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DISCOVER

Notes On Foreign Exchange Risk Management Notes For CS And CA

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Published in: Cost Accounting and Financial Management | Financial Management | Law, Ethics and Communication
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This Note Cover The 19 must to know Concept for Foreign exchange which is Prepared By us (Bhupesh Anand Classes) which will Help You To improve Your basic uderstanding Of this Topic . Here Are some List Of topic in The Notes 1. - Home Currency/ Domestic Currency 2. Exchange Rate 3. Base Currency & Quote Currency 4. Conversion of Direct Quotation into Indirect Quotation (Vice Versa) / Two Way Quotation. 5. Direct Quotation/ Indirect Quotation (DQ/ IDQ) (Traditional View) Versa (One Way Quote) and much more.

Bhupesh A / Delhi

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Teaches: ACCA, CA - IPCC, CA Intermediate, CFA, CS - Executive, CS Professional, Accountancy, Business Studies

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  1. ?? ? ? ? ??? ? ??? ? Z 3
  2. BHUPESH ANAND Classes Foreign Exchange Risk Mgt ted By: CA. Bhupesh Anand FCA, ACMA, FCS, Dip-IFRS (London) nualified Valuer, Mind Trainer
  3. Lecture CONCEPT 1- CONCEPT 2- CONCEPT 3- CONCEPT 4- CONCEPT 5- CONCEPT 6- CBQ's Introduction of Foreign Exchange / why foreign exchange. Home Currency/ Domestic Currency Foreign Currency Countries & Currencies Flow Chart Exchange Rate EPQ's Contd.
  4. CBQ's CONCEPT 7- Base Currency & Quote Currency CONCEPT 8- Layers in foreign Exchange Market. CONCEPT 9- Inter Bank Rate / Bank Rate CONCEPTIO-Two way Bank quotation / When Bid Rate & Ask Rate are different EPQ's Contd.
  5. CBQ's CONCEPT 11- Spread (Gross Profit Ratio) CONCEPT 12- How to Read Bank Rate CONCEPT 13- Conversion of Direct Quotation into Indirect Quotation (Vice Versa) / Two Way Quotation. EPQ's Contd.
  6. CBQ's CONCEPT 14- Evaluation of exchang rate quotation received from two banks. CONCEPT 15- One way Exchange Rate Quotation CONCEPT 16- Direct Quotation/ Indirect Quotation (DQ/ IDQ) (Traditional View) Versa (One Way Quote) EPQ's Contd.
  7. CBQ's CONCEPT 17- Direct Quotation / Indirect Quotation Thought) CONCEPT 18- Hard Currency & Soft Currency/ Darling Currency/ Chocolate Currency . EPQ's Contd.
  8. CONCEPT 19- How to convert Direct Quote into indirect quote & Vice Versa (One Way Quote) Total Questions Total Practical Questions Total Theory Questions Total Objective type Questions CBQ's 81 EPQ's 1 33 114 22 6 Contd.
  9. Concept 1 Introduction of Foreign Exchange / why foreign exchange a) Till now our chapters were limited to domestic boundaries of a given country (India) b) But now we will expand our operations beyond domestic boundaries of a country (India) Contd.
  10. c) In the Era of Globalization, the knowledge of foreign exchange market is must. d) Without proper knowledge of foreign exchange we C.A , C.S , 11th 12th (Accounts) ,B.com , ACCA CFA can not (1/4fGround Floor,East Patel NagarfNear Patel Nagar Metro Station , N.D -08 Think Globally (Lanclnnarlc.- Almondz Hotel Patel Naaar) Work Globally Earn Globally
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  12. GrantThornton Reason says: ere are three Reason says: there arc three ways to grow. Instinct says: only onc lcgds to growth, Instinct says: new markets could take your IP. Reason says: take your new I? to markets.
