Foreign exchange market in india

FOREIGN
EXCHANGE
MARKET IN
INDIA
GUIDE :
PROF. (DR.) HARKIRAT
SINGH, IIFT,
DELHI(INDIA)
NAVNEET ,ROLL
NO. 80, MBA(IB),
2011-14
IIFT,DELHI(INDIA)
WITH SPECIAL FOCUS
ON FOREX DEALER NRR
FINANCE LTD.

1 | P a g e F O R E I G N E X C H A N G E M A R K E T I N I N D I A
NAVNEET, ROLL NO. 80, MBA (IB), IIFT –DELHI 2011-14
EXECUTIVE SUMMARY
The Foreign Exchange market, also referred to as the "Forex" or "FX” market is The
largest financial market in the world, with a daily average turnover of US$1.9 trillion
-- 30 times larger than the combined volume of all U.S. equity Markets. "Foreign
Exchange" is the simultaneous buying of one currency and selling of another.
Currencies are traded in pairs, for Example Euro/US Dollar (EUR/USD) or US
Dollar/Japanese Yen (USD/JPY).
There are two reasons to buy and sell currencies. About 5% of daily turnover is from
companies and governments that buys or sells products and services in a foreign
country or must convert Profits made in foreign currencies into their domestic
currency. The other 95% is trading for profit, or speculation. For speculators, the best
trading opportunities are with the most commonly traded (and therefore most liquid)
currencies, called "the Majors." Today, more than 85% of all daily transactions
involve trading of the Majors, which include the US Dollar, Japanese Yen, Euro,
British Pound, Swiss Franc, and Canadian Dollar and Australian Dollar.
A true 24-hour market, Forex trading begins each day in Sydney, and moves around
the globe as the business day begins in each financial center, first to Tokyo, London,
and New York. Unlike any other financial market, investors can respond to currency
fluctuations caused by economic, social and political Events at the time they occur -
day or night. The FX market is considered an Over the Counter (OTC) or ‘Interbank’
market, due to the fact that transactions are conducted between two counterparts over
the telephone or via an electronic network. Trading is not centralized on an exchange,
as with the stock and futures markets.
If you are interested in trading currencies online, you will find that the Forex Market
offers several advantages over equities trading. 24-Hour Trading Forex is a true 24-
hour market, which offers a major advantage over equities trading. Whether it's 6pm
or 6am, somewhere in the world there are always Buyers and sellers actively trading
foreign currencies. Traders can always respond to breaking news immediately, and
P&L is not affected by after hours Earning reports or analyst conference calls. After
hours trading for U.S. equities brings with it several limitations. ECN’s (Electronic
Communication Networks), Also called matching systems, exist to bring together
buyers and sellers - when Possible.
However, there is no guarantee that every trade will be executed, nor at a fair market
price. Quite frequently, traders must wait until the market opens the following day in
order to receive a tighter spread.
Superior Liquidity With a daily trading volume that is 50 xs larger than the New York
Stock Exchange, there are always broker/dealers willing to buy or sell currencies in
the FX markets. The liquidity of this market, especially that of the major Currencies,

helps ensure price stability. Traders can almost always open or Close a position at a
fair market price. Because of the lower trade volume, investors in the stock market are
more vulnerable to liquidity risk, which results in a wider dealing spread or larger
price movements in response to any relatively large transaction.
The foreign exchange market in India
The foreign exchange market in India started in earnest less than three decades
ago when in 1978 the government allowed banks to trade foreign exchange with one
another. Today over 70% of the trading in foreign exchange continues to take place in
the inter-bank market. The market consists of over 90 Authorized Dealers (mostly
banks) who transact currency among themselves and come out “square” or without
exposure at the end of the trading day. Trading is regulated by the Foreign Exchange
Dealers Association of India (FEDAI), a self-regulatory association of dealers. Since
2001, clearing and settlement functions in the foreign exchange market are largely
carried out by the Clearing Corporation of India Limited (CCIL) that handles
transactions of approximately 3.5 billion US dollars a day, about 80% of the total
transactions.
The liberalization process has significantly boosted the foreign exchange market
in the country by allowing both banks and corporations greater flexibility in holding
and trading foreign currencies. The Sodhani Committee set up in 1994 recommended
greater freedom to participating banks, allowing them to fix their own trading limits,
interest rates on FCNR deposits and the use of derivative products.
The growth of the foreign exchange market in the last few years has been nothing
less than momentous. In the last 5 years, from 2000-01 to 2005-06, trading volume in
the foreign exchange market (including swaps, forwards and forward cancellations)
has more 3 than tripled, growing at a compounded annual rate exceeding 25%. Figure
1 shows the growth of foreign exchange trading in India between 1999 and 2006. The
inter-bank forex trading volume has continued to account for the dominant share (over
77%) of total trading over this period, though there is an unmistakable downward
trend in that proportion. (Part of this dominance, though, results from double-counting
since purchase and sales are added separately, and a single inter-bank transaction
leads to a purchase as well as a sales entry.) This is in keeping with global patterns.
In March 2006, about half (48%) of the transactions were spot trades, while swap
transactions (essentially repurchase agreements with a one-way transaction – spot or
forward – combined with a longer-horizon forward transaction in the reverse direction)
accounted for 34% and forwards and forward cancellations made up 11% and 7%
respectively. About two-thirds of all transactions had the rupee on one side. In 2004,
according to the triennial central bank survey of foreign exchange and derivative
markets
conducted by the Bank for International Settlements (BIS (2005a)) the Indian Rupee
featured in the 20th position among all currencies in terms of being on one side of all
foreign transactions around the globe and its share had tripled since 1998. As a host of
foreign exchange trading activity, India ranked 23rd among all countries covered by
the BIS survey in 2004 accounting for 0.3% of the world turnover. Trading is
relatively moderately concentrated in India with 11 banks accounting for over 75% of
the trades covered by the BIS 2004 survey.

