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  CAIIB - General Bank Management
Posted by: rakesh_123 - 06-11-2015, 07:31 PM - Forum: CAIIB-- Advanced Bank Management - No Replies

CAIIB - General Bank Management

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Posted by: pradeep_iob - 06-10-2015, 08:27 PM - Forum: CAIIB-- Bank Financial Management - No Replies

A risk can be defined as "uncertainties which may result in reduced earnings or outright loss" in the context of
financial transactions"
Foreign exchange is a highly volatile commodity. The volume of foreign exchange transactions undertaken by the
banks is also increasing day by day because of liberalization of foreign trade and steps being initiated towards
globalization. Therefore, a strict discipline and internal controls emanating from Dealing Room are necessary to
avoid loss and to be on the safer side. The different types of Risks that exist in Forex operations are as follows:
EXCHANGE RISK :Foreign Exchange Risk is the risk which the banks face when they deal in multi-currencies and
take positions in these currencies. As is known, foreign market is open 24 hours of the day and the values of the
currencies are being determined every second by the markets factoring in all the information that come in to their
hands then and there. Demand, supply, balance of payments, trade deficit, government borrowings, inflation,
interest rate and political environment are the fundamentals which influence the markets. Using this information,
fluctuations in currencies are anticipated to a certain extent, but the element of uncertainty will always be there.
This element of uncertainty which may result in the value of the Currency ( in which the assets are held)
depreciating is called the Exchange risk. Banks necessarily get in to different positions in foreign currencies due to
merchant transactions entered with their constituents. An open position (open to risk) arises when the assets and
outstanding contracts to purchase that particular currency. (Forward purchase contracts) exceed the liability plus
outstanding sale contracts in that currency. Here, the bank has a long (overbought) _position. If the value of the
currency in terms of other currencies remains same, there is no risk. For example, let us say the ,,bank has an
open position in USD at USD 1 million. Today, it would get Rs.45 million against USD. Overnight if the rupee
appreciates against the dollar by a rupee (for example), the value of the holdings in USD in terms of the Indian
rupee would then
go down by one million rupees. Similar risks arise in oversold positions also. Thus exchange risks are inevitable if
there are open positions.