  13. takshila learning educate yourself Office )ffice KPMG Building cutting through complexit}ü Deloitte India
  14. India {IJERNST&YOUNG Quality In Everything 110 Do 21 ERNST&YOUNG Qualityln Everything We Do Nip. Meet our.Budqet analysis webcas neHsts Building a better working world 500 x 377 - ghssdoor.com
  15. PCAOB WATERHOUsE Public Company Accounting Oversight Board Nostalgia is a eompilation of stories. aneedotes and 'Rentories shared by Pu•C alumni 9 Enjoy c ace!' pwc
  16. Concept 2 Home currency / Domestic Currency. a) Countries own currency is known as Domestic currency] Home Currency. For USA $ is home currency.
  17. Concept 3 Foreign Currency a) For any country , any currency other than home currency will be named as foreign currency. For India $ , €, f, etc all are foreign currencies. [Other than (Rs)] Contd.
  18. For USA ' , €, f, (Other than ' ) $ etc all are foreign currencies Classes On C.A , C.S , 11th 12th (Accounts) ,B.com , ACCA , CFA 4/4fGround Floor,East Patel NagargNear Patel Nagar Metro Station N.D -08 (Lanclrnatk- Almondz Hotel Patel Naqar) [email protected]
  19. Concept 4 Countries & Currencies All over the earth planet there are approximately 250 countries & 150 currencies Out of which following are the famous currencies Contd.
  20. NAME OF COUNTRY (1) Great Britain Pound (2) European EURO (3) United States of America (4) Japan (5) (6) Hong Kong (7) Brazil (8) China (9) India (10) Japan NAME OF CURRENCY GBP EURO USD Yen HKD BRL Yuan Renminbi INR JPY Yen SYMBOL
  21. Concept 5 Flow Chart: Following is the flow chart which explains the meaning of Foreign exchange, foreign exchange risk & Foreign exchange risk Mgt. Meaning of Forex Exchange Foreign Currency, Foreign Deposits, Foreign Investments, Foreign Bills, Foreign Borrowings etc. Contd.
  22. Obi. of Forex Mgt Meaning of Forex Risk 'The Possibility of variation in Foreign Exchange rates" Meaning of Forex Risk Mgt. Effective & Efficient Utilization of F. Exchange' Contd.
  23. QI Q2 Q3 What is Forex Arithmetic? What are D. types of Forex Risk? How to manage Foreign Exchange risk? Clas€ On C.A , C.S , 11th 12th (Acc ,Bmm , ACCA , CFA 4/4fGround Floor,East Patel NagarfN ar Patel Nagar Metro Station , N.D -08 (La ncl ma rk:- Alnnorl(- [email protected] Contd.
  24. Step (1) FOREX ARITHMATIC 'HC / FC ,DQ/IDQ Step (2) FOREX RISK *Transaction Risk *Translation Risk Step (3) FOREX RISK MANAGEMENT Internal hedging tools External hedging tools Contd.
  25. Bank Rate Theories of trade Premium/Discount Arbitrage Economic Risk Political Risk C.A , C.S , 11th 12th (Accounts) ,B.com , ACCA , CFA 4/4,Ground Floor,East Patel NagarjNear Patel Nagar Metro Station , N.D -08 (Landmark:- Alrnondz Hotel Patel Naqaj-) bhu pesha [email protected] Contd.
  26. Concept 6 Exchange Rate Exchange Rate is the Rate AT which one currency is exchanged with another currency. i.e. Purchased & Sold with another Currency.
  27. Concept 7 Base Currency & Quote Currency. a) In exchange Rate quotations we use two types of currencies out of which one currency is named as base currency & other currency is named as quote currency. b) The currency which is unit currency i.e. Fixed Currency is named as Base currency & that Currency which varies i.e. Variable is named as quote currency. Contd.
  28. Ex- 1 $ = PXS. 70 c) In this case US d $ is Base currency & RS.(INR) is quote currency. Classes On CA, C.S , 11th 12th (Accounts) ,B.com , ACCA , CFA 4/4fGround FlooryEast Patel NagarjNear Patel Nagar Metro Station , N.D -08 (Lanclrnark:- Alnnondz I-lotel Patel Naqar) bhu pesha
  29. Concept 8 Layers in foreign Exchange Market :- a) There are 3 Layers involved in Foreign Exchange Market. Contd.
  30. F S Player 1 Layer 1 Player 2 Layer 2 Gayer 3 Regulator RBI, FEDAI Whole Sale Retail Customer, Merchant, (Exporter/ Importer)
  31. Concept 9 Inter Bank Rate / Bank Rate, a) Exchange Rate in Between Regulator & Bank is named as Inter Bank Rate. b) Exchange Rate quoted by bank For customer is named as Bank quote or Bank Rate or Merchant Rate or cover Rate. c) Bank Rate includes Commission or margin i.e. Profit Contd.