Liberalization has transformed India’s external sector and a direct beneficiary of
this has been the foreign exchange market in India. From a foreign exchange-starved,
control-ridden economy, India has moved on to a position of $150 billion plus in
international reserves with a confident rupee and drastically reduced foreign exchange
control. As foreign trade and cross-border capital flows continue to grow, and the
country moves towards capital account convertibility, the foreign exchange market is
poised to play an even greater role in the economy, but is unlikely to be completely
free of RBI interventions any time soon.
INTR
ODUCTION TO FOREIGN EXCHANGE MARKET
Executive Summery 1
 GLOBAL FOREIGN EXCHANGE MARKET 3
 DOMESTIC FOREIGN EXCHANGE MARKET 6
GLOBAL FOREIGN EXCHANGE MARKET
HISTORY OF THE GLOBAL FOREX MARKET
 The Foreign Exchange market, also referred to as the "Forex" or "FX” market
is The largest financial market in the world, with a daily average turnover of
US$1.9 trillion -- 30 times larger than the combined volume of all U.S. equity
Markets. "Foreign Exchange" is the simultaneous buying of one currency and
selling of another. Currencies are traded in pairs, for Example Euro/US Dollar
(EUR/USD) or US Dollar/Japanese Yen (USD/JPY).There are two reasons to
buy and sell currencies. About 5% of daily turnover is from companies and
governments that buys or sells products and services in a foreign country or

must convert Profits made in foreign currencies into their domestic currency.
The other 95% is trading for profit, or speculation. For speculators, the best
trading opportunities are with the most commonly traded (and therefore most
liquid) currencies, called "the Majors." Today, more than 85% of all daily
transactions involve trading of the Majors, which include the US Dollar,
Japanese Yen, Euro, British Pound, Swiss Franc, and Canadian Dollar and
Australian Dollar.
 A true 24-hour market, Forex trading begins each day in Sydney, and moves
around the globe as the business day begins in each financial center, first to
Tokyo, London, and New York. Unlike any other financial market, investors
can respond to currency fluctuations caused by economic, social and political
Events at the time they occur - day or night. The FX market is considered an
Over the Counter (OTC) or ‘Interbank’ market, due to the fact that
transactions are conducted between two counterparts over the telephone or via
an electronic network. Trading is not centralized on an exchange, as with the
stock and futures markets.
 If you are interested in trading currencies online, you will find that the Forex
Market offers several advantages over equities trading. 24-Hour Trading
 Forex is a true 24-hour market, which offers a major advantage over equities
trading. Whether it's 6pm or 6am, somewhere in the world there are always
Buyers and sellers actively trading foreign currencies. Traders can always
respond to breaking news immediately, and P&L is not affected by after hours
Earning reports or analyst conference calls. After hours trading for U.S.
equities brings with it several limitations. ECN’s (Electronic Communication
Networks), Also called matching systems, exist to bring together buyers and
sellers - when Possible. However, there is no guarantee that every trade will
be executed, nor at a fair market price. Quite frequently, traders must wait
until the market opens the following day in order to receive a tighter spread.
Superior Liquidity

 With a daily trading volume that is 50 xs larger than the New York Stock
Exchange, there are always broker/dealers willing to buy or sell currencies in
the FX markets. The liquidity of this market, especially that of the major
Currencies, helps ensure price stability. Traders can almost always open or
Close a position at a fair market price. Because of the lower trade volume,
investors in the stock market are more vulnerable to liquidity risk, which
results in a wider dealing spread or larger price movements in response to any
relatively large transaction.
100:1 Leverage
 100:1 leverage is commonly available from online FX dealers, which
substantially exceeds the common 2:1 margin offered by equity brokers. At
100:1, traders post $1000 margin for a $100,000 position, or 1%.While
certainly not for everyone, the substantial leverage available from online
currency trading firms is a powerful, moneymaking tool. Rather than merely
loading up on risk as many people incorrectly assume, leverage is essential in
the Forex market. This is because the average daily percentage move of a
major currency is less than 1%, whereas a stock can easily have a 10% price
move on any given day. The most effective way to manage the risk associated
with margined trading is to diligently follow a disciplined trading style that
consistently utilizes stop and limit orders. Devise and adhere to a system where
your controls kick in when emotion might otherwise take over.
Lower Transaction Costs
 It is much more cost-efficient to trade Forex in terms of both commissions and
Transaction fees. FOREX.com charges NO commissions or fees whatsoever,
while still offering traders access to all relevant market information and
trading Tools. In contrast, commissions for stock trades range from $7.95-
$29.95 per Trade with online discount brokers up to $100 or more per trade
with full Service brokers.

 Another important point to consider is the width of the bid/ask spread.
Regardless of deal size, forex dealing spreads are normally 3-4 pips (a pip
is .0001 US cents) in the major currencies. In general, the width of the spread
in a Forex transaction is less than 1/10 that of a stock transaction, which could
Include a .125 (1/8) wide spread. Profit Potential in both Rising and Falling
Markets
DOMESTIC FOREIGN EXCHANGE MARKET
INDIAN ECONOMY
Emerging and growing
 The financial landscape has changed forever. There are now new rules of the
game. Change is the only constant. Technology has made the effects of change
manifest quicker.
 Forex business seeks new and better ways to address the challenges and
opportunities in this new market economy. At the centre of all activities is the
client around whom the full market revolves, the companies constantly
innovate and refine wealth management practice to create a better product and
service. Nowadays we find forex market is more Professional, the money
changer with their ability builds long term relationships with their client and
understand their problems and provides a unique solution which adds to their
business objectives.
 As India, steps out post liberalization by plugging into the global economy
many Indian corporate entities are thinking globally. There is no reason why
Indian investors in India and abroad be left behind and not take advantage of
this new investment climate. Ability to see the bigger picture enables. Various
Investment Company do guide investors, for their investments. They actively

meet various industry leaders to understand their vision, thinking, and long
term plans. Also they find new regulatory environment that offers greater
transparency and innovation. This companies draw rich experience and
expertise to advise clients so they are either able to take advantage of the
opportunities or weather the adverse business environments
GUJARAT MARKET
 Gujarat Foreign Exchange market is highly potential market. As per the study
done it was found out that due to high industrial investment in Gujarat it is
predicted that Foreign Exchange market will rise in near future.
 As per the 15 sample taken from FFMCs and 2 A.D.s it was found that Gujarat
market is growing specially Saurashtra region and Kutch. The reason is
because a big investment is going to be their in near future as a result money
changer finds a very good corporate business out their in this region.
 As far as the main land of Gujarat is concern it was found that more and more
people are going abroad for either study or for immigration. Specially kheda
district which is highest potential for doing foreign exchange business.