TRANSACTION EXPOSURE: Transaction exposure measures the risk involved due to a change in the foreign
exchangerate between the time, the transaction is executed and the time it is settled..
TRANSLATION EXPOSURE: This relates to valuation of foreign currency assets and liabilities at the end of
accounting year realizable values. These losses and gains are also known as accounting losses/gains. For example, if the bank has
granted a foreign currency loan (FCL or PCFC) for USD 100,000. to a customer and has accounted for the loan at
Rs.45 /USD in its books, The asset value would appear eroded if the rate at the end of the accounting year shows
Rs.44/USD. It may be noted that the asset° value continues at USD100,000 only but in the books of the bank
which is written in INR, there is value erosion. Translation losses affect a bank's accounting profits and
consequently valuations of banks in the market will suffer. This is significant for banks which have overseas
branches and subsidiaries. It is important to note that Translation exposures will ultimately become transaction
exposure when the asset or liability is actually converted / realized.
The magnitude of this risk is dependent on the level of exposures. Level of exposure is the only element, which is
within one's control. The first step in Forex risk management is therefore fixing its open foreign exchange open
position limits.
These open position limits are classified as two types. Daylight limit & Overnight limits
Overnight limits are the maximum amounts the bank is willing to put at risk at the time the foreign exchange
market is closed in the time-zone in which the bank is operating.
Daylight limits refers to the maximum amount that the bank is willing to put at risk at any point during the
dealing day.
The Daylight limit is normally higher because:
The dealers need a higher limit to accommodate client flows during business hours. It is easier to manage
exchange risk when the markets are open. Overnight position is lower being susceptible to uncertainty during the
time when the dealer is not viewing the markets which are active elsewhere in the world. The overall limits fixed
by the top management are further distributed amongst the various dealing rooms (if more than one is present),
within each centre, dealer wise limits are allocated such that the aggregates fall within the stipulated limits.
During the day real-time monitors are in place and overnight-day end positions are aggregated and checked.
Mismatched Positions and Gap limits: If the maturity spread between foreign currency assets and liabilities are at
variance, a mismatched position would arise. Mismatched positions lead to gaps which have to be bridged using
various hedge tools. Banks have to be particularly careful if liabilities mature earlier to assets as t he risk is higher
(It may become difficult to borrow funds at reasonable cost or conclude a deal & ensure that bank has necessary
foreign currency funds to meet the liability on due dates)
COUNTRY RISK: Country Risk may be defined as the risk to operating cash flows, or to the value of investment,
resulting from operating in a particular country. At the macro level, Country Risk includes both sovereign risk and
currency risk. The major elements of Country Risk are: Economic Risks• Political Risks • Social and Cultural
Political stability, in itself may not be a sufficient reason for not doing business with or in a country. The Banks
need to look at all the dimensions of country before reaching a conclusion on whether or not to do business with a
particular country. Banks are required to formulate a Country Risk Management Policy (CRM) for dealing with the
country risk problems only in respect of that country, where a bank's net funded exposure is 2 per cent or more
of its total assets. The CRM policy should stipulate rigorous application of the 'Know Your Customer' (KYC)
principle in international activities
which should not be compromised by availability of collateral or shortening of maturities. Country risk element'
should be explicitly recognized while assessing the counter-party risk.
Provisioning I Capital requirement: Banks in India have to make provisions (with effect from the year ending
31 March 2003)on the net funded country exposures on a graded scale ranging from 0. 25 to 100 per cent,
according to the risk categories
CREDIT RISKS : Credit Risk arises when a party to a contract is either unable or unwilling to perform his
obligation of a contract. The failure to execute may also be due to official regulation. Thus the risk associated with
default is the element of credit risk in foreign exchange transactions. The default risk has: two elements
associated with it. These are termed as "Revaluation Risk" and Settlement Risk".
Revaluation Risk: It is the cost (in the event of a counter party default) of replacing non-settled contracts. For
example, if ABC
bank needs USD One million on a particular day and gets in to a contract with XYZ Bank for getting the dollars, it
will suffer the revaluation risk being the cost associated with arranging for USD One million at short notice if XYZ
Bank defaults in its contractual obligation of selling the required USD One million as per its contractual obligation
to ABC Bank.
Settlement Risk: Let us say that a bank buys USD 1 million from Bank B. What if after receiving the INR
equivalent, Bank B fails to deliver the foreign currency? This risk of the Counter-party failing to deliver is known
as Settlement risk. Famously known as the Herstatt or Temporal Risk, this risk is incurred 'By Chance" where one
party honors the contract but the other party fails to do so because it is across border and the business hours on
the other end are either over, or have not yet started. Such risks occur when counter parties are located in
different time zones. This is called Herstatt risk because in 1974, several banks that had entered in to
transactions with Bank Herstatt in Germany faced losses when Herstatt bank was put under liquidation after the
transactions were initiated by these banks but before they were settled by the German bank due to the difference
in the time-zone. Herstatt risk can be controlled by matching the time zones (notionally) and also by putting
counter-party limits in place.
LEGAL RISK: Legal risks are the risk of non-enforceability of a contract.
SYSTEMIC RISK: The risk of the entire system collapsing due to collapse of a major institution. In recent times-
Subprime crisis in major banks in U.S.A led to a chain of events but was fortunately halted by the US Fed & other
Investors taking prompt action)
OPERATIONAL RISK: Risk arising out of human errors, frauds, technology failures etc. Operational risk arises as
a result of human, machine failures, judgmental errors, frauds and so on. The very famous case of judgmental
errors and trading by a single individual (a dealer called Nick Lesson) resulting in the collapse of his bank itself
(Barings—UK) and recently Jerome Kerviel of Societe General resulting in multibillion losses are well known
examples of operational risk.
For effective control of suck risks few measures as follows are commonly taken: Segregating Dealing,
Accounting (Back-up) and Control (Audit). Each of these functions should be independent of the others such that
checks and balances are in place.

Proper information channels should be in place Selection, training and Job rotation of staff in key positions is
critical to risk management in these areas. Reconciliation of Nostro accounts (with mirror accounts) and control
Over Nostro transactions, funding. Concurrent and on-site audits. Review mechanism to analyze losses and
investigate reasons Proper security systems. Here Security involves both physical security of Hardware and digital
DERIVATIVES- ORIGIN & ROLE IN RISK MANAGEMENT : Derivatives are hedging instruments derived from
the values of the underlying exposures such as commodities, currencies or shares and bonds. Derivatives are
financial contracts which derive their value off a spot price time-series, which is called the "underlying". Common
derivative instruments are Forward contracts, Options, Swaps, Forward rate agreements, and 'Futures.
Derivatives do not have independent existence without underlying product and market. The underlying assets
could be a stock index, a foreign currency, a commodity or an individual stock. The simplest form of derivatives is
the forward contract (known as the forefather of the derivatives).
FUNCTIONS OF DERIVATIVES: The primary purpose of the derivative instruments is not to borrow or lend
funds but to transfer prii risks associated with fluctuation in asset values. The derivatives provide three important
economic functions viz.
a) Risk Management. b) Price Discovery c) Transnational Efficiency.
TYPES OF DERIVATIVES: The commonly used derivatives are as follows: a) Forward contracts b) Futures
c) Options d) Swaps
FORWARD CONTRACTS:'Authorized dealers (Banks) have been permitted under FEMA to enter in to Forward
contracts for sale or purchase of Foreign Currency with their customers who are exposed to foreign currency risks
arising out of their normal transactions which are permitted under current regulations. The mechanism of Forward
Contract is very simple. On being approached by a customer for a forward cover, the AD would satisfy himself
that there exists a genuine exposure and quote a rate. For example, if an Importer who is required to pay an
inward bill maturing after one month may approach his banker for a forward cover. This is because the importer is
either risk averse or feels that the rupee / dollar rate would move against him in the intervening month. The bank
would then quote a forward rate. If the customer is satisfied with the quotation, he would sign the contract which
would bind him to the rate and the date. Contract documents are signed and charges if any are collected. If the
customer fails to perform his part of the contract, the contract is cancelled and Swap charges are recovered
where necessary. Similar contracts can be entered in to different customers based on their requirements. In other
words subject to RBI / FEDAI guidelines, banks enter in to contracts to seli or buy specified amount of foreign
currency- on specified futUre dates.

