Foreign Currency Management Pdf

Foreign bullion Management Exchange topical anestheticise This is the prise at which the property of i clownish would change hand with currency of a nonher country. E. g. $1 = SLR 130 Types of Exchange position 1. floating array This dictate depends on a levels of the international trade of a country and it does not interfere with the government of that country. 2. Fixed prescribe This is the send that the government of the country would set its own currency rate and it is not depending on the market rate. 3. Dirty Float This is the rate that mixed among floating rate and fit(p) rate system.This is where the government would allow permutation rate to float in the midst of a particular both limits. If it goes immaterial either of the limit, accordingly the government would take further action. Forex Dealings 1. put up expenditure The price at which the currency is bought by the dealer. 2. Offer price The price at which the currency is sold by the dealer. When regarding the forex dealings, Offer Price Bid Price Example 01 David is a UK businessman. He needs $ 400,000 to corrupt US equipment. Identify the join of ? equired to buy the Dollars? ($/? 1. 75 1. 77) Answer The amount of ? required = $ 400,000 $/? 1. 75 = ? 228571. 43 Example 02 James is a US businessman. He has just received a payment of ? 150,000 from his main guest in UK. Identify the amount of $ received by James when ? 150,000 be accustomed? (? /$ 0. 61 0. 63) Answer The amount of $ received = ? 150,000 ? /$ 0. 63 = $ 238095. 24 Spot Rate and Forward Rate Spot Rate This is the rate which is applicable for the immediate delivery of currency as at now.Forward Rate This is a rate that set for the future day transaction for a improve amount of currency. The transaction would take place on the future eon at this agreed rate by disregarding the market rate. Discounts & Premiums Discounts If the preliminary rate which is quoted cheaper, wherefore it is set to be quoted at a discount. E. g. $/? present-day(prenominal) spot is 1. 8500-1. 8800 and the one month forrad rate at 0. 0008-0. 0012 at a discount. When quoted at a discount, Answer 1. 8500-1. 8800 their should be more Dollars + 0. 0008-0. 0012 existence received at a presumptuousness Pound. = 1. 508-1. 8812 So the discount compute endure to be added to the spot rate. Premiums If the forward rate which is quoted more expensively, then it is set to be quoted at a premium. E. g. $/? current spot is 1. 9000-1. 9300 and the one month forward rate at 0. 0010-0. 0007 at a premium. When quoted at a premium, Answer their should be less Dollars being 1. 9000-1. 9300 received at a given Pound be character 0. 0010-0. 0007 of the expensiveness of Dollars. So = 1. 8990-1. 9293 the premium factor exhaust to be deducted from the spot rate. Foreign Exchange Rate put on the lines . Transaction assay This is the risk that adverse win over rate movement occurring in the cause of normal international trading transaction. This arises when the prices of imports or exports are fixed in alien currency basis and there is a movement in the exchange rate between the date when the price is agreed and when the immediate payment is paid or received. 2. Translation Risk This is the risk that the organization entrust made exchange losses when the accounting results of its alien branches or subsidiaries translated into the local currency. . Economic Risk This is the risk that suppose to a effect of exchange rate movements on the international competitiveness of the comp some(prenominal). 4. Direct & Indirect Currency retells Direct Quote This means the exchange rate is mentioned in terms of the amount of domestic currency which needs to be given in returns for one unit of foreign currency. E. g. SLR 130 for $1 Indirect Quote This means the amount of foreign currency units that needs to be given to obtain one unit of domestic currency. E. g. $ 1/130 for SLR 1 Example 01ABC Ltd is a US telephoner, buying goods from Sri Lanka which cost SLR 200,000. These goods are resold in the US for $2000 at the time of the import purchased. The current spot rate is $1 = SLR 126-130. Calculate the expected profit of the resale in terms of US Dollars use both direct & indirect quote systems. Answer 1. ) under Direct Quote manner $/SLR = 1/126 1/130 = 0. 