Total Pageviews

Followers

Search This Blog

Friday 5 April 2013

IF-Analytic question for practice-3


Spot rat 1 US $ = Rs.48.0123
180 days Forward rate for 1 US $ = Rs.48.8190
Annualised interest rate for 6 months – Rupee = 12%
Annualised interest rate for 6 months – US $ = 8%
Is there any arbitrage possibility? If yes how an arbitrageur can take advantage of the situation, if he is willing to borrow Rs.40,00,000 or US $83,312.

IF- Analytic question for practice -2


The following data relates to ABC Ltd.’s share prices:
Current price per share                                              Rs. 180
Price per share in the futures market-6 months         Rs. 195
It is possible to borrow money in the market for securities transactions at the rate of 12% per  annum. Required:
(i) Calculate the theoretical minimum price of a 6 month-forward contract.
(ii) Explain if any arbitraging opportunities exist.

IF-Analytic questions for practice 1

The United States Dollar is selling in India at Rs. 45.50. If the interest rate for a 6-months borrowing in India is 8% per annum and the corresponding rate in USA is 2%.
(i) do you expect United States Dollar to be at a premium or at discount in the Indian forward market;
(ii) what is the expected 6-months forward rate for United States Dollar in India; and
(iii) what is the rate of forward premium or discount?