Forward Contracts are either Forward purchase contracts or Forward Sale contracts depending on the nature of
the transaction. Exporters, NRIs, holders and so on would enter in to Forward purchase contracts. Importers,
Constituents who have to make payments under foreign currency loans and so on would enter in to Forward sale
contracts. It is again emphasized that the word purchase and Sale are used from the point of view of the Bank
and not the customer. Forward Contracts in India are governed by RBI guidelines and FEDAI rules RBI has
permitted all entities having Exchange risk exposures permission to enter in to Forward contracts subject to rules
and limits
FUTURE CONTRACTS: A future contract is defined as a "commitment to buy or sell at a specified future
settlement date a designated amount of commodity or a financial asset. It is a legally binding contract by two
parties to make / take delivery of commodity at Certain point of time in the future.

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Posted by: aparna - 06-09-2015, 08:12 PM - Forum: CAIIB-- Bank Financial Management - Replies (1)

All Forward contracts should be for a definite period and amount. In case delivery date has not been specified, an
option period of maximum one month may be given. In case the last date for delivery happens to be non-working
day for Forex dealing, preceding working day will be considered for effecting delivery.
All contracts, which have matured and have not been picked up, shall be automatically cancelled on the rh day
after the maturity Date.
Consequent to Liberalization, RBI has removed all restrictions on exchange rate quotations. Therefore, Indian
currency is on a boating rate system. Banks are now free to quote their own rates based on market rates. Market
rates are determined by forces I Demand and Supply. By convention, exchange rates can be quoted in two ways
DIRECT METHOD: A given number of units-of focal currency per (47 otioreign currency e.g. US$ 1= Rs. 45.00

INDIRECT METHOD: A given number of units of foreign currency per given units of local currency e.g. Rs. 100 =
US$ 2.222 India, it was the practice to use the Indirect method of quotation. The unit in India was Rs. 100.
However, with effect from 2ndus 1993 direct quotations are being used.
TWO- WAY QUOTATION: The foreign exchange quotation by the Bankbas two rates — one at which the quoting
Bank is willing buy and the other at-which it is willing to sell. For example: U S $ I = Rs 45.00 - 45,20 ere the
Bank will enter into purchase transaction at Rs 45.00 and Self transaction at Rs 45.20. Hence the principle; Buy
low & all, high.
RATES: This rate is applied when the transaction does not involve-any -delay in realization of the foreign
exchange by the ink. In other words, the Nostro account of the bank would already have been credited. TT Buying
rate is arrived at each bankdeducting its required margin from the inter-bank buying rate that is being quoted in
the market. • w example, if SBI (market) is quoting US$1 = INR 44.20/25 in...the-market, JOB which needs to
arrive at its TT Buying rate pending on the market rate will quote as follows;
20 minus its desired margin of say 0 .15% as follows:
20 - 0.15% of 44.20 = 44.1337 (may be rounded to 44:1335)
ire it is presumed that 10B will quote 44.1337 to the CUStoitier, buy dollars from him and sell it in the market SBI
in this ample) at 4.4 20.The difference goes in to the margin (profit) account of 10B.

BILL BUYING RATES: These rates apply when foreign bills, are purchased. Banks build in higher margins in Bill
buying to factor the higher risk and transaction costs. For Usance bills, banks quote rates taking the forward
premium or discount on the rrency for matching future periods also in to consideration.

