CHAPTER 1 INTRODUCTION

1.1 Introduction
In todays world no economy is self sufficient, so there is need for exchange of goods and services amongst the different countries. So in this global village, unlike in the primitive age the exchange of goods and services is no longer carried out on barter basis. Every sovereign country in the world has a currency that is legal tender in its territory and this currency does not act as money outside its boundaries. So whenever a country buys or sells goods and services from or to another country, the residents of two countries have to exchange currencies. Abhyudaya Bank is one of the select few Urban Co-operative banks who have been granted AD category I license to deal in Foreign Exchange Business by Reserve Bank of India. Bank has entered into tie ups with Bank of India, H. D. F. C. Bank, Development Credit Bank, UAE Exchange & Financial Services Ltd., Thomas Cook and many others to provide Trade Finance Services, Travel related services, Investment Schemes for NRIs etc. For communication and money transfer purpose it will be using SWIFT / RTGS/ ECS / NEFT to provide efficient and prompt service to all its users.

1.2 Objectives

Followings are the objectives of study: 1. 2. India. 3. 4. How Indian Banks are catering the needs of the people. To speed the awareness about the services provided by the banks in To identify the importance of financial services to the customers. To study the fluctuation risk involved in foreign exchange transaction.

5. To study the technique of hedging undertaken by the managers to reduce the fluctuation risk. This project attempt to study the intricacies of the foreign exchange market. The main purpose of this study is to get a better idea and the comprehensive details of foreign exchange risk management.
6.

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 To learn and understand the concept of forex To know the meaning of the word treasury To understand the concept of Integrated Treasury To understand the role of Forex and Integrated treasury To know the financial market To know the dealing platforms of forex To understand the risk involved in forex To understand how to limit risk (hedging)

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1.3 Scope

As compared to other financial trading markets, Foreign exchange day-trading has numerous advantages. Currency trading is, in a lot of ways, more beneficial than trading futures or stocks. The Foreign exchange market is really a 24-hour market, daily. It means that the trader of currency can essentially choose their own hours to do their trading business. Foreign day-trading demands a lot less beginning capital than day stock-trading, hence, investors can really begin small in the currency market. Traders need to focus on several leading currencies only, instead of on tens and thousands of stocks. What is more, Foreign exchange day-trading has good liquidity. The Forex currency exchange market is the biggest financial market around the globe today. This leads to narrow spreads and fair prices. The stock liquidity is cut after normal trading hours. Forex trading does not suffer this conflict, since the currency market is available around the clock. Not only because of the around-the-clock market and the liquidity, but because of electronic Foreign exchange day-trading, fast entries and exits are combined with global trading. Traders can choose their most feasible time to do trading business with Forex daytrading, as it is a 24/7 market. The high liquidity of Forex is combined with a real 24hour market. It offers traders with exceptional independence, and Foreign exchange currency trading, when they want to, and not when the market wants traders to. The Forex market virtually follows the sun, moving around the world from major banking and financial firms of United States, to New Zealand and Australia, to the Far East, to Europe, and then back to United States. With each trading day in Forex day-trading, total currency trading volumes are identified by the markets that are open, and the times each of the markets intersect with one another. With each second, minute, and hour that pass, Foreign exchange currency trading volume stays high, but the peak is reached when British, European, and United States markets open at the same time - this is from 1 p.m. GMT to 4 p.m. GMT

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1.4 Research Methodology

Research methodology is a way to systematically solve the research problem. It may be understood as a science of studying how research is done scientifically. In it we study the various steps that are generally adopted by a researcher in studying his research problem along with the logic behind them. Research methodology has many dimensions and research methods do constitute a part of the research methodology. The scope of research methodology is wider than that of research methods. Thus, when we talk of research methodology we not only talk of the research method but also consider the logic behind the methods we use in the context of our research study and why we are using a particular method or technique and we are not using others so that research results are capable of being evaluated either by the researcher himself or by other. Why a research study has been undertaken, what data have been collected and what particular method has been adopted, why particular technique of analyzing data has been used and a host of similar other questions are usually answered when we talk of research methodology concerning a research problem or study. Research is often described as active, diligent and systematic process of inquiry aimed at discovering, interpreting and revising facts. This intellectual investigation produces a greater understanding of events, behaviors or theories and makes practical application through laws and theories. In other words we can say the purpose of research is to discover answer to the questions through the application of scientific procedures. To carry out this project I have used the descriptive research. Descriptive research includes survey and fact finding enquiries of different kinds. The major purpose of descriptive research is description of the state of affairs, as it exists at present. The main characteristic of this method is that the researcher has no control over the variable; he can only report what is happening. It is also called as ex post facto research. Most ex post facto research projects are used for descriptive studies in which researcher seeks to measure such items as, for example, frequency of shopping, preferences of people, or similar data. Descriptive research also includes attempts by the researcher to discover causes even when they cannot control the variables. The methods of research utilized in descriptive research are survey method of all kinds.

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1.5 Limitations
Central Bank Intervention

Many government central banks intervene in the markets in order to preserve the value of their currency, unbeknown to the average investor. This intervention is usually camouflaged to keep the market from knowing. For example, the central bank may use a network of smaller banks to buy or sell on their behalf. Regardless of the camouflage used, the result is the same: the currency value is artificially strengthened or weakened, making it difficult to make trades based on market fundamentals. Timing Difficulties The foreign exchange market is a bartering based system. This means that one item (a given currency) is exchanged directly for another item (a second currency). These trades are usually made through a third "vehicle" currency. So, for example, if an investor wants to trade from the Brazilian Real into the British Pound, holdings of Real are usually converted into the U.S. Dollar and then reconverted into the Pound. In such a complex arrangement, it can be difficult to time when the vehicle currency will remain stable and the currency to be bought will appreciate against the base currency all within the same time frame.
Differences between Retail and Wholesale Pricing

Roughly two-thirds of all trades on the foreign exchange are made between dealers and large organizations such as hedge funds and banks. Organizations that make trades of this size operate at wholesale prices (known as interbank trading). The investor, on the other hand, is forced to buy and sell at the retail price (known as client trading). The difference is known as the spread, and shows itself in the form of commissions and fees paid to the investor's broker. When dealing with spreads, it becomes a challenge to compete against the larger organizations that start with a lower entry point and can sell profitably with far less market fluctuation. 24 Hour Trading Unlike organized trading exchanges with a central location, the foreign exchange market is open for trading 24 hours a day. With currency fluctuations being triggered from traders across the globe, it's a never-ending challenge to stay profitable. This makes forex trading time intensive and constantly hectic.

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 Platform Freezes Certain forex brokers build price freezes into their platforms that are triggered by major news events or large fluctuations in the market. This keeps investors from trading during the most profitable moments.

CHAPTER 2
BANKING SECTOR 2.1 Role of Banks
Banks play a positive role in economic development of a country as repositories of communitys savings and as purveyors of credit. Indian Banking has aided the economic development during the last fifty years in an effective way. The banking sector has shown a remarkable responsiveness to the needs of planned economy. It has brought about a considerable progress in its efforts at deposit mobilization and has taken a number of measures in the recent past for accelerating the rate of growth of deposits. As recourse to this, the commercial banks opened branches in urban, semi-urban and rural areas and have introduced a number of attractive schemes to foster economic development. The activities of commercial banking have growth in multi-directional ways as well as multi-dimensional manner. Banks have been playing a catalytic role in area development, backward area development, extended assistance to rural development all along helping agriculture, industry, international trade in a significant manner. In a way, commercial banks have emerged as key financial agencies for rapid economic development. By pooling the savings together, banks can make available funds to specialized institutions which finance different sectors of the economy, needing capital for various purposes, risks and durations. By contributing to government securities, bonds and debentures of term-lending institutions in the fields of agriculture, industries and now housing, banks are also providing these institutions with an access to the common pool of savings mobilized by them, to that extent relieving them of the responsibility of directly approaching the saver. This intermediation role of banks is particularly important in the early stages of economic development and financial specification. A country like India, with different regions at different stages of development, presents an interesting spectrum of the evolving role of banks, in the matter of inter-mediation and beyond. Mobilization of resources forms an integral part of the development process in India. In this process of mobilization, banks are at a great advantage, chiefly because of their network of branches in the country. And banks have to place considerable

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reliance on the mobilization of deposits from the public to finance development programmers. Further, deposit mobilization by banks in India acquired greater significance in their new role in economic development.

Commercial banks provide short-term and medium-term financial assistance. The short-term credit facilities are granted for working capital requirements. The medium-term loans are for the acquisition of land, construction of factory premises and purchase of machinery and equipment. These loans are generally granted for periods ranging from five to seven years. They also establish letters of credit on behalf of their clients favoring suppliers of raw materials/machinery (both Indian and foreign) which extend the bankers assurance for payment and thus help their delivery. Certain transaction, particularly those in contracts of sale of Government Departments, may require guarantees being issued in lieu of security earnest money deposits for release of advance money, supply of raw materials for processing, full payment of bills on the assurance of the performance etc. Commercial banks issue such guarantees also.

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2.2 Company Profile: Abhyudaya Co-Operative Bank Ltd.

Abhyudaya Co-op. Bank Ltd., one of the leading Urban Co-operative Banks in India, in its outlook and approach, has the objective of progress and prosperity of all. From a humble beginning in January 1964 as a Co-operative Credit society with a share capital of a merely Rs.5,000/- held by 83 members, today Abhyudaya Co-op Bank has become one of the large Urban Co-operative Banks with a "Scheduled Bank" status. The Bank has been converted into aMulti-State Scheduled Urban Coop. Bank w.e.f. 11th January, 2007. The area of operation which was restricted to the State of Maharashtra has now been extended to Karnataka & Gujarat State. Currently, the capital base of the bank stands at Rs. 72 Crore and Reserves and surpluses at Rs. 804.18 Corer as on 31.03.2011.The bank has 1, 38,000 members and more than 14 lakh depositors. The Bank has seen a tremendous growth in deposits. The deposits of the bank are over Rs. 5260.63 Crore as on 31.03.2011, which were Rs. 4170.62 Crore as at the end of the financial year 2009-2010. The loans and advances stood at Rs. 3453.61 Crore as on 31.03.2011. The bank had posted a Net Profit of Rs. 77.65 Crore as on 31.03.2011. The growth rate of the bank compares well with that of others in the sector. The Bank has maintained a steady growth. The bank has been paying dividend @ 15% to its members which is maximum permissible as per the MCS Act. The Bank has launched different loan schemes tailor-made to suit the needs of various customers. The schemes aim at providing loans for purchase or construction of residential premises, repair/renovation of house property, purchase of car, seeking higher education and for purchase of household consumer durable. One of the loan schemes, viz. "Udyog Vikas Yojana" is specially designed for the benefit of small entrepreneurs and businessmen. The procedure for sanctioning of loans under the schemes has been simplified and relaxed with a view to benefit the customers and facilitating speedy sanction of loans. The Bank has total 105 branches including a Mobile Bank at Navi Mumbai. Bank is committed to spread network of branches throughout the State and provide much needed banking services to the population, which has been deprived of the banking facilities. Innovative Banking is another area of operation that Abhyudaya is currently focusing on for a sustainable long term growth. The Bank has always endeavored for providing excellent customer service with the help of the latest technology. The Bank has provided fully computerized services to its valued clients. Bank is offering 11 hours fully computerized services and 7 days working at 18 branches and 24 hours ATM service at 85 branches.

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2.3 Foreign Exchange Services Foreign Currency (FC) AccountExchange Earners Foreign Currency Account (EEFC Account)Indian exports have surged over the last decade owing to an unprecedented boom in sectors like software, biotechnology, gems, jewellery, textiles etc. As a result of this, the volume of inward remittances has also increased significantly. To shield the firms engaged in regular export and import from the exchange rate fluctuations, RBI has allowed parking of foreign currency by exporters in an account designated as Exchange Earners Foreign Currency Account (EEFC). Currently, EEFC deposits are in the form of a current account and do not attract any interest earning. Features & Benefits EEFC accounts are offered without any minimum balance requirements. Along with the account, we will offer you the following set of services: Foreign Cheque Collections: You can deposit foreign currency cheques payable anywhere in the world. Our wide coverage, enabled with the help of correspondent bank network will ensure that the cheques are credited to the Account extra fast. Foreign Currency Drafts: Using your EEFC Account, you can also purchase Foreign Currency Drafts in USD, GBP, EURO, AUD & CAD. There will not be any foreign currency margin on the same. Free monthly statements will be available on demand Foreign Currency Cheque Book for international transactions, on demand Cash withdrawal from EEFC account: Withdrawals in foreign currency is permitted only against applicable conversion margin, whereas there is no restriction on cash withdrawals in Indian Rupees. Cash deposit into EEFC Account: Deposits in foreign currency is permitted only against applicable conversion margin. Remittances from EEFC Account: In lieu of currency conversion margins.