MAJOR FOREIGN EXCHANGE TERM
FOREIGN EXCHANGE TERM
 FX = Foreign Exchange
 RBI = Reserve Bank Of India
 AD = Authorized Dealers
 FFMC = Full Fledge Money Changer
 RAD = Restricted Authorized Dealer
 AP = Authorized Person
 LERMS = Business Travel Quota
 MC = Money Changer
 AMC = Authorized Money Changer
 MLRO = Money Laundering Reporting Officer
 FIU = Financial Intelligence Unit
 OBU = Offshore Banking Unit
 RRB = Regional Rural Banks
 AML = Anti Money Laundering
 KYC = Know Your Customer
 BTQ = Basic Travel Quota
 CDF = Currency Declaration Form
 TC = Travelers Cheque
 IRS = Interest Rate Swaps
 FR = Forward Rates
 CR = Cross Rates
 NCD = National Currency
 ECU = European Currency Unit.
 FCY = Foreign Currency
 BOP = Balance of Payments
 ECN = Electronic Communication Network

 SWIFT = Society for world wide international financial
telecommunication.
 CHIPS = Clearing house Interbanks payment system
 LIBOR = London Interbanks online /offered rate
CURRENCY
MAJOR
 USD = US DOLLAR
 GBP = STERLING POUND
 AUD = AUSTRALIAN DOLLAR
 CAD = CANADIAN DOLLAR
 EUR = EURO
 JPY = JAPANESE YEN/100
 CHF = SWISS FRANC
OTHERS
 BHD = BAHRAIN DINAR
 CYN = CHINESE YUAN
 DKR = DANISH KRONER
 EGP = EGYPTIAN POUND
 HKD = HONG KONG DOLLAR
 KD = KUWAIT DINAR
 MYR = MALAYSIAN RINGGIT
 NZD = NEW ZEALAND DOLLAR
 NKR = NORWEGIAN KRONER
 OMR = OMANI RIYAL
 QTR = QATAR RIYAL
 SAR = SAUDI RIYAL
 SGD = SINGAPORE DOLLAR
 ZAR = SOUTH AFRICAN RAND
 SKR = SWEDISH KRONER

 SYP = SYRIAN POUND
 THB = THAI BHAT
 AED = UAE DIRHAMS
BASICS OF FOREIGN EXCHANGE
 WHAT IS FOREIGN EXCHANGE? 11
 WHAT IS FUNDAMENTAL ANALYSIS? 12
 WHAT IS TECHNICAL ANALYSIS? 13
 WHAT IS FOREX RISK MANAGEMENT 15
 EMERGING PRODUCTS 16
 WHY DOES IT EXIST? 23
 HOW ARE FX MARKETS ORGANIZED? 24
 WHO ARE THE PLAYERS? 25
 THE MECHANICS OF FOREIGN EXCHANGE – RATE
QUOTATION 27
 EURO WHAT IS THE CURRENCY 30
 THE MECHANICS OF FOREIGN EXCHANGE – CROSS
RATES 31
 THE MECHANICS OF FOREIGN EXCHANGE –
FORWARD RATES 32
 THE DRIVERS OF FOREIGN EXCHANGE 35
 CENTRAL BANK POLICY 40
 FOREX VS. EQUITY 41
 FOREX VS. FUTURES 44

WHAT IS FOREIGN EXCHANGE?
 Foreign Exchange is essentially the area where a nation’s currency is
exchanged for that of another. The foreign exchange market is the largest
financial market in the world, with over $ 1.7 trillion being traded on a daily
basis with only 25% of this amount being in actual merchant position. The rest
of the amount denotes trading or speculation that is the principal reason why
currency markets are extremely volatile, being at least ten times faster than
stock markets in any country.
 Unlike other markets, Forex markets have no physical location or central
exchanges and operate through an electronic network of banks and
corporations. It is for this reason that Forex markets operate on a 24-hour basis,
spanning from one zone to another across major financial centers. It is for this
reason that constant monitoring across time zones are required so as to negate
adverse movements or book extra-ordinary profits.

WHAT IS FUNDAMENTAL ANALYSIS?
 It is one of the two main approaches of analyzing and forecasting currencies
and basically comprises of financial situations, economic theories and political
developments. Thus the health of a currency of a particular country would be
dependent upon growth rates of GDP, interest rates, inflation, unemployment,
money supply and foreign exchange reserves. While stock markets, bonds and
real estate prices would affect the state of a currency, the state of a
government and natural calamities if any would also be major influences.
 Government Policies of a particular country also have impact on their
currency. Currencies may be pegged to a particular major currency or it may
be partially or fully convertible which would dictate the extent to which a
currency would be open to outside influence. Also, Central Banks of a country
intervene either singly or in conjunction with another Central Bank to move or
strengthen/weaken it’s currency by either intervening directly or by moving
interest rates which should be taken into consideration while evaluating the
health of that particular currency.

WHAT IS TECHNICAL ANALYSIS?
 Technical analysis is a method of forecasting price movements by looking at
purely market-generated data. It is basically different methods of charting and
mathematical tools to analyze movements of price. Price itself has been
defined in many ways but to grasp technical analysis, we must be able to
understand the meaning of price. Price would best be defined as a figure,
which moves between panic, fear and pessimism of the crowd in one hand and
confidence, excessive optimism and greed on the other.
 Thus Technical Analysis is a method of predicting future price movements by
examining the past pattern of movements in those prices. These movements
are depicted in Charts and Diagrams, which are analyzed to point our major
and minor trends so as to pinpoint points of entry into and exist from markets.
TREND
 One of the first things to learn is that the market is supreme and thus at no
point should one try to over-rule the underlying trend of a market. The Trend
is the Biggest Friend and it is always wise to catch that signal. One should
only enter the market after identifying the long term and them the intermediate
and short-term trend of the market. As regards patterns of currency
movements remember that ‘a currency always goes UP by the LADDER BUT
comes DOWN by a LIFT’.
RELATIVE STRENGTH INDEX (RSI)
 RSI reflects the overbought or oversold position of a market. For this
calculation, to compute support the RSI figure should be taken at 70 and for
the purpose of Resistance, RSI should be taken at 30. However, this

methodshould ideally be used in a consolidating market and would best be
avoided in a trending market.
BOLLINGER BANDS
 This tool carries the advantages of other tools and tried to nullify their
disadvantages and is calculated at 1.95/2.00 Standard Deviation of the Moving
Average (usually 20 day period) which results in an envelope within which
majority of the prices move. The bands of this envelope act as support and
resistance so it is easy to buy at the lower end of the band and sell at the upper
end. Entry and exit should best be done when a price has closed outside the
band and is definitely a leading indicator.
ELLIOT WAVE ANALYSIS
 This is done by classifying prices into patterned waves that can indicate future
targets and reversals. Waves moving with the trend are called impulse waves
and waves moving against the trend are called corrective waves. These
Impulse and Corrective waves are broken down into five primary and three
secondary movements respectively which forms a complete wave cycle and
these can be further subdivided. These wave patterns needs to be identified so
as to predict accurately and is best used in conjunction with the Fibonacci
theory.