  32. d) Bank Always Buys From RBI at coiner Rate & Sells to customer at Higher Rate (importer). e) Bank Always Buys at Lower Rate from Customer (Exporter) & Sells to RBI at Higher Rate. f) Bank is always at a win-win Situation. Classes On C.A , C.S , 11th 12th (Accounts) , ACCA , CFA 4/4fGround Floor,East Patel Nagar,Near Patel Nagar Metro Station N.D -C8 (I-anclnnark: Almondz Patel Naaaj-) 98731/19995, 4503 8585 blnupeshanandclasses@g mail.carn
  33. Concept 10 takshila learning educate yourself Two way bank quotation/ when BID Rate & Ask Rate Are Different, a) Bank Always gives A two way quotation to its customer. b) Bank Quote consists of two Rates. BID Rate (Buying Rate) Ask Rate (Selling Rate) Contd.
  34. c) Format of Bank quote is BID Rate — Ask Rate B d) Ask Rate is the Rate at which Bank Sells 1 unit of Base currency to its customer & BID Rate is the Rate at which Bank buys 1 Unit of Base currency from customer. Contd.
  35. e) Bank always Buys at a Lower Rate From Customer & sells to its customer at higher Rate, Hence BID rate is less than Ask Rate .
  36. Concept 11 Spread (Gross Profit Ratio) a) Difference Between BID rate & Ask Rate is named as Spread. b) Spread Can be calculated in - Absolute Terms - Relative Contd.
  37. c) Spread = Ask Rate - BID Rate d) Sperm 0/0 = Ask Rate - BID Rate Ask Rate 100 e) For Understanding Purpose Relate Spread with Gross Profit Ratio.
  38. Concept 12 How to Read Bank Rate Suppose HDFC Bank today gives Following Exchange Rate Quotation. 1 $ = RS. 60 - RS. 65 a) So in this Case it implies Bank will buy Base currency From Customer 1 $ = RSS 60 b) It also Implies Bank will Sell 1 $ to customer 1 $ = @ RS 65 c) Spread in Absolute terms = Rs.65 - 60 = Rss 5 Contd.
  39. learning Spread In % age 65 - Rs.60 65 takshila educate yourself x 100 e) Spread % can Also be related with gross Profit ratio. Gross Profit x 100 Sales f) We will always Read Bank quotation From the Point of view of Bank. Contd.
  40. g) In any Bank quotation it is the Base Currency which will be purchased or sold. h) In examination All questions are framed from customer point of view unless other wise stated. i) The currency which is in left Hand side will be Bought or sold.
  41. Concept 13 How to Convert Direct quotation into Indirect quotation (Vice Versa) / Two way Quotation. a) Direct Quote can be Converted into ID Q By changing the position & taking Reciprocal. b) Ex- 1 $ = 50- 55 In this quotation $ is base Currency so if $ is to be bought by customer then This quotation Can easily Be used. Contd.
  42. c) If Customer has to Purchase or Sell Rss Then it is better to convert the bank quote Because Currency which is to be bought or to be sold Should be base Currency. d) Now we can not do like This 50 55 1 = .02 $ - 001818 $ Because in this case buying Rate is more than Selling Rate which is not Possible. Contd.
  43. Correct Way of Converting Bank quotation is IRS. - 50 55 masse - 018181 $- $ , ACCA CFA 4/4Ground Floor,East Patel Nagat%Near Patel Nagar Metro Station N.D -08 (Landrmark:- Alnnondz Hatel Patel Nac at-) Now BID Rate is Less than Ask rate. Contd.
