Foreign Exchange Management

1
Foreign Exchange Management

• The Foreign Exchange Management Act, 1999 (FEMA)
  is an Act of the Parliament of India "to
  consolidate and amend the law relating to foreign
  exchange with the objective of facilitating
  external trade and payments and for promoting the
  orderly development and maintenance of foreign
  exchange market in India".

2
Background

• Volume of international trade (exports and
  imports) increased manifold
• Emergence of MNCs
• International lending and borrowing (IMF, World
  Bank, ADB)
• Transnational services
• Outsourcing of financial services
• Software development, ITES, BPO
• There is large scale flow of funds across nations
• Flow of funds in different currencies

3
Study areas

• Understanding of foreign exchange is integral
  part of modern commerce/management
• Exchange rate mechanism
• Foreign exchange market
• Foreign exchange risk and its management

4
Foreign exchange

• Each country has its own currency
• Home currency and other currencies
• Any currency other than home currency is foreign
  exchange

5
Exchange rate mechanism

• Exchange rate ratio of exchange between two
  currencies
• Exchange rate quotations
• Direct quote home currency price of a foreign
  currency
• Example Rs.46/USD Rs.58/Euro
• Indirect quote value of one unit of home
  currency in terms of a foreign currency
• Example Re USD 0.0217 Re Euro 0.0172

6
Currency appreciation/depreciation

• Increase in foreign currency price
• From Rs.46 to Rs.48/ USD
• Foreign currency appreciation
• Home currency depreciation
• From USD 0.0217 to USD 0.0208/ Re

7
Buying and selling rates

• Buying rate Bid rate
• Selling rate Offer rate /Ask rate
• Examples Rs.46.15 46.45/ USD Rs. 58.00
  58.40/ Euro
• Bid-offer spread profit of the dealer
• Size of spread depends on quantity traded,
  demand for currency, type of customer

8
Spot and forward rates

• Spot rate rate for cash transactions (Buying and
  selling)
• Forward rate rate for delivery on a future date
  (Buying and selling)
• Examples
• Spot Rs.46.15 46.45 / USD
• 1 month Rs.46.27 46.56 / USD
• 2 months Rs.46.28 46.60 / USD
• 3 months Rs.46.30 46.64 / USD

9
Forward rate differential

• difference between spot and forward rates
• Forward premium forward gt spot
• Forward discount forward lt spot

10
Contact us

• 4/80 Janpath Connaught Place, New
  Delhi - 110001,India
• Telephone [phone] to
  100Email rnm_at_rnm.in