study on foreign on exchange

8/14/2019 Study on Foreign on Exchange

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STUDY ON FOREIGN EXCHANGEND ARITY THEORY . .AILASH R SLEUSTUDENT


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INTRODUCTION

A foreign exchange to arise, either buying or selling hasto be with another country or foreign currency.

The main players in the foreign exchange market arelarge commercial banks, forex brokers, largecommercial and central banks.

Any drafts, travelers cheques, letters of credit and bills

of exchange expressed or drawn in Indian currencypayable in foreign currency;


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OBJECTIVES OF THE STUDY

To determine the exchange rate of a currency.To show two types of determination of

exchange rate.To explore how FEDAI has categorized

exchange dealers.To illustrate the market mechanism and

conventions.To study different types of quotes.

To understand multi-national companiesoperations.To illustrate the accounting issues in

hyperinflation economies.


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LIMITATIONS OF THE STUDY

The study is limited to the categorization ofFEDAI rules

The flow effect has been considered.

The holding effect has not been shown.


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FEDAI CATEGORISEATION

Category A: these are the offices which keepindependent foreign currencies accountswith overseas correspondent banks in theirnames.

Category B: These are the branches which donot maintain independent foreign currencyaccounts but have the powers to operate the

accounts.

Category C: The branches which fall in neitherof the above categories a yet handle forex

business.


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EXCHANGE RATE QUOTATIONS

AMERICAN QUOTE

EUROPEAN QUOTE

BID AND ASK RATE

INTERBANK QUOTE VS. MERCHANT QUOTE MARKET MECHANISM AND CONVENTIONS

INVERSE QUOTES

CROSS RATE

DISCOUNT AND PREMIUM


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BROKEN DATE FORWARD CONTRACT

It is a kind of forward contract for a maturitywhich is not a whole month or for which is aquote is not readily available.


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PURCHASING POWER PARITYPRINCIPLE

The basic tenet of this principle is that theexchange between various currenciesreflects the purchasing power of thesecurrencies. This is based on the LAW OF ONE

PRICE. PxA =S (A/B)*PB

X

Where

PxA the price of the commodity x in country

A.

S (A/B) is the spot exchange rate of the twocountries currency.

PBX is the price of commodity x in the country

B.


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THE ABSOLUTE FORM OF PPP

If the law of one price were to hold good foreach and every commodity, then it willfollow:

PA = S(A/B)*PB

Where PA and PB are the of the same basket of

goods and services in countries A and Brespectively.

S (A/B) = PA

/ PB


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REASONS FOR PPP NOT HOLDING GOOD

Some of the factors which do not hold goodare:

Constraints on movement of commodities.

Price index constraints.

Effect on statistical method employed


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INVESTORS DECISION

The currencies when converted from spot rateto forward rate will give

1/SF (A/B)*(1+ra ) units of A

Investors would prefer to invest in securitiesdenominated in currency A rather than B. Ifit is other way around the investors wouldprefer to invest in currency B than A.

(1+ra)>F (A/B)/S (A/B)*(1+rB)


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REASONS FOR IRP NOT HOLDING GOOD

Interest Rate Parity does not hold goodbecause of the following reasons

Transaction cost

Political risk

Taxes

Liquidity preferences

Capital controls


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MULTI NATIONAL OPERATIONS

ACCOUNTING ISSUES

Choice of exchange rate

Definition exposure

Disposition of resulting translation adjustment

EFFECT OF THE EXCHANGE RATECHANGES

Flow Effect


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TRANLATION OF FINANCIALSTATEMENTS

Foreign currency translations (e.g., exports,imports, & loans) which are denominated ina currency other than a company functionalcurrency.

Temporal method Current method


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HYPERINFLATIONARY ECONOMIES

Hyperinflationary economy as one thatexperiences a cumulative 3 year inflationrate of more than100%. Example,Zimbabwe.


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Two solutions for accounting inhyperinflationary economies:

The parent currency can be the functionalcurrency for all operations of

hyperinflationary subsidiaries.The value of non-monetary assets and

liabilities are translated at the currentexchange rate.


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study on foreign on exchange

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