FORAWARD RATES: When the delivery has to take place at a date farther than the spot date, then it is a
forward transaction 'aced out on Forward. rate. A currency could be quoted at a higher ('Premium') or a lower
('Discount') rate tar future liveries. Given the connection, between exchange rates and funds.cost in a totally free
market, the premium / discount on wards would tend to equal the difference in interest rates inthe IWO
ARIVING AT FORWARD RATES: Forward rates are arrived as follows under normal circumstances
If the currency is quoted at a premium : Forward rate = Spot rate + Premium
If the currency is being quoted at a discount : Forward rate = Spot rate - Discount
Spot price.
Interestrate differentials in the currencies involved. -Term or tenor of the quote (One month, two month etc ).
Clean inward _remittances (PO, MT, TT, DD) for which cover has already been credited to ADs account abroad.
Conversion of proceeds of instruments sent for collection.
Cancellation of outward TT, MT, PO etc. Cancellation of a forward sale contract.'Bill Buying Rate Purchase /
Discounting of Bills and other Instruments.Where bank has to claim cover after payment. Where drawing bank at
one centre remits cover for credit to a different center. Foreign - TCs / Currency Notes:
Applied for purchase of Foreign TCs & Currency
EXCHANGE ARITHMETIC : During the course of their business, banks acquire FX from their Exporter/NRI and
other customers and sell FX to their Importer /other customers. They purchase and sell FX like any other
commodity. They have to cover their transaction costs after adding some profit too. Earlier the Foreign Exchange
Dealers' Association of India (FEDAI) used to issue guidelines for computing rates and bank charges for FX
transactions. However, FEDAI has given freedom to the banks for calculating rates / fixing charges for merchant
transactions. Therefore, in India, now FX rates are determined by market forces of Demand and Supply.
BANKS QUOTE BASED ON MARKET RATES: In practice, Exchange rates are quoted based on SPOT rates
available in the markets. Banks can choose from various sources and decide the market participant for their deal.
Let us say, the Market participant is quoting rates as follows for USD as: USD 1 = 46.25/35.
This means they will buy dollars at 46.25 and sell at 46.35.
An Exporter has approached the bank with a bill denominated in US Dollars. He wants to know at whit rate the
Bank will buy the bill from him. The dealer knows once he buys the dollar bill from his customer, he has to sell it
in the market at Rs 46.25. If he has to make a profit in this transaction, he has to quote a figure lesser than Rs
46.25 to the customer. The difference which is called margin depends upon the Bank's policy. Assuming that the
bank wants to make a 0.1% margin, the dealer will do the following calculations. Rate at which the Market buys
from him : 46.25000
Less 0.1% of 46.25 (46.25 X 0.10/100) : 0.04625
Rate to be quoted to Customer : 46.20375 rounded to 46.20
(Hint: Rounding off depends on the rule given in the problem)
Thus, the bank will reduce its required margin from Market Buying rate and quote a suitable rate to the
Let us say an Importer wants to retire a bill in US $. Bank has to now quote a selling rate to him. Once again the
Dealer will turn to the Market rates. This time, he needs to buy the Dollars from the market and sell them to the
Importer after making sure that his profits are assured Assuming that the Bank wants the same 0.1% margin
here also, the Dealer would do the following calculations: Rate at which the Market would sell him dollars : 46.35
Add Required Margin (46.35 X 0.1/100) : 0.04635
Rate at which Bank will sell to the customer : 46.39635 rounded to 46.40
SUMMARY : Margins are reduced from Market buying rates to arrive at Bank's buying rates.
Margins are added to Market selling rates to arrive at -Bank's selling rates:—
'Banks add different margins to different transactions depending on—their policy, risks. Transaction costs, stature
of the customer, current positions in the currency to be quoted under the same formula. In a Direct rate scenario,
the maxim is always "Buy low and Sell high"
EXAMPLES: If the market is quoting GBP 1=78.60/80, at what rate can your Bank buy GBP from the market?
Answer: GBP1=78.80
1. If you have to quote a TT buying rate for GBP with a 0.20% margin, what will be the quote if the market is
quotingGBP 1=78.50/70 round off to two decimals?
Answer:Market buying rate = 78.500, Less Margin @0.2% =0.157 , Rate to be quoted = 78.343 Rounded to
3.Inflow of USD 100,000.00 by TT for credit to your exporter’s account, being advance payment for exports
(credit received in Nostro statement received from New York correspondent). What rate will be applied if the
market is quoting 45.40/50 for USD. As the customer is very valuable, you are not collecting any margin in
this transaction:
Answer: When we apply rate to the TT received, we are purchasing USD from customer, we have to sell it in the
market. Market buys USD at Rs. 45.40. We shall have to quote rate based on 45.40, less our margin. Since we
don’t intend making any margin here as stated in the sum, the rate quoted will be USD1=45.40.
4.Your foreign correspondent maintaining a Nostro. Rupee account_ with your' bank, wants to fund his account
by purchase of Rs. 30.00 million, against US dollars. Assuming that the USD / INR interbank market is at
45.2550 .1 2650, what rate would be quoted to the correspondent, ignoring exchange margin. Calculate
amount of USD you would receive in your USD Nostra account, if the deal is struck.