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1. Foreign Currency Non-resident (FCNR) AccountNRIs can avoid Risk of Foreign Exchange fluctuations by keeping their overseas money in Foreign Currency Non Resident Bank Deposits (FCNR-B) and you can convert back money to the foreign currency. The account should be opened by the non-resident account holder. FCNR-B enables NRIs to earn good returns on their foreign currency earnings. Key Features of FCNR-B (Foreign Currency Non Resident Bank Deposits) accounts

FCNR(B) accounts are maintained in Foreign currency only No need to worry forex rate fluctuation risk as the accounts are always maintained in the foreign currency Source of funds to FCNR-B accounts should be from abroad(can be from NRE or FCNR accounts) USD, GBP, EUR, JPY, CAD and AUD are allowed to maintained in this account Remittances in other Currencies will be converted into any of the currencies named above at the option of the depositor Interest will be made in the same foreign currency Interest income earned on the money in a FCNR account is non-taxable in India No gift tax on Gifts made out of balances No wealth tax on balances held FCNR-B is maintained only in term deposit Period of deposits range from 1 year to maximum 5 years. FCNR-B deposits can be closed before the due date(penalty apply) NRIs can appoint Power of Attorney Holder to residents in India for operating their FCNR(B) accounts in India You can have joint account with other NRIs ( Resident Indians cannot be joint account holders in NRE accounts)

Resident Foreign Currency (RFC) (Domestic) AccountA person resident in India can open, hold and maintain with an authorized dealer in India, a Resident Foreign Currency (Domestic) Account, out of foreign exchange acquired in the form of currency notes, Bank notes and travelers cheques from any of the sources like, payment for services rendered abroad, as honorarium, gift, services rendered or in settlement of any lawful obligation from any person not resident in India.

The account may also be credited with/opened out of foreign exchange earned like proceeds of export of goods and/or services, royalty, honorarium, etc., and/or gifts received from close relatives (as defined in the Companies Act) and repatriated to India through normal banking channels by resident individuals.

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For NRIs/PIOsIf you are a Non-Resident Indian (NRI) or a Person of Indian Origin (PIO), you can avail of the following facilities without permission from the Reserve Bank: Deposits:

You can open, hold and maintain following types of accounts with an authorised dealer in India i.e. a bank authorised to deal in foreign exchange. Non-Resident (Ordinary) Rupee Account NRO Account Non-Resident (External) Rupee Account NRE Account Foreign Currency Non Resident (Bank) Account FCNR (B) Account

Salient features of the above accounts are as under : Particulars NRE Account NRO Account Permitted Permitted

Joint account of two or Permitted more NRIs Joint account with Not permitted another person resident in India Currency in which Indian Rupees account is denominated Repatriability Principal Freely repatriable

Indian Rupees Not repatriable (except current income like rent, dividend, pension etc. and remittances indicated under "Repatriation of NRO Funds")

Interest Foreign currency risk

Freely repatriable

Freely repatriable

Account holder is exposed Account holder is exposed to the fluctuations in the to the fluctuations, in the value of INR. value of INR to the extent of interest amount. Current, Savings, Current, Savings, Recurring, Recurring, Fixed Deposits. Fixed Deposits. the periods as For the periods as

Type of accounts

Period of fixed deposits For

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announced by the deposit announced by the deposit taking bank. taking bank. Rate of interest Banks are free to Banks are free to determine determine interest rates. interest rates.

Rupee Loans in India against Security of the funds held in the Permitted account to : Permitted Account holder Third Party Foreign currency loans outside India against security of the funds Permitted held in the account to : Permitted Account holder Third Party

Permitted Permitted

Not Permitted Not Permited

Only account holders can avail of foreign currency loans in India against the security held in FCNR (B) Deposit Account.

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For Exporters and Importers-

Facilities available for Exporters:

(i) Export Packing Credit:

Export Packing Credit to all eligible exporters for procuring raw material/ processing/ meeting expenses till shipment of goods. Can be extended either in Indian Rupees or in designated currencies, presently USD / GBP / EURO as per option of the exporter. Concessional rate of interest and on liberal terms as per RBI directive. Interest rates linked to LIBOR for packing credit in Foreign Currency. These facilities are extended for a maximum period of production cycle / 180 days or as per RBI directives.

(ii) Post Shipment Finance:

Post shipment finance to all eligible exporters by purchasing their export sight bills / negotiating their export bills drawn under export L/Cs opened by foreign banks / discounting their export usance bills. Interest charges are very competitive and linked to LIBOR rates.

(iii) Other Facilities Available for Exporters:

Handling of export bills on Collection basis.

Facility of opening Exchange Earners Foreign Currency accounts (EEFC) in US dollars/ GBP/EURO. Undertaking hedging the foreign currency exposures by booking Forward Contracts, etc.

Advising Export L/Cs received from our foreign correspondents.

Issuance of guarantees on behalf of exporter clients on account of exports out of India.

Facilities available for Importers: Issuing Import Letters of Credit through a wide network of foreign correspondents, through which we advise, import L/Cs in favours of overseas

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suppliers through SWIFT channel. Handling import bills on collection basis. Arranging short term buyers credit for our importer customers. Hedging facilities for foreign currency exposures. Issuing foreign currency bank guarantees for Execution of overseas projects / Securing External Commercial borrowings.

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2.4 Inter Bank Transfer

Inter Bank transfer is a special service that allows transferring funds electronically to accounts in other banks in India through as follows:

Clearing Corporation of India Limited (CCIL)-

CCIL was set up on April 30, 2001 at the initiative of the Reserve Bank of India (RBI) to establish an institutional structure for the clearing and settlement of trades in government securities, foreign exchange products and money market instruments. The key objectives were to bring in efficiency in the transaction settlement process, eliminate counterparty risk for the market participants, insulate the financial system from shocks emanating from the operational issues and undertake other related activities to help broaden Indias money, debt and foreign exchange markets. CCIL commenced operations in February 2002. CCILs operations are broadly divided in the following segments: Securities settlement, Forex transactions settlement (USD/INR), Collateralized Borrowing and Lending Obligation (CBLO) settlement, settlement of ATM Transactions and settlement of cross-currency deals (Continuous Linked Settlement (CLS)). CCIL provides guaranteed settlement for securities, forex and CBLO transactions and is a central counter-party to every accepted trade in all these segments. For Continuous Linked Settlement (CLS) the settlement of cross-currency transactions and for ATM transactions- settlement through National Financial Switch (NFS), it does settlement on non-guaranteed basis. This eliminates counter-party risk for the market participants, namely banks, financial institutions, insurance companies, primary dealers and mutual funds. CCIL provides an umbrella for settlement of multiple products. It is based on the concept of multilateral netting by a central counterparty for a transaction on Over the Counter (OTC) as well as anonymous-order driven markets. Multilateral netting involves aggregation of obligations of members to pay or receive funds arising out of every single transaction which are offset into a single net fund obligation, resulting in a significant reduction in bilateral exposure between counterparties.

National Electronic Funds Transfer (NEFT)

The acronym NEFT stands for National Electronic Funds Transfer. Funds are transferred to the credit account with the other participating Bank using RBI's NEFT service. RBI acts as the service provider and transfers the credit to the other bank's account.

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Real Time Gross Settlement (RTGS)

The acronym RTGS stands for Real Time Gross Settlement. The RTGS system facilitates transfer of funds from accounts in one bank to another on a real time and on gross settlement basis. The RTGS system is the fastest possible interbank money transfer facility available through secure banking channels in India. The Real Time Gross Settlement (RTGS) System aims to do what e-mail did for the post card. Instead of sending instructions for payments through cheques, with Real Time Gross Settlement System banks can route payments through on-line messages to RBIs RTGS Payment Gateway. As electronic messages move instantaneously the transactions can be concluded immediately unlike in the case of cheque clearing. In RTGS environment the payer has to inform his bank to debit his account and credit the payees account with an equivalent amount. With RTGS, money would move faster and transactions would be settled in a matter of minutes and the payee would have funds in his account within a maximum time-frame of two hours of the settlement. RTGS is an electronic payment system of Reserve Bank of India which provides online settlement between participating Banks continuously throughout the day. Using RTGS Customers of the Bank can make payment to the beneficiarys account in another Bank. RTGS facilitate the funds transfer across the Banks and Branches. At present 95 Banks and 1435 Branches are under RTGS system. Under RTGS system Inter Bank transactions and Customer Transactions has been enabled by the Reserve Bank of India. Customer Transaction can be outward or inward remittances i.e. Funds can be transferred by or received by the Customer under RTGS system. The unique feature of the system is unlike other clearing system in RTGS Funds can be transferred or received Just In Time i.e. within 2 hours of instructions so given that to at cost less than draft charges. For sending the funds through the RTGS all you have to do is fill & sign the Funds Transfer Instruction Form ( available at Branches ) along with all the necessary details, such as Name of the beneficiary, Name of the Bank and Branch, A/c No. and IFSC Code of the beneficiarys Bank. For receipt of the funds you need to give the IFSC Code of our Bank & Branch to the remitter of the funds. After the instructions are received in prescribed form, duly signed in we will remit the funds through RTGS and within 2 hours funds will be credited to beneficiarys account.

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CHAPTER 3
FINANCIAL MARKET 3.1 Introduction
In economics, a Financial Market is a mechanism that allows people to buy and sell (trade) financial securities (such as stocks and bonds),commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction costs and at prices that reflect the efficient-market hypothesis. Both general markets (where many commodities are traded) and specialized markets (where only one commodity is traded) exist. Markets work by placing many interested buyers and sellers in one "place", thus making it easier for them to find each other. An economy which relies primarily on interactions between buyers and sellers to allocate resources is known as a market economy in contrast either to a command economy or to a non-market economy such as a gift economy. In finance, financial markets facilitate:

The raising of capital (in the capital markets) The transfer of risk (in the derivatives markets) The transfer of liquidity (in the money markets) International trade (in the currency markets)

Typically a borrower issues a receipt to the lender promising to pay back the capital. These receipts are securities which may be freely bought or sold. In return for lending money to the borrower, the lender will expect some compensation in the form of interest or dividends. In mathematical finance, the concept of a financial market is defined in terms of a continuous-time Brownian motion stochastic process.

Definition
In economics, typically, the term market means the aggregate of possible buyers and sellers of a certain good or service and the transactions between them.

The term "market" is sometimes used for what are more strictly exchanges, organizations that facilitate the trade in financial securities, e.g., a stock exchange or commodity exchange. This may be a physical location (like the NYSE) or an electronic system (like NASDAQ). Much trading of stocks takes place on an exchange; still, corporate actions (merger, spinoff) are outside an exchange, while any two companies or people, for whatever reason, may agree to sell stock from the one to the other without using an exchange. Trading of currencies and bonds is largely on a bilateral basis, although some bonds trade on a stock exchange, and people are

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building electronic systems for these as well, similar to stock exchanges. Financial markets can be domestic or they can be international.

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3.2 Types of Financial Markets

The financial markets can be divided into different subtypes:
a. Capital market- Which consists of Capital markets may be classified as

primary markets and secondary markets. In primary markets, new stock or bond issues are sold to investors via a mechanism known as underwriting. In the secondary markets, existing securities are sold and bought among investors or traders, usually on a securities exchange, over-the-counter, or elsewhere. b. Stock Market- Which provide financing through the issuance of shares or common stock, and enable the subsequent trading thereof. c. Bond Market- Which provide financing through the issuance of bonds, and enable the subsequent trading thereof. d. Commodity Market- Which facilitate the trading of commodities. e. Money Market- Which provide short term debt financing and investment. f. Derivatives Market- Which provide instruments for the management of financial risk. g. Futures Market- Which provide standardized forward contracts for trading products at some future date; see also forward market. h. Insurance Market- Which facilitate the redistribution of various risks. i. Foreign Exchange Market- Which facilitate the trading of foreign exchange.

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3.3 FOREX MARKET

Introduction-

Particularly for foreign exchange market there is no market place called the foreign exchange market. It is mechanism through which one countrys currency can be exchange i.e. bought or sold for the currency of another country. The foreign exchange market does not have any geographic location. Foreign exchange market is described as an OTC (over the counter) market as there is no physical place where the participant meets to execute the deals, as we see in the case of stock exchange. The largest foreign exchange market is in London, followed by the New York, Tokyo, Zurich and Frankfurt. The market is situated throughout the different time zone of the globe in such a way that one market is closing the other is beginning its operation. Therefore it is stated that foreign exchange market is functioning throughout 24 hours a day. The foreign exchange market (Forex, FX, or currency market) is a global, worldwide decentralized over-the-counter financial market for trading currencies. Financial centres around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. The primary purpose of the foreign exchange is to assist international trade and investment, by allowing businesses to convert one currency to another currency. For example, it permits a US business to import British goods and pay Pound Sterling, even though the business's income is in US dollars. It also supports speculation, and facilitates the carry trade. In a typical foreign exchange transaction, a party purchases a quantity of one currency by paying a quantity of another currency. The modern foreign exchange market began forming during the 1970s after three decades of government restrictions on foreign exchange transactions (the Bretton Woods system of monetary management established the rules for commercial and financial relations among the worlds major industrial states after World War II), when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system.

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3.4 Foreign Exchange

Foreign exchange means foreign currency and includes: An Exchange Rate is the rate at which one currency can be exchanged for another. In other words, it is the value of another countrys compared to that of your own. If you are travelling to another country, you need to buy the local currency. Just like the price of any asset, the exchange rate is the price at which you can buy that currency. All deposits, credits and balance payable in any foreign currency and any draft, travelers cheques, letter of credit and bills of exchange. Expressed or drawn in India currency but payable in any foreign currency. Any instrument payable, at the option of drawee or holder thereof or any other party thereto, either in Indian currency or in foreign currency or partly in one and partly in the other. In order to provide facilities to members of the public and foreigners visiting India, foreign exchange of foreign currency into Indian currency and viceversa, RBI has granted to various firms and individuals license to undertake moneychanging business at seas/airport and tourism place of tourist interest in India. Besides certain authorized dealers in foreign exchange (banks) have also been permitted to open exchange bureaus. A foreign exchange has two aspects Purchase (Buy) and Sell. The Foreign exchange transaction is always talked from the Banks point of view and the item referred to is the foreign currency. Hence when we say Purchase, it means that the bank has purchased and it has purchased foreign currency and when we say Sale, the bank has sold the foreign currency. In purchase transaction, the Bank acquires the foreign currency and parts with home currency. In a sale transaction the Bank parts with the foreign currency and acquires home currency. The Exchange rate is quoted as Direct Quotation and/or Indirect Quotation. In a Direct Quotation, the foreign currency is fixed and the home currency is variable. For example, 1 USD = Rs. 46. In an Indirect Quotation, the home currency is fixed and the foreign currency is variable. For example, Rs. 100 = USD 2.20. Except in London Market, the direct quotations are only used. In India all quotes are on Direct Method. There are three markets, where foreign exchange rates are quoted. While quoting rates for customer, the rate is called Merchant Rate and normally quoted either as a sale or purchase transaction.

