IF- CRR

• Balance of visible trade is also known as balance of merchandise trade, and it covers all transactions related to movable goods where the ownership of goods changes from residents to non-residents (exports) and from non-residents to residents (imports). The valuation should be on F.O.B basis so that international freight and insurance are treated as distinct services and not merged with the value of goods themselves. Exports valued on F.O.B basis are the credit entries. Data for these items are obtained from the various forms that the exporters have fill and submit to the designated authorities. Imports valued at C.I.F are the debit entries. Valuation at C.I.F. though inappropriate, is a forced choice due to data inadequacies. The difference between the total of debits and credits appears in the “Net” column. This is the ‘Balance of Visible Trade.’ In visible trade if the receipts from exports of goods happen to be equal to the payments for the imports of goods, we describe the situation as one of zero “goods balance.’ Otherwise there would be either a positive or negative goods balance, depending on whether we have receipts exceeding payments (positive) or payments exceeding receipts (negative).
• Transactions above the line in BOP. : Economists have often found it useful to distinguish between autonomous and accommodating capital flows in the BOP. Transactions are said to Autonomous if their value is determined independently of the BOP. Accommodating capital flows on the other hand are determined by the net consequences of the autonomous items. An autonomous transaction is one undertaken for its own sake in response to the given configuration of prices, exchange rates, interest rates etc, usually in order to realise a profit or reduced costs. It does not take into account the situation elsewhere in the BOP. An accommodating transaction on the other hand is undertaken with the motive of settling the imbalance arising out of other transactions. An alternative nomenclature is that capital flows are ‘above the line’ (autonomous) or ‘below the line’ (accommodating). Obviously the sum of the accommodating and autonomous items must be zero, since all entries in the BOP account must come under one of the two headings. Whether the BOP is in surplus or deficit depends on the balance of the autonomous items. The BOP is said to be in surplus if autonomous receipts are greater than the autonomous payments and in deficit if vice – a – versa. Essentially the distinction between both the capital flow lies in the motives underlying a transaction, which are almost impossible to determine. We cannot attach the labels to particular groups of items in the BOP accounts without giving the matter some thought. For example a short term capital movement could be a reaction to difference in interest rates between two countries. If those interest rates are largely determined by influences other than the BOP, then such a transaction should be labelled as autonomous. Other short term capital movements may occur as a part of the financing of a transaction that is itself autonomous (say, the export of some good), and as such should be classified as accommodating. There is nevertheless a great temptation to assign the labels ‘autonomous’ and ‘accommodating’ to groups of item in the BOP. i.e. to assume, that the great majority of trade in goods and of long term capital movements are autonomous, and that most short term capital movements are accommodating, so that we shall not go far wrong by assigning those labels to the various components of the BOP accounts. Whether that is a reasonable approximation to the truth may depend in part on the policy regime that is in operation. For example what is an autonomous item under a system of fixed exchange rates and limited capital mobility may not be autonomous when the exchange rates are floating and capital may move freely between countries. 

• The overall BOP is determined by computing the cumulative balance of payments including the current account, capital account, and the statistical discrepancies. The overall BOP is significant because it indicates a country’s international payment gap that must be financed by the government’s official reserve transactions. Overall balance is the total sum of current account, capital account and errors and omissions. Reserve account is not considered while computing overall balance. Basic balance refers to total of current account and capital account and when errors and omission is added we get overall balance. Except Foreign exchange reserve account, rest all is considered in overall balance.
•    Yankee bonds: These are dollar denominated bonds issued by foreign borrowers. It is the largest and most active market in the world but potential borrowers must meet very stringent disclosure, dual rating and other listing requirements, options like call and put can be incorporated and there are no restrictions on size of the issue, maturity and so forth.  Yankee bonds can be offered under rule 144a of Sec. These issues are exempt from elaborate registration and disclosure requirements but rating, while not mandatory is helpful. Finally low rated or unrated borrowers can make private placements. Higher yields have to be offered and the secondary market is very limited.
