Floating Exchange Rate Definition Free floating or Clean floating of a currency occurs when its exchange rates are left free to be determined by the market forces of demand for and supply of that currency in foreign exchange market with no floor or ceiling vis-à-vis the dollar, gold, SDRs, or any other currency. The government… Read More »
Control and Monitoring of Exchange Position As a matter of policy each bank establishes “limits” for various levels.in case a bank has more centers dealing in foreign exchange, the limit is allocated to each center. Such limits are periodically reviewed and revised.in the event of a special situation arising interim limits are approved for a… Read More »
Foreign Trade Risks Why is foreign exchange risk so important today? there are three broad reasons: i. The growth in international trade and financing. ii. The increased magnitude of exchange rate fluctuations. iii. The increasing visibility of the foreign exchange gains/loss items in corporate financial statement. The first two factors are the source of the… Read More »
The calculation of profit or loss on net foreign exchange position is carried out monthly through what is termed as month-end revaluations. A simple but effective method to calculate separately the profit or loss on the spot position and on the forward position currency is outlined below: ii. if the net position is overbought, the… Read More »
As a matter of policy each bank establishes “limits” for various levels.in case a bank has more centers dealing in foreign exchange, the limit is allocated to each center. Such limits are periodically reviewed and revised.in the event of a special situation arising interim limits are approved for a given transaction or a limited period.… Read More »
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 »