IF-Revision problem series


1.       Convert the direct quotes into indirect quotes: (a) 1$ = Rs.40.00 / 40.05 (b) 1£ = Rs.82.00/82.07 (c) 1Euro = Rs.56.00/ 56.18
2.       Calculate how many rupees a New Delhi based firm will receive or pay for its following four foreign currency transactions:
(i) The firm receives dividend amounting to Euro 90,000 from its French Associate Company.  (ii) The firm pays interest amounting to 2,00,000 Yens for its borrowings from a Japanese Bank.
(iii) The firm exported goods to USA and has just received USD 3,00,000. (iv) The firm has imported goods from Singapore amounting to Singapore Dollars (SGD) 4,00,000.
Given:
1 Re = Euro 0.0178/0.0180 ; 1 Re = Yens 2.50/2,51 ; 1 Re. = $ 0.0249/0.0250 ; 1 Re = SGD 0.040 / 0.041
3.       Calculate how many rupees Shri Ras Bihari Ji Ltd., a New Delhi based firm, will receive or pay for its following four foreign currency transactions:
(i) The firm receives dividend amounting to Euro 1,12,000 from its French Associate Company.
(ii) The firm pays interest amounting to 2,00,000 Yens for its borrowings from a Japanese Bank.
(iii) The firm exported goods to USA and has just received USD 3,00,000.
(iv) The firm has imported goods from Singapore amounting to Singapore Dollars (SGD) 4,00,000.
4.       Calculate how many British pounds a London-based-firm will receive or pay for its following four foreign currency transactions:
a.       The firm receives dividend amounting to Euro 1,00,000 from its French Associate Company.
b.      The firm pays interest amounting to 2,30,000 Yens for its borrowings from a Japanese Bank.
c.       The firm exported goods to USA and has just received USD 3,00,000.
d.      The firm has imported goods from Singapore amounting to Singapore Dollars (SGD) 4,00,000.
Spot rates (per Pound)
Euro                       1.59/1.60
Yen                        230/234
USD                       1.99/2.00
SGD                       3.20/3.21
5.       Spot 1 $ = Rs. 40.00 / 40.10 ; 1 month forward .10 /.11 ; 2 months forward .12/.13 ; 3 months forward .14/.15;  Calculate 1 month, 2 months and 3 months forward rates.
6.       You are given the following $ quotes: Spot Rs 40.50/40.60 ;  2 months forward 0.10/0.20; 3 months forward 0.20/0.10 ; 4 months forward 0.25/0.30
(a) Calculate 2 months, 3 months and 4 months forward rates. (b) What amount you will pay in rupees for purchasing 5,00,000 USD? (c) How many Dollars you will sell to get Rs.5, 00,000? (You have enoughcDollars) (d) Calculate % of discount/premium of Dollars on 3 months and 4 monthscforward rates. Assume (i) You are buying $(ii) You are selling $.
7.       The following foreign currency rates, per Pound, are being quoted in
London Market:
Spot                                       3 months forward            4 months forward
USD                                                 1.6200/1.6220   0.30/0.40 c                         0.40/0.30 c
Canadian Dollars                       1.9000/1.9010   0.40/0.50 c                          0.50/0.40 c
Japanese Yens                            200/205                                1/2                                        2/1
How many Pounds a person will pay for purchasing (i) 1,00,000 USD on spot (ii) 1,00,000 Canadian Dollars on 3 months forward and (ii) 1,00,000 Japanese Yens on 4 months forward?
Answer
(i) 1 £ = $ 1.6200/1.6220  Bank is purchasing £. The applicable rate : 1 £ = $1.62 The person has to pay £(1,00,000 /1.62) i.e. £ 61,728.40
(ii) Spot rate: 1£ =CD 1.9000/1.9010 Swap points = 0.40/0.50 cents = 0.0040/0.0050 CD ; 3 months forward rate: 1£ = CD 1.9040 /1.9060 ; Bank is buying £. Applicable rate 1£ = CD 1.9040
The customer has to pay: £ (1,00,000 /1.0940) = £ 52,521
(iii) Spot rate: 1£ = 200/205 Yens ; 4 months Swap points = 2/1 Yens ; 4 months forward rate: 1£ = JY 198/204 ; Bank is buying £. Applicable rate 1£ = JY 198 ; The customer has to pay: £ (1,00,000 /198) = £ 505.05
8.       A French firm exported certain cosmetic goods to a New York firm, the invoice being $4,00,000, credit terms 30 days. Spot exchange rate: 1$ = 0.80 Euro. Find the gain/loss to the exporter if Euro strengthens by 5% over the 30 days period. What if Euro weakens by 5% during the period. Make calculations in terms of Euro per $. Attempt the question by (a) direct quote (b) indirect quote.
9.       Rs./ £ : 74.00-74.50 (ii) Rs./CHF 26.00- 26.60. Find CHF/£.
10.   An Indian firm is interested in purchasing 5m Chinese Yuan. The following quotations have been given by two different banks.
Bank A :  1 Pound = Rs. 79.89 / 80.00 ; 1 Pound = CY 12.50 / 12.60
Bank B : 1 CY = $0.1598 – 0.1600; 1 $ = Rs.40.00 / 40.05
Advise the Indian firm
11.   Given the following rates, find ‘bid’ and ‘ask’ rates for CY in terms of rupees. 1 USD = 5.7040 – 5.7090 CY ;  1 USD = 40.30 - 40.50 Rupees
12.   Alert Ltd. is planning to import a multi purpose machine from Japan at a cost of 3400 lakhs Yen. The company can avail loans at 18% interest per annum with quarterly rests with which it can import the machine. However there is an offer from Tokyo branch of an India based bank extending credit of 180 days at 2% per annum against opening of an irrevocable letter of credit. Other information:
Present exchange rate Rs. 100=340 yen
180 days forward rate Rs. 100=345 yen
Commission charges for letter of credit at 2% per 12 months. Advise whether the offer from the foreign branch should be accepted? (Nov 96)(Nov. 2008)
Note: Credit from Tokyo Branch is available for 180 days. Considering this fact, we assume
(a) Alert Ltd. requires credit for 180 days i.e. under both the alternatives, all the payments