• American depository receipt is a negotiable certificate that represents a company's publicly traded equity or debt. They are created when a broker purchases the company's shares on the home stock market and delivers those to the depository's local custodian bank, which then instructs the depository bank, to issue Depository Receipts. Depository receipts could be traded freely just like any other security, either by exchange or in the over-the-counter market and could be used to raise capital.
• Arbitrage may be defined as an operation that consists in deriving a profit without risk from a differential existing between different quoted rates. It may result from 2 currencies, also known as, geographical arbitrage or from 3 currencies, also known as, triangular currencies.  Arbitrage may be defined as an operation that consists in deriving a profit without risk from a differential existing between different quoted rates. It may result from 2 currencies, also known as, geographical arbitrage or from 3 currencies, also known as, triangular currencies. Arbitraging is the process of buying and selling the same security (currency) in different markets to benefit or gain from the price differential. In the international parlance, arbitraging means taking advantage of the price differentials in the quoted prices of the currencies in different markets. The process of arbitrage will normalise the prices.  For example, if a stock is quoted on two different equity markets, there is the possibility of arbitrage if the quoted price (adjusted for institutional idiosyncrasies) in one market differs from the quoted price in the other. 
• Triangular arbitrage is the process of trading out of the U.S. dollar into a second currency, then trading it for a third currency, which is in turn traded for U.S. dollars. The purpose is to earn an arbitrage profit via trading from the second to the third currency when the direct exchange between the two is not in alignment with the cross exchange rate. Most, but not all, currency transactions go through the dollar. Certain banks specialize in making a direct market between non-dollar currencies, pricing at a narrower bid-ask spread than the cross-rate spread. Nevertheless, the implied cross-rate bid-ask quotations impose a discipline on the non-dollar market makers. If their direct quotes are not consistent with the cross exchange rates, a triangular arbitrage profit is possible.
• A crawling peg rate is a hybrid of fixed and flexible exchange rate systems. Under this system, while the value of a currency is fixed in terms of a reference currency, this peg keeps on changing itself in accordance with the underlying economic fundamentals, thus letting the market forces play a role in the determination of the change in exchange rate. There are several bases which could be used to determine the direction of change in the exchange rate for example – the actual exchange rate ruling the market, t there is gradual modifications with permissable variations around the parity restricted to a narrow band. The change in parity per unit period is subject to a ceiling with an additional short term constraint, e.g. parity change in a month cannot be more than 1/12^th of the yearly ceiling. Parity changes are carried out , based on a set of indicators. They may be discretionary, automatic or presumptive. The indicators are : current account deficits, changes in reserves, relative inflation rates and moving average of past spot rates. Countries such as Portugal and Brazil have in the part adopted variants of Crawling Peg.
• Adjustable Peg system was established which fixed the exchange rates, with the provision of changing them if the necessity rose. Under the new system, all the members of the newly set up IMF were to fix the par value of their currency either in terms of gold, or in terms of US dollar. The par value of the US dollar was fixed at $ 35 per ounce. All these values were fixed with the approval of the IMF, and were reflected in the change economic and financial scenario in the countries engaged in international trade. The member countries agreed to maintain the exchange rates for their currency within a band of one percent on either sides of the fixed par value. The extreme points were to be referred to as upper and lower support point, due to which requirement that the countries do not allow the exchange rate to go beyond these points. The monetary authorities were to stand ready to buy or sell the US dollar and thereby support the exchange rates. For this purpose, a country which would freely buy and sell gold at the aforementioned par value for the settlement of international transactions was deemed to be maintaining its exchange rate within the one percent band.
• Transaction exposure is the sensitivity of realized domestic currency values of the firm’s contractual cash flows denominated in foreign currencies to unexpected changes in exchange rates. Unlike economic exposure, transaction exposure is well-defined and short-term. Some typical situations, which give rise to transactions exposure, are: (a)   A currency has to be converted in order to make or receive payment for goods and services; (b)          A currency has to be converted to repay a loan or make an interest payment; or (c)        A currency has to be converted to make a dividend payment, royalty payment, etc.  Note that in each case, the foreign value of the item is fixed; the uncertainty pertains to the home currency value. The important points to be noted are (1) transaction exposures usually have short time horizons and (2) operating cash flows are affected.