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A customer wants a demand draft for USD 100. It implies that the customer wants to purchase USD 100 from the Bank and will sell him foreign currency by acquiring rupees. The rate quoted will be a Sale Rate says USD 1 = 45.00. It means that Bank will take Rs. 45 from the customer for each dollar sold to him. The exchange rate is always quoted in four decimals in multiples of 0.0025. The rates quoted will be USD 1 45.2525. The last two digits will be rounded off to quarter. All currencies are quoted in the units of One, meaning thereby USD 1 = Rs. 45.2525, GBP 1 = Rs. 80.55. Following currencies are however, quoted in the units of 100. Japanese Yen, Belgian Franc, Italian Lira, Indonesian Rupiah, Kenyan Shilling, Spanish Peseta and currencies of Asian Clearing Union countries (Bangladesh Taka, Myanmar Kyat, Iranian Riyal, Pakistani Rupee and Sri Lankan Rupee). In India, rupee amount received or paid to the customer on account of exchange transaction should be rounded off to the nearest rupee i.e. up to 49 paise ignored and 50 to 99 paise rounded off to higher Rs.

Fixed Exchange Rate A countrys exchange rate regime under which the government or central bank ties the official exchange rate to another countrys currency is called fixed exchange rate. The purpose of a fixed exchange rate system is to maintain a countrys currency value within a very narrow band. Fixed Rates provide greater certainty for exporters and importers. This also helps the government maintain low inflation, which in the long run should keep interest rates down and stimulate increased trade and investment. Floating Exchange Rate A countrys exchange rate regime where its currency is set by the foreign exchange market through supply and demand for that particular currency relative to other currencies is called Floating Exchange Rate. Thus, floating exchange rates change freely and are determined by trading in the Forex Market.

Vehicle Currency:
It is an international currency. It is acceptable in all the countries. It can be used to convert any countries currency to any other countries currency. U.S. Dollar is the most commonly used and strongest vehicle currency in the international market. In India, USD operates as a vehicle currency since August 1991. For Example We want to exchange rupee with Ethiopian Currency Birr. Hence we shall have quote for USD and INR and also USD and Birr. From these quotes we can calculate the requisite exchange rate. In such case US $ is called Vehicle Currency.

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3.5 Factors Affecting Exchange Rate

a) Balance Of Payment (BOP):

If Balance of Payment is favourable (or Surplus) it means there is more supply of foreign exchange. Therefore, the foreign exchange will become cheaper vis-avis domestic currency. However, if BOP is deficit it indicates that there is more demand for foreign exchange as compared to supply and hence exchange rate of domestic currency will go up i.e. domestic currency becomes cheap.

b) Strength of the Economy: In short run if the economy is growing there may be need of higher imports and exports may take sometimes to increase. Thus the foreign exchange demand will be more which will result in higher exchange rate of foreign currency. The domestic currency will be cheaper. However if the economy is strong and the future outlook is positive then the foreign investment in the economy increases the capital inflows. This increases the supply of foreign exchange and helps the local currency to appreciate.

c) Interest Rate: The capital is attracted towards the country and currency which yields higher interest rates, provided there are no controls. If interest rates of domestic currency are raised this will result in more demand for domestic currency by foreign investors and more supply of foreign currency, thus making foreign currency cheaper and the local currency costlier.

d) Central Banks Intervention: If Central Bank is of the opinion that local currency is becoming a stronger thereby affecting export it will buy foreign currency and sell local currency. This action of the Central Bank will increase the demand for foreign currency and the rate of foreign currency vis-a-vis local currency will go up.

e) Speculation: In forex market there is lot of speculative activity. If a few big speculators start buying a currency in an aggressive manner, others may follow suit and the currency may strengthen in the short run. This is known as Band wagon effect. Similarly, if a few big speculators start selling a currency in an aggressive manner,

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others may also join them for making a quick buck by riding the market and hence currency may weaken in short period.

f) Exchange Control: Exchange Control is generally aimed at controlling free movement of capital flows and therefore affects the exchange rate. If the country wants to give boost to its export it will keep the value of its currency low vis-a-vis foreign currency. The reverse would be the case if the government decides to follow a liberal import policy.

g) Inflation Rate: High rate of inflation discourages exports and encourages imports. The higher imports results in more demand for foreign exchange and lesser exports result in less supply of foreign exchange. Hence the exchange rate of foreign currency visa-vis domestic currency will appreciate.

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CHAPTER 4 FOREX MARKET IN INDIA

4.1 History of Forex Market in India

Until the early seventies, given the fixed rate regime, the foreign exchange market was perceived as a mechanism merely to put through merchant transactions. With the collapse of the Breton Woods agreement and the floatation of major currencies, the conduct of exchange rate policy posed a great challenge to central banks as currency fluctuations opened up tremendous opportunities for market players to trade in currency volatilities in a borderless market. The market in Indian, however, remained insulated as exchange rate controls inhibited capital movements and the banks were required to undertake cover operations and maintain a square position at all times. Slowly a demand began to build up that banks in India be permitted to trade in FOREX. In response to this demand the RBI, as a first step, permitted banks to undertake intra-day trade in FOREX in 1978. As a consequence, the stipulation of maintaining square or near square position was to be complied with only at close of business each day. The extent of position which conduct be left uncovered overnight (the open position) as well as the limit up to which dealers conduct trade during the day was to be decided by the management of the banks. As opportunities to make profit began to emerge, the major banks started quoting two-way prices against the Rupee as well as in cross-currencies (Non-rupee) and gradually, trading volumes began to increase. This was enabled by a major change in the exchange rate regime in 1975 whereby the Rupee was delinked from the Pound Sterling and under a managed floating arrangement; the external value of the rupee was determined by the RBI in terms of a weighted basket of currencies of Indias major trading partners. Given the RBIs obligation to buy and sell unlimited amounts of Pound Sterling (the intervention currency), arising from the banks merchant trades, and its quotes for buying/selling effectively became the fulcrum around which the market moved. As volumes increased, the appetite for profits was found to lead to the observance of widely different practices (some of which were irregular) dictated largely by the size of the players, their location, expertise of the dealing staff, and availability of communications facilities, it was thought necessary to draw up a comprehensive set of guidelines covering the entire gamut of dealing operations to be observed by banks engaged in FOREX business. Accordingly, in 1981 the Guidelines for Internal Control over Foreign Exchange Business was framed for adoption by banks.

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During the eighties, deterioration in the macro-economic situation set in, ultimately warranting a structural change in the exchange rate regime, which in turn had an impact on the FOREX market. Large and persistent external imbalances were reflected in rising level of internal indebtedness. The graduated depreciation of the rupee could not compensate for the widening inflation differentials between India and the rest of the world and the exchange rate of the Rupee was getting increasingly overvalued. The Gulf problems of August 1990, given the fragile state of the economy, triggered off an unprecedented crisis of liquidity and confidence. This unprecedented crisis called for the adoption of exceptional corrective steps. The country simultaneously embarked upon measures of adjustment to stabilize the economy and got in motion structural reforms to generate renewed impetus for stable growth. As a first step in this direction, the RBI effected a two-step downward adjustment of the Rupee in July 1991. Simultaneously, in order to provide a closer alignment between exports and imports, the EXIM scrip scheme was introduced. The scheme provide a boost to exports and with the experience gained in the working of the scheme, it was thought prudent to institutionalize the incentive component and convey it through the price mechanism, while simultaneously insulating essential imports from currency fluctuations. Therefore, with effect from March 1, 1992, RBI instituted a system of dual exchange rates under the Liberalised Exchange Rate Management System (LERMS). Under this, 40% of the exchange earnings had to be surrendered at a rate determined by the RBI and the RBI was obliged to sell foreign exchange only for imports of essential commodities such as oil, fertilizers, life saving drugs etc., besides the governments debt servicing. The balance 60% could be converted at rates determined by the market. The scheme worked satisfactorily preparing the market for its emerging role and the Rupee remained fairly stable with the spread between the official and market rate hovering around 17%. Even through the dual exchange rate system worked well, it however, implied an implicit tax on exporters and remittances. Moreover it distorted the efficient allocation of resources. The LERMS was essentially a transitional mechanism and in March 1993, the two legs of the exchange rates were unified and christened Modified LERMS. It stipulated that form March 2nd 1993; all FOREX receipt could be converted at market determined rates of exchange. Over the next eighteen months restrictions on a number of other current account transactions were relaxed and on August 20th 1994, the Rupee was made fully convertible for all current account transactions and the country formally accepted obligations under Article VIII of the IMFs Article of Agreement.

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1966 The Rupee was devalued by 57.5% against on June 6 1967 Rupee-Sterling parity change as a result of devaluation of the sterling. 1971 Bretton Woodss system broke down in August. Rupee briefly pegged to the USD @ Rs 7.50 before reneging to Sterling at Rs. 18.8672 with a 2.25% margin on either side. 1972 Sterling floated on June 23. Rupee sterling parity revalued to Rs 18.95 and the in October to Rs 18.80 1975 Rupee pegged to an undisclosed basket with a margin of 2.25%on either side. Sterling the intervention currency with a central bank rate of Rs 18.3084 1979 Margins around basket parity widened to 5% on each side in January 1991 Rupee devalued by 22% July 1st and 3rd. Rupee dollar rate depreciated from 21.20 to 25.80. A version of dual exchange rate introduced through EXIM scrip scheme, given exporters freely tradable import entitlements equivalent to 30-40% of export earnings. 1992 LERMS introduced with a 40-60 dual rate converting export proceeds, market determined rate for all but specified imports and market rate for approved capital transaction. US Dollar became the intervention currency from March 4th. EXIM scrip scheme abolished. 1993 Unified market determined exchange rate introduced for all transactions. RBI would buy/sell US Dollars for specified purposes. It will not buy or sell forward Dollars though it will enter into Dollar swaps. 1994 Rupee made fully convertible on current account from August 20th. 1998 Foreign Exchange Management Act FEM Bill 1998, which was placed in the Parliament to replace FERA. 1999 Implication of FEMA starts.

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4.2 Foreign Exchange Regulation Act (FERA) to Foreign Exchange Management Act (FEMA)1. Foreign exchange regulation act to Foreign exchange management act (1973) (August,1998) 2. Balance of Payment Balance of Payment refers to the yearly financial statement of a country for the transactions in the external sector with the rest of the world. The BOP table has got two side viz, credit (export) and debit (import), hence it can be conceptualized as balance sheet of the country with rest of the world. 3. Currency convertibility it means freedom for withdrawal of foreign exchange from authorised dealer for payment abroad. Full account convertibility refers to the permission to withdraw foreign exchange without ceiling for transaction. Listed under the current account of the BOP. India has adopted partial capital account convertibility and liberal current account convertibility. RBI has fixed ceiling on withdrawal of foreign exchange for transactions, under the capital account 4. The Capital account is an accounting measure to the total domestic currency value of financial transaction between domestic residents and the rest of the world over a period of time. Capital account can be divided into three accounts: 2. Direct Investment 3. Portfolio Investment 4. Other capital Flows 5. The principle objective of the Foreign Exchange Regulation Act (FERA) is to prevent the outflow of Indian currency. The objective of the act is as follows. To regulate dealings in foreign exchange and securities To regulate the transaction indirectly affecting foreign exchange To regulate import and export of currency and bullion To regulate employment of foreign nationals To regulate foreign companies To regulate acquisition, holding etc of immovable property in India by non-residents 6. Given Indias progress towards a more open economy, it was only inevitable that the Foreign Exchange Regulation Act. (FERA). Be reborn in a liberal, modern avatar. The process received a push, with the cabinet approving the draft Foreign Exchange Management Act (FEMA). The draft reportedly relaxes to a degree the restrictions on all current and some capital account transactions. and provides for the expected move towards full account convertibility. FERA was the product of a time when oil crisis, among other things, had depleted Indias foreign currency reserves. 7. Unfortunately, the act went to absurd lengths in its attempt to conserve foreign exchange. A simple hospitality offered by a foreign national for instance, had to be reported to the government. The Act also routinely came into the way of many national business transactions, and combined with the extremely harsh penalties for offences under the Act, Effectively discouraged productive investment. The excess became glaring post 1991, as the countrys trade and investment linkage