Answer: The Correspondent wants to credit INR 30 million i.e. INR 300,00,000 (Rs 3 crones). He will be placing
corresponding amount of dollars in our Nostro account with a request to convert and credit to his Rupee account
with us. In other words, we will be purchasing dollars from him and therefore have to quote a USD buying rate to
Market rates (also called Inter-bank rates) are USD 45.2550/2650
Market buys from us at : 45.2550,Less margin (nil here) :,Rate to be quoted : 45.2550
Amount of dollars required for INR 30,00,00,00 is 30,00,00,00 = USD 662910.175 or USD 662,910.18 If the deal
is struck, the foreign bank would pay USD 662,910.18 to our USD Nostra account.
CROSS RATES : At times, direct quotes are not available for certain pairs of currencies in the market. For
example, we may have a quote for INR/USD and another for USD/GBP. However INR/GBP may not be readily
quoted. In such situations dealers arrive at INR/GBP rates using the Cross rate mechanism and the Chain rule.
Rule for arriving at a comparison or ratiu between two quantities which are linked together through another
quantity and consists of a series of equations, commencing with a statement of the problem in the form of a
query and continuing the equation in the form of a chain so that each equation must start in terms of the same
quantity as that which concluded the previous equation. 1)You have to quote Cross rate for retirement of Import
bill for GBP 100,000by TT. Your margin is 0.15%. Market rate quotations are GBP / USD 1.8300 / 10, USD / INR
Answer: This is an Import bill settlement, we have to sell the required FX i.e. GBP 100,000 to the customer. We
have to
thereforePuy this required sum of GBP 100,000 from the market. i--10.ru $ 1(ZThe
market is selling GBP as-I-GB11)1-.8300/83TrisFte-r3fore, first we need USD.
To buy USD, the rates quoted are 1USD = 45.40/50.
Since we are buying, the market rate will be USD 1=45.50.
We need to pay USD 1.8310 to get 1GBP.
Therefore we need (1.8310 X 45.50) INR. i.e. INR 83.3105 to buy 1 GBP. We have to add our margin which is
0.15% Final rate will be (INR 83.3105) plus ( 0.15% of 83.3105=0.1250) = 83.4355(TT selling rate)
2) M/s PQRS wants to remit JPY 10.00 million by TT value spot, as pa payment of an Import invoice.
Given that USD / INR is at 45.2500/45.2600 and USD / JPY is 108.15 / 108.25, and a margin of 0.15% is to be
loaded to the exchange rate, calculate rate to be quoted and the Rupee amount to be debited to the account of
M/s PQRS .
Answer: Since JPY is to be sold against Rupee, and the rate is not directly given, we would use cross rate
mechanism to calculate the same. We need to buy USD against INR and use the USD to buy JPY for the deal.
Thus, USD / INR rate would be 45.2600 (market USD selling rate — high) and USD / JPY at 108.15 (market JPY&
selling rate low). The JPY / INR rate would be 45.2600 / 108.15 = 0.418492 per JPY
100 JPY = 41.8492.
Add: Margin of 0.15 = 0.0628
Rounded off to = 41.9100/100 JPY
Total rupee amount to be debited to the account of M/s PQRS would thus be 10,00,0000 X 41.9100= Rs.
41,91,000(Note: JPY is quoted as per 100 Yen, as per FEDAI guidelines)
FORWARD RATES : As we are aware, banks have to quote forward rates in certain cases such as:
While entering in to a Forward Sale or Forward.Purchase Contract, While discounting a Usance Bill.
By definition, Forward rates are rates quoted beyond Spot deliveries i.e. beyond T + two working days. While
quoting Forward rates, Banks take cognizance of Forward rates quoted by the markets.
The currency may be trading at a higher price (premium) or a lower price (discount) compared to the Spot prices.
The Forward rates are arrived at as follows: If !he Currency is at a Premium Forward rate = Spot rate + Premium
If the Currency is at Discount.Forward rate =Spot rate — Discount
After arriving at rates as above, Banks will build in their margins (add or reduce as the case may be) and quote
the final Forward rate to the customer.
1) On 5 January, Exporters tenders for discounting, e)pottbill_for US 500,000.00, drawn 90 days sight (transit
period 25 days) due date 30 April. Compute applicable rate and amount to be credited, presuming:
Exchange margin of 0.15%,
Spot Rupee 45.40/50 and premium Spot — April 40 paise,
Rate to be quoted to nearest 0.25 paise, and rupee amount to be rounded off, and
Interest to be charged at 7.50% for first 90 days and 10.50% thereafter. Answer:
Calculation of Bill buying rate
Spot Rate Rs. 45.4000
Less: 0.15% margin 0.06'$1 f
45.3319,Say 45.3325
Add: April Premium_ .4000
Rate of the transaction (Bill Buying Rate) 45.7325 ,Calculation of amount payable to the customer: USD
500,000.0J at 45.7325 = 2,28,66,250.00, Interest 90 days @ 7.50% = 4,22,869.00, 25 days @ 10.50 =
Amount payable to exporter = 2,22,78,932.00 (Commission and out of pocket expenses ignored)
2) On 15 September, a customer request for booking of a Forward contact for export bill of USD 150,000.00, to
be realized in the month of December.