WHAT IS FOREX RISK MANAGEMENT?
 Forex Risk Management refers to scientific study of currencies and devising
various hedging techniques based of predictions of such currencies. The
expected movements might be either in favor or against the underlying
exposure of a particular organization, and as such the hedging mechanisms
should be geared to extract the maximum profit of / reduce potential losses
arising from such trends.
 Though the studies of currencies are based on fundamental and technical
analysis, expected trends are also greatly influenced by the sentiments of the
market which can best be assessed from an inter-bank dealing room where
inter-bank trades takes place. Eforexindia is equipped with professional
dealers and state of the art technology and is backed by the dealing room of its
parent concern M/s S.C.Dutta & Co. The various studies and risk management
strategies, which are done to estimate risk arising from the forex exposures of
an organization, are:
 Exposure Analysis Currency and Market Forecasts.
 Risk Appraisal and Evolving a Foreign Exchange Risk Management Policy.
 Setting up Risk Management Goals.
 Formulating Hedging Strategies Designed to meet such Goals.
 Implementing such strategies with the assistance of our highly equipped
Dealing Room.
 Structured Review / Analysis.
 Daily Currency Updation with Weekly and Special Forex Reports.

EMERGING PRODUCTS
A. INTEREST RATE SWAPS
 An IRS can be defined as a contract between two parties (called Counter
Parties) to exchange, on a particular date in the future, one series of Cash
Flows ( fixed interest) for another series of Cash Flows (variable or Floating
Interest) in the same currency on the same principal amount (called Notional
Principal) for an agreed period of time. The two payment streams are called
the legs or sides of a swap. The exchange of Cash Flows need not occur on the
same date. This means payment may be different for each side of the swap. So
the variable rate may be paid monthly and the fixed quarterly, in which case
the pricing of the swap can allow for discounted timing cost.
 Swaps, unlike FRA’s, generally do not net settle the difference between the
agreed fixed interest rate and the Variable interest rate. Netting of payments is
however allowable. The Floating rate of interest is referenced to a short-term
interest rate like the LIBOR in the international market or the MIBOR in the
Rupee market. The Floating Rate used as benchmark or index is RMIBOR
(Reuters Mumbai Inter Bank Offered Rate) or N-MIBOR (NSE Mumbai Inter
Bank Offered Rate).
 The reset frequency for the floating rate index is the term for the interest rate
index itself. However, the reset frequency for the floating rate does not
necessarily match the timetable of the floating rate index. Therefore the
floating rate may be set daily, weekly, month, quarterly while settlement dates
may fall monthly, quarterly, semi-annually etc. If the reset date and the
settlement date do not coincide, the swap is said to be “paid in arrears set in
advance”.

QUOTING OF SWAP POINTS
 The pricing of swaps is against the fixed interest rate. At the start of a
swap, the expected NPV is zero for both counterparties. Theoretically, the
floating leg’s worth is the same as those of a fixed rate leg and thus swaps
are a zero sum game at the inception. In case at the inception the NPV’s
are not exactly equal, one party pays higher to compensate the price.
Generally, swaps have been quoted in a number of ways, but the most
commonly used is setting the floating rate equal to a short term index
(such as a given maturity of MIBOR) with no margin or plus/minus a
given margin, which are payable in the money market by the
counterparties.
 When no margin is added to a floating rate, such rate is said to be quoted
'Flat'. The price of a Fixed /Floating swap is quoted in two parts : a fixed
interest rate and a short term index upon which the floating rate is based.
The convention is to quote All-In-Cost (AIC) which means the fixed
interest rate is quoted relative to the floating rate index without any margin.
After having set the floating rate, the fixed rate is set appropriate to it.
Each bank quotes its own swap rate to exchange fixed cash flows interest
for floating in each maturity. Further one should take care of different day
count conventions to calculate interest that is 30 days month means 360
days a year or actual number of days elapsed since the previous settlement
is due based on a 360 days year.
EFFECT OF RATE CHANGES ON AN IRS
 Floating Rate payers will gain if interest rate falls, as they will have to pay
lesser interest whereas fixed rate payer will loose as they are locked in fixed
rate. In case the Interest rate rises, The Floating payer will loose and the Fixed

rate will gain.
UNWINDING SWAPS
 The party who wishes to unwind a swap has the following three alternatives:
 Swap Buy-Back / Closeout/ Termination/ Cancellation.
 Swap Reversal with new swap equaling the remaining period of
original swap with Same Reference Rate and Same Notional Principal.
 Swap Sale or Assignment
THE MECHANISM OF IRS
 It is a known fact that investors willing to invest in fixed rate instruments are
more sensitive to credit rating of the issuer than credit rate lenders. To
compensate for this a higher premium is demanded from the issuer of lower
credit quality in the fixed rate debt market than floating rate market. The
counterparties obtain an arbitrage by drawing down funds where they have
greater relative cost advantage, subsequently by entering into an IRS to cover
the cost of funds so raised from a fixed rate to a floating rate ad vice-versa.
Here it is a win-win situation. Therefore two companies can come together to
an agreement such that both can reduce their cost of borrowings. The fact that
such opportunities exist is due to imperfection in the money market that is the
difference in risk-premium in fixed and floating market. An example will
illustrate the point:
 Suppose that there are two parties to the swap viz. X and Y and a dealer
arranges a swap taking a margin (spread). The deal is for Rs. Hundred Million
in One Year. The other related data are hereunder.
X Y Quality Spread
Credit Rating AAA BBB