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with the rest of the world increased and foreign exchange reserve mounted to near embarrassing levels. 8. Business associations without exception and rightly, saw the Act as a fetter on the ability of domestic enterprise to take on the challenges of a globalising world. It is this concern primarily that the government is now seeking to address with FEMA. For all the expected relaxations through, the draft bill is unlikely to receive more than half a cheer from Industry. While most would welcome the distinction the bill seeks to make between compoundable and penal offence the former with provisions for fine and the latter with provision for criminal proceedings 9. It is still far from clear what would actually constitute penal offence(s) and what would be the enforcement directorates precise powers. If penal offences relate essentially to money laundering activities--- the Indian subcontinent is, incidentally, a major international hub for such actions--- the definition would make eminent sense. A much wider definition could, however make the proposed act not very different from what exists, and especially if the current over arching power of the enforcement directorate remain what the area. It was also widely anticipated that the provision of new bill would apply retrospectively, to cover cases already under investigation. 10. As it stands tough, this is not to be. The principle that ongoing cases ought to be considered in the light of the objectives and norms that obtain today is a well established one, and it is difficult to understand why government did not it appropriate for application in the present instance. The issue needs to be debated once again. Finally the government would do well to examine how other countries, placed in situation similar to Indias in the matter of foreign exchange problems, have managed with significantly more lenient legislation. 11. If Indian enterprise is to mark its presence globally, it is perhaps much better to err on the side of liberty. In any case, the government guiding objective in this whole exercise should be to take the fear out of FERA. 12. The FEMA act extends to the whole of India. The main provision of the Act are as follows: Section 3: Dealing in Foreign Exchange Section 4 Holding of foreign Exchange Section 5 Current account Transaction Section 6 : Capital account Transaction Section 7: Export of Goods and Services Section 8 : Realisation of Repatriation and Foreign Exchange Section 9: Exemption from Realisation and Repatriation 13. Recent Changes Overseas Investment External commercial Borrowing (ECB) Liberalized Remittance of US $ 25000 per annum by Resident Indians. Foreign Investment liberalized. Student studying abroad are treated as NRIs the system of self write-off and self extension of due date for export realisation for exporter was introduced. 14. The Rupee Progress 1950-51 to 1960-61: Rs 4.76 1980-81: Rs 7.9 1987-88: Rs12.97 1992-93: Rs 30.65 2001-02: Rs 47.68 The rupee has not been too volatile over the years. But that doesnt mean it hasnt depreciated to the dollar. It has

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fallen from Rs 4.76 in 1950-51to Rs 47.84 on December 7, 2001-a plunge in excess of 1000%. Now, see this in the light of the fact that the past 50 years have seen a mere two devaluation (in June 1966 and July 1991) and 15. The Rupees Progress It is evident that the rupee has continually adjusted its value. In 1991, the RBI partially freed the rupee through the liberalised Exchange Rate Mechanism (LERM) in 1991. Subsequently in 1993, the central bank scrapped LERMs and made the rupee free on the trade account. And in 1993, the RBI made the rupee fully convertible on the current account to boost foreign capital inflows

4.3 Foreign Exchange Management Act (FEMA) Rules & Policies

The Foreign Exchange Management Act, 1999 (FEMA) came into force with effect from June 1, 2000. With the introduction of the new Act in place of FERA, certain structural changes were brought in. The Act consolidates and amends the law relating to foreign exchange to facilitate external trade and payments, and to promote the orderly development and maintenance of foreign exchange in India. From the NRI perspective, FEMA broadly covers all matters related to foreign exchange, investment avenues for NRIs such as immovable property, bank deposits, government bonds, investment in shares, units and other securities, and foreign direct investment in India. FEMA vests with the Reserve Bank of India, the sole authority to grant general or special permission for all foreign exchange related activities mentioned above. Section 2 - The Act here provides clarity on several definitions and terms used in the context of foreign exchange. Starting with the identification of the Non-resident Indian and Persons of Indian origin, it defines "foreign exchange" and "foreign security" in sections 2(n) and 2(o) respectively of the Act. It describes at length the foreign exchange facilities and where one can buy foreign exchange in India. FEMA defines an authorised dealer, and addresses the permissible exchange allowed for a business trip, for studies and medical treatment abroad, forex for foreign travel, the use of an international credit card, and remittance facility Section 3 prohibits dealings in foreign exchange except through an authorised person. Similarly, without the prior approval of the RBI, no person can make any payment to any person resident outside India in any manner other than that prescribed by it. The Act restricts non-authorised persons from entering into any financial transaction in India as consideration for or in association with acquisition or creation or transfer of a right to acquire any asset outside India.

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Section 4 restrains any person resident in India from acquiring, holding, owning, possessing or transferring any foreign exchange, foreign security or any immovable property situated outside India except as specifically provided in the Act. Section 6 deals with capital account transactions. This section allows a person to draw or sell foreign exchange from or to an authorised person for a capital account transaction. RBI in consultation with the Central Government has issued various regulations on capital account transactions in terms of sub-sect ion (2) and (3) of section 6. Section 7 covers the export of goods and services. All exporters are required to furnish to the RBI or any other authority, a declaration regarding full export value. Section 8 puts the responsibility of repatriation on the persons resident in India who has any amount of foreign exchange due or accrued in their favors to get the same realised and repatriated to India within the specific period and in the manner specified by the RBI. The duties and liabilities of the Authorized Dealers have been dealt with in Sections 10, 11 and 12, while Sections 13 to 15 cover penalties and enforcement of the orders of the Adjudicating Authority as well as the power to compound contraventions under the Act. Sections 36 and 37 deal with the establishment of an Enforcement Directorate, and empowers it to investigate the violation of any provisions of the Act, rules, regulations, notifications, directions or order issued under this Act.

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4.4 Role of Foreign Exchange Dealers Association of India (FEDAI) in Foreign Exchange
Authorized Dealers in Foreign Exchange (Ads) have formed an association called Foreign Exchange Dealers Association of India (FEDAI) in order to lay down certain terms and conditions for transactions in Foreign Exchange Business. Ad has to given an undertaking to Reserve Bank of India to abide by the exchange control and other terms and conditions introduced by the association for transactions in foreign exchange business. Accordingly FEDAI has evolved various rules for various transactions in order to protect the interest of the exporters, importers general public and also the authorized in dealers. FEDAI which is a company registered under Section 25 of the companies Act, 1956 has subscribed to the 1. Uniform customs and practice for documentary credits (UCPDC) 2. Uniform rules for collections (URC) 3. Uniform rules for bank to bank reimbursement. Rules of FEDAI (I) FEDAI deals with hours of business of banks which is the normal banking hours of ADs. On Saturdays no commercial transaction in foreign exchange will be conducted except purchase/sale of travellers cheques and currency notes and transactions where exchange rates have been already fixed. (II) FEDAI deals with export transactions export bills purchased/discounted negotiation, export bills for collection export letters of credit, etc.

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4.5 RBI Rules & Regulations Foreign Exchange Services

Purpose of Remittance Remittances for Restricted Authorized Eligibility Private Visits Remittance by tour operators / travel agents etc. Business travel Fee for participation in global conferences Film shooting Remittance for participation in international events / competitions Medical Treatment abroad Disbursement of Crew wages Overseas Education Remittance under educational tie up arrangements with universities Remittance towards exam fees for exams held in India /abroad and for additional score sheets for GRE, TOEFL, etc. Employment and processing, assessment fees for intending migrants Emigration Visa fees. Documentation AD-II dealer shall submit an application form with details and also confirming customers KYC compliance for affecting the remittance. Covering letter from the AD II providing the complete applicant/ remitter and beneficiary details & also certifying the KYC norms are complied with. FEMA Declaration duly signed by the AD II. Completed A2 form if applicable (for cases over USD 5000) Payment needs to be collected by way of draft /cheque from the debit of the AD II account. (In case of cheque remittance need to be effected after cheque realization). AD-II customer to submit 5 % of the transaction documents to the bank on a random basis for audit purpose

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4.6 Need of Foreign Exchange in India

RBI provides licenses to the bank for the dealership of maintaining foreign exchange department in their bank and dealing or performing any transactions in foreign currency. Earlier RBI issued this license under FERA (Foreign Exchange Regulation Act) as earlier the transactions of foreign currency and Forex reserves was small in quantity so there was a need for proper regulation of foreign currency and balance of payments. There need to be regulation of foreign exchange for future need and maintain enough balance of foreign exchange. The Indian economy was opened up from July 1991 as the country was facing a severe forex crunch due to heavy imports made in late 80s global event of Iraq war (Gulf war) in 1990. India had also heavily borrowed from external sources in mid 80s and there were repayment pressure mounting for which forex was badly required. The situation became very precarious around the middle of 1991 when the forex reserves came down to a low of USD 975 million which was barely sufficient to meet 1 weeks import requirements. Since India was not sufficient in a large way imports were essential else development would suffer. The urgency was also to meet short term debt commitments and therefore the country had to pledge its gold reserves with the Bank of England to get immediate foreign exchange to temporarily tide over the situation. India thereafter approached the IMF (International Monetary Fund) for assistance under the structural adjustment plan of IMF. The amount borrowed was USD 2.5 billion which by todays standards is hardly material but it was badly required in those days. The country would thereby meet its debt obligations and were saved from being a defaulter country like some of the East African nations. The IMF assistance came with certain conditions which were not politically palatable in those days but in hindsight proved to be a blessing in disguise. The IMF conditions are also called as IMF conditionalitys broadly dealt with opening up of the economy so that industrial activities can pick up and thereby there could be structural correction in the economy. Banking Reforms were introduced as a part of the economic reforms and a committee was set up under the chairmanship of Mr. Narsimha Rao. At present the countrys Forex position is about USD 295 billion. Later after the economy was liberalised and opened exclusively for foreign currency FERA was amended as FEMA. FEMA (Foreign Exchange Management Act) was introduced after the liberalisation of the economy and the economy opened up for import and exports. There was an increase in the quantity of exports and imports and there was a huge inflow and outflow of foreign exchange. For this purpose there was no more need for regulation. Now there was a need for proper management of Forex. Under FEMA, RBI issued 3 types of licenses to the bank for the foreign exchange transactions i.e. Category I, Category II, FMMC.

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4.7 Market Participants in Forex Market

Unlike a stock market, the foreign exchange market is divided into levels of access. At the top is the inter-bank market, which is made up of the largest commercial banks and securities dealers. Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are razor sharp and not known to players outside the inner circle. The difference between the bid and ask prices widens (for example from 0-1 pip to 1-2 pips for a currencies such as the EUR) as you go down the levels of access. This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the foreign exchange market are determined by the size of the "line" (the amount of money with which they are trading). The top-tier interbank market accounts for 53% of all transactions. From there, smaller banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail FX market makers. According to Galati and Melvin, Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in FX markets in Particular, since the early 2000s. (2004) In addition, he notes, Hedge funds have grown markedly over the 20012004 period in terms of both number and overall size. Central banks also participate in the foreign exchange market to align currencies to their economic needs.
1.

Banks-

The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. Many large banks may trade billions of dollars, daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, which are trading desks for the bank's own account. Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for large fees. Today, however, much of this business has moved on to more efficient electronic systems. The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago.
2.

Commercial Companies-

An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable

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impact when very large positions are covered due to exposures that are not widely known by other market participants.
3.

Central banks-

National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.

4. Forex Fixing
Forex fixing is the daily monetary exchange rate fixed by the national bank of each country. The idea is that central banks use the fixing time and exchange rate to evaluate behavior of their currency. Fixing exchange rates reflects the real value of equilibrium in the forex market. Banks, dealers and online foreign exchange traders use fixing rates as a trend indicator. The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives. The combined resources of the market can easily overwhelm any central bank. Several scenarios of this nature were seen in the 199293 ERM collapse, and in more recent times in Southeast Asia.

5. Hedge Funds as Speculators

About 70% to 90% of the foreign exchange transactions are speculative. In other words, the person or institution that bought or sold the currency has no plan to actually take delivery of the currency in the end; rather, they were solely speculating on the movement of that particular currency. Hedge have gained a reputation for aggressive currency speculation since 1996. They control billions of dollars of equity and may borrow billions more, and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds' favor.

6. Investment Management Firms

Investment management firms (who typically manage large accounts on behalf of customers such as pension funds and endowments) use the foreign exchange market to facilitate transactions in foreign securities. For example, an investment manager bearing an international equity portfolio needs to purchase and sell several pairs of foreign currencies to pay for foreign securities purchases. Some investment management firms also have more speculative specialist currency overlay operations, which manage clients' currency exposures with the aim of generating profits as well as limiting risk. Whilst the number of this type of specialist

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firms is quite small, many have a large value of assets under management (AUM), and hence can generate large trades.

7. Retail Foreign Exchange Traders

Individual Retail speculative traders constitute a growing segment of this market with the advent of retail forex platforms, both in size and importance. Currently, they participate indirectly through brokers or banks. Retail brokers, while largely controlled and regulated in the USA by the CFTC and NFA have in the past been subjected to periodic foreign exchange scams. To deal with the issue, the NFA and CFTC began (as of 2009) imposing stricter requirements, particularly in relation to the amount of Net Capitalization required of its members. As a result many of the smaller and perhaps questionable brokers are now gone or have moved to countries outside the US. A number of the forex brokers operate from the UK under FSA regulations where forex trading using margin is part of the wider over-thecounter derivatives trading industry that includes CFDs and financial spread betting. There are two main types of retail FX brokers offering the opportunity for speculative currency trading: brokers and dealers or market makers. Brokers serve as an agent of the customer in the broader FX market, by seeking the best price in the market for a retail order and dealing on behalf of the retail customer. They charge a commission or mark-up in addition to the price obtained in the market. Dealers or market makers, by contrast, typically act as principal in the transaction versus the retail customer, and quote a price they are willing to deal at.

