A.Every foreign exchange transaction involves exchange of two currencies by the counter parties to the transaction. The date on which the exchange is to take place is the value date of the transaction. The standard nomenclatures for value dates are:
Ready or cash – value today
Tomorrow "tom" – value tomorrow, or next working day
Spot – value two business days after the trading date
Forwards – any value date beyond spot.
A. In India, forward contracts can be booked by persons,
firms, and companies having genuine foreign exchange exposures. In other words,
forward contracts can be booked by importers, exporters and others (like NRIs &
FIIs). This is permitted only to the extent and in the manner allowed by RBI. Forward
contracts cannot be booked by foreign exchange brokers.
A. Exporters and importers are permitted to cancel and rebook forward
contracts freely as many times as they want. Payables arising out of loans can also
be cancelled and rebooked freely.
A. An option contract is an agreement between two parties
in which one grants the other the right to buy or sell an asset under specified
conditions and assumes the obligation to sell or buy it. The party who has the right,
but not an obligation, is the buyer of the option, and pays a fee, or premium, to
the "writer" or seller of the option. The asset could be a currency, bond, share,
or a futures contact.
Thus a currency option is characterised by the following:
An option giving a right to buy another currency is referred to as a call option
on that currency and a option giving the holder the right to sell the currency is
referred to as a put option. An European option can be exercised
only on the date of maturity while an American option can be exercised on any day
before the maturity date.
Underlying currency on which the option is based
The amount of the underlying currency the holder has the right to acquire or sell
The price (also known as exercise price or strike price) at which the option can
be bought or sold
The time frame (also referred to as expiration date or maturity date) for which
the option is valid.
A. Foreign exchange markets are open for 24 hours and apart
from the dealings that are done during the course of the day, overnight orders can
be executed by contacting the dealing room of your bank and requesting them to place
an order with their overseas correspondents.
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A. In international markets for fully convertible currencies, the forward premiums/discounts
are purely a function of the interest rate differentials between the two countries
whose currencies are fully convertible. Thus in the case of Euro/Dollar the forward
premium is the differential between the US and Eurozone interest rates.
If the base currency in a currency pair has a lower interest rate than that
of the terms currency, the forward rate will be higher than the spot rate. For instance,
the forward rate for EUR/USD is higher than the relevant spot rate because the LIBOR
for Euro is less that for the dollar. On the other hand, the forward rate for USD/JPY
is lower than the relevant spot rate because the LIBOR for dollar is higher than
the LIBOR for yen.
Hence the lower interest rate currency is at a premium when compared to the
higher interest rate currency and vice-versa.
A. As one would expect, the dollar like other foreign currencies
is at a premium to the rupee. However, in view of exchange control regulations and
the absence of a well-developed term structure for the rupee money market in India,
arbitrage opportunities exist. In international markets for convertible currencies,
demand/supply imbalance in the forward markets, leads to spot rate fluctuations
while the premiums/discount continue to reflect interest rate differentials. On
the other hand in India, forward demand/supply imbalance lead to movements in premium
with or without movements in spot rate.
A. If he has already booked a forward contract for this purpose before the date
of discounting, then the documents will be discounted at the contracted rate. However,
if a forward contract has not been booked, then the documents will be discounted
at the rate prevailing on the day of discounting. In the case of usance bills, the
relevant forward rate will be applicable. All the permitted invoicing currencies
are at a premium to the rupee. Hence, on any date prior to the date of discounting,
the forward rate will be the sum of the spot rate, the premium till the date of
discounting and the premium from the date of discounting till the maturity date
of the bill. In the absence of a forward contract, the exporter is exposed to a
complete loss of the premium till the date of discounting and adverse movements
in the spot rate and the premium from the date of discounting to the maturity date.
Either or both of the latter two components could move in the exporter’s favour
too and the exporter will have to make a reasoned judgement while deciding whether
or not to book a forward contract.
A. There is no stipulated margin as such but depends largely
on the size of the transaction, customer relationship with the bank and the customer
awareness about the forex rates. However, till recently FEDAI had given detailed
guidelines for computing rates. Base rate is a rate that forms the basis of computation
of spot and forward rates. The base rate selected by the Authorised Dealers should
be in line with the ongoing market rates.