•     Translation Exposure. (April 2003):Also called Balance Sheet Exposure, it is the exposure on assets and liabilities appearing in the balance sheet but which is not going to be liquidated in the foreseeable future. Translation risk is the related measure of variability.The key difference is the transaction and the translation exposure is that the former has impact on cash flows while the later has no direct effect on cash flows. (This is true only if there are no tax effects arising out of translation gains and losses.)            Translation exposure typically arises when a parent multinational company is required to consolidate a foreign subsidiary’s statements from its functional currency into the parent’s home currency.
• The authorities are intervened more or less intensely in the foreign exchange market in which there are no officially declared parties, but there is official intervention that has come to be known as managed or dirty float. A dirty float system is not considered as true floating rate system don’t allow for intervention.  Floating rate system may be independent or managed. Theoretically speaking, the system of managed floating involves intervention by the monetary authorities of the country for the purpose of exchange rate stabilization. The process of intervention interferes with market forces and so it is known as “dirty” floating as against independent floating which is known as “clean” floating. However, in practice, intervention is global phenomenon. Keeping this fact in mind, the IMF is of the view that while the purpose of intervention in case of independent floating system is to moderate the rate of change, and to prevent undue fluctuation, in exchange rate; the purpose in managed floating system is to establish a level for the exchange rate
• Currency options provide a more flexible means to cover transactions exposure. A contracted foreign currency outflow can be hedged by purchasing a call option (or selling a put option) on the currency while an inflow can be hedged by buying a put option. (Or writing a call option. This is a “covered call” strategy).  A fixed-to-floating currency swap is a combination of a fixed-to-fixed currency swaps and a fixed-to-floating interest rate swap. Here, one payment stream is at a fixed rate in currency X while the other is at a floating rate in currency Y.
•     Samurai Bond. (April 2003): They are publicly issued yen denominated bonds. They are issued by non-Japanese entities. The Japanese Ministry of Finance lays down the eligibility guidelines for potential foreign borrowers. These specify the minimum rating, size of issue, maturity and so forth. Floatation costs tend to be high. Pricing is done with respect to Long-term Prime Rate. Foreign bonds are referred to as traditional international bonds because they existed long before eurobonds. Yankee bonds are foreign bonds issued in the United States. Foreign bonds issued in U.K. re called Bulldog bonds. Those issued in Japan are called Samurai bonds.
• International Capital Markets have come into existence to cater to the need of international financing by economies in the form of short, medium or long-term securities or credits. These markets also called Euro markets, are the markets on which Euro currencies, Euro bonds, Euro shares and Euro bills are traded/exchanged. Over the years, there has been a phenomenal growth both in volume and types of financial instruments transacted in these markets. Euro currency deposits are the deposits made in a bank, situated outside the territory of the origin of currency. For example, Euro dollar is a deposit made in US dollars in a bank located outside the USA; likewise, Euro banks are the banks in which Euro currencies are deposited. They have term deposits in Euro currencies and offer credits in a currency other than that of the country in which they are located. A distinctive feature of the financial strategy of multinational companies is the wide range of external services of funds that they use on an ongoing basis. British Telecommunication offers stock in London, New York and Tokyo, while Swiss Bank Corporation-, aided by Italian, Belgian, Canadian and German banks- helps corporations sell Swiss franc bonds in Europe and then swap the proceeds back into US dollars.