8. Non-Bank Foreign Exchange Companies

Non-bank foreign exchange companies offer currency exchange and international payments to private individuals and companies. These are also known as foreign exchange brokers but are distinct in that they do not offer speculative trading but rather currency exchange with payments (i.e., there is usually a physical delivery of currency to a bank account). It is estimated that in the UK, 14% of currency transfers/payments are made via Foreign Exchange Companies. These companies' selling point is usually that they will offer better exchange rates or cheaper payments than the customer's bank. These companies differ from Money Transfer/Remittance Companies in that they generally offer higher-value services.

9. Money Transfer/Remittance Companies and Bureau De Changes

Money transfer companies/remittance companies perform high-volume lowvalue transfers generally by economic migrants back to their home country. In 2007, the Aite Group estimated that there were $369 billion of remittances (an increase of 8% on the previous year). The four largest markets (India, China, Mexico and the Philippines) receive $95 billion. The largest and best known provider is Western Union with 345,000 agents globally followed by UAE Exchange

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Bureau de change or currency transfer companies provide low value foreign exchange services for travelers. These are typically located at airports and stations or at tourist locations and allow physical notes to be exchanged from one currency to another. They access the foreign exchange markets via banks or non bank foreign exchange companies.

4.8 Structure of Forex Market in India

The Forex Market in India has broadly 3 layers or constitutes. They are as follows:

1) Reserve Bank Of India (RBI): The RBI is in the first layer of the market. The RBI is the custodian of the Foreign Exchange and it influences the Foreign Exchange Market for 2 reasons: a) By intervention in the form of selling and buying the foreign currency whenever it feels the need of moderating the exchange rates. If foreign exchange rate is rising fast and excessively RBI intervene by buying local currency against foreign currency which leads to more supply of the foreign exchange. This results in reduction in foreign exchange rate.

b) For forex reserve management also the RBI buys and sells foreign exchange. The process of reserve management involves a certain amount of switching between currencies. In general the Reserve Bank does not trade in Foreign Exchange for making profits.

2) Authorized Dealers (AD): The ADs consists of commercial banks and specially approved dealers like Thomas Cook and others. They buy and sell among themselves generally bulk quantity of Foreign Exchange.

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3) Money Changers: They constitute 3rd layer of Indian Forex Market. They deal in retail market. There are two types of money changers: a) Full fledged money changers- They are allowed to buy and sell foreign currencies. b) Restricted Money Changers- They are allowed only to buy (not sell).

4) Accredited Brokers: The Indian Forex Market has accredited brokers. They are recognized by Foreign Exchange Dealers Association of India (FEDAI). As per FEDAIs guidelines the Deals between any two Authorized Dealers must be routed through the Brokers. The Forex Market in India is overseen and monitored by RBI.

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CHAPTER 5

FOREIGN TREASURY
5.1 Introduction
Treasury in a company is key in determining the firms financial strategy and financial policy advising on what businesses to invest in, organising the appropriate funding for this, and controlling the risk in the organisation. Dependant on the risk environment, treasury will create an appropriate capital structure of debt and equity in order to fund the business, getting the optimum balance between cost and risk. This translates into the need to ensure that at all times the company has the liquidity and cash to meet its obligations as they fall due, taking in funding from equity or debt capital markets activities, bank borrowings, through to day-to-day cash management and investment. Treasury is responsible for the identification of risks associated with this activity and for controlling risks that could erode financial strength, using mitigation and hedging techniques and encouraging a culture of sound financial practice. In essence treasury management is all about handling the banking requirements, the funding for the business and managing financial risk. It therefore incorporates raising and managing money, currency, commodity and interest rate risk management and dealing, and in some organizations, the related areas of insurance, pensions, property and taxation.

Integrated Foreign Treasury:

Treasury Department (Forex Division) will facilitate Foreign Exchange Department in providing exchange rates for undertaking various types of merchant transactions, including forward rates, notional rates, etc. It will also undertake trading transactions on its own to earn trading profits as also being able to give competitivc rates to the customers. Additionally, it may take positions in the forex market to provide competitive rates for its merchant transactions. Settlement of all these merchant and other transactions will be routed through the Nostro Accounts maintained by the Bank in foreign currencies or ACU accounts/ bilateral accounts as the case may be. The operational aspects such as drawing cheques on the accounts, issuing mandates for payments, sending/ receiving swift messages and taking actions thereon will be done by the Foreign Exchange Department (other than Treasury Transactions). However since the propriety of these Nostro Accounts lies with the Treasury Department, they will also supervise and regulate these messages whenever required. Similarly, obtaining relevant documents, forms, fixing credit/ forward contract limits, etc. and observing FEMA/RBI guidelines in respect of all merchant transactions irrespective of nature of transactions will be the responsibility of Foreign Exchange Departments at all B-category branches.

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Foreign Exchange Department will be taking rates for merchant transactions from the Treasury dealer. However, to enable their important customers having substantial forex exposure to cover or trade on their positions, Foreign Exchange Department may, in consultation with the Treasury Department, fix limits after taking their applications, margins, regulatory restrictions, procedures, etc. Foreign Exchange Department may provide their customers, dealing room telephone number etc. On the basis of the telephonic instructions from such customers, dealers may provide competitive and market related rates as also book/ cancel/ amend forward contracts, etc under advice to Foreign Exchange Department. In such cases, completing the formalities of obtaining documents, and other compliances will be the responsibility of Foreign Exchange Department. At any point of time, if it is realized by the dealers that customers are taking undue advantages of the liberty given by the Foreign Exchange Department, they may bring it to the notice of Foreign Exchange Department immediately and discontinue entertaining such customers requests thereafter. Treasury Department will in coordination with Foreign Exchange Department open Nostro Accounts in those banks and those currencies as per the requirement of foreign exchange department. They would also fund these accounts as and when required keeping optimum balance as per the understanding with the foreign bank while opening the account to avoid unnecessary charges being levied by the foreign bank as also ensuring compliance of conditions attached thereto and to avoid adverse rating. It should be ensured that conditions like minimum balance etc. should be complied with at all times taking into account the known transactions. For unknown transactions the balance should be brought to normal in shortest possible time and not to get carried away by revenue aspects. Also, to keep a control over the operations in the account and to avoid any revenue leakage/ financial losses, these accounts are to be monitored on day to day basis and reconciled at least on a weekly basis.

Office / Branches of Authorised Dealers Handling Foreign Exchange Business Office / branches of authorised dealers, which are authorised to transact foreign business, are classified into the following three categories: CATEGORY A: These are the Offices and branches maintaining independent foreign currencies accounts with overseas correspondents / branches in their own name and also Position Maintaining Branch (PMB). CATEGORY B: These are authorized to operate the Nostro Account for Forex related transactions on their own routing these transactions through Nostro accounts maintained by PMB.

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CATEGORY C: These are all other branches of Bank, which are not authorized to undertake any foreign exchange transactions independently. In case any transaction is to be undertaken for the customers of these branches, the same will be routed through the book of linked B category branches.

5.2 Forex Treasury Operations

Forex Treasury classified into 3 Operations are as follows: A) Front Office Operations 1. Study the market trends 2. Buying/Selling Foreign exchange to forex customers through B category branches. 3. Providing Guidance to these branches on possible exchange rate movements and also to their customers on forex rates strategies to be adopted. 4. Buying/selling (Trading) in forex on Cash/TOM/Spot and forward basis for taking advantage of the exchange fluctuations in the forex market. 5. Executing deals for the funds Management / Strategic Operations of the Bank. 6. Borrow/lend money in the Inter-bank / International markets. 7. Placement of foreign currency deposits with banks. 8. Maintenance of Front Office records. 9. Keeping liaison with counterparties, brokers and back office to ensure that all deals are completed. 10. Approving / acknowledging deals put through by the dealers. Funds Management and Nostro accounts balance Management on the basis of B category branches demands / reports / information. B) Mid Office Operations: 1. Portfolio Risk appraisal. 2. Valuation of Portfolio. 3. Systematic Risk appraisal 4. MIS reports relating to Risk Management Process and recommendations. 5. Recommending Counter Party/ instrument Limits and Empanelment of Brokers.

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6. Research necessary to assist dealers and risk management cell. 7. Monitoring of adherence to various limits stipulated by the management. 8. Monitoring the shock and VAR of SLR and HTM securities in the portfolio and intimating the same to the front office on fortnightly basis. 9. Valuation of Forex positions and limits monitoring. 10. Market Risk capital requirement reports generation and monitoring.

C) Back Office Transactions

1. Downloading all Nostro accounts statements through SWIFT / Internet. 2. Follow up of foreign currency deposits, interest, etc. 3. Follow up of the RTGS cash flows of forex sales affected by the front office. 4. Confirmation of deals (with all details) made by front office with the counter parties back offices. Pointing out discrepancies, if any, to front office to complete the deals in time. Authorisation of all other deals. 5. Settlement of all Deals within the stipulated time as per the settlement procedures for these deals in terms of FEDAI (Foreign Exchange Dealers Association of India) guidelines / market practices. 6. Obtaining and Maintaining Rate Scan Reports and validating transaction rates. 7. Reporting of marked deviations in exchange rates quoted for some forex deal in comparison with other forex rates in the market. 8. Timely submission of all MIS reports to higher authorities. 9. Submission of all periodic returns to RBI including R returns, GPB, FTD and POS 10. Reconciliation of all Nostro accounts on daily basis or at periodic intervals. 11. Furnishing data to Accounts Dept. To enable Accounts Dept. to pass necessary Accounting Entries, Record Keeping and Audit Compliance. 12. Settlement/ Payment of bills of various service providers like Brokers, Tickerplant, Reuters, FEDAI, CCIL, MTNL,etc. 13. Maintenance of all records for the Treasury Dept.

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5.3 Products which can be handled by Foreign Treasury

Following products can be handled by Treasury:
1. Buy/ Sell foreign currency on Cash/ TOM/ Spot Transactions against rupee or

a foreign currency. 2. Forward Contracts. 3. Rupee/ Foreign Currency Swaps. 4. Foreign Currency borrowing/ lending. 5. Arranging Lines of Credit for Customers/ Bank. 6. Discounting/ Rediscounting of Trade Bills. 7. Derivative products like Currency Futures, IRS, FRAs, and Options Contracts as may be permitted by RBI from time to time. The product at sr. number 7 will be undertaken only at a Future Date and a Separate note will be submitted to the Board for their approval.

Nostro AccountA foreign currency denominated demand deposit account maintained by a bank in India with a bank overseas is called a Nostro Account. For Example: Dena Bank (Mumbai) maintains a USD account with City Bank (New York). AD Category-I banks providing such facilities shall open a NOSTRO collection account for receipt of the export related payments facilitated through such arrangements. Where the exporters availing of this facility are required to open notional accounts with the OPGSP, it shall be ensured that no funds are allowed to be retained in such accounts and all receipts should be automatically swept and pooled into the NOSTRO collection account opened by the AD Category-I bank. A separate NOSTRO collection account may be maintained for each OPGSP or the bank should be able to delineate the transactions in the NOSTRO account of each OPGSP. The following debits will only be permitted to the NOSTRO collection account opened under this arrangement: a) Repatriation of funds representing export proceeds to India for credit to the exporters account;

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(b) Payment of fee/commission to the OPGSP as per the predetermined rates / frequency/ arrangement; and (c) Charge back to the importer where the exporter has failed in discharging his obligations under the sale contract. AD Category -I banks shall satisfy themselves as to the bonafides of the transactions and ensure that the purpose codes reported to the Reserve Bank in the online payment gateways are appropriate. Each NOSTRO collection account should be subject to reconciliation and audit on a quarterly basis.

Vostro AccountDemand Deposit accounts denominated in Indian Rupees maintained by overseas banks with banks in India are called Vostro Accounts. For Example: Barclays bank, London maintains an INR account with Bank of India, Mumbai. Prior approval of the Reserve Bank is required to be obtained by Authorised Dealer Category-I (AD Category-I) banks for opening and maintaining Rupee/ foreign currency vostro accounts in India of non-resident Exchange Houses. The following are the detailed guidelines for opening and maintenance of Rupee/ foreign currency vostro accounts of non-resident Exchange Houses in India. Under the Rupee Drawing Arrangements (RDAs), cross-border inward remittances are received in India through Exchange Houses situated in Gulf countries, Hong Kong and Singapore. Prior approval of the Reserve Bank is required for opening and maintaining Rupee vostro accounts of these non-resident Exchange Houses in India. AD CategoryI banks should apply to the Reserve Bank in the form provided at Annex-I with necessary documents for opening and maintaining in India the Rupee vostro accounts of non resident Exchange Houses from Gulf countries, Hong Kong and Singapore. Funds in such accounts will not be convertible, nor will they be transferable to other AD Category-I banks or to other non-resident accounts maintained with the same AD Category-I bank. Balances in such accounts will not qualify for payment of interest.