00794 0. 00769 gross revenue = $2000 (-)Purchase Cost=SLR200,000*$/SLR0. 00794 =($1588) Expected Profit = $412 2. ) Under Indirect Quote Method Sales (-)Purchase Cost=SLR200,000/SLR126/$ Expected Profit = $2000 =($1587) = $413Managing the Exchange Rate Risk 1. Invoicing in domestic currency Since the exporter does not have to do either currency transaction in this method, the risk of currency conversion is transferred to the importer or ill-doing versa. 2. Money securities industry Hedging Because of the close relationship between forward exchange rate and the interest rate in two currencies, it is possible to calculate a forward rate by using the spot exchange rate and money market lending or borrowing which is called as a money market hedge.Feature name aboutProduction Management3.Entering into Forward Exchange Rate blesss A somebody rotter enter into an agreement with a entrust to purchase the foreign currency on the fixed date at a fixed rate. 4. Matching receipts & payments Under this method a company can set off its payments against its receipts in that particular currency. 5. Options These are sympathetic to forward trade agreements, but the consumer can choose between the banks rate and the market rate. Example 01 A Sri Lankan company has to slump $800,000 after three months time. The current spot rate is $1 = SLR 126-130.The foreign currency depositing interest rate is 12%per annum and the borrowing rate in Sri Lanka is 8% per annum. The agreed exchange rate with the bank is $1 = SLR128. The company has identified to overcome the exchange rate under Money market place Hedging & Forwa rd Exchange Rate Contract methods. Identify the cheapest method to overcome the exchange rate risk. Answer 1. ) Using Money Market Hedging Method FV = PV* (1+r)n PV = $800,000* (1+ 0. 03)-1 PV = $776,699 r = 0. 12*3/12 r = 0. 03 n=1 Purchase Cost(SLR) = $776,699*SLR130/$1 = SLR 100,970,870 Interest Cost(SLR) = SLR 100,970,870*0. 8*3/12 = SLR 2,019,417 Total Cost(SLR) = SLR(100,970,870+2,019,417) = SLR 102,990,287 2. ) Using Forward Exchange Rate Contract Method Total Cost (SLR) = $ 800,000*SLR128/$1 = $102,400,000 The best method is forward Exchange Rate Contract Method, because it gives the lowest total cost when study to Money Market Hedging Method. Reasons for Short Term Changes of Exchange Rate 1. Investment Flows If a country does more investment to outside countries, then there would be a uplifteder demand for foreign currency. therefore the domestic will depreciated or vice versa. 2.Trade Flows In a given time if a country has more imports and less exports, the domestic cu rrency will depreciated, because of the higher demand for the foreign currency or vice versa. 3. Economic Prospectus If a country has good economic policies and is showing shines of economic growth, it could receive more investment and therefore the domestic currency would appreciated. Reasons for Long Term Changes of Exchange Rate 1. Purchasing Power coincidence Theory This hypothesis describes how the differences in inflation rate among two countries would die hard to changes in the exchange rates. in store(predicate) Rate(A/B)=Spot Rate(A/B) * (1+ Inflation Rate of A) (1 +Inflation Rate of B) 2. Interest Rate Parity Theory This theory links the future currency rates with differences in interest rate among two countries. Future Rate(A/B)=Spot Rate(A/B) * (1+ Interest Rate of A) (1 +Interest Rate of B) 3. Monetarist Theory This theory identifies the relationship between exchange rate and the government money add to an economy of one country. E. g. When the government released more money to their economy, individual would have more money.So they would purchased more, the demand will increased & through that result in higher prices & high inflation. This would lead to a high level of derogation to the currency. 4. Keynesian Approach This theory says that an exchange rate may not change in a balance and sometimes currency may continuously appreciate or depreciate without reverse. E. g. There is a high taste & demand for imported product in one country while their exports are losing its export position in other countries. Therefore, without any appreciation of currency will continuously depreciate over a long time period in that country.