Fixed Rate Cost 8% 10% 2%
Floating Rate Cost (FR) FR+100bp FR+150bp 50bp
Quality Spread Differential 1.5%
 It is clear from the above that each of the parties have a comparative
advantage in either the floating or fixed rate market. The company X can
borrow more cheaply than Y both fixed and floating loans, but its comparative
advantage is in fixed rate market whereas Y has an advantage in the floating
market.
 But X wants to be a floating rate payer and Y a fixed rate payer. One way
which will divide the gain equally is for X to actually borrow at fixed rate and
service floating rate in the swap and Y to borrow in floating and service fixed.
But there are other methods of reaching the same goal and is generally done
through an intermediary who takes credit risk on each counterparty. Suppose
the swap dealer quotes 7.50/100 for the swap:
 In the swap, X, the floating payer
 Pays floating to the swap bank at the prevailing rate.
 Receives fixed rate 7.5%
 Pays fixed rate 8%
 Receives floating rate from the swap bank at the prevailing rate.
 The net cost of funds and savings to X and Y using the swap arrangement can
be worked out clearly. With swap X makes a payment of Floating rate to bank
at 8% and receives 7.5% from swap bank. Thus his cost is floating rate + 50
bp. Without swap on the other hand his cost would be Floating rate +100bp.
For Y with swap will involve a payment of Floating rate +150bp to swap bank
and receive 8% from swap bank. His borrowing cost would be Floating Rate +
150bp + 8% - Floating Rate. Thus we can observe that X and Y are not only
better by 50bp but also the swap bank has made a margin of 50bp (8%-7.5%).

Thus the gain has been shared out between the swap parties and the bank is
150bp that are equal to the Quality Spread Differential in two markets.
USAGE OF SWAPS
 Interest Rate Swaps are used to achieve one of the following:
 To lower the cost of borrowings as compared to those otherwise available in
the market or from bank.
 To hedge against, or speculate upon Interest Rate Movements.
 To obtain fixed rate financing when it is impossible to access the market
directly.
B. FORWARD RATE AGREEMENT (FRA)
 A FRA is an agreement between two counter-parties to pay or receive the
difference (called settlement money) between
 an agreed fixed rate (the FRA rate)
 the interest rate prevailing an a stipulated future date (Fixing Date),
 Based on a notional amount for an agreed period.
 In short, in a FRA interest rate is fixed now for a future period. The special
feature of FRA is that the only payment is the difference between the FRA rate
and the Reference rate and hence is single settlement contracts. As in IRS, the
principal amount is not exchanged.
 The settlement sum is calculated on the fixing date by discounting the
difference between the previously contracted FRA rate and the then prevailing
Reference rate. Money changes hand only on the settlement day and not on the
transaction day or the maturity date. So if an investor wants to lock in

reinvestment rate of January 3rd 2000 for 90 days and is quoted a FRA of 7 /
7.5% , it means he can lock-in an interest rate of 7% if he wishes to protect
himself from a falling interest rate or 7.5% if he is concerned that interest rate
will go up. The settlement date will be two days before the value/maturity date.
FRA’s are expressed in terms of giving or receiving the fixed rate Vs short
term interest rate index and are quoted numerically like
 3 months rate starting in 3 months time is 3/6
 Two-way quotes are available in the market and levels can be found on the
Reuters (MIBORO2). The lower rate is the bid at which the bank is ready to
pay fixed and the higher rate will be the offer rate at which the bank will be
ready to receive fixed.
 We take the case of a borrower who has obtained a one-year credit amounting
to Rs.10 lakhs on September 5th 1999. The interest rate is based on 6 months
MIBOR. For the first six months MIBOR has already been fixed. Now he is
not confident about the second six months, as he is not confident about what
he has to pay and apprehends rates to rise. To protect himself he can buy a
FRA for the next 6 months with a matching notional principal. Suppose a bank
quotes him for 6X12 FRA 9.10 / 90 on September 3rd itself. He can lock in at
9.90% by buying 6X12 FRA on Sept 3rd itself for the period Sept 5th `99 to
Sept 4th `2000. On 3rd March 2000 the 6 months MIBOR will be known (we
assume 10%) and on that date the 6m MIBOR rate is compared with the FRA
rate and the settlement amount is computed by discounting back to the
beginning of the contract period using the formula below:
 SA = ((SR – FRA) X NP X CP) / 360 + ( SR X CP )
 Where SA is Settlement Amount, SR is Settlement Rate, NP is Notional
Principal and CP is Contract period. Using the data in our example we get :

(.10 - .099) X 10, 00,000 X 182 / 360 + (.10 X 182) = Rs. 481.23 Thus the
borrower would receive Rs.481.23 and this amount will be used to pay the
extra 10bp (10% -9.9%). It is clear from the calculation that the net cost to the
borrower will be the same as agreed under the FRA contract in both the cases.
It should be remembered that the counter-party of a customer is always a bank
as there is no secondary market and an FRA price should be analyzed
/calculated by always keeping the corporate’s point of view and not that of the
market maker or the bank.
 There is no restriction on the Notional Principal of FRA/IRS and any domestic
money market or debt market can be used as benchmark to enter into
FRA/IRS once the basis is computing is acceptable to both the parties. There
is various Exposure and Capital Adequacy Norms that are laid down by the
apex bank to whom all such deals have to be reported on a fortnightly basis.
However the derivative market in India is at a nascent stage with an
underdeveloped MIBOR market, absence of big public sector banks, uniform
pricing mechanism and of course a shaky approach which is more
psychological than lack of knowledge of the product and thus care should be
taken in the initial stages by engaging professional consultants to avoid
untoward losses by either not using the instrument available or using it in an
erroneous manner.

WHY DOES IT EXIST?
 Foreign Exchange (FX) is the buying and selling of foreign currencies. A FX
Rate expresses the relationship between two national monies. It is the price of
one currency in relation to another. The FX Market is similar to any other
financial market except that the commodity being bought and sold is foreign
currencies.
 Traditionally, FX was used primarily for international trade. This includes
payment for imports and receipts for exports. With technological advancement
and increase in cross-border investments, the service sector began to make
increasing demand on the FX Market. Uses include payment for transportation,
interest and dividend payments and foreign travel. Today, financial markets
and increased foreign direct investments have substantially added to the need
for FX. These include money and capital movements for fixed assets, stocks /
bonds and currency deposits