The Authorised Dealers can load profit margins as under:
TT Buying - 0.025% to 0.080%
Bill Buying - 0.125% to 0.150%
TT Selling - 0.125% to 0.150%
Bill Selling - 0.175% to 0.200% (on TT selling rate)
The above margins are the maximum margins that bank can charge but are negotiable.
Note: The prescription as regards to margins have since been withdrawn
by FEDAI and the banks are free to load margins as per their discretion subject
to the conditions that the spread between TT buying and TT selling rate is within
the limits prescribed by it.
A. NEER – Nominal Effective Exchange Rate is an index of the weighted average
of bilateral nominal exchange rates.
A. REER – Real Effective Exchange Rate is the NEER adjusted for
relative inflation rates.
A. The exchange rate index is conceptually very similar to
a stock market index. Once the objective of determining an effective exchange rate
is defined (for example, export competitiveness), several key issues need consideration
for actual calculation.
In India the base year for the index is1993 and the basket consists currencies of
our major trading partners such as US, UK, Japan, Italy, Germany and France.
The number of countries to be included (the major trading partners – or competitors
in third markets also?)
The weight of each chosen currency in the basket (trade-weighted)
The base period when the index is 100
The choice of the measure of inflation (wholesale price index, retail price index,
The mathematical formulation (arithmetic or geometric weights)
A. One of the methods for effecting remittance abroad is by way
of cable or Telegraphic Transfer (TT). In this method, the buyer pays the amount
of remittance in his country’s currency to his banker who in turn will convert the
remittance to the currency of the seller and transmit the coded payment message.
Examples of transactions where TT rate is applied include payment or receipt of
demand drafts, mail transfers, Telegraphic transfers etc. drawn on the bank.
This rate is applied for purchase of foreign currency by banks. It is applied to
a transaction that does not involve any delay in realisation of foreign exchange
by the bank. The rate is calculated by deducting from the interbank buying rate
the exchange margin. Thus, all foreign inward remittances which are made payable
in India are converted by applying this rate.
This rate is applied for selling foreign currency to the customer by the bank for
effecting remittances outside India. This rate is calculated by adding exchange
margin to the interbank selling rate.
TT rate is used for all transactions that do not involve handling of documents by
A. Bill buying or selling by any bank involves handling of documents
by the bank. This rate is worse than the TT rate. In addition, the bank will also
recover interest for the period for which the bank has lent the funds.
This is the rate applied when a foreign bill is purchased/negotiated/discounted.
When a bill is purchased, the proceeds will be realised by the bank after the bill
is presented to the drawee at the overseas centre. In the case of a usance bill,
the proceeds will be realised on the due date of the bill, which includes the transit
period and the usance period of the bill.
This rate is to be applied for transaction involving transfer of proceeds of import
bills. Even if the proceeds of import bills are remitted in foreign currency by
way of DD, MT,TT,PO, the rate to be applied is the bill selling rate (and not the
TT selling rate).
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A. Financial assistance provided by the commercial banks to exporters
before the shipment of goods is called pre-shipment finance. Pre-shipment finance
is given for working capital for purchase of raw material, processing, packaging,
transportation, ware-housing etc. of goods meant for export. Pre-shipment finance
is presently given to Indian exporters at a concessional rate of 10% for a period
of 180 days. Pre-shipment credit for a further period of 180 days to 270 days is
given at 12%.
A. Financial assistance provided by commercial banks after the
shipment of goods is called post shipment finance. Post shipment finance is provided
for bridging the gap between the shipment of goods and realisation of proceeds.
Post shipment finance is provided by purchasing or negotiating the export documents
or by extending advance against export bills accepted on collection basis. The interest
rates charges are 10% upto 90 days and 12% beyond 90 days to six months.
A. Indian exporters can avail both pre and post shipment
finance in foreign currency. Interest rates under the scheme are linked to LIBOR
and the rates charged by Indian Banks over LIBOR for such credits would not exceed
1.5%. Export credit in foreign currency is available in US Dollar, Euro, Pound Sterling
and Japanese Yen. Export credit is available without exchange risk and at internationally
competitive rates. Banks extend credit on "need basis" of exporters and collateral
security is not insisted. Banks also provide lines of credit for longer periods
say three years, to exporters with satisfactory track records without insisting
on the submission of export order/Letter of Credit.