Net Open Position Limit (NOPL) and Aggregate Gap Limit (AGL)-

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For any Bank, any forex exposure is a risk due to the constant exchange rate movement. Considering the risk factor, it is necessary for any authorized dealer to take a considerate view as regards the exposures to be taken. On the basis of banks Board of Directors decision, Reserve Bank of India has approved for Bank exposure limit. These limits do and will choke the Treasury operations as well as business of the bank as the exposure limits are insufficient creating operational hurdles. Hence, all the dealers should be specially apprised of the exposure limits by name and the Chief Dealer will supervise and co-ordinate with both the forex dealers to ensure that these limits and other conditions attached thereto are not breached and yet customer demands are always met. If necessary limits may be allocated between the Inter-bank dealer and merchant dealer. Net Open Position in a Single CurrencyThe measurement of a bank's exposure in a single currency consists in determining if the bank has a long or a short open position in that particular currency, and how large this open position is. The open position in a currency is the sum of (a) The Net Spot Position and (b) The Net Forward Position. (a) Net spot position The spot position is simply the position which appears directly on the balance sheet. The net spot position is the difference between foreign currency assets and liabilities in a particular currency. This should include all accrued income and accrued expenses. (b) Net forward position This represents all amounts to be received less all amounts to be paid in the future in a particular currency as a result of foreign exchange transactions which have already taken place. These transactions which are recorded as off balance sheet items would include: (i) Spot transactions which are not yet settled; (ii) Forward foreign exchange transactions; (iii)Guarantees and similar commitments denominated in foreign currencies which are certain to be called upon and are likely to be irrecoverable. Overall Foreign Exchange Exposure This involves measurement of risks inherent in a bank's mix of long and short positions in different currencies. Banks should adopt the "shorthand method", which is accepted internationally, for calculating the overall foreign exchange exposure or overall open position as follows: (i) Calculate the net open position in each currency (as above).

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(ii) Arrive at the sum of all the net short positions. (iii) Arrive at the sum of all the net long positions. Overall foreign exchange exposure or overall open position is the higher of (ii) and (iii).

R-Return
The information about the inflows and outflows of foreign exchange is of immense importance to the Government of India and Reserve Bank of India for making policy decision. In addition as a member of International Monetary Fund, India has an obligation to present the quarterly balance of payment (BOP) statistics to the IMF. The BOP data should be published within three months from the close of the quarter as per Special Data Dissemination Standards (SDDS) prescribed by IMF and accepted by Government of India. Returns and statements prescribed are used in the Reserve Bank of India for compiling very valuable data relating to the countrys financial transactions with the external world as well as for exercising supervision over the operations of authorized dealers in foreign exchange and reported by them in R-Returns. The R returns also serve a means of post facto scrutiny in Reserve Bank of India to ensure that AD have correctly exercised in the powers delegated to them under general or specific authority. Maintenance of Records: Accuracy and strict observance of the fortnightly periodicity is of the great importance in the system of R Returns reporting. The authorised dealers should maintain proper records of all purchases and sales of foreign currencies made by them in systematic manner on daily basis. Uniform code number allotted to AD branches: Part 1 (7 digits) of the uniform code number allotted to the reporting office branch of authorized dealer should be indicated on the top of R-Returns. Any existing branch having code number but which is not transacting foreign exchange business may use the number allotted to it as and when it starts transacting such business at a future date.

Types of R Returns: Every transactions, which causes in flow of foreign exchange in India or outflow of foreign exchange from India effects the position of foreign currency assets or liabilities, is required to be reported to Reserve Bank of India. As these transactions takes place by way of debit and credits to the Nostro accounts maintained by authorised dealers and Vostro account of non-resident banks maintained with the authorized dealers, every debit and credit to these accounts are required to be reported. Thus there are two types of R Returns: 1. R return (Nostro)

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2. R return (Vostro) A separate R return (Nostro) for each currencies and a separate R return (Vostro) is required to be submitted irrespective of number of accounts operated upon in that currency. Time limit for submission of R Return: R-Returns should be submitted twice in a month as at the close of business on 15 and the last day of the month. If 15th or the last day of the calendar month is a holiday, then the return should be submitted as at the close of business on the preceding working day. The R-Returns are to be sent so as to reach RBI within 7 calendar days from the close of period to which they relate. Authorised dealers branches submitting R-Returns should, however, make all efforts to submit them as quickly as possible, without waiting for the last day of submission, to avoid delay in submission of returns to Reserve Bank of India.
th

If in any fortnight, there are no transactions to report, NIL return should be submitted in the prescribed time period. Authorised dealers should ensure that the R Returns are submitted to RBI reflecting the position correctly and completely. All the relevant transactions should be reported in the statement and all supporting documents and forms should be completely correctly. Any contravention to Reserve Bank of India directions or failure to file returns as specified may attract fine from RBI. Reserve Bank of India may take a serious view of the failure of any branch of authorised dealer to furnish returns and statements if not submitted regularly or promptly. If they find irregularities during compilation and where it deems fit, it may impose financial penalty or even direct the authorized dealer concerned to refrain from transacting foreign business at the branch concerned.

5.4 Foreign Exchange Transactions

(I) Merchant Transactions

(II) Interbank Trading Transactions (III) Funding & Merchant Cover Transactions

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(I) Merchant Transactions:

All merchant transactions will be undertaken by B category branches only. They will be supervised, regulated and controlled by our Foreign Exchange Department in tune with FEMA & RBI guidelines. However, these transactions will automatically result in exchange risk, funding risk, settlement risk, credit risk, etc. Hence to mitigate these risks, these transactions will be reported by the respective branch officials to Treasury officials with full details immediately or as soon as possible on the same day over phone or fax. It should be noted that all transactions in all currencies should be reported to Treasury (merchant/corporate) dealer by respective branch official and obtain rates therefore. In case, any branch fails to report any transaction to Treasury for whatsoever reason and such a lapse results in a financial loss to the Bank then such lapses will be viewed seriously by the Bank and may warrant disciplinary action. Treasury dealer to whom the transaction is reported over phone or by fax will immediately take it in Deal Register and provide a Transaction Deal No. to the reporting staff. This transaction no. will be incorporated in the vouchers / registers/ documents etc. By the concerned branch to avoid duplication reporting as also for retrieving any further information or processing at a later date. As mentioned above, sometimes the Merchant dealer on receiving requests from the customers for improvement in the rates may provide the improved / competitive rates to the customers if its within his delegated authority and take the deal in the books. In the case the customer is not satisfied with the improvement then in consultation with the Chief Dealer/ Dep. General Manager (Treasury) he may further improve the rate to clinch the deal. It should be noted that the improved rate should not ordinarily be better than the ongoing market rates so as to put the bank in a position of notional loss/ actual loss. If, however, dealers position permits, and is considered necessary having business relation with the client, with the approval DGM (Treasury)/ Chief/ Dealer improve the rate in such a way that it is alignment with the market. Such improved rates should be immediately conveyed to the B category branch where the deal will be executed. Sometimes, the customer may enquire over telephone with the dealer for booking contact/ forward contract to insure him against the exchange rate fluctuation risk. In such a case, the dealer will ascertain that the customer enjoys sanctioned limits for booking forward contracts and adequate limits are available. He may then provide indicative rate/ forward rate. If the provided rate is acceptable to the customer then in consultation with the B category branch where the customer wishes to execute the deal, dealer may confirm the quote (firm quote with time validity) and book a forward contract at that or revised rate depending upon the market conditions after ascertaining the fixed forward or option forward right the customer wants. Subsequently, the confirmation note will be prepared and forwarded to the category

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branch to obtain customers confirmation to the contract and the forward rate/ due date, etc. Stop LossFor any business and for investment in particular, the principle of Stop Loss and Take Profit is seminal. Any investor and trader, in particular, enter into a position with a view of making profit in a given time frame. Due to market conditions or due to error of judgement, the position may turn adverse resulting in to a loss. It is, therefore, found prudent to set target for maximum loss that a dealer or investor may take on his position. The limit could vary from type of investment, portfolio constraints/ objectives, market conditions and ability of the organization to tolerate the same. Banking is essentially the business of risk different types on our portfolios whether it is an investment or loan or even deposits. But, they must not be of nature and size which could annihilate the existence of the bank. Stop Loss limit provided by the bank is an extreme limit generally applicable in a given market situation. A dealer must within that limit adopt for himself a stop loss based on his approach to dealing and profit target he has in mind. Generally, it is suggested that a dealer should fix a Stop Loss limit which is not more than 50% of the targeted profit. This principle ensures that a dealer on a statistical probability end up in money in spite of some deals going wrong. It is also necessary that the dealer need to remain out of market or should not initiate fresh positions, when he is in doubt or key events are scheduled to take place or expected and not speculate on the event. For example: Suppose the bank has allotted a stop loss limit of 1% to a dealer, so the dealer cannot hold his position until it exceeds this limit. Suppose the dealer has bought 100 USD for Rs. 45.00 per dollar, according to 1% as a Stop loss limit if due to a market fall the USD weakens the dealer cannot hold his position till it falls below Rs. 44.55 per dollar rate. The dealer has to release from his position and sell the foreign currency before this 1% limit of Stop loss. The above is just an example. However this 1% limit decided by the bank is equally distributed among all the branches so as to reduce the loss of all the branches totaled together. Also in a branch the stop loss limit is divided among the dealers. As per the stop loss limit given to the dealer he can hold his position accordingly.

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Take ProfitCompulsory take-profit limit may be allowed up to Rs. 1.00 per Rs. 100.00 face value under the discretion of the GM. In case of extended take profit limit trailing stop loss will be observed i.e. the profit or loss of the dealer will be worked out from the take profit limit on his original bill price if his profit is less than the take profit level. These limits are to facilitate the dealers to maximize profits and reduce losses and avoid temptation to hang on to the positions, which could lead to increased losses or reduced profits in Hope. This will be applicable only to securities purchased for the purpose of taking advantage of the short-term movement in prices, which have been classified in the Trading portfolio. It is also necessary that the discretionary limits are not used as a matter of routine but on a due consideration and record of such reasons be maintained. It is necessary that we follow the Stop Loss/ Take Profit limits more as a matter of rule and discipline and exceptions thereto be made only when the dealer makes clear case for justification for holding the same and the confirming authority has fair level of conviction to believe that by holding the position, losses would be reduced. Further, if any transfer to AFS is to be made it will be only after elapse of 90 days provided that market was only one way or the quotes were too wide to take SL and the dealer had no chance to take out the position at a profit or a reasonable loss. Similarly, till such time the hard line approach of the RBI continues on liquidity management and too many dealers may prefer to as intraday dealer and overnight positions per dealer do not exceed 50% of their allocated limit or Rs. 10 Cr, whichever is lower, any time. Investment Committee may be authorized to increase these limits taking in to account the environment, performance, etc. within the overall limit fixed for HFT. In case of dealer is found to be showing tendency to often breach the limits, Investment Committee may decide to put the dealer for cooling away from the dealing activity. This can help him revisit his strategies, correct himself by discussions with the other players in the market, etc. if the dealer is found to be delinquent, he may be sent out of the dealing room.

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(II)

Inter-Bank Transactions:

Inter-bank transactions can be broadly classified into: 1. Deals to cover the merchant transactions undertaken. 2. Deals/ transactions to fund our Nostro accounts. 3. Proprietary Trading transactions undertaken to take advantage of the market volatility. 4. Forward transactions undertaken to manage the exchange/ gap risk in case of foreign currency borrowings or arbitrage earnings, etc. Bank can undertake any of the above transactions and the same will be undertaken by the dealers handling the Inter-bank desk. As far as our bank is concerned, we so far do not have foreign currency deposits as of now, a resource which is low cost generally and will have to depend on other banks for foreign currency requirement. Hence we are at decided disadvantage in extending Forex credit lines at competitive rates to customers. Hence, the Treasury will have to make arrangements with other banks for line of credit, which is needed to support our Foreign Exchange Dept. for their trade finance related transactions. Of late, many customers are going for expansions of their business with foreign currency borrowing, which is available at cheaper rate thereby reducing their borrowing costs. Hence, Treasury will have to undertake such operation like arranging foreign currency lines of credit through other banks subject to forex risk management especially foreign banks and private sector banks / public sector banks. If required, they should open current account with such banks and also keep rupee deposits to provide as security for leveraging thereon. At appropriate time, bank could, on the basis of its business plan and strategies in place, consider going for ECB in its own name provided there is a prospect for utilizing the same for granting foreign currency loans to customers. Till such times, Bank may consider lending to Exporters in Foreign Currencies under PCFC scheme and to importers under buyers credit scheme (FCCI) upto say Rs. 25 crores each scheme initially. Maximum exposure to all customers in aggregate should not exceed Rs. 50 crores. Later, if there is good response for this product from the customers and market conditions / rates are helpful Bank may decide to take higher exposure. For this, they may undertake Buy / Sell or Sell / Buy Swaps and arrange for foreign currency funds. Our bank may also accept foreign currency deposits accounts of following types through B category branches: 1. Foreign Currency Non Resident Deposit (FCNR) 2. Exchange Earners Foreign Currency Account (EEFC)

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3. Resident Foreign Currency Account (RFC) 4. Resident Foreign Currency Account (RFC Domestic) These will be supervised, regulated and controlled by our Foreign Exchange Dept. in tune with FEMA & RBI guidelines. Fixation of interest rates, operations in the account, answering to the customer queries etc. will be handled by Foreign Exchange Dept. However, these deposits could be the resource for the Treasury and Treasury will use surpluses prudently taking into account liquidity requirements and manage the exchange risk as well as interest rate risk too. Banks will have following alternatives to deploy these funds: 1. To lend these funds to the customers in India in foreign currency itself. 2. To lend these funds to the customers in India in INR while covering the exchange risk through swap mechanism. 3. To invest the same in foreign markets in Govt. Securities. 4. To keep the same as bank deposits in a foreign bank / PSU Banks. 5. To invest in rupee instruments such as G-Secs., Corporate Bonds, CPs, CDs, etc. (this will be done by domestic segment of Treasury) Since, the third and fourth options are presently financially unviable; bank will use the first / second option for the deployment of foreign currency deposits. Only when there will be surplus in the Nostro account which could not be gainfully deployed they may deploy the same in overnight deposits with the foreign correspondent. However, it is possible that situation may change and the Treasury Department could opt for any permissible and beneficial options. In normal course, the other option for the Bank would be to convert the foreign currency amount in INR and simultaneously purchasing the same forward to cover the exchange risk. The INR available would be deployed in the local markets. The decision on this will be taken by the Treasury Dept. from time to time on merits depending upon the expected and actual markets conditions. Settlement of Transactions: The transactions in interbank market may take place for settlement as under: a) On the same day Called Ready transactions. Cash transactions. b) Next day - TOM (settlement on next working day)

c) Spot transactions Two days later.