HOW ARE FX MARKETS ORGANIZED?
 The FX market is organized into two broad categories: the bank note market
and the Interbanks market. Bank note transactions, the most common of which
are for obtaining foreign currencies for travel purposes, occur at commercial
banks and FX currency changers. The Interbanks has no central geographical
location for FX trading. Transactions are conducted entirely through
telecommunications systems such as wire transfers.
WHO ARE THE PLAYERS?
 There are various players in the market. They include businesses, central
banks, individuals, and commercial banks. There are two sides to the FX
market: the wholesale and the retail side. The wholesale side consists of
commercial banks. This is the interbank market which is made-up of a group
of market makers; i.e. their trading levels set indicative rates for the rest of the
market. The other players represent the retail side as each player, or market-
taker, interacts with a commercial bank.
Central banks can influence interbank trading rates and volume through both policy
measures and buying and selling in the FX market. Examples include Federal Reserve
Bank of the US, Bundesbank of Germany, and the Bank of Japan. Some of their
objectives are to manage the value of domestic currency vis-à-vis foreign currencies,
intervene in support of economic policy objectives, and manage foreign currency
reserves.
Commercial banks are the Interbanks players. Examples include Citibank, and the
Hong Kong Shanghai Banking Corporation (HSBC). Some of their objectives are to

meet customers FX needs, manage the bank’s overall FX position, and produce profit
for the bank.
Businesses can be broadly categorized into two categories: financial firms and non-
financial firms. Financial firms (e.g. Morgan Stanley and Fidelity Investment) help
individuals, institutions, and other non-financial firms (e.g., Coca-Cola, Honda) to
meet their FX needs. Their activities include trade finance, hedging, equity/mutual
funds/unit trust investments, interest/dividend remittances, and speculation. On the
other hand, non-financial firm’s activities include international trade, foreign direct
investments and hedging. International investing by businesses has had an enormous
impact on the FX market by increasing demand for currencies and changing
investment practices and methods.
Individuals have varied and sometimes very specific FX needs. For this reason, it is
imperative that Relationship Managers (RMs) are knowledgeable about the objectives
of their customers. Their activities include foreign currency transactions for
obligations or remittances, foreign currency investments, portfolio diversification, and
speculation in the FX market. Individuals form the target market for Global Consumer
Bank (GCB)’s FX products.
INTERBANKS MARKET RATES AND TRANSACTIONS
 Interbanks market rates and retail customer rates will differ. This is because
the customer rates will include the bank’s markup or markdown. Take for
example the buying and selling of US dollars (USD) and Japanese Yen (JPY):
Say the Interbanks market was quoting:
 Bank buys USD 1 for JPY 110.00
 Bank sells USD 1 for JPY 110.10
 Given these Interbanks market rates, the bank may quote the following to the
retail customer:
 Bank buys USD 1 for JPY 110.00 - 0.10 = JPY 109.90 (markdown)
 Bank sells USD 1 for JPY 110.10 + 0.05 = JPY 110.15 (markup)

 This is just an example to illustrate the point. As you progress through this
Unit, you will find the markup and markdown will depend on how the
currency pairs are expressed. This will be covered in the Mechanics of FX
section
 Interbank market transactions involve several components: Banks and brokers
transact via telephone, telex, Reuters, and electronic brokering. Settlement is
handled through correspondent accounts using transfer and clearance systems.
SWIFT (Society for Worldwide International Financial Telecommunications)
is a system for transferring funds. CHIPS (Clearinghouse Interbank Payment
Systems) is a system for clearing funds. The actual transaction process varies
by country depending on the size of the bank and level of sophistication of its
systems as well as that of the country.
THE MECHANICS OF FOREIGN EXCHANGE – RATE
QUOTATION
COMMODITY CURRENCY AND TERM CURRENCY
 There are two currencies in every FX quote. Here is an example: If a customer
wants to buy USD for YEN from a bank, the bank may quote the customer: �
USD/JPY = 110.00 what this means it that the customer has to pay the bank
JPY 110.00 in exchange for US$1.00. In this example, the USD is what is
called the base currency or the commodity currency. It is the unit currency and
the currency being priced. It is always represented first in a quote. In this
example, the JPY is what is called the term currency. It is the non-one-unit
currency. It is the price of the commodity currency. It is always represented
second in a quote. The Oblique symbol (e.g. USD/FCY) does not mean USD
divide by FCY or USD per FCY. It means the number Foreign Currency
(FCY) per one dollar.

FX Rate Quotation Terms – Direct and Indirect Terms
 There are two different ways FX rates are quoted. One method is refereed to
as the American (Direct) System; the other is the European (Indirect)
System.
 European (Indirect) Term is the number of foreign currency per unit of US
dollar. For example:
 USD/JPY
 USD/CHF
 American (Direct) Term is the number of US dollars per unit of base currency.
For example:
 EUR/USD
 AUD/USD
 Choosing a system depends on the terms of reference one requires. Both terms
express the same relationship but from different perspectives.
FX RATE QUOTATIONS
 American = Direct Quotes apply to the following currencies:
 Sterling Pound (Cable)
 Australian $ (Aussie)
 New Zealand $ (Kiwi)
 Euro (EUR)
 European = Indirect Quotes apply to the following currencies:
 Japanese Yen (Yen)
 Swiss Franc (Swissy)
 Canadian $ (Candy)
BID AND OFFER – HOW TO READ AN FX QUOTE

 A FX quote is made when two parties enter into a transaction for the exchange
of two currencies. One party is buying currency A and selling currency B. The
second party is selling currency A and buying currency B.
 The bid rate is the quoting party’s buying price of the commodity currency,
and the offer rate is the quoting party’s selling price of the commodity
currency.
 Example: Say the Interbank rates were: USD/JPY 105.40(bid)/44(offer). The
bank, based on its interbank trades will markup or markdown the interbank
rates and quotes a bid/offer rate to the customer
 The bank will quote bid or offer rates depending on whether the customer
buys or sells. Usually, the larger the customer’s request, the better the quote
will be.
 For example: “USD 1 = CAD$ 1.3720/25.
 The bank sells (offer) USD 1 for CAD$ 1.3725 (=1.3700+0.0025)
 The bank buys (bid) USD 1 for CAD$1.3720
 The lower number represents the bid, i.e. the rate at which the bank will buy
(bid) USD and sell CAD. The higher number represents the offer, i.e. the rate
at which the bank will sell (offer) USD and buy CAD. The figure 25 is 0.0025.
Thus the offer is 1.3700+0.0025 = 1.3725. Often, a bid/offer quote is also
written with an oblique (/), i.e.1.3720/25. Please note that in the case of
1.3798/03, the offer is NOT 1.3700+0.0003. It is 1.3800+0.0003.
 The quality of a bid and offer quote or “a quote” can be judged upon several
criteria. A fast reply usually indicates a high volume, experienced commercial
bank that is able to be a market maker. A narrow spread implies a more stable