A. Foreign Currency Packing Credit (FCPC)
Under this facility, the exporter does not have the option of booking a forward
contract nor can he gain from any dollar appreciation against the rupee. The packing
credit amount in dollars together with interest will be adjusted against the dollar
bill tendered for negotiation.
Interest charged at LIBOR + 1.5% (Max.)
A 90 days Dollar Packing Credit can be availed at 3m LIBOR + 1.5%.
6.10% + 1.50 = 7.60%.
Rupee Packing Credit
A 90 days Rupee Packing Credit can be availed at 10%. However, under this facility,
the exporter has the option of booking a forward contract for the export proceeds,
thereby getting back some money in the form of premium.
At prevailing levels of premiums, the exporter will get Rs.0.35 for booking his
dollar export proceeds for 90 days. This would amount to receiving 3.25% interest
The net interest cost of a rupee packing credit with a simultaneous booking of forward
contract is 6.75%. This compares quite favorably with that of the dollar
packing credit rate of 7.60%. When premiums go up, the net rate for the rupee packing
credit will reduce further.
A. FCNR(B) loans are a source of short term funding available to
corporates. Out of the resources mobilised by the banks under the FCNR(B) scheme,
banks have been permitted to provide foreign currency denominated loans to their
customers. Banks decide the purpose, tenor and interest rates on such loans. While
the introduction of the scheme has placed cheap credit at the disposal of Indian
corporates (as interest rates are linked to LIBOR), the foreign exchange risk is
borne by the party who has availed the loan.
A. The interest rate for the tenor of the loan is fixed on the
date of draw down and the corporate can hedge his exchange rate risk by booking
a forward cover. The illustration given below will provide you with more clarity.
Corporate A has got a rupee credit at 16% p.a.
Corporate A can switch this rupee loan to a dollar FCNR (B) loan/take a fresh FCNR(B)
loan. The cost of a 6-month FCNR (B) LOAN is as follows
The comparative cost advantage is evident as it results in a net saving of 4% over
his rupee cost of funding. The spread over LIBOR would depend on the credit worthiness
of the party involved.
Thus, corporates can utilise this opportunity to reduce their interest burden and
thereby minimise costs.
Date of Draw down
|6 Month $ Libor (%)
|Bank’s Margin (Spread over LIBOR – assumed)
|Cost of forward cover (annualised %)
|Other transaction costs
|Net rate (%)
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A. Exporters are permitted to cancel and rebook forward contracts freely as
many times as they want. Forward contracts in respect of payables arising out of
imports or loans can be cancelled but contracts once cancelled cannot be rebooked.
However, they may be rolled over on or before maturity. Roll over involves the simultaneous
cancellation and rebooking of the contract.
A. Beneficiaries of inward remittances in convertible foreign currencies
such as exporters of goods and services can open and maintain accounts in India
expressed in foreign currency and titled "Exchange Earners Foreign Currency" accounts
and credit to such accounts 50% of the remittances. In case of 100% Export
Oriented Units, units located in Export Processing Zones or in Software Technology
Parks or in Electronic Hardware Technology Parks, amounts up to 70% of the remittances
can be credited to such accounts.
Authorised Dealers (ADs) may also allow credits to EEFC accounts in the following
Up to 50% to 70% of the inward remittances, as the case may be, received towards
export advance in freely convertible currencies.
Up to 50% of the payments received by exporters by debit to US $ Escrow accounts
maintained in India as also under the foreign currency debt repayment route, towards
value of goods exported by them.
A. Escrow accounts are US Dollar accounts opened in India. Counter
trade proposals involving adjustments of value of goods imported into India against
the value of goods exported from India, in terms of an arrangement voluntarily entered
into between an Indian party and an overseas party can be routed through an escrow
account. All imports and exports under the arrangement should be at international
prices and all transactions routed through the account should be in conformity with
the Indian Trade and Exchange control regulations. No interest is payable on the
balance standing to the credit of the escrow account but the funds temporarily rendered
surplus may be held in a short term deposit up to a total period of 3 months in
a year and the banks may pay interest at the applicable rate. Overdrafts will not
be permitted in the escrow account nor any loans will be granted against funds in
A. Application for permission to open an Escrow account may be
made by the overseas exporter/organisation through the authorised dealer with whom
the account is proposed to be opened to the RBI under whose jurisdiction the authorised
dealer is functioning.