(Principal, Commission & Interest) will be made after 180 days.
(b) 180 Days = 6 months = Two Quarters.
13.   Excel Exporters are holding an Export bill in United States Dollar (USD) 1,00,000, due 60 days hence. They are worried about the falling USD value which is currently at Rs.45.60 per USD. The concerned Export Consignment has been priced on an exchange rate of Rs. 45.50 per USD. The firm’s bankers have quoted a 60-day forward rate of Rs.45.20. Calculate (i) rate of discount quoted by bank (ii) the probable loss of operating profit if the forward sale is agreed to. ( NOV. 2004)
14.   Spot rate (Switzerland ) 1 $ = 1.3689 / 1.3695 CHF
Spot rate (USA) 1 CHF = 0.7090 / 0.7236 $ ;  You have 1 Million CHF. What amount of profit you can make from arbitrage?
15.   Singapore Spot 1$ = 1.3689 / 1.4150 CHF ; New York Spot 1 CHF = 0.7090 /0.7236 $ ; Can you make profit through Arbitrage?
16.   A person borrowed $1,00,000 @ 8% p.a. for three months, converted the dollars in rupees the dollars in rupees at spot rate 1$ = Rs.46.70 / 46.80. Invested the dollar proceed (i.e. Rupees) @ 12% p.a. for three months. Purchased $ 1,02,000 on 3 months forward basis of $ 1 = 46.75 / 46.86 What is the gain /loss. Assume no loss of time in any transaction.
17.   Spot 1 $ = Rs. 47.00 – 47.20 ; 3 months forward 1 $ = Rs. 47.50 – 47.70 ;  Interest Rates = Rs. 8% p.a., $ 5% p.a. ; Is there opportunity for covered interest arbitrage?
Covered Interest Arbitrage : Let’s borrow $ 1,00,000. Convert into Rs. 47,00,000. Invest @ 8 % p.a. for 3 months. Repayment along with interest after 3 months = $
1,01,250. Enter into forward purchase contract of $ 1,01,250 @ Rs. 47.70.
18.   Spot rate 1 $ = Rs. 48.0123 ;  180 days forward rate 1 $ = Rs. 48.8190 ;  Annualized rate for 6 months – Rupee – 12% ; Annualized rate for 6 months - $ - 8% ; Is there any arbitrage possibility ? If yes, how can the arbitrageur take advantage of the situation, if he is willing to borrow Rs. 40,00,000 or $ 83,312. (Nov. 2006 )
19.   Spot 1 $ = Rs. 47.00 – 47.20 ; 3 months forward 1 $ = Rs. 47.50 – 47.70 ;  Interest Rates = Rs. 8% p.a., $ 5% p.a. ;  Is there opportunity for covered interest arbitrage? Is there arbitrage opportunity?
20.   Followings are the spot exchange rates quoted in three different forex markets:
USD/INR 48.30 in Mumbai
GBP/INR 77.52 in London
GBP/USD 1.6231 in New York
The arbitrageur has USD 1,00,00,000. Assuming that there are no transactions cost, explain whether there is any arbitrage gain possible from the quoted spot exchange rates. (Nov. 2008)
22. The following 2-way quotes appear in the foreign exchange market: Spot 2-months forward ;  RS/US $ Rs.46.00/Rs.46.25 Rs.47.00/Rs.47.50
Required: (i) How many US dollars should a firm sell to get Rs.25 lakhs after 2 months? (ii) How many Rupees is the firm required to pay to obtain US $ 2,00,000 in the spot market? (iii) Assume the firm has US $ 69,000 in current account earning no interest. ROI on Rupee investment is 10% p.a. Should the firm encash the US $ now or 2 months later? (June 2008 )
21.   You have following quotes from Bank A and Bank B:
Bank A                                  Bank B
SPOT                           CHF/USD 1.4650/55                        CHF/USD 1.4653/60
3 months                                   5/10
6 months                                   10/15
SPOT                           USD/GBP 1.7645/60                        USD/GBP 1.7640/50
3 months                                   25/20
6 months                                   35/25
Calculate : (i) How much minimum CHF amount you have to pay for 1 Million GBP spot? (ii) Considering the quotes from Bank A only, for CHF/GBP what are the Implied Swap points for Spot over 3 months? (Adapted June 2009)
22.   1 USD = £ 0.6184 1 USD = CHF 1.3733 1 USD = Yens 105 Derive direct quotes in UK and Japan for various foreign currencies.
                                USD       YEN                        CHF
23.   1 USD          1             83.65                    1.3733
1 YEN          ?             1                             ?
1 CHF          ?              ?                              1
24.   Your bank wants to calculate selling rate of DM, when : Euro 1 = DM 1.9558 (locked in rate)  Euro 1 = $ 1.0238/43 $ 1 = Rs. 48.51/53 ; 1 Euro = DM 1.9558 / 1.9558 (DM/Euro)
25.   Spot rates of a particular day in New York are as follows : 1 Pound = 2$ ;  1 Pound = 4.80 Swiss Franks
On the same day in Geneva 1 Swiss Frank was quoted at $ 0.40. Is there some arbitrage opportunity? If yes, please explain.
26.   In the International Money Market, an international forward bid for DEC.15 on Pound sterling is $ 1.2816. At the same time the price of IMM sterling future for delivery on Dec. 15 is $ 1.2806. The contract size of pound sterling is Pounds 62,500. How could the dealer use arbitrage in profit from this situation and how much profit is earned? (Nov. 2002 CA Final )
27.   An Indian exporting firm, Rohit and Bros, would cover itself against a likely depreciation of Pound sterling. The following data is given : Receivables of Rohit and Bros: £ 5,00,000. Spot rate Rs.56/£
3 months interest rate: India: 12% p.a. UK : 5% p.a. What the exporter should do? (Nov 2008 SFM)
28.   The rate of inflation in USA is likely to be 3% p.a. and in India it is likely to be 6.50%.
The current spot rate of US $ in India is 43.40. Find the expected rate of US $ in India after 1 year and 3 years from now using purchasing power parity theory. (Nov 2008 SFM)
29.   Today the Foreign exchange rate is 1.90$ per Pound. The one year forward is quoted at 2$ per pound. In which currency the interest is higher, Pound or Dollar?

