C20 FOREIGN EXCHANGE RISK

BASICS OF FOREIGN EXCHANGE #

DIRECT QUOTE:- Home currency denoted as one unit of foreign currency Eg. $1= ₹ 65

INDIRECT QUOTE:- Foreign currency as one unit of home currency Eg. ₹1= $ 0.0154

BID ASK RATES #

Exam note:- If transaction is in between interbank market to BANK then interbank market will quote. (Similar to question in question bank)

Net exposure (IMP) (FRM PART I May 17 EXAM) #

Net position exposure (Say USD) = (USD  Asset – USD Liability) + (USD Bought – USD Sold )

IF ANSWER IS + THEN BANK IS NET LONG AND  ( – ) THEN NET SHORT

(Note: Refer question bank and its alternate possible variation to be asked in exam in Q No 13 in Question bank Pro)

FOREIGN EXCHANGE TRADING ACTIVITY #

4 KEY TRADING ACTIVITY

1. INTERNATIONAL COMMERCIAL BUSINESS TRANSACTION SALE/ BUY OF GOODS ETC
2. TAKE POSITION IN REAL FOREX INVESTMENT
3. OFSETTING EXPOSURE – HEDGING
4. SPECULATING OF FOREIGN CURRENCIES.

PARITIES (PURCHASING POWER PARITY) VIMP (MAY 16) #

States exchange price should be reflective of  purchasing power in both the countries.

Forward rate calculation using purchasing power parity.

F= FWD rate       I_H = inflation in home currency

S= SPOT rate       I_F = Inflation of foreign currency

PARITIES (Interest Rate) VIMP #

Forward rate calculation using interest rate parity.

Note:- Solve all the questions from the question bank given on these two concepts

If interest rate is in continuously compounded.

RELATION BETWEEN  (Int. Rate and inflation) #

(1 + Nominal rate) = (1+ Real Rate )(1 + inflation rate)