A. Under the Basic Travel Quota (BTQ), resident Indian citizens
can avail foreign exchange up to US$ 3000 or its equivalent for undertaking one
or more private visits to any country (except Nepal and Bhutan) in any calendar
A. Currency convertibility may be defined as the freedom to convert
one currency into other internationally accepted currencies. There are two forms
of convertibility – convertibility for current international transactions and the
convertibility for international capital movements. Currency convertibility implies
the absence of exchange controls or restrictions on foreign exchange transactions.
India has made the rupee convertible on the current account. Current account convertibility
has been defined as the freedom to buy or sell foreign exchange for
The international transactions consisting of payments due in connection with foreign
trade, other current businesses including services and normal short-term banking
and credit facilities
Payments due as interest on loans and as net income from other investments
Payment of moderate amounts of amortisation of loans for depreciation of direct
Moderate remittances for family living expenses
Authorised Dealers may also provide exchange facilities to their customers without
prior approval of the RBI beyond specified indicative limits, provided, they are
satisfied about the bonafides of the application such as, business travel, participation
in overseas conferences/seminars, studies/ study tours abroad, medical treatment/check-up
and specialised apprenticeship training.
A. Capital account convertibility means that the home currency
can be freely converted into foreign currencies for acquisition of capital assets
abroad. The rupee is currently not freely convertible on the capital account.
A. ACU – stands for Asian Clearing Union. As the first step towards
securing regional co-operation Asian Clearing Union was established with its headquarters
at Tehran, Iran on 9th December 1974 at the initiative of United Nations
Economic and Social Commission for Asia and Pacific (ESCAP). The participants of
this union are the central banks of Iran, India, Bangladesh, Nepal, Pakistan, Sri
Lanka and Myanamar. The need for expanding trade has been widely accepted as the
main objective of this union. The clearing operations commenced on 1st
Value wise, there is no difference between the ACU dollar and the US dollar. The
exchange rates for transactions denominated in US dollar are applicable for transactions
denominated in ACU dollar also. As regards the forward rates, the forward premia
which are quoted for US dollar against the rupee would also be applicable for ACU
Payments for export from India will be received by debit to the ACU dollar accounts
of the commercial banks of other participant countries maintained with ADs in India
or by credit to the ACU dollar accounts of ADs maintained with correspondent banks
in the other participant countries. The reverse will be the case for imports into
India from any of the ACU countries (except Nepal).
The accounts of the member countries are maintained at the ACU headquarters in Asian
Monetary Unit (AMU) which is equivalent to one ACU dollar or one US dollar. Settlement
of transactions by the member countries will be done at the end of a 2-month period.
The settlement will take place by paying of US dollar amount by the net debtor country
to the country having net creditor position.
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A. RBI guidelines in this regard follow.
NRIs are allowed to book forward contracts in respect of their portfolio investments
and FCNR accounts subject to the following provisions.
Equity portfolio – 15% of the market value (reckoning pipeline transactions) as
at the close of business on 31.3.99 converted at the rate of $1=Rs.42.43 and
the increase in the market value/inflows subsequent to that date. Forward covers
once taken may be allowed to continue so long as it does not exceed the value of
the underlying investment.
Balances held in FCNR/NRE rupee accounts and the interest payable thereon – entire
Non-resident shareholders for the amount of dividend due to them on shares held
in Indian companies on repatriation basis – for the actual amount of dividend due.
The cover may be provided only by the designated account – maintaining banks.
Eligibility for cover may be determined on the basis of the declaration of the NRIs
A quarterly review may be undertaken on the basis of market price movements, fresh
inflows, amounts repatriated and other relevant parameters to ensure that the forward
cover outstanding is supported by underlying exposure.
The cost of rollovers should be met out of repatriable funds or inward remittances.
All outward remittances incidental to the hedge may be allowed subject to the payment
of tax, if any.
