OVERSOLD POSITION Where the liabilities and sales of a bank in a particular foreign currency exceed the assets and purchase of the same currency the bank is said to have a “short” or “oversold” in that currency. if the bank maintains an “oversold” position in a particular currency and there occurs an appreciation of the… Read More »
What is a fixed forward? Fixed Forward is a type of forward exchange contract which provides for taking up or delivery of the foreign currency on a fixed data in the future, while the rate of exchange is agreed upon at the time of execution of the contract. What is Option Forward? Option Forward is… Read More »
Overbought and Oversold Overbought means that a bank’s assets and purchases of a particular foreign currency exceed its liabilities and sales of that currency. Where oversold means that a bank’s liabilities and sales in a particular foreign currency exceed the’ assets and purchases of that currency. In order to avoid risk on account of exchange… Read More »
Interest rates and Exchange rates The question of interest rate arises when currencies are borrowed or lent; whereas exchange rates are involved when different currencies are being bought or sold. Exchange rates are subject to more frequent fluctuations than interest rates. Interest rate is a factor that affects exchange rates. High interest rates cause speculative… Read More »
Hedging and speculating Hedging means avoiding or covering foreign exchange risk. The need for hedging arises because exchange rates fluctuate continuously. Accordingly, individuals, companies and banks who expect to make or receive payments in foreign currencies at a future data face the risk of having to pay more or receiving less in domestic currency than… Read More »
Pips & points: A point is a unit of decimal, the fourth place to the right of the decimal (0.0001) whereas a pip is the fifth place to the right (0.0001). One point is one ten thousandth of a dollar thus, 100 points become one cent. Which decimal place is implied by a point varies… Read More »
In spot transactions, settlements are effected within two working days of striking the deal. Although both payments are to be made simultaneously, because of geographical distance, the differing timing zones and the technicalities of the respective clearing systems, it is only possible to ascertain on the following day whether payment has actually been made by… Read More »
Correspondent Banking The term “correspondent banking” is defined as informal arrangement whereby a smaller bank maintains deposit balances with larger banks in nearby cities and looks to them for a wide variety of services and assistance. Another writer has described “Correspondent Banking” as an informal linkage between banks in different countries set up when banks… Read More »
Standby Letter of Credit Standby letter of credit is a guarantee and is mainly used in USA where according to local laws American Banks are not permitted to issue guarantees. Standby LC differs from a documentary letter of credit in that the latter requires “performance” while the former requires “non-performances” i.e. under a documentary letter… Read More »
Differentiate between “Financial Documents” and “Commercial Documents” Financial documents Financial documents mean bills of exchange, promissory notes, checks or other similar instruments used for obtaining the payment of money. Commercial documents Commercial documents mean invoices, transport documents, documents of title or other similar documents or any other documents whatsoever not being financial documents.
What is Cross Rate? The exchange rate of major international currencies are quoted with reference to their base currencies e.g. in London with reference to Pound sterling and in New York with reference to US Dollars. At times for transactions between two currencies whose rates are not quoted, a third currency rate may have to… Read More »
What is Foreign Exchange? The foreign exchange is defined in different ways, e.g. Webster Dictionary as “transferring of funds to settle accounts with firms or residents in a foreign currency.” Encyclopedia Britannica: as the system by which commercial nations discharge their debts to each other and H.E. Evitt : “the means and methods by which… Read More »
Performance Guarantee or Performance Bond Article 2 of ICC publications 325 defines “Performance Guarantee” as an undertaking given by bank (guarantor) at the request of a supplier of goods or services or other contractor (principal) to a buyer or to an employer (the beneficiary) whereby the guarantor undertakes, in the event of default by the… Read More »
Tender Guarantee or Bid Bonds The Uniform Rules for Contract Guarantee, Article two states that for the purpose of these rules, a “tender guarantee” means an undertaking given by bank (guarantor) at the request of a tenderer (principal) to a party inviting tenders (beneficiary) whereby the guarantor undertakes, in the event of default by the… Read More »
Shipping Guarantee The need for such a guarantee arises when the goods have arrived destination before document of the title to goods i.e. Bill of Landing, Air waybill etc. Therefor in order to take delivery of the goods, the importer approaches his bank to issue a bank guarantee in favor of the carrier of goods… Read More »