For calculating rate for forward purchase contract, we need to take forward premium for November, the one that
the market would pay, i. e. 30 paise. Convention: For a sale contract premium for the full period, up to end date
of the contract shall be charged where as for Spot rate as 45.40, Premium : 0.30, Forward : Rate 45 .70
Forward Inter-bank rate arrived is 45.70 and deduct 0.05 paise as margin to arrive at 45.65 as customer forward
rate for delivery of export proceeds during December, full month at the option of the customer (Forward TT
Buying Rate).
3)On 1 January 2004, a customer requests to book Forward contract, for retirement of import bill for USD
100,000.00, due for payment on 15 March 2004. Given rates Spot / INA-4-6.00/95orward premium as under:
Spot January: 10/12, Spot February : 21/23, Spot March :32/34, Feb-15 to March: 5/6
Charge Margin of 0.20%, Answer: Being a merchant sale forward booking transaction, rate would be calculated as
USD / INR spot to be taken as 46.05, Premium payable : Spot February 23 paise
Feb — 15th March 6 paise ,Add: Total premium 29 paise 0.29
Thus IB forward rate would be: 46.34
Add: Margin 0.20% 0.09,,patefor customer 46.43

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  Foreign Exchange Dealers Association of India (FEDAI)
Posted by: harpreet_kour - 06-09-2015, 08:00 PM - Forum: CAIIB-- Bank Financial Management - Replies (2)

Foreign Exchange Dealers Association of India (FEDAI) is registered under Companies Act 1956, and was
incorporated in the year 1958. The Association has been recognized by Reserve Bank of India, as well as Govt. of
India. The main functions of FEDAI are to lay down uniform rules and guidelines to be observed by all authorized
dealers in India. Some of its functions are:
1) Maintaining a close liaison with RBI and Govt. of India.
2) Maintaining a liaison with International Chamber of Commerce and other world bodies related to foreign trade
and business.
3) To circulate various policies matters and decisions related to foreign exchange business amongst the members.
4) Represents Indian foreign exchange dealers on policy matters related to foreign exchange dealings.
5) Maintaining of FEDAI rules regarding Transit period, Crystallization, Forward covers etc., that govern all the
6) Other functions include approving Foreign Exchange brokers.
1) All cancellations shall be at bank's opposite TT rates, TT selling rate for purchase contract and TT buying rate
for sale contract.-
2) In the event of delay in payment of Interbank foreign currency funds, interest at 2% above the prime rate of
the currency of the specified banks shall be paid by the seller bank.
3) In event of delay in payment of rupee settlement funds, interest for delayed period at 2% above NSE MIBOR
ruling on each day.
4) FEDAI, also prescribes code of conduct for Forex dealers, as also guidelines with regard to dealings with Forex

HOURS OF BUSINESS: Left at the discretion of the banks now. Extended business hours for dealers, if any,
should be approved by respective management.
RATES: ADs will quote exchange rates in direct terms. All currencies to be quoted as — per unit of foreign
currency = INR, while JPY to be quoted as 100 units of JPY = INR.
EXPORT BILLS FOR COLLECTION: In the event of ADs delay of payment to the exporter, they will pay interest
from date of realization to the date of actual payment. ADs may utilize 1 to 3 claim to release payment depending
upon the distance/location of branch where payment has to be remitted.
CRYSTALLIZATION: Unpaid Export bills should be crystallized at TT selling rate. Earlier FEDAI rule made it
mandatory to crystallize unpaid demand bills 30 days after the transit period and Usance bills, 30 days after the
due date. However FEDAI has given the authorized dealers the freedom to decide-on the period for crystallization
which may be linked to risk factors like credit perception of different types of exporter clients, operational aspects
etc. In case the bills are realized after crystallization, TT Buying rate is to be applied.
IMPORTS: Unpaid foreign currency bills drawn under L/C will be crystallized on le day from due date at Bills
Selling Rates or Contracted rates.
INWARD REMITTANCES: All foreign currency inward remittances equivalent to Rs. one lac should immediately
be converted in Indian rupees. Inward remittance for more than Rs. one lac may be converted at the request of
the customer but within the ) permissible period. If the payment of inward remittance is delayed, ADs will pay
interest @ 2% over the applicable to SB accounts after a period of 10 days, for remittances up to Rs one lac and
for 3 days after remittance for more than Rs one lac.

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Posted by: anupma - 06-09-2015, 07:53 PM - Forum: CAIIB-- Bank Financial Management - No Replies


With the country ushering in the 2nd phase of reforms, the Parliament passed the Foreign Exchange Management
Act (FEMA) 1999, on December 02, 1999, replacing FERA 1973. FEMA was implemented in India w.e.f. 1-6-2000.
Details of certain major departure made from FERA are provided hereunder:

1. The Govt. assumes the role of facilitator and promoters of the economic developments under FEMA.  

2. There were 81 Sections in FERA while FEMA has 49 sections 

3. FERA has Section 56 to deal with prosecutions stipulating a punishment of not less than 6 months and not
more than 7 years in addition to penalty for contravention of its provisions. FEMA holds out no threat of
prosecution and violations shall be treated as a civil offence.

4. Sec. 13 of FEMA provides for a penalty upto three times the amount involved for contravention and if the
amount is not quantifiable, the penalty can go up to Rs. 2 lac. A continuing offence can invite penalty, which
may extend uptoRs 5,000 per day. FERA provided penalty upto 3 times.