  44. f) Following are the two Rules of converting Any Bank Quotation. Rule 1 Convert ask rate as BID rate & BID rate As ASK rate. 1 $ = 50- Rs. 255 Rule 2- then take their Reciprocals. 1 Rs.=l$ -1 $ 50 55 = 0018181 $ - .02 $
  45. Concept 14 Evaluation of exchange Rate quotation Received from two Banks. a) Normally exchange rate quotation given by two banks should be same. b) However sometimes minor Difference may prevail. Contd.
  46. c) In such a situation customer should select a bank beneficial to him. Ex- ICICI quotation 1 $ = 50- Rs, 51 SBI quotation 1 $ = 50.20 - 51.30 Contd.
  47. Now customer wants to buy $ so Applicable Beneficial Rate will be Rate = 1$ = 51 Suppose customer wants to sell then applicable Rate is SBI Rate. 1 $ = 50.20
  48. Concept 15 One way Exchange rate Quotation. a) When Bid & Ask Rates are same then that exchange rate quotation Is named as one way Exchange Rate quotation. b) Ex- 1 $ = 70 c) It implies Bank will by 1 $ @ Rss 70 d) It implies bank will sell 1 $ @ Rss 70.
  49. Concept 16 Direct quotation / indirect quotation (Traditional View) a) As per traditional thought If domestic currency varies & Foreign Currency is Fixed then It is named as Direct quotation. Ex- 1 $ = 45 Now This quotation is direct Quotation for India. Now this quotation is indirect quotation for USA. Contd.
  50. b) Foreign Exchange quotations can be Quoted - Directly - Indirectly c) As per Traditional thought indirect quotation is the quote where domestic Currency is Fixed i.e. is Base Currency & Foreign Currency is variable. = .02 $ d) 1 Kg onion = Rss 25 is directly understandable for India, Hence Direct quotation. Contd.
  51. We can also Read the above quotation as 1 onion = 1 Rs.i5 But truly Speaking mathematically it is ok but not actually understandable.) 1 chocolate (8 pieces) or 1 piece of chocolate = 50 = 50 8 f) It may be noted that if one quotation is direct for one country then the same quotation is indirect for another country.
  52. Concept 17 Direct quotation/ Indirect quotation (Modern Thought)./American/European Terms, a) As all currencies are traded with Respect to USD($) So it is also named as Darling Currency. b) If in any quotation chocolate/ Darling / USD Is Fixed / Base Currency & Rest of the World Currency are Indirect then it means it is a Direct Quotation. 1 $ = 60 Contd.
  53. c) If in any exchange Rate Quotation if USD is Quote Currency i.e. Variable Currency then As per Modern Thoughts It will Be treated As indirect quotation. CA , CS , 11th 12th (A ,Bucom , ACCA , CFA 4/4fGround Floor, r ,te' ar Nagar Tvletro Station N.D -08 st -L 110
  54. Concept 18 Hard Currency & Soft Currency / Darling Currency/ Chocolate currency. a) Hard Currency is sign of stronger currency. b) Soft currency is a sign of weak currency.
  55. Hard Currency & Soft currency A Hard currency is a freely convertible currency that is not expected to depreciate significantly in value in the foreseeable future. A hard currency is considered to be stable, meaning that it is not subject to dramatic variations in its value relative2 to other currencies expressed as changes in its exchange rate. As a general rule, demand for hard currency in foreign exchange markets is high because of it stability.
  56. A currency with a value that fluctuates as a result of the country's political or economic uncertainty. As a result of the currency's instability, foreign exchange dealers tend to avoid it. Also known as a "weak currency". Currencies from most developing considered to be soft currencies. Soft currency is weak currency. Classes On C.A. C.S , 11th 12th (Accounts) ,Bmm , ACCA , CFA 4/4Ground Floor,East Patel Nagar,Near Patel Nagar Metro Station N.D -08 (Lanclma rk:- Almandz Hotel Patel Näqar) 9873149995, 011 4503 8585 lahupeshanandc
  57. Concept 19 How to convert Direct Quote into indirect quote & Vice Versa (one Way Quote) a) Direct quote can be converted into Indirect Quote By taking Reciprocal of Direct quote. IDQ= 1 Direct Q Ex- 1 Kg. potato = Rss 20 is a DQ = 1 Kg. potato is indirect quotation. 20

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