IF-Revision paper 1,2 and 3

No
Revision Set 1
Revision Set 2
Revision Set 3
1.        
a.       Overall balance
b.      Fisher parity
c.       Foreign currency derivatives
d.      (Transaction/position/pre-settlement/settlement) Risk faced by commercial bank
e.      Foreign currency derivatives
a)      BOT
b)      Smithsonian agreement
c)       Mint parities
d)      Monetization of Gold
e)      Reserve management
a.       Speculation and trading
b.      Dirty float and clean float
c.       Offshore banking
d.      Foreign currency exchangeable bonds
e.      Crawling peg
2.        
·         Problem-Arbitrage possibilities
·         Case study-BOP based case study
·         Problem-Arbitrage possibilities
·         Case study-Triangular arbitrage and export import trade and exchange fluctuation decisions
·         Problem-Arbitrage possibilities
·         Case study- Foreign exchange management in india
3.        
·         Problem-Forward quotation/AFM calculation
·         Problem-Covered interest arbitrage
·         Problem-Forward quotation/AFM calculation
·         Problem-Covered interest arbitrage
·         Problem-Forward quotation/AFM calculation
·         Problem-Covered interest arbitrage
4.        
·         Problem-Spread/Inverse rate calculation
·         Problem-Calculation of Cross quote

·         Problem-Spread/Inverse rate calculation
·         Problem-Calculation of Cross quote

·         Problem-Spread/Inverse rate calculation
·         Problem-Calculation of Cross quote

5.        
1)      What is meant by Capital Account Convertibility? Discuss the extent to which CAC has been attained in India.
2)      What was Bretton Woods System? Why did it fail? What were the efforts to retain & defend BWS?

a.       What are the objectives of IMF ? How far has it achieved it ?
b.      Give a detailed outline of the Balance of Payment Statement?


a.       Differentiate b/w Translation & transaction exposure
b.      Foreign exchange management in India
6.        
Write a note on any two a) Currency swaps & Currency Options b) P-notes c) Managed float
Or
a.       Discuss the exposure & risk occurring due to changes in: a) Interest Rates   b) Exchange rates 
b.      Differentiate b/w ADR & GDR

Write a note on any two) MIGA. B) ECB c) Instruments of risk management
Or
a.       Distinguish internal and external hedging
b.      (Merits and demerits or features ) of fixed and flexible exchange rate system
Write a note on any two a) LIBOR b)LERMS c) Triffins paradox
Or
a.       Risk vs. exposure
b.      Euro credit vs. euro bond market



IF- Internal and external hedging


INTERNAL HEDGING STRATEGIES /TECHNIQUES
• a) Natural hedge
• b) Invoicing in own currency
• C) Split currency invoicing
• D) Netting
• D) Leading and lagging
• e) Price adjustments
• f) Risk sharing agreements
• g) Review of market – product combination
EXTERNAL HEDGING STRATEGIES /TECHNIQUES
• a) Currency forward contracts
• b) Currency future contracts
• c) Currency options
• e) Money market hedge

