1. FOREIGN EXCHANGE MARKET

2. NEED FOR FOREX MARKET

3. BANK INVOLVEMENT IN FOREX MARKET

4. SOME OTHER CHARACTERISTICS IMPORTANT TO CUSTOMERS COMPETITIVENESS OF QUOTE SPECIAL RELARIONSHIP WITH BANK SPEED OF EXECUTION ADVICE ABOUT CURRENT MARKET CONDITIONS FORECASTING ADVICE

5. SPOT RATE Def : “ The rate at which currencies will be traded for immediate exchange is known as Spot rate.” “Current rate of a currency” “ Today’s rate of a currency”

6. BID & ASK PRICE BID PRICE : Price at which bank is willing to purchase the currency ASK PRICE : Price at which the bank is willing to sell the currency.

7. BID / ASK SPREAD It is the difference b/w bid & ask Price EXAMPLE :. YOU HAVE RS 1 M. IF U WANT TO CONVERT RS INTO $. BID PRICE : 57/= ASK PRICE : 57.5/= Calculation @ Ask Price : 1000000 / 57.5 = $ 17391.304

8. CONVERT $ BACK TO R s. NOW WHEN U WILL COVERT $ BACK TO RS Calculation @ Bid Price : 17391.304 * 57 = RS 991304.32. DUE TO THE BID/ASK SPREAD U GOT A LOSS ( 1000000 - 991304.32 ) = RS 8695.7

9. FORWARD CONTRACT Def : “ Contracts which allow for the purchasing or selling of currencies in future periods”.

10. SPECIFICATIONS FOR CONTRACT Name of the currency No. of days No of currency units.

11. MATURITY DATES 1 WEEK,2 WEEKS, 1,2,3,6,9, & 12 MONTHS IN SOME CASES LONG TERM CONTRACTS ARE ALSO AVAILABLE. If a 3-month forward deal is done on Nov 26th than the maturity will be on Feb 28th ( i.e : three Calendar months & two business days) Because if the deal is done on Nov 26th then the contract will start from 28 th Nov.

12. HOW MNC s USE FORWARD CONTRACTS When MNC s anticipate future needs or future receipt of a foreign currency, they can set up forward contract. EXAMPLE : Payables Receivables Investments Financing

13. PREMIUM OR DISCOUNT If the forward rate exceeds the spot rate it contains the premium. E g : Forward = R s 57.5 Spot = R s 57 If the forward rate is less then the spot rate it contains a discount.

14. 00 01 02 03 04 05 06 56 56.5 57 57 57.2 57.8 57.9

15. EXAMPLE M r A is expecting receivable of $ 1m DATA Home currency = R s Spot rate = R s 60 / $ 1 Time period = 60 days Receivables in = US $ Are you assure that in 60 days the rate remain same? Answer : NO

16. CALCULATION If the $ depreciates you will have a loss. After 60 days if the rate becomes $ 1 = R s 58 Calculation @ spot rate after 60 days : $ 1,000,000 * 58 = R s 58,000,000 Calculation @ spot rate before 60 days : $ 1,000,000 * 60 = R s 60,000,000 LOSS = R s 2,000,000

17. Calculation @ Forward rate So it is wise to have a Forward Contract If Forward rate : $ 1 = R s 59.5 Calculation @ Forward rate (Predetermined): $ 1,000,000 * 59.5 = R s 59,500,000 So you saved 59,500,000 - 58,000,000 = R s 1,500,000

18. Forward Contract can backfire

19. SWAPS Exchange by barter Definition “ The simultaneous spot sale (purchase ) of an asset against a forward purchase (sale) of an approximately equal amount of the asset.”.

20. Cross Exchange rate Definition “ Given the values of currency A & currency B in terms of the third currency, the cross rate is the rate between currency A & B.”

21. FORMULA FOR CROSS RATE Value of currency A relative to currency B = R s value of A / R s value of B currency currency

22. Exchange Rates In Pak R s. USD 57.5 EUR 71.6 GBP 104.5 CAD 48.2

23. Calculation of Cross Ex-Rate USD / GBP Example 1 : USD 1 = 57.5 / 104.5 = GBP 0.55 Example 2 : GBP 1 = 104.5 / 57.5 = USD 1.81