In these cases, the contracts once cancelled cannot be rebooked. They may however,
be rolled over on or before maturity.
A. Balances in the EEFC accounts can be sold forward by the account-holders
provided they remain earmarked for delivery. Such contracts cannot, however, be
A. There is no limitation on the time period. It would depend on
the usage of the funds and the attractiveness of keeping the funds in the account
(interest rate, currency depreciation etc.).
The other salient features are-
Exporters who have obtained export credit from a bank against shipment in respect
of which a percentage of the proceeds is sought to be credited to the EEFC account,
the export credit has to be liquidated fully before affording any credit out of
the export proceeds to the EEFC accounts
EEFC accounts in any convertible foreign currency can be maintained in the form
Current account - No interest is payable on the balances held in
the form of current account.
Savings account or Term deposit account – Banks will determine the rate
of interest payable on the balances in savings/term deposit accounts by taking into
account the interest rates prevailing in the international markets. Savings bank
accounts, however, cannot be maintained in the names of firms, companies, etc.
Authorised Dealers maintaining these accounts may prescribe a suitable minimum balance
for these accounts.
Funds held in EEFC accounts are not permitted to be sold/transferred to accounts
of other residents in India.
EEFC account holders can now use the facility of making payments from such accounts
for eligible purposes by issue of cheques to the beneficiaries of the payment. In
order to facilitate easy identification of cheques drawn on EEFC accounts, separate
cheque books containing a special series of cheques distinct from cheques issued
on domestic rupee accounts and NRE accounts superscribed with the words "EEFC Account"
will be issued. Authorised Dealers may fix their own requirement of minimum balance
in the account for being eligible to avail of cheque facility.
Credit facilities, fund based as well as non-fund based, is permitted against the
security of funds held in the EEFC accounts but is subject to the commercial judgement
of the ADs.
A. RBI guidelines in this regard are as under:
RBI should have accorded final approval for the conclusion of the underlying loan.
The notional principal amount of the hedge should not exceed the outstanding amount
of the foreign currency loan.
The maturity of the hedge should not exceed the remaining life to maturity of the
The Board of Directors of the corporate should have drawn up a risk management policy
laying down clear guidelines for concluding transactions, and institutionalising
arrangements for a quarterly review of operations and annual audit of transactions
to verify compliance with the regulations.
The hedge should result in reduction of the risk of exposure and there should be
no net inflow of premium direct or implied incases where the option components are
built into the hedge strategy.
Corporates may be permitted to unwind a hedge transaction.
A report of the transaction (booked/cancelled), verified by the authorised dealer
should be submitted to the concerned Regional Office of the Reserve Bank, within
a week of its conclusion.
Authorised dealers should obtain from the concerned corporates copies of the quarterly
reviews and annual audit reports.
Payment of up front premia if any as well as all other charges incidental to the
hedge transaction may be effected without the prior approval of RBI.
Only resident customers having genuine exposure can book foreign currency option
contracts. This product may be freely booked and cancelled.
Banks should obtain a request letter from the customer as per specimen provided
by FEDAI which inter-alia contains a declaration that there is already no forward
exchange cover or foreign currency option in place against the exposure.
The customer should communicate notice of exercise of option contract two working
days in advance before the delivery date as provided in the International Currency
Option Market (ICOM) and should exercise the option before 4 p.m IST on the date
of exercise. Notice of exercise cannot be given by facsimile transmission.
Foreign currency option can be concluded only Over the Counter (OTC)
Banks may write options in respect of customer transactions and cover themselves
with the overseas branches/correspondent banks accordingly.
Option premium may be paid and received in foreign exchange. In the case of premiums
on options bought by Authorised Dealers they may charge the premium to the customer
by keeping a spread.
The factors that should be reckoned for determining the premium amount are strike
price, maturity period of the contract, expected currency volatility, interest rate
differentials and market conditions.
The premium amount once collected is not refundable.
Option should be written only on a fully covered basis. i.e. Option positions should
not be left open.
Option premium may be remitted without the prior approval of the Reserve Bank.
Appropriate accounting entries should be passed for options bought and sold and
premiums amount received and paid. Option exposure should appear in the accounts
as a contingent item.
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