) (c) L/C Advising Bank or Nominated L/C Advising Bank or Nominated BankBank

(d) (d) Any bank preferred by the Any bank preferred by the beneficiary.beneficiary.

Answer: (c)

Q. Q. In case of an Acceptance Credit, the In case of an Acceptance Credit, the usance period is calculated from the usance period is calculated from the date of Shipment or date of Bills of date of Shipment or date of Bills of Exchange. Exchange.

(a) (a) Statement is true Statement is true

(b) (b) Statement is falseStatement is false

(c) (c) Statement is partially trueStatement is partially true

(d) (d) Non of the aboveNon of the above

Answer: (a)

Q. Q. A ‘Certificate of Origin’ accompanying A ‘Certificate of Origin’ accompanying documents must be issued & signed documents must be issued & signed by: by:

(a) (a) Exporter/Seller Exporter/Seller

(b) (b) Shipping AgentsShipping Agents

(c) (c) Customs OfficialsCustoms Officials

(d) (d) Chamber of Commerce of Chamber of Commerce of Exporter’s Exporter’s Country.Country.

Answer: (d)

Q. Q. ‘Crystallization’ of Foreign Currency ‘Crystallization’ of Foreign Currency Liability of the importer to be done by Liability of the importer to be done by the Issuing bank on the 10the Issuing bank on the 10thth day from day from due date of payment in case of failure due date of payment in case of failure on the part of importer. The conversion on the part of importer. The conversion of Foreign Currency Liability to Rupee of Foreign Currency Liability to Rupee liability is done at:liability is done at:

(a) (a) Bill Buying Rate Bill Buying Rate

(b) (b) TT Selling RateTT Selling Rate

(c) (c) Bill Selling RateBill Selling Rate

(d) (d) Spot RateSpot Rate

Answer: (c)

Q. Q. Export Proceeds from any of the ACU Export Proceeds from any of the ACU countries should be settled under ACU countries should be settled under ACU mechanism except:mechanism except:

(a) (a) Sri Lanka Sri Lanka

(b) (b) NepalNepal

(c) (c) PakistanPakistan

(d) (d) Republic of IranRepublic of Iran

Answer: (b)

Q. Q. Maximum amount for which AD can Maximum amount for which AD can permit for realization of export permit for realization of export proceeds beyond six months is:proceeds beyond six months is:

(a) (a) USD 100,000 USD 100,000

(b) (b) USD 1,000,000USD 1,000,000

(c) (c) USD 50,000USD 50,000

(d) (d) No such limit prescribedNo such limit prescribed

Answer: (b)

Q. Q. The Rate of interest charged for Export The Rate of interest charged for Export Finance for period up to 180 days Finance for period up to 180 days which is stipulated by RBI is:which is stipulated by RBI is:

(a) (a) At Bank’s BPLR At Bank’s BPLR

(b) (b) Maximum BPLR minus 2.50%Maximum BPLR minus 2.50%

(c) (c) At Bank RateAt Bank Rate

(d) (d) At 9% flat.At 9% flat.

Answer: (b)

Q. Q. Waiver (exemption) for submission of Waiver (exemption) for submission of GR form is made in case of GR form is made in case of Export/Remittance of Foreign Exchange Export/Remittance of Foreign Exchange in which of the following case(s)?in which of the following case(s)?

(a) (a) Gift up to Rs.5 lacs Gift up to Rs.5 lacs

(b) (b) Trade SamplesTrade Samples

(c) (c) Export up to US $ 25000Export up to US $ 25000

(d) (d) All of the aboveAll of the above

Answer: (d)

Q. Q. The GR forms are required to be signed The GR forms are required to be signed by Customs Officials where as PP by Customs Officials where as PP Forms (Post Parcel) is signed by APs in Forms (Post Parcel) is signed by APs in the case of:the case of:

(a) (a) 100% Advance Payment 100% Advance Payment

(b) (b) Against Letter of CreditAgainst Letter of Credit

(c) (c) Track Record of the PartyTrack Record of the Party

(d) (d) All of the aboveAll of the above

Answer: (d)

Q. Q. The NPT (Notional Transit Period) The NPT (Notional Transit Period) computation for Advance against Bills computation for Advance against Bills sent on collection, the period sent on collection, the period commences from:commences from:

(a) (a) Bill of Lading Bill of Lading

(b) (b) Date of Bills of ExchangeDate of Bills of Exchange

(c) (c) Date of acceptance of Bill at Branch Date of acceptance of Bill at Branch level for collectionlevel for collection

(d) (d) Usance periodUsance period

Answer: (c)

Q. Q. A mechanism by which APs finances A mechanism by which APs finances Exporters by discounting Export Exporters by discounting Export Receivables without recourse to Receivables without recourse to Exporter/Seller is known as:Exporter/Seller is known as:

(a) (a) Factoring Factoring

(b) (b) GuaranteesGuarantees

(c) (c) ForfaitingForfaiting

(d) (d) Bill RediscountingBill Rediscounting

Answer: (c)

Q. Q. IEC Code is issued by:IEC Code is issued by:

(a) (a) RBI RBI

(b) (b) EXIM BankEXIM Bank

(c) (c) ECGCECGC

(d) (d) DGFTDGFT

Answer: (d)

Q. Q. Credit arranged by the importer (buyer) Credit arranged by the importer (buyer) from a bank/FI outside his country to from a bank/FI outside his country to settle payments of imports is known settle payments of imports is known as:as:

(a) (a) Supplier’s CreditSupplier’s Credit

(b) (b) Buyer’s CreditBuyer’s Credit

(c) (c) External Commercial BorrowingExternal Commercial Borrowing

(d) (d) GDRGDR

Answer: (b)

Q. Q. NRE account can be jointly opened withNRE account can be jointly opened with

(A) With Non residents only (A) With Non residents only

(B) With resident only(B) With resident only

(C) with both Residents & Non Residents(C) with both Residents & Non Residents

Answer: (A)

Payment in rupees for purchase of foreign exchange may be done in cash , if the rupee value equivalent is not more than

A) Re 1,00,000B) Re 50,000C) RE 2,00,000D) None of the above

Answer – (B)