IF-Diff bet transaction and economic exposure


Diff bet transaction and economic exposure
Transaction exposure
• Contract specific                              
• Cash flow loss can be easily computed
• Co’s do have policies to cope up with it
• Duration is same as time period of contract
Economic exposure
• General relates to entire investment.
• V difficult to compute opportunity losses.
• Do not have any policies to cope up.
• Relatively longer duration

IF-Operating or Economic exposure


Operating or Economic exposure is the effect of exchange rate movements on the value of a firm. Unlike transaction exposure, operating exposure does not necessarily occur in the same currency in which the transaction has occurred. The exposure analyses the risk of future cash flows due to changes in exchange rates.
Management of Exchange Risks/ Exposures: -
A company’s approach to exposure is dependent on various factors such as the nature of the business, the competition or the culture of the company. A company could either choose to face a high degree of risk and expect commensurate returns, or be prepared to pay a high price for certainty. An active approach to foreign currency management involves hedging, which means taking an equal and opposite position to assets or liabilities which have an exposure. It reduces the volatility in cash flows. However, most hedging strategies are cost, either in the form of fees, premiums or the time involved. The various hedging policies usually have a 0% to 100% risk cover, based on the management’s perspective. Some companies are not only involved in hedging but will also buy and sell currencies on occasions when there are no special business need or obligations to fulfil.
Management of Operating Exposure
Operating exposure is the change in a firm’s profit margin measured in any currency, influenced by the changes in exchange rate. Prices and quantities of output and input rate are not fixed, and are subject to change, when exchange rates changes.

F-Translation explosure


Translation exposure is the possibility of change in the net worth of the company due to fluctuations in home valuation of assets and liabilities denominated in foreign currency. Translation exposure occurs when an MNC’s overseas subsidiary’s earnings are translated into domestic currency prior to consolidation with the parent company’s financial statements. This can reflect in the company’s consolidated profit and loss account. Companies can adopt any of the following strategies to manage their translation exposure,
o          Adjusting the flow of funds
o          Entering into forward contracts
o          Netting of exposures. 

IF-Transaction Exposure


Transaction Exposure involves different transactions where items are traded in foreign currency, i.e., there are contractual future cash flows of the foreign currency. For example, a company may sign a contract to supply machine parts to a foreign company at a specified sell price. The company will be susceptible to fluctuations in foreign exchange markets till it receives payment and converts it into domestic currency. The company’s exposures can be calculated by deducting the potential future inflows from future outflows. There are various methods that can be employed to minimise transactional exposure risks, namely,
o          Forward contracts.
o          Price adjustment clauses.
o          Currency options
o          Borrowing and lending in foreign currency.
o          Invoicing in domestic currency, etc. 

IF-Merits and Demerits of Fixed and Flexible Exchange rate systems


A nation’s choice as to which currency regime to follow reflects national priorities about all factors of the economy, including inflation, unemployment, interest rate levels, trade balances, and economic growth. The choice between fixed and flexible rates may change over time as priorities change. At the risk of over-generalizing, the following points partly explain why countries pursue certain exchange rate regimes. They are based on the premise that, other things being equal, countries would prefer fixed exchanges rates.
·          Fixed rates provide stability in international prices for the conduct of trade. Stable prices aid in the growth of international trade lessens risks for all businesses.
·          Fixed exchange rates are inherently anti-inflationary, requiring the country to follow restrictive monetary and fiscal policies. This restrictiveness, however, can often be a burden to a country wishing to pursue policies that alleviate continuing internal economic problems, such as high unemployment or slow economic growth.
·          Fixed exchange rate regimes necessitate that central banks maintain large quantities of international reserves (hard currencies and gold) for use in the occasional defense of the fixed rate. An international currency markets have grown rapidly in size and volume, increasing reserve holdings has become a significant burden to many nations.
·         Fixed rates, once in place, can be maintained at rates that are inconsistent with economic fundamentals. As the structure of a nation’s economy changes and its trade relationships and balances evolve, the exchange rate itself should change. Flexible exchange rates allow this to happen gradually and efficiently, but fixed rates must be changed administratively- usually too late, too highly publicized, and too large a one-time cost to the nation’s economic health.
The advantages of the flexible exchange rate system include: (I) automatic achievement of balance of payments equilibrium and (ii) maintenance of national policy autonomy.
If exchange rates are fluctuating randomly, that may discourage international trade and encourage market segmentation. This, in turn, may lead to suboptimal allocation of resources.
Economic agents can hedge exchange risk by means of forward contracts and other techniques. They don’t have to bear it if they choose not to. In addition, under a fixed exchange rate regime, governments often restrict international trade in order to maintain the exchange rate. This is a self-defeating measure.