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In case of spot transactions, if transaction takes place on Monday, the delivery or exchange of currencies will take place on Wednesday. If Wednesday is holiday, the transaction takes place on Thursday. The transaction which takes place subsequent to the spot date is called Forward Transaction. The forward transaction can be for delivery one month or two months or longer. The forward rate may be equal to spot rate. It means that the spot rate of USD 1 Rs.44.8022 and the forward rate may be one month is USD 1 Rs. 44.8022. It is called the rates are at par. It does not happen usually. The forward rates may be at PREMIUM or DISCOUNT. If the forward margin is at premium, it indicates that the foreign currency will be costlier than the spot rate. If it is at Discount, the foreign currency is cheaper for forward delivery than for spot delivery. For Example: SPOT SPOT AUGUST USD 1 = Rs. 44.4000/4200 USD 1 = Rs. 44.2000/2100

Where the forward margin for a month is given in ascending order, it indicates that the forward rates at a premium. The forward rates are arrived at by adding the premium.

SPOT ADD PREMIUM SPOT AUGUST RATE

USD 1 = Rs. 44.4000 0.2000 Rs. 44.6000

44.4200 0.2100 44.6300

If the forward rate is at Discount, it would be indicated by quoting the forward margin in descending order. For Example: SPOT SPOT AUGUST GBP 1 = Rs. 73.4000/4300 GBP 1 = Rs. 73.2100/2000

The forward rates for August will be calculated as under: SPOT DEDUCT DISCOUNT SPOT AUGUST RATE GBP 1 = Rs. 73.4000 0.2100 Rs. 73.1900 73.4300 0.2000 73.2300

(III)

Funding Transactions:
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We are maintaining various Nostro accounts in different currencies. We are required to fund these accounts periodically to ensure that no over draft is created in these accounts. Hence the Inter-bank dealer will undertake deals as and when there is a need felt in consultation with settlement and funds Manager and funding of accounts will be done by the settlement officer. However, the funding should be done only to the extent what is considered necessary to maintain sufficient balance in our Nostro account at all times. It may prove to be prudent that the funding positions are also covered through forward deals. This will release the limited O/N limit we have apart from reducing the exchange risk to interest rate. It may also be possible that the forwards could also be gainfully traded. The advance purchase or sale of foreign currency in anticipation of customer transaction hitting the Nostro account for which no instructions are given by the customer for purchase or sale, will not be treated as funding deals and will be subject to Stop loss / Take profit rules. Since many of our transactions with the customers are tiny in nature for which no competitive quotes are available, we are required to purchase foreign exchange in advance and are subject to risk. It is therefore requested that an aggregate amount up to USD 2, 50,000 may not be subjected to S/L principle.

5.5 Foreign Exchange Quotation

Currency Pairs -

All the dealing or exchange of transactions is done on the basis of Currency Pair. XXX YYY

Base Currency

Quoting Currency

Here XXXYYY is called a Currency Pair. XXX is called the Base currency and YYY is the Quoting currency.

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Example: INRUSD, INREUR, INRGBP. In the above example INR (Indian rupee) is the base currency against which the USD (United States dollars), EUR (Euro), GBP (Great Britain Pound) is Quoted currency. Foreign currencys rate will be quoted or decided keeping rupee as the base price or it can also be explained as what amount of rupees need to be paid for USD or EUR or GBP. Cross pair/ Cross rate/ Cross currency: This is a pair of currency where the domestic currency is not included and two foreign currencies are quoted and exchanged. The dealing or the exchange is taken place between two foreign currencies. For example: EURUSD, USDGBP, USDJPY. In the above examples it does not include rupee and only has foreign currency in the currency pair. Such pair is called Cross currency.

QuotationWhen a customer asks for a price quote for UK Pound for US Dollars to a trader, he/ she would quote in following manner: For Example1.8102- 1.8450 $/ This quote means following: 1. Quote is in US $ 1.8102 and 1.8450 per 1 2. This is the buying and selling rate of
3. First Number i.e. 1.8102 is his Bid Rate. Trader is ready to pay 1.8102 $ to

buy a . This is his dollar quote to buy Pound (Buy One Pound)
4. Second Number i.e. 1.8450 is his Ask Rate or Offer Rate. Trader is ready to

give one Pound if you pay him 1.8450 $. This is his Dollar quote to sell Pound.
5. Since the quotes is available for buy and sell both, it is called as Two Way

quote. The difference between bid rate and ask rate is called as bid ask spread. In the example Bid Ask Spread is 0.0348 dollar (per one Pound). Bid Ask Spread is the measure of the following:

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1. It is margin to cover transactions costs and other costs of the trader. 2. It covers normal profit on capital invested by the trader in dealing function.

Bid Price and Ask Price: Bid price and Ask price are the two quoting prices in the market. Bid is the price at which the bank will buy any foreign currency from the opposite party and Ask price is the price at which the bank will sell the foreign currency. There is always a slight difference in the Bid and Ask price. The rule follows as Bid (Buy) low and Ask (Sell) high. The system on which the bank works, for ex, Ticker plant system displays the Bid and Ask price of all the currency pair under which the bank is dealing. This is the current market price prevailing in the market. For Example: If any customer calls the bank to buy any foreign currency the bank will quote the ask price with a margin of profit above the ask price displayed on the screen. If the customer calls the bank to sell his foreign currency then the bank will quote the bid price with a slight reduction in the bid price displayed on the screen. This also applies when the bank approaches any other customer or bank. However negotiation is always possible.

Direct and Indirect Quote In Currency pair there is two types of quotes i.e. the way of describing the way of expressing the two currencies according to the base and the quoting currency. Direct Quote: Foreign Exchange Rate expressed in terms of domestic currency per unit of foreign currency is called as Direct Quote.

For Example: In USDINR, USD is the stable currency and INR is the Fluctuating or variable currency.

The above pair will be expressed as Rs. 45.00 per dollar. The dollar will be kept as base with keeping it as 1$ and the quoting rupee will be fluctuating and changing according to the various factors. In direct quote we follow the principle as:

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Buy low Sell high Indirect Quote: Foreign Exchange Rate expressed in terms of foreign currency per unit (or per hundred units) of domestic currency is called as Indirect Quote. For ex: In INRUSD, INR is the stable currency and USR is the fluctuating or variable currency. It is expressed as $2.0894 per Rs. 100. In this case the Rupee will be kept as base and dollar price will be changed according to the market. In indirect quote we follow the principle as: Buy high Sell low Initially Indirect quote was used. However later direct quote became more acceptable and prevalent in the market as per Rupee is concerned. American OptionAn option that can be exercised anytime during its life. The majority of exchange-traded options are American. An option which can be exercised at any time between the purchase date and the expiration date. Most options in the U.S. are of this type. This is the opposite of a European-style option, which can only be exercised on the date of expiration. Since an American option provides an investor with a greater degree of flexibility than a European style option, the premium for an American style option is at least equal to or higher than the premium for a European-style option which otherwise has all the same features also called American Option. For Example: If you bought a Ford March Call option expiring in March of 2011 in March 2010, you would have the right to exercise the call option at anytime up until its expiration date. Had the Ford option been a European option, you could only exercise the option at the expiry date in March '11. During the year, the share price could have been most optimal for exercise in December of 2010, but you would have to wait to exercise your option until March 2011, where it could be out-of-the-money and virtually worthless. European OptionA European option can only be exercised at a pre-determined price (written into the option contract) on the expiry date of the option.

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European options are significantly easier to value than American options. This is because American options add the complication of determining the optimal exercise time. The result is that almost all formulae for valuing options are for European options. An important exception is American call options. For these, the optimal time to exercise is always on expiry, and, therefore, their value is the same as that of a European call with the same terms. Price Maker and Price Taker: Market is any place where the exchange takes place. If the bank approaches any other party for any foreign exchange transaction the bank is said to be the Price taker. Whereas the opposite party whom the bank approaches is called the Price maker. Price maker is the one who decides the price or the rate at which the exchange will take place. Since the bank is in need of the exchange to take place, the bank needs to accept the price whatever quoted and hence is the price taker. However there is always a chance of negotiation in the rate. There is also situation when the bank is the price maker if any party approaches for the transaction to take place.

5.6 Foreign Exchange Trading

Types of transactions: There are basically 4 types of transactions according to the settlement period. These are as follows: 1. Spot rate (T+2): This is a transaction which the most common in the market. In this transaction the spot rate i.e. the prevailing rate on the screen is fixed. T+2 consist of T as the transaction day i.e. current day plus 2 working days for the settlement of the transaction. On the T+2th day the transaction will be settled by actual exchange of the currency and is also called as Settlement day. If suppose the customer does not mention anything about the transaction settlement date of the transaction it is always considered as Spot rate by default.

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2. Cash/Ready/TOD (T+0): This the transaction settled on the same day. The transaction as well as the settlement is completed on the same day. The rate at which the exchange takes place will be the spot rate displayed on the screen. The caller will always mention the transaction as TOD i.e. today.

3. TOM (T+1): TOM is the short form of Tomorrow. This transaction is settled on the next working day.

4. Forward rate (T+3 and more): Any transaction which is more than the Spot rate transaction period i.e. T+3 and more will be considered as a forward rate transaction. However this forward transaction will be for a maximum period of 12 months. The rate at which the transaction is completed will be calculated automatically by the system keeping certain conditions. Suppose according to the current market price, INR ----- Rs. 44.50 per $ That is to exchange 1 USD the bank has to pay Rs.44.50 And as per market conditions if Rupee invested in Indian market earns an interest of 6% or is growing by 6% at the same if USD invested in foreign market earns an interest of 2% or is growing by 2%. Then with such a growth after a certain period of time the change in both the currencies would be: Rs. 44.50 $ 1.00 6% 2% Rs. 47.17 $ 1.02

According to the above calculation, with a 6% increase in the value of a rupee the amount of investment done in the market will increase from Rs 44.50 to Rs 47.17. At the same time with a 2% increase in the value of USD the amount of per dollar invested in the international market will increase to $1.02. Now since after a certain period of time $1.02 will cost Rs 47.17 so how much will be the cost of 1 USD? According to the cross multiplication in mathematics the cost of 1 USD will be Rs 46.24. Previously at the time of booking the transaction the exchange rate of 1 USD was Rs 44.50 and at the settlement date 1 USD is Rs 46.24. This difference of 1.7450 is called

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as Premium. And if there is a decrease, the difference is called as Discount. Most of the forward rate transactions include a Premium i.e. it is said as USD is at premium. There is hardly any case of forward transaction with a discount i.e. USD at discount. At the time of booking the transaction the dealer has a look at the market rate for the future period in the system, which is automatically calculated as per the growth rate and certain other market conditions, and then quotes his rate at which the exchange will take place. All the calculated value for the next 12 months is available in the system for all the foreign currencies.

5. Card Rate: For facilitating branches to undertake forex transactions and to guide customers at the branches, the Treasury department merchant dealer with the approval of Chief dealer / DGM (Treasury) will provide card rates to all branches at 9.15 am every working day through exchange server. The card rates provided will be only indicative rates and branches should seek confirmed rate for all transaction but for small transaction upto INR 1 lakh branches may apply card rates. All the transactions will have to be reported to the Treasury as soon as possible on the same day to enable the Treasury department to manage funding and currency positions. Different types of merchant transactions and the exchange rate to be used for undertaking the transactions are: Sr no. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. Types of transactions Rates to be applied Clean outward Remittances for other than import purposes TTS Clean Inward Remittances for which credit is received in TTB our Nostro account Clean Outward Remittances for Import purpose BS Retirement of import Documents under L/C BS Purchase / negotiation of Export Documents-sight L/C BB Discounting/ Negotiation of Usance Export Bill under L/C FP Foreign currency cheques collected TTB Issue of Travellers cheque TCS Encashment of travellers cheque TCB Issue of Foreign currency notes CNS Encashment of Foreign Currency Notes CNB Purchase of foreign currency instruments CIP Forward Contract Rate for undertaking Import Transaction FS Forward Contract Rate for undertaking Export Transaction FP Cancellation of Forward Sale Contract TTB Cancellation of Forward Purchase Contract TTS Delinking Of Export Bill TTS

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It may be noted that this is only illustrative and not exhaustive. Hence if any other type of transaction is to be undertaken for which rate is not specified then the branch officials should seek clarification from Treasury Department. Treasury Department will provide card rates to the branches based on ongoing rates ruling in the market after loading normal margins as given below: TTS Rate: TT selling rate will be quoted taking into consideration the ongoing market selling rate.
1. 2. 3. 4. 5.

BS Rate: On the TT selling rate load exchange margin (added). TCS Rate: On the TT selling rate load exchange margin (added). CNS Rate: On the TCS add an exchange margin.

TTB Rate: Taking into consideration the ongoing market buying rate, TTB rate will be quoted.