currency. Reasonable or large amounts tend to receive better quotes because
the trade volume is high.
THE EURO – WHAT IS THIS CURRENCY?
 In the earlier section, reference was made to a currency called the euro. The
following is a brief description of this currency and its mechanics. On January
1, 1999, this currency was introduced as a single European currency. The
economic rationale is that the euro may strengthen the single European
market.
 From January 1, 1999 to January 1, 2002, no one is forced to use the euro or
prohibited from using it. Customer’s account balance in European Currency
Unit (ECU) has been replaced by euro on a 1:1 basis on January 1, 1999. By
January 1, 2002, national currencies (NCD) such as Deutschmark, French
Franc, etc. were migrated to a euro account.
WHICH CURRENCIES ARE INVOLVED?
There are 11 participating Member States. They are:
1. German Deutschmark (DEM)
2. Austrian Schilling (ATS)
3. Netherlands Guilder (NLG)
4. French Franc (FRF)
5. Italian Lira (ILT)
6. Spanish Peseta (ESP)
7. Belgium Franc (BEF)
8. Finnish Marka (FIM)
9. Luxembourg Franc (LUF)
10. Irish Punt (IEP)
11. Portuguese Escudo (PTE)
12. Swedish Mark

THE MECHANICS OF FOREIGN EXCHANGE – CROSS RATES
CROSS RATES
 A Cross rate is a FX rate of two currencies derived via a third currency.
Usually the intermediate currency is the USD. Cross rates depend on the
perspective of the currency holder and his/her desire trade. Cross rate between
two currencies can differ depending on which currency is being bought and
which is being sold. Cross Rate tables are often published on a daily basis. An
example of which can be found in The Asian Wall Street Journal.
 The commodity or base currency is the one unit of currency; the term currency
is the non-unit currency. An example is AUD/JPY 65.49. The AUD 1 is the
commodity or base currency; the JPY 65.49 is the term currency. The most
important part is to determine which bid rate and which offer rate to use. Here
is an example using the AUD/JPY example.
 How was the AUD/JPY derived? The AUD/JPY quote can be split into two
quotes: AUD/USD and USD/JPY First, sell AUD to buy USD and then sell
USD to buy JPY. Here, AUD is the base currency and is traded to buy USD,
the correct quote to use is the offer rate. Then the bid rate is used because the
USD is traded to buy the term currency of JPY. Hence, in determining which
bid and offer to use, you must bear in mind whether the currencies use the
direct or indirect quote. For example, when calculating CHF/JPY, the quote
can be split into: USD/CHF and USD/JPY You will see this more clearly in
the examples in the Chain Rule section. The Chain Rule is a standard formula
used to derive any cross rate.

THE MECHANICS OF FOREIGN EXCHANGE – FORWARD
RATES
SPREADS: BUSINESS SPREADS AND BID/OFFER SPREADS
 Note that there are two different spreads. It is important to understand the
distinction between them in order to calculate the correct profit margin from a
transaction.
 Market bid/offer spread is the difference between the bid and offer rate as
quoted in the interbank market. The business spread is the markup or
markdown which the bank charges the customer. It is the profit margin made
from a FX transaction.
DETERMINING BID/OFFER SPREAD
 Wide spreads usually signify risk because they result from trading in soft
currencies whose markets tend to be volatile and illiquid. A wide spread may
also be due to a small degree of market competition.
 On the other hand, narrow spreads represent relatively stable currencies,
whose markets tend to be liquid. The greater the market competition, the
narrower the spread. Size and experience of the commercial bank greatly
influence the spread.
TOTAL RETURN CONCEPT

 Currency time deposits are the most common form of FX investment. From
which the bank will earn a FCY deposit spread. This is the difference
between the interest rate assumed by the bank and the interest rate charged by
the bank to the customer.
 So if a customer makes a foreign currency time deposit, what is the return for
the bank and the customer? From the customer and the bank’s standpoint, their
total return is as follows:
 Customer Standpoint:
Total Return = Currency Appreciation/Depreciation + FCY Deposit Interest
Return
 Bank Standpoint:
Total Spread = FX Spread (Markup / Markdown) + FCY Deposit Spread
TIME ELEMENT IN FX QUOTES
 A SPOT transaction is a transaction which settles in two business days. This
accounts for two-thirds of all FX transactions. A Forward transaction contract
is for a FX transaction at a future date at a rate determined at the time the
contract is entered. Settlement can range from the spot date up to five years.
Various forward rates exist depending on the time frame (i.e., 30-day, 90-day,
180-day). The forward transaction can be used to lock in FX gains, protect
against future adverse FX movements, and eliminate exchange rate
uncertainty.
FORWARD RATES
 The forward price for a unit of foreign currency may be at par with the spot
price (the same), but usually it is either at a premium (higher than the spot
rate) or at a discount (lower than the spot rate). The exchange differential
reflects whether the forward rate is at a premium or at a discount, and what the

price difference is for delivery on a specified future date. This differential is
called the SWAP rate or SWAP points.
 If the SWAP bid appears to be higher than the SWAP offer, the commodity
currency trades at a discount against the term currency. To find the forward
Bid and offer, subtract the SWAP bid from the SPOT bid and the SWAP offer
from the SPOT offer. The reverse is true if the SWAP bid is lower than the
SWAP offer. Hence, you will add the SWAP bid and offer to the SPOT bid
and offer.
INTEREST DIFFERENTIAL
 Interest rate differential and the length of time between the Spot and forward
transaction are the main two factors which determine the SWAP rate.

