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Forex markets usually operate from “Monday to Friday” globally, except for the Middle East or other Islamic Countries which function on Saturday and Sunday, but are closed on Friday.
The bulk of the Forex markets are OTC (Over the Counter).
Most of the Forex deals in general are done on SPOT basis.
Ready or Cash: Settlement of funds takes place on the same day (date of Deal)
TOM: Settlement of funds takes place on the next working day of the deal. If the settlement day Is holiday in any of the 2 countries, the settlement date will be next working day in both the countries.
Spot : Settlement of funds takes place on the second working day after/following the date of Contract/deal. If the settlement day is holiday in any of the 2 countries, the settlement date will be next working day in both the countries.
Forward: Delivery of funds takes place on any day after SPOT date. Forward Rates are derived from Spot Rates and are function of the spot rates and forward premium or discount of the currency, being quoted. Forward Rate = Spot Rte + Premium or – Discount. If the value of the currency is more than being quoted for Spot, then it is said to be at a premium. If the currency is cheaper at a later date than Spot, then it is called at a Discount.
The price of currency can be expressed in two ways i.e. Direct Quote, Indirect Quote.
Under Direct Quote, the local currency is variable E.g.: 1 USD = `48.10.
Under indirect Quote, the local currency remains fixed, while the number of units of foreign currency varies
Only in case of GBP (Great Britain Pound) £, €, AU$ and NZ$, the currencies are quoted as indirect rates.
Bid & Offered Rates: The buying rates and selling rates are referred to as Bid & Offered rate.
Per Cent or Per mille: A percentage (%) is a proportion per hundred. Per Mille means per thousand.
Arbitrage in Exchange: Arbitrage consist in the simultaneous buying and selling of a commodity in two or more markets to take advantage of temporary discrepancies in prices.
Category Entities
AD - Category I Banks, FIs and other entities allowed to handle all types of Forex
AD - Category II Money Changers (FFMCs)
AD - Category III Money Changers (RMCs)
Foreign Exchange Dealers Association of India, FEDAI (ESTD 1958
Export bills drawn in foreign currency, purchased/ Discounted/ negotiated, must be crystallized into rupee liability. The same would be done at TT selling rate.
The crystallization period can vary from Bank to bank, (For Export Bills Generally on the 30th Day) customers to customer but cannot exceed 60 days.
Sight Bills drawn under ILC would be crystallized on the 10th day after the due date of receipt if not yet paid.
All contracts, which have matured and have not been picked up, shall be automatically cancelled on the 7th working day, after the maturity date.
All cancellations shall be at Bank’s opposite TT rates. TT Selling = purchase contracts; TT buying = Sale contracts.
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Derivatives are the instruments to the exposure for neutralize or alter to acceptable levels, the uncertainty profile of the exposure.
E.g: Forward contracts, options, swaps, forward rate agreements and futures.
Various Dealing Limits are as follows:
a. Overnight Limit: Maximum amount of open position or exposure, a bank can keep overnight, when markets in its time zone are closed.
b. Daylight Limit: Maximum amount of open position or exposure, the bank can expose itself at any time during the day, to meet customers’ needs or for its trading operations
c. Gap Limits: Maximum inter period/month exposures which a bank can keep, are called gap limits
d. Counter Party Limit: Maximum amount that a bank can expose itself to a particular counter party.
e. Country Limit: Maximum exposure on a single country
f. Dealer Limits: Maximum amount a dealer can keep exposure during the operating hours.
g. Stop-Loss Limit: Maximum movement of rate against the position held, so as to trigger the limit or say maximum loss limit for adverse movement of rates.
h. Settlement Loss Limit: Maximum amount of exposure to any entity, maturing on a single day.
i. Deal Size Limit: Highest amount for which a deal can be entered. The limits are fixed to restrict the operational risk on large deals.
CCIL (Clearing Corporation of India Ltd) takes over the Settlement Risk, for which it creates a large pool of resources, called settlement Guarantee Fund, which is used to cover outstanding of any participant.
Six 'core promoters' for CCIL - State Bank of India (SBI), Industrial Development Bank of India (IDBI), ICICI Ltd., LIC (Life Insurance Corporation of India), Bank of Baroda, and HDFC Bank.
The Chicago Mercantile Exchange introduced world’s first Exchange traded currency future contract.
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Nostro Account: “Our Account with you”. DLB maintains an US $ account with Bank of Wachovia, New York is Nostro Account in the books of DLB, Mumbai.
Vostro Account: “Your account with us”. Say American Express Bank maintain a Indian Rupee account with SBI is Vostro Account in the books of American Express bank
Loro Account: It refers to accounts of other banks i.e. His account with them. E.g. Citi Bank referring to Rupee account of American Express Bank, with SBI Mumbai or some other bank referring to the USD account of SBI, Mumbai with Citi Bank, New York.
Mirror Account: While a Bank maintains Nostro Account with a foreign Bank, (Mostly in foreign currency), it has to keep an account of the same in its books. The mirror account is maintained in two currencies, one in foreign currency and one in Home currency.
SWIFT: Society for Worldwide Interbank Financial Telecommunications. SWIFT has introduced new system of authentication of messages between banks by use of Relationship Management Application (RMA) also called as SWIFT BIC i.e.Bank Identification Code.
CHIPS: (Clearing House Interbank Payment System) is a major payment system in USA since 1970. It is established by New York Clearing House. Present membership is 48. CHIPS are operative only in New York.
FEDWIRE: This is payment system of Federal Reserve Bank, operated all over the US since 1918. Used for domestic payments.
CHAPS: Clearing House Automated Payments system is British Equivalent to CHIPS, handling receipts and payments in LONDON
TARGET: Trans-European Automated Real Time Gross Settlement Express Transfer System is a EURO payment system working in Europe. And facilitates fund transfers in Euro Zone.
RTGS + and EBA: RTGS+ is Euro German Based hybrid Clearing System. RTGS+ has 60 participants.
EBA-Euro 1 is a cross Border Euro Payments
RTGS/NEFT in India: The RTGS system is managed by IDRBT- Hyderabad. Real Time Gross Settlement takes place in RTGS. NEFT settlement takes place in batches.
NRE Accounts – Rupee and Foreign Currency Accounts
NRI has provided with various schemes to open Bank A/cs an invest in India.
1) Non Resident (External) Rupee Account (NRE);
2) Non- Resident (Ordinary) Rupee Account (NRO);
3)Foreign Currency (Non-Resident) Account (Banks) {FCNR(B)}
When resident becomes NRI, his/her domestic rupee account, has to be re-designated as an NRO account.
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