5. FEMA defines certain terms such as:

CAPITAL ACCOUNT TRANSACTION: One that alters the assets or liabilities outside India of a person
resident in India or assets or liability in India, of a person resident outside India.
CURRENT ACCOUNT TRANSACTION: Other than a capital a/c transaction and include payments due in
connection with foreign trade, other current business services and short term banking and credit facilities in
ordinary course of business.
EXPORT: Taking out of India to a place outside India, goods and services from India to any person outside India.
SERVICE: Service of any description which is made available to potential users and includes the provision of
facilities in connection with banking, financing, insurance, medical and legal assistance, real estate etc. FEMA
incorporates an inclusive definition of the term 'person' and takes in it any agency, office or branch owned or
controlled by such person. Any person residing in India for more than 182 days during the course of
preceding financial year will be taken as resident in India. The definition also excludes persons going
outside India for taking up employment or for carrying on business outside India and those who go out with the
intention of staying abroad for an uncertain period. A body registered or incorporated in India is deemed resident
in India even if a foreigner or non-resident holds its entire share capital.

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Posted by: pradeep_iob - 06-08-2015, 08:16 PM - Forum: CAIIB-- Bank Financial Management - No Replies

For the purpose of monitoring, RBI calls for certain returns 8.‘ statements from ADs. Some important statements are:
 Return — Fortnightly data for the purpose of compiling litalanceof .payments/monitoring transactions.
Authorized Dealers should report all transactions. made by them through. their Nostro Accounts abroad and
Vostro Accounts maintained with them inappropriate R Return, i.e. R Return (NOSTRO) and R Return (VOSTRO)
respectively, as laid down in the Guide to Authorized
Dealers for compilation of R Returns twice a month, at the close of business on 15th and the last day of calendar
month so as to reach Reserve Bank within seven calendar days from –the close .of reporting period to which they

AD Category - I Banks have to submit Bank-wise R-Retumpow (from the first fortnight of January 2009)

BAL STATEMENT - Statement showing balances in Nostro, Vostro accounts

NRDCSR-Consolidated _data on Non-resident deposits

INTERNATIONAL BANKING STATISTICS (IBS)-Quarterly data on all International Assets &Liabilities
XOS-Half yearly statement of Overdue Export RBI is empowered under statute to control and regulate the Foreign
exchange transactions, Forex reserves and policies related to inflows & outflows of Foreign exchange in the
country. It maintains the external value of the rupee both through policy measures and active intervention in the
markets when felt necessary. All transactions of Foreign exchange are governed by FEMA 1999', As per Se.c11
(1) of FEMA 1999, RE empowered to give directions in regard to Foreign Exchange transactions. Under Sec 11(3)
of FEMA 1999, RBI may after giving reasonable opportunities for hearing, impose on the authorized person, a
penalty which may extend to Rs.10,000/- (Rs. Ten thousand) for contravention of any direction given under FEMA
or failure to file any return under this act. In case of continuing contravention, an additional penalty which may
extend up to Rs.2,000/- per day for which such contravention continues may be imposed.
bills of US$ 25,000 and above

BEF-Half yearly Statement showing details of Import transactions where remittances have been effected but
evidence of Import not received (USD 100,000 & above).

FEMIS: Daily data on Forex dealing room operations

EBW: Half yearly statement showing Export Bills Written off (30 June & 31 December)

STAT-5: Statement of FCNR deposits (total inflow, outflow and outstanding under FCNR accounts)

STAT-8: Statement showing inflow/outflow of deposits under non-resident (external) rupee (NRE) accounts
scheme and NRO accounts scheme for the specified month

LRS- Liberalized Remittance Scheme of USD 2,50,000 for resident individuals: Monthly

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Posted by: priya_idbi - 06-08-2015, 08:07 PM - Forum: CAIIB-- Bank Financial Management - No Replies


for world wide inter-bank financial telecommunications is a joint, being exchanged physically. All foreign currency,
third country commercial payments are settled electronically.

FEDWIRE (USA): System of inter bank settlement operated by Federal Reserve Bank of USA. The facility is
available to member banks throughout USA. The .facility is available for paper instruments like cheques, demand
drafts also apart from online transactions. It is therefore available in both on-line and off-line formats. However, it
is restricted to US Dollar instruments only. It is not a general Inter-bank System but is restricted to Federal
Reserve Bank and Banks having their accounts with Federal Bank. It is meant for domestic settlements within
CHAPS (UK): Clearing House Automated Payments System (CHAPS) is the British equivalent to CHIPS, handling
receipts and payments in LONDON. This system also works on the net settlement system. non—profit cooperative
society owned by about 250 banks. Most of these are European and North American banks with
headquarter at Brussels. SWIFT is a world wide, computer based secure net work system and each member has
access to all the other members. It operates on a secure network. It is a large network of interconnected banks
and financial institutes facilitating secure international dealings. It eliminates the need to maintain multiple coding
systems with various correspondents and totally removes the risk of theft of code books, errors creeping as a
result of not updating of code books etc. Messages are delivered in uniform perform or formats. This reduces the
chances of misinterpretation or confusion. Besides being confidential, safe, self authenticated and swift in real
sense, the system reduces the cost of the transaction too.

