26. Direct Quote rates are also called Home
Currency or Price Quotations.
27. Under indirect Quote, the local
currency remains fixed, while the number of units of foreign currency varies.
E.g. `100 = 2.05 USD
28. Globally all currencies (Except a few)
are quoted as Direct Quotes, in terms of USD = So many
29. Only in case of GBP (Great Britain
Pound) £, €, AU$ and NZ$, the currencies are quoted as
30. Japanese Yen being quoted per 100
Units.
31. Cross Currency Rates: When dealing in a
market where rates for a particular currency pair are not directly available,
the price for the said currency pair is then obtained indirectly with the help
of
32. How to calculate Cross Rate?:
The math is simple algebra: [a/b] x [b/c] =
a/c
Substitute currency pairs for the fractions
shown above, and you get, for instance,
GBP/AUD x AUD/JPY = GBP/JPY.
This is the implied (or theoretical) value
of the GBP/JPY, based on the value of the other two pairs.
The actual value of the GBP/JPY will vary
around this implied value, as the following calculation shows. Here are
Friday's actual closing BID prices for the 3 currency pairs in this example
(taken from FXCM's Trading Station platform):
GBP/AUD = 1.73449, AUD/JPY = 0.85535 and
GBP/JPY = 1.48417. Now, let's do the math:
GBP/AUD x AUD/JPY = GBP/JPY
1.73449 x 0.85535 = 1.4836, which is not
exactly the same as the actual market price. Here's why.
During market hours (Sunday afternoon to
Friday afternoon, EST), all prices are LIVE, and small departures from the
mathematical relationships can exist momentarily.
33. Fixed Vs Floating Rates:
- The fixed exchange rate is the official
rate set by the monetary authorities for one or more currencies. It is usually
pegged to one or more currencies.
- Under floating exchange rate, the value
of the currency is decided by supply and demand factors for
34. Since 1973, the world economies have
adopted floating exchange rate system.
35. India switched to a floating exchange
rate regime in 1993.
36. Bid & Offered Rates: The buying
rates and selling rates are referred to as Bid & Offered rate.
37. Exchange Arithmetic – Theoretical
Overview:
- Chain Rule: It is used in attaining a comparison
or ratio between two quantities linked together through another or other
quantities and consists of a series of equations.
- Per Cent or Per mille: A percentage (%)
is a proportion per hundred. Per Mille means per
38. Value Date: The date on which a payment
of funds or an entry to an account becomes actually effective and/or subjected
to interest, if any. In the case of TT, the value date is usually the same in
39. The payments made in same day, so that
no gain or loss of interest accrues to either party is called as Valuer
Compense, or simply here and there.
40. 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.
41. A transaction conducted between two
centers only is known as simple or direct arbitrage.
42. Where additional centers are involved,
the operation is known as compound or Three (or more)
43. Forex Operations are divided into 3:
1) Forex Dealer 2) Back Office 3) Mid
Office
44. The Forex dealing room operation
functions:
- a service branch to meet the requirement
of customers of other branches/divisions to buy or sell
- Manage foreign currency assets and
liabilities,
- Fund and manger Nostro Accounts as also
undertake proprietary trading in currencies.
- It is a separate profit center for the
Bank/FI
45. A Forex Dealer has to maintain two
positions – Funds position and Currency Position
46. Funds position reflects the inflow and
out flow of funds.
47. Back office takes care of processing of
Deals, Account, reconciliation etc. It has both a supportive as well as a checking
role over the dealers.
48. Mid Office deals with risk management
and parameterization of risks for forex dealing operations. Mid Office is also
supposed to look after the compliance of various guidelines/instructions and is
an independent function.
49. The major risks associated with the
dealing operations are :
- Operational Risk - Exchange Risk - Credit
Risk - Settlement Risk
- Liquidity Risk - Gap Risk/ Interest/ Rate
Risk - Market Risk
- Legal Risk - Systemic Risk - Country Risk
- Sovereign Risk
50. The Operation Risk is arising on
account of human errors, technical faults, infrastructure breakdown, faulty
systems and procedures or lack of internal controls.
*as downloaded rom FB with thanks