BB Rate: This rate is quoted for purchasing or negotiating export sight bills in which case Normal Transit Period (NTP) stipulated by FEDAI is 25 days. Most of the foreign currencies are in premium in comparison to INR hence Banks earn premium on these currency sales in the market. Also, RBI is of the opinion that exporters are to be provided additional incentives hence minimum margins are to be stipulated while quoting these rates.
6. 7. 8. 9. 10.

CIP Rate: From the TTB rate, subtract an exchange margin. TCB Rate: From the TT buying rate subtract exchange margin. CNB Rate: From the TCB rate subtract exchange margin.

Forward Selling Rate: (European Option) On the TTS rate add appropriate premium for the forward period plus paisa. If the foreign currency is at a discount in comparison to INR then subtract the appropriate discount for the forward period plus paisa. Forward selling Rate: (American Option) On the TTS rate add appropriate premium for the last date of the forward period plus paisa. If the foreign currency is at a discount in comparison to INR then subtract the appropriate discount till the first date of the forward period plus paisa.
11.

Forward Buying Rate: (European Option) On the TTB rate add appropriate premium for the forward period minus paisa. If the foreign currency is at a discount in comparison to INR then subtract the appropriate discount for the period minus paisa.
12.

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Forward Buying Rate: (American Option) On the TTB rate add appropriate premium till the first date of the forward period less paisa. If the foreign currency is at a discount in comparison to INR then subtract the appropriate discount till the last date of the forward period less paisa.
13.

Foreign exchange markets are very volatile in nature and the forex business is subject to different risks. Hence the bank and the dealing staff should tread cautiously while undertaking foreign exchange transactions. Treasury should track the forex market rates continuously while market is operating and if need is felt they may suspend card rates giving clear instructions to all B category branches undertaking forex business and that further transactions if are to be undertaken then they should consult and take confirmed rate from the Treasury before the deal is undertaken. The customers, who undertake forex business are well informed and market survey. They have dealings with different banks and are well aware about market ongoing rates. Hence they always seek improvement in exchange rates. Keeping this in mind other Banks have provided contact nos. of the dealing rooms to high net worth customers who contact the dealers directly and seek improvement in the rates. Every bank will be required to practice to withstand the competition and retain good customer base. To meet this requirement, banks will have to delegate adequate authority to the dealers to improve the rates with the approval of higher authorities. Once the rates are quoted and agreed and deal is struck by the dealing room, based on deal ticket details and confirmation of the counter party, putting through the transactions to its logical end will be the responsibility of the respective B category branch where the customer has approached for putting through the forex deal.

Evaluation of Foreign Exchange Position: As per the existing FEDAI guidelines, all AD 1 Banks have to evaluate their exchange position and Forward Position every month on the last day at the revaluation rates provided by FEDAI. Accordingly, bank will also comply with this requirement as under:
1. Spot Exchange Position: The Nostro Mirror position in terms of exchange

position will be revalue at the FEDAI spot revaluation rates and the difference between the resultant revaluation positions against the Nostro mirror position should be transferred to Profit and Loss Account (Exchange).
2. Forward Exchange Position: All the forward contracts which are booked and

which are still to mature will be revalue at the FEDAI forward rates for the appropriate maturity periods. The net position in respect of all forward contracts will be calculated and transferred to a revaluation account at the time of

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revaluation. On the first working day after the revaluation date, this entry will be reversed.

5.7 Society for Worldwide Interbank Financial Telecommunication (SWIFT)

Foreign exchange markets make extensive use of the latest developments in telecommunications for transmitting as well settling foreign exchange transaction, Banks use the exclusive network SWIFT to communicate messages and settle the transactions at electronic clearing houses such as CHIPS at New York. SWIFT is a acronym for Society for Worldwide Interbank Financial Telecommunications, a co operative society owned by about 250 banks in Europe and North America and registered as a co operative society in Brussels, Belgium. It is a communications network for international financial market transactions linking effectively more than 25,000 financial institutions throughout the world who have been allotted bank identified codes. The messages are transmitted from country to country via central interconnected operating centers located in Brussels, Amsterdam and Culpeper, Virginia. The member countries are connected to the centre through regional processors in each country. The local banks in each country reach the regional processors through the national net works. The SWIFT System enables the member banks to transact among themselves quickly (i) international payments (ii) Statements (iii) other messages connected with international banking. Transmission of messages takes place within seconds, and therefore this method is economical as well as time saving. Selected banks in India have become members of SWIFT. The regional processing centre is situated at Mumbai. The SWIFT provides following advantages for the local banking community: Provides a reliable (time tested) method of sending and receiving messages from a vast number of banks in a large number of locations around the world. Reliability and accuracy is further enhanced by the built in authentication facilities, which has only to be exchanged with each counterparty before they can be activated or further communications. Message relay is instantaneous enabling the counterparty to respond immediately, if not prevented by time differences.

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 Access is available t a vast number of banks global for launching new cross border initiatives. Since communication in SWIFT is to be done using structure formats for various types of banking transactions, the matter to be conveyed will be very clear and there will not be any ambiguity of any sort for the received to revert for clarifications. This is mainly because the formats are used all ove3r the world on a standardized basis for conducting all types of banking transactions. This makes the responses and execution very efficient at the receiving banks end thereby contributing immensely to quality service being provided to the customers of both banks (sending and receiving). Usage of SWIFT structure formats for message transmission to counterparties will entail the generation of local banks internal records using at least minimum level of automation. This will accelerate the local banks internal automation activities, since the maximum utilization of SWIFT a significant internal automation level is required. For Example-

SWIFT Message Type MT 101 MT 102 MT 200 MT 201 MT 300 MT 303 MT 400 MT 405 MT 500 MT 501 MT 600 MT 601 MT 701 MT 705

Description Request for Transfer Multiple Customer Credit Transfer Financial Institution Transfer for its Own Account Multiple Financial Institution Transfer for its Own Account Foreign Exchange Confirmation Forex/Currency Option Allocation Instruction Advice of Payment Clean Collection Instruction to Register Confirmation of Registration or Modification Precious Metal Trade Confirmation Precious Metal Option Confirmation Issue of a Documentary Credit Pre-Advice of a Documentary Credit

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CHAPTER 6
6.1 Information System
Information System is seminal to the dealers. For these dealers we may prove Ticker plant financial information system. For dealing purpose membership of FX clear of CCIL and complete all formalities that are required to completed such as maintaining margin deposit etc. later on if need is felt then go for Routers Dealing screen too. A submission therefore will be put up to appropriate time. Rate Scan:

All Foreign Exchange rates fluctuates throughout the day. Whenever the dealers be providing rates to branches for merchant transactions as also when the dealer will quote improved rates to customers at their requests, such improvements will on the basis of latest exchange rates ruling in the market. Hence, it will be necessary to scan the exchange rates at periodic intervals at least thrice during the day rate scan print out will be taken by the inter-bank dealer every 2 hours and pass on to the Back Office immediately for scrutiny and record. Voice Recording:

Experience has shown that recourse to taped conversation proves invaluable to the speedy resolution of differences. It is, therefore, desirable to introduce voice recorders in the dealing rooms. The tapes may be preserved for at least two months and where a dispute has been raised, until the issue is resolved. Access to the equipment and tapes should be subject to strict control.

6.2 Management Information System (MIS)

An accurate, and timely MIS, is sine qua non to a banks risk management process. An effective MIS should facilitate a banks monitoring of compliance with internal controls and regulating requirements and provide reasonable comfort that these are being complied with. The banks risk exposures should be reported to senior management/Board. In adverse market conditions, more frequent reports should be placed before Board/Committee. The monitoring and reporting should be undertaken by officials who are not directly concerned with the trading activities. Exposure and profit and loss statement should be submitted to the senior management. In times of volatile market conditions, such reports should be submitted more frequently so that the senior management is fully apprised of the levels of activities and the risk involved.

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Documentation and Record Keeping -

As regards documentation with counterparty banks and with clients, banks are to be guided by the following: (I) Forward exchange contracts with tenor not exceeding 13 months a) Contracts between Banks And CustomersBanks should obtain specific individual contract note (duly stamped), for each transaction containing the detailed terms of the contract such as amount, rate, value /delivery date, etc. b) Inter- Bank DealsWith regard to forward exchange contracts between banks, unsigned computer generated confirmations be exchanged backed by 'one time' stamped letter of indemnity executed in favour of the counterparty banks as per FEDAI guidelines. (II) Forward exchange contracts where the tenor exceeds 13 months a) Contracts between banks and retail/individual customersBanks should obtain specific individual contract note (duly stamped), for each transaction containing the detailed terms of the contract such as amount, rate, value /delivery date, etc. b) Inter -bank deals and contracts with other customersBanks should enter into International Swaps and Derivative Association (ISDA) Master Agreement. (III) All other derivative transactions a) Contracts between banks and retail / individual customersBanks should obtain specific individual contract note (duly stamped), for each transaction containing the detailed terms of the contract such as amount, rate, value /delivery date, etc. b) Inter- bank deals and contracts with other customersBanks should enter into International Swaps and Derivative Association (ISDA) Master Agreement.

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6.3 Auditing Internal Audit:

The nature and scope of internal audit varies widely between banks. However, its work will generally be designed to ensure that established procedures are adhered to and are operating effectively. Thus, an important part of its work will be to review the adequacy and timeliness of key management reports, such as those relating to limit excesses and maturity periods, and to ensure that appropriate action is initiated in response to this information. Other tasks of the internal audit department will include statutory and regulatory compliance reviews, data processing control reviews, and back-office efficiency reviews. For the internal audit function to be beneficial it is essential that its reports are submitted promptly to senior management. The officers drafted for audit should have the requisite expertise, knowledge and experience. System Audit:

Special audit of the Dealing Room and the system in operation should be conducted at least once in a year. Typically, the areas tested during this audit should include the following: I. Dealing-room procedures to ensure that all deals executed are promptly captured by the accounting system. II. Reconciliation of foreign exchange positions between the dealers' records and the accounting system. III. Review of incoming deal confirmations. IV. Full scrutiny of sample deals. Compliance with the minimum requirements is to be checked at irregular, appropriate intervals by the auditors. The main audit areas listed below should be subjected to a risk-based audit once a year. a. Limit system b. Determination and reconciliation of positions and results c. Changes in the EDP systems d. Completeness, correctness and timeliness of the internal reporting system e. Functional separation f. Degree to which transactions are in line with market conditions g. Confirmations and counter-confirmations

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Concurrent Audit:

As advised by the Reserve Bank from time to time, concurrent audit is to be regarded as a part of ADs early-warning signal system to ensure timely detection of irregularities and lapses aimed at prevention of fraudulent transactions at branches undertaking foreign exchange transactions. Banks management shall bestow serious attention to the implementation of the same. While minor irregularities pointed out by the concurrent auditors are to be rectified on the spot, serious irregularities should be reported to the Controlling Authority for immediate action. The bank shall ensure that concurrent auditors of the branches undertaking foreign exchange transactions are also fully conversant with the provisions of FEMA and the Rules/ Regulations/ Notifications/ Directives issued under it.

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CHAPTER 7 FACTS AND FINDINGS

Foreign Exchange Buying and selling national currencies. All currencies have an underlying value relative to the value of gold, registered with the International Monetary Fund (IMF). This value may deviate, and governments can control the amount of deviation by tactical trading on foreign exchange markets. Speculators may trade on foreign exchange markets in the hope of profiting from short-term fluctuations in the value, an activity known as arbitrage. International commercial companies and financial institutions also buy and sell foreign currencies.

Foreign exchange methods and instruments used to adjust the payment of debts between two nations that employ different currency systems. A nation's balance of payments has an important effect on the exchange rate of its currency. Bills of exchange, drafts, checks, and telegraphic orders are the principal means of payment in international transactions. The rate of exchange is the price in local currency of one unit of foreign currency and is determined by the relative supply and demand of the currencies in the foreign exchange market. Buying or selling foreign currency in order to profit from sudden changes in the rate of exchange is known as arbitrage. The chief demand for foreign exchange within a country comes from importers of foreign goods, purchasers of foreign securities, government agencies purchasing goods and services abroad, and travelers.

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CHAPTER 8 CONCLUSION
The study at Abhyudaya Co-operative Bank gave a vast learning experience to me and has helped to enhance my knowledge. During the study I learnt how the theoretical financial analysis aspects are used in practice during the foreign exchange services. I have realized during my project that a foreign currency analyst must own multi-disciplinary talents like financial, technical as well as legal know-how.

The Foreign Exchange for finance system has been devised in a systematic way. There are clear guidelines on how to convert the foreign currency has to analyze a Foreign Exchange Services. It includes phase-wise analysis which consists of 4 phases: 1. Financial Statement Analysis 2. Working and Its Assessment Techniques 3. Credit Risk Assessment 4. Documentation

Today banking sector is marked by high customer expectations and technological innovations. Technology is playing a crucial role in the day to day functioning of the banks. These banks that have harnessed and leveraged technology best have a strategic advantage. To face competition it is necessary for banks to absorb the technology and upgrade their services.

In todays context banks are following the strategy of Foreign Exchange Services. The customer services are playing a very significant role in banking business. Prompt and efficient services have become very significant.

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CHAPTER 9 BIBLIOGRAPHY

BOOKS REFERED

MANAGEMENT OF INDIAN FINANCIAL INSTITUTION

- R.M.SHRIVASTAVA.

INVESTMENT POLICY OF ABHYUDAYA BANK

WEBSITES

www.abhyudayabank.com www.rbi.org.in www.business-today.com

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