IF-Tax havens


A tax haven is a state, country or territory where certain taxes are levied at a low rate or not at all.[1] Individuals and/or corporate entities can find it attractive to establish shell subsidiaries or move themselves to areas with reduced or nil taxation levels. This creates a situation of tax competition among governments. following characteristics as indicative of it:
a)      nil or nominal taxes;
b)      lack of effective exchange of tax information with foreign tax authorities;
c)      lack of transparency in the operation of legislative, legal or administrative provisions;
d)      no requirement for a substantive local presence; and
e)      self-promotion as an offshore financial center.
f)       Some features of these tax havens are:
g)      •Low rate or complete absence of income tax on foreign investment and income.
h)      •High degree of economical and political stability and a political system, which directly or indirectly encourages and fosters business activity at the center.
i)        •Strict and well enforced rules of banking secrecy.
j)        •Absence of exchange control
k)      •Availability of supporting infrastructure such as an efficient communications and transportation network.
l)        •Presence of well developed legal system and professional accounting expertise.
m)    •Investor’s confidence due to past credential.
n)      •No incidence of violence or criminal activities.
o)      These features encourage various types of business operations some of which are bonafide but most of them generate what has been termed as ‘dirty offshore funds’.
The Organisation for Economic Co-operation and Development (OECD) identifies three key factors in considering whether a jurisdiction is a tax haven:  
1.Nil or only nominal taxes. Tax havens impose nil or only nominal taxes (generally or in special circumstances) and offer themselves, or are perceived to offer themselves, as a place to be used by non-residents to escape high taxes in their country of residence.
2.Protection of personal financial information. Tax havens typically have laws or administrative practices under which businesses and individuals can benefit from strict rules and other protections against scrutiny by foreign tax authorities. This prevents the transmittance of information about taxpayers who are benefiting from the low tax jurisdiction.
3.Lack of transparency. A lack of transparency in the operation of the legislative, legal or administrative provisions is another factor used to identify tax havens. The OECD is concerned that laws should be applied openly and consistently, and that information needed by foreign tax authorities to determine a taxpayer’s situation is available. Lack of transparency in one country can make it difficult, if not impossible, for other tax authorities to apply their laws effectively. ‘Secret rulings’, negotiated tax rates, or other practices that fail to apply the law openly and consistently are examples of a lack of transparency. Limited regulatory supervision or a government’s lack of legal access to financial records are contributing factors.

IF-Distinction between Euro Credit and Euro Bond Market:


        Both Euro bonds and Euro credit (Euro currency) financing have their advantages and disadvantages. For a given company, under specific circumstances, one method of financing may be preferred to the other. The major differences are:
1.      Cost of borrowing: Euro bonds are issued in both fixed rate and floating rate forms. Fixed rate bonds are an attractive exposure management tool since the known long-term currency inflows can be offset by the known long-term outflows in the same currency. In contrast, Euro currency loans carry variable rates.               
2.      Maturity: Euro bonds have longer maturities while the period of borrowing in the Euro currency market has tended to lengthen over time.
3.      Size of the issue: Earlier, the funds available for lending at any time have been much more in the inter-bank market than in the bond market. But of late, this situation does not hold true. Moreover, although in the past the flotation costs of a Euro currency loan have been much lower than a Euro bond (about 0.5 % of the total loan amount versus about 2.25 % of the face value of a Euro bond issue), compensation has worked to lower Euro bond flotation costs.
4.      Flexibility: In a Euro bond issue, the funds must be drawn in one sum on a fixed date and repaid according to a fixed schedule, unless the borrower pays a substantial prepayment penalty. By contrast, the drawdown in a floating rate loan can be staggered to suit the borrower’s needs and can be repaid in whole or in part at any time, often without penalty. Moreover, a Euro currency loan with a multi-currency clause enables the borrower to switch currencies on any roll-over date, whereas switching the denomination of a Euro bond from currency A to currency B would require a costly, combined, refunding and reissuing operation.
        Speed: Funds can be raised by a known borrower very quickly in the Euro currency market. Often, a period of two to three weeks should suffice. A Euro bond financing generally takes more time, though the difference is becoming less significant.  

