Mechanics of buying and selling foreign currency future Foreign Exchange Futures: Let us assume that in January an importing firm requires Swiss Franc 125,000 in three-month time. It purchases a SF12500 future contract through a broker at the rate of SF1 = $0.6600. the contract’s current value would be ($0.66SF SF125000) U.S, $82500. It would… Read More »
These are the markets that were “derived” from other markets. The first financial future contracts were derived from the foreign exchange market. A financial future contract is a contract to deliver or take delivery of a financial instrument at a future date. In some cases where delivery is difficult, the contract may be settled by… 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 »
Forward contracts versus Future contracts Commodity brokers use forward and futures contracts for which reason? Points of difference between forward contracts and financial futures are as under: Forward contracts are available in any amount, small or large, whereas financial future contracts are in standard size. Forward contracts are meant for bonafide trade transactions whereas in… 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 »
Advance Payment Guarantee A contractor who is awarded a contract may ask for advance payment in order to start the project. The project sponsor will, for this purpose, require an Advance Payment guarantee to the effect that the contractor will perform his contract and if he fails, he will refund to the project sponsor the… 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 »
Role of Guarantees/bonds in international trade A bank guarantee is an irrevocable obligation of a bank to pay a sum of money to the beneficiary in the event of non-performance of a contract by its customer, the principal. Like letters of credit, performance bonds and advance repayment guarantees are being increasingly used in international trade… Read More »
Spot Deal A spot deal is one where foreign exchange is sold or purchased for immediate delivery or latest delivery within two days. the rate at which such deals are conducted is known as the spot rate. In majority of transactions currency is bought or sold for immediate delivery. “Spot” rate refers to transaction that… Read More »