• While opening up of the domestic markets began only around the end of seventies, a truly international financial market had already been born in the mid-fifties and gradually grown in size and scope during sixties and seventies. This refers to the well-known ‘Eurocurrencies Market’. It is the largest offshore market.  Prior to 1980, Eurocurrencies market was the only truly international financial market of any significance. It is mainly an inter-bank market trading in time deposits and various debt instruments. What matters is the location of the bank neither the ownership of the bank nor ownership of the deposit. The prefix "Euro" is now outdated since such deposits and loans are regularly traded outside Europe.  Over the years, these markets have evolved a variety of instruments other than time deposits and short-term loans, e.g. certificates of deposit (CDs), euro commercial paper (ECP), medium- to long- term floating rate loans, eurobonds, floating rate notes and euro medium-term notes (EMTNs). Euro market transactions are the financial transactions denominated with currency outside the country of its origin. Euro banks are other banks which take deposits and make loans in a currency or currencies other than that of the country in which they are located. Euro markets consist of Euro banks that offer wholesale deposits and loans in favourable jurisdiction and in a variety of currencies other than that of the country in which the banks are situated. These Euro banks are entirely free of market regulatory controls. Euro market operations basically have been medium to long-term lending with floating interest rates. Euro currency is the currency of Euro land and transaction in the Euro currency are known as Euro currency market
• At the end of each trading session, all outstanding contracts are appraised at the settlement price of that trading session. This is known as marking to market. This would mean that some participants would make a loss while others would stand to gain. The exchange adjusts this by debiting the margin accounts of those members who made a loss and crediting the accounts of those members who have gained.
• Global Depositary Receipts mean any instrument in the form of a depositary receipt or certificate (by whatever name it is called) created by the Overseas Depositary Bank outside India and issued to non-resident investors against the issue of ordinary shares or Foreign Currency Convertible Bonds of issuing company.”      They are negotiable certificates that usually represent a company’s publicly traded equities and can be denominated in any freely convertible foreign currency. They are listed on a European stock exchange, often Luxembourg or London. Each DR represents a multiple number or fraction of underlying shares or alternatively the shares correspond to a fixed ratio, for example, 1 GDR = 10 Shares.
•  A spread can be defined as an option trading strategy, in which a trader offsets the purchase of one trading unit against another. It can also be referred to as the gap or difference between the bid and ask of a financial instrument. Interbank market deals are conducted mainly over the telephone. If the price quoted is acceptable, then the deal between traders will move further in terms of amount bought/sold, price, identity of the party etc. in their respective banks’ computerised record systems. On the day of settlement, banks will settle the transaction with both the sides.
• When the exchange of currencies takes place on the second working day after the date of the deal, it is called spot rate.  A spot foreign exchange transaction is the exchange of one currency for another, at the spot (or today’s) exchange rate. Although the exchange rate is agreed at the time of the transaction, market convention dictates that the exchange of funds (settlement) will occur two business days later (the spot date).A forward transaction is identical to a spot transaction, except that the settlement date (and the exchange of currencies) is more than two business days ahead. The forward transaction allows each party to lock in a known forward exchange rate today, with the outright exchange of currency amounts occurring at a future date. If the exchange of currencies takes place after a certain period from the date of the deal (more than 2 working days), it is called a forward rate. A trader may quote a forward transaction for any future date. It is a binding contract between a customer and dealer for the purchase or sale of a specific quantity of a stated foreign currency at the rate of exchange fixed at the time of making the contract.
  
  
• The foreign exchange market is an informal arrangement of the larger commercial banks and a number of FOREX brokers. The banks and brokers are linked together by telephone, Telex and satellite communication network called the SWIFT (Society For World Wide International Financial Telecommunications). This counter based communication system, based in the Brussels, Belgium links banks and brokers in just about every financial centers.
• The bid rate denotes the number of units of a currency a bank is willing to pay when it buys another currency.   The offer rate denotes the number of units of a currency a bank will want to be paid when it sells a currency.
• The 'spot' and 'forward' contracts are the most basics tools of Foreign exchange Management. These are contracts between end users (exporters, importers etc.) and financial institutions that specify the terms of an exchange of two currencies. In any foreign exchange contract the following have to be agreed upon:  1) The currencies to be bought and sold - in every contract there are two currencies. One that is bought and the one that is sold.  2) The amount of currency to be bought or sold
  3) The date at which the contract matures  4) The rate at which the exchange of currencies will occur. In determining the rate of exchange in six months time there are two components:  1) The current spot rate  2) The forward rate adjustment The spot rate is simply the current market rate as determined by supply and demand.  The forward rate adjustment is a slightly more complicated calculation that involves the interest rates of the currencies involved.
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