IF-Euro currency (off shore) markets


        A Eurocurrency is any foreign currency denominated deposit or account at a financial institution outside the country of the currency’s issue
        While there are hundreds of different major interest rates around the globe, the international financial markets focus on the interbank interest rates
The Euro market can be loosely divided into a Euro currency market for short-term finance and a Eurobond markets for longer-term financing.
Emergence of Euro markets:
1.      During the 1950s, the erstwhile USSR was earning dollars from the sale of gold and other commodities and wanted to use them to buy grain and other products from the West, mainly from the US. However, they did not want to keep these dollars on deposit with banks in New York, as they were apprehensive that the US government might freeze the deposits if the cold war intensified. They approached banks in Britain and France who accepted these dollar deposits and invested them partly in US.
2.      Domestic banks in US (as in many other countries) were subjected to reserve requirements, which meant that a part of their deposits were locked up in relatively low yielding assets.
3.      The importance of the dollar as a vehicle currency in international trade and finance increased, so many European corporations had cash flows in dollars and hence temporary dollar surpluses. Due to distance and time zone problems as well as their greater familiarity with European banks, these companies preferred to keep their surplus dollars in European banks, a choice made more attractive by the higher rates offered by Euro banks.
The main factors behind the emergence and strong growth of the Eurodollar markets were the regulations on borrowers and lenders imposed by the US authorities which motivated both banks and borrowers to evolve Eurodollar deposits and loans. Added to this are the considerations mentioned above, viz. the ability of Euro banks to offer better rates both to the depositors and the borrowers and convenience of dealing with a bank that is closer to home, who is familiar with business culture and practices in Europe

IF-NDF market


  • The NDF markets have generally evolved for currencies with foreign exchange convertibility restrictions, particularly in the emerging Asian economies, viz., Taiwan, Korea, Indonesia, India, China, Philippines, etc., With controls imposed by local financial regulators and consequently the non-existence of a natural forward market for non-domestic players, private companies and investors investing in these economies look for alternative avenues to hedge their exposure to such currencies. NDF market is an offshore market to trade and hedge in currencies of countries wherein there is no full convertibility (both capital account and Current Account). Few of the NDF market traded currencies are Indian Rupee, Chinese Yuan, Philippine Peso, Taiwan Dollar, and Korean Won. NDFs are distinct from deliverable forwards as the NDF s trade outside the countries of the corresponding currencies. NDF is a Non-Deliverable Forward contract which is settled in cash and only in US Dollars. The difference between the Spot rate and the outright NDF rate is arrived on an agreed notional amount and settled between the two counterparties. Trading in the NDF market generally takes place in offshore centres.
  • In this market, no exchange takes place of the two currencies’ principal sums; the only cash flow is the movement of the difference between the NDF rate and the prevailing spot market rate and this amount is settled on the settlement date in a convertible currency, generally in US dollars, in an offshore financial centre. The other currency, usually an emerging market currency with capital controls, is non-deliverable. In this particular respect, of course, NDFs are similar to commodities futures market where commodities, like wheat or corn, are traded in organized futures markets and positions are later settled in dollars, wheat or corn being nondeliverable. The NDF prices are generally determined by the perceived probability of changes in foreign exchange regime, speculative positioning, conditions in local onshore interest rate markets, the relationship between the offshore and onshore currency forward markets and central bank policies.
  • NDFs are primarily over-the-counter, rather than exchangetraded products, thus making it difficult to gauge the volume of  contracts traded, who trades the contracts, and where they are traded. At the international level, New York tends to dominate trading in Latin American NDFs, Singapore (and to a lesser extent Hong Kong) dominate trading in non- Japan Asian NDFs, while London spans these markets. The INR NDF is largely concentrated in Singapore and Hong Kong, with small volumes being traded in the Middle East (Dubai and Bahrain) as well