CHIPS (USA): CHIPS stand for Clearing House Inter bank Payment System. It is an electronic payment system
and is jointly owned by New York house clearing association members. It processes more than a million
instruments daily without

TARGET (EURO): Trans-European Automated Real-Time Gross Settlement Express Transfer system is a EURO.
payment system comprising 15 national RTGS systems working in EUROPE.

RTGS-PLUS AND EBA (EURO): These are other Euro clearing system. RTGS plus, is a German hybrid clearing
system operating as a European oriented real time gross settlement and payment system with over 60
participants. The EBA-EURO-1, with a membership of over 70 banks, in all EU member countries, works as,a
netting system with focus on cross border Euro payments. For retail payments, EBA has another system, called
STE01, Wit* over 200 members across EU zone. STEP 2 is also in use in EU zone, which facilitates straight
through processing (STP) to Member banks, using industry standards.

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Posted by: anupma - 06-08-2015, 08:00 PM - Forum: CAIIB-- Bank Financial Management - No Replies

Foreign Exchange as defined in FEMA means foreign currency and includes: I) All deposits, credits, balances
payable in any foreign currency and any drafts, travelers cheques, letters of credit and bills of exchange
expressed or drawn in Indian currency and payable in foreign currency; ii) Any instruments payable at the option
of the drawee or holder, thereof or any other party thereto, either in Indian currency or in foreign currency or
partly in one and partly in ttie other. In short, the term 'Foreign Exchange' means the process of converting one
national currency into another national currency and transferring money. In such conversions, the foreign
currency is always treated as a commodity and the home currency as the medium of purchasing power.

Foreign Exchange Market and its Participants

Banks and Customers who have to buy or sell foreign exchange.Inter-Bank dealings where sale and purchase
business is transacted between the banks themselves within the country. Dealings between domestic banks and
foreign banks.


Inter-Bank Transactions: Sale or Purchase of FX between Banks and other Financial Institutions (Market

Merchant Transactions: Sale or Purchase transactions with the customers are called merchant transaction.

FACTORS AFFECTING EXCHANGE RATES: Exchange rates in the market are the outcome of the combined
effect of a multiple of factors. They can be classified as Fundamental, Technical and Speculative factors. The
factors are:

BoP: Surplus BOP in a country strengthens its currency.

Economic growth rate: High growth rate fuels imports and weakens the local currency.

Fiscal Policy: An expansionary policy, normally leads to a higher economic growth which in turn fuels imports.

Monetary Policy: Central banks determine monetary measures to influence and control interest and money supply.

Interest Rates: Domestic interest rates if high, attracts overseas capital (FDI, FII) leading to an excess supply of
foreign currencies resulting into appreciation of domestic currency in the short term. However if high interest
rates continue for a long term, economy will slow down, weakening the currency.

Political Issues: Without Political stability, there can be no economic stability (detrimental to the value of the
Technical reasons in Exchange Rate determination: Government controls, which determine the inflow and
outflow of capital, are considered technical reasons.
Speculation - a major factor in Exchange Rate determination: Speculative trading is a reality in Forex
markets. It is estimated that the speculative trade to daily forex turnover is above 90%.


Banks dealing in international trade and foreign exchange maintain accounts in various foreign countries for the
purposes of settlements. They also enter into drawing arrangements such as overnight or regular overdrafts
limits, agency arrangements for international remittances, collection of cheques / bills etc. The international
banks involved are termed as foreign correspondents and the concept of providing such services is called as
Correspondent Banking. In a Correspondent banking relation, it is not always necessary that an account
relationship should exist. Some of the services can be rendered without an account. However, for arrangements
like Cheque clearing, OD arrangements, accounts are needed. The accounts when maintained by
banks in a Correspondent Relationship are classified as follows:

NOSTRO ACCOUNTS: NOSTRO Account means "OUR ACCOUNT WITH YOU". It is a foreign currency account
maintained by a bank in domestic country with a bank in foreign country.

VOSTRO ACCOUNT: VOSTRO Account means, "YOUR ACCOUNT WITH US". It is an account of a foreign bank
being maintained in our country and with our bank. When. Vostro accounts are opened, KYC norms are compulsory in
India. Vostro accounts are to be operated in line with RBI guidelines.

LORO ACCOUNT: LORO Account means "THEIR ACCOUNT WITH THEM" This is an account of a third bank being
maintained by another or our bank.

MIRROR ACCOUNTS: These are dummy accounts maintained by banks to know actual position of their accounts
with the foreign correspondent banks. We may call it a pass-book of our accounts maintained with the

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Posted by: yogeshvandra - 06-08-2015, 01:46 PM - Forum: CAIIB-- Advanced Bank Management - No Replies

Dear All friends,

Kindly upload/provide CAIIB complete material (PDF File/Word File from Macmillan Publications) for ABM, BFM and Elective paper from your side if you have. If anybody have the soft copy of complete book of all these subjects of CAIIB, request to provide/upload it here. You may call me on my mobile no 8123299495 and reach me at - yogesh143@yahoo.com


Yogesh H Vandra

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