THE DRIVERS OF FOREIGN EXCHANGE
FACTORS AFFECTING EXCHANGE RATES
 The FX market is one of the more volatile financial markets. Understanding
and predicting the factors that affect FX rate is a valuable but difficult skill to
obtain. The key is in understanding the fundamental forces that drive these
factors in today’s world.
FX SUPPLY AND DEMAND
 The forces that drive FX rate fluctuations are the changes in the supply and
demand of currencies. Moving away from the equilibrium FX rate creates
pressure on the currency to return to that rate. This pressure results in an
appreciation or a depreciation of a currency. Supply of FCY comes from
exports and capital inflow. Demand of FCY comes from imports and
capital outflow. Supply and demand of a nation’s currency are captured in a
national account called the balance of payments (BOP). The BOP consists
of the current account and the capital account. The current account covers the
imports and exports of goods and services while the capital account covers
the movement of investments or capital inflows and outflows. The capital
account refers to both short-term and long-term capital flows and foreign
direct investments.
 The components in the current account (i.e. imports and exports, imports)
and the capital account (i.e. investments) are the dynamic forces which drive
FX rate movement. In addition, market expectations and central bank
initiatives are also key determinants of FX supply and demand.

BALANCE OF PAYMENTS (BOP)
 The Balance of Payment consists of the Current Account and the Capital
Account.
BOP = Current Account + Capital Account
Current Account = Exports – Imports of Goods & Services
Capital Account = Foreign Domestic Investment – Domestic Investment
Abroad.
BALANCE OF PAYMENTS: CURRENT ACCOUNT
 A current account surplus signals that a country’s exports are greater
than its imports. A surplus results in excess demand for domestic
currency. Other things being equal, the domestic currency will most likely
undergo an appreciation.
 A current account deficit signals that a country’s exports are less than its
imports. A deficit results in excess supply for domestic currency.
 Other things being equal, the domestic currency will most likely undergo
depreciation.
 Remember that all factors must be seen from a relative perspective because it
is the performance of one country compared with the performance of another.
Consider the scenario where there is relatively more income growth in
country A than B. An increase in Country A’s growth rate means residents of
Country A may purchase more imports from Country B. If more imports are
needed by Country A, then its current account will decrease, and Currency B

will be demanded by Country A to pay for the imports. As a result, Country
A’s currency can depreciate relative to Country B’s currency.
MARKET EXPECTATIONS
 Expectations can change rapidly depending on market psychology. Analyzing
the effect of expectations requires a “feel” for the market. Expectations
capture the unpredictability of the FX market because there can be more than
one possible outcome for a single expectation.
MARKET SENTIMENT
 Market sentiment can run the gamut from being bearish to neutral to bullish.
Below are examples:
 Consol dative: Market pauses normally after a big move before expecting
further movement.
 Neutral: Lack of direction; lack of interest or view on part of players
 Volatile: Violent movements in market prices
 Range Trading: Market trades within a band; whenever there is no significant
news or interest.
 Bullish: Market expects prices to rise.
 Bearish: Market expects prices to fall.
CENTRAL BANK INTERVENTION
 There are various reasons for central bank interventions including currency
stabilization (reduced fluctuations), maintaining FX rate policies, and to meet
economic policy objectives. Each central bank has a distinct character, i.e.,

policy orientation. To understand a central bank you must be knowledgeable
about the macroeconomic environment in which it exists. Central bank actions
and policies are based on the performance of key economic indicators
DIRECT CENTRAL BANK INTERVENTION
 Central banks can directly intervene in the FX market by buying and selling
currencies in order to manage a rate. This will lead to an appreciation or
depreciation of FX rate. The impact that central banks can have over a
sustained period is limited with direct intervention.
INDIRECT CENTRAL BANK INTERVENTION
 Central banks play a key role in affecting short-term interest rates which in
turn affect the FX rate. The central bank is then making an indirect
intervention to affect FX rates. For example, Open-market operations are
activities carried out by the Federal Reserve Bank based upon instructions
from the Federal Open Market Committee (FOMC) of New York. These
activities are designed to regulate the money supply. The operations are
important tools because they affect the federal funds rate. Short-term interest
rates are priced off the federal funds rates. Short-term interest rates affect the
FX rate because they affect investment decisions and forward rates.
FLOATING FX RATE SYSTEM
 This is when market forces determine the FX rates. The advantages and
disadvantages of this include the following:
ADVANTAGES DISADVANTAGES
1. Automatic adjustment if there is a 1. Speculation leading to market
destabilization. trade deficit

2. Flexible to use other policy measures 2. Uncertain exchange rates may
discourage international trade
3. Creates liquidity
FIXED FX RATE SYSTEM
 This is where the FX rates are determined by government decisions, not
market conditions. The central bank maintains the external value of the
currency by buying or selling.
ADVANTAGES DISADVANTAGES
1. Currency certainty 1. Delays in adjustment process
2. Adjustments may be more costly
than the floating system

CENTRAL BANK POLICY
 The central bank seeks to impact their currencies primarily by three ways:
 Controlling the money supply
 Controlling interest rates
 Intervening directly in the market
 Tightening money supply, increasing short-term interest rates and actively
intervening to support the currency causes the currency to gain strength. Loose
monetary policy, cutting short-term interest rates and active intervention to
devalue a currency causes the currency to weaken.
 The first two ways are indirect attempts to influence the exchange rate. The
third (direct intervention) has both a direct and indirect effect.
 Buying or selling a currency directly affects the supply and demand of
the currency.
 Indirectly the central bank’s actions send a message to the market
about the intentions of the central bank to support or devalue a
currency.
POLITICAL NEWS
 Political news can have an equally big impact on the strength or weakness of a
currency. Two types of political news influence exchange rate fluctuations:
 Confidence in political leadership
 Stability of the region

 Increase in confidence in political leadership and more stable regional
situations can lead to strengthening of the domestic currency. Whereas loss of
confidence in the political leadership and destabilized regional situation can
cause the domestic currency to weaken.
FOREX VS. EQUITY
 If you are interested in trading currencies online, you will find that the Forex
market offers several advantages over equities trading.
24-HOUR TRADING
 Forex is a true 24-hour market, which offers a major advantage over equities
trading. Whether it's 6pm or 6am, somewhere in the world there are always
buyers and sellers actively trading foreign currencies. Traders can always
respond to breaking news immediately, and P&L is not affected by after hours
earning reports or analyst conference calls.
 After hours trading for U.S. equities brings with it several limitations. ECN's
(Electronic Communication Networks), also called matching systems, exist to
bring together buyers and sellers - when possible. However, there is no
guarantee that every trade will be executed, nor at a fair market price. Quite
frequently, traders must wait until the market opens the following day in order
to receive a tighter spread.
SUPERIOR LIQUIDITY
 With a daily trading volume that is 50x larger than the New York Stock
Exchange, there are always broker/dealers willing to buy or sell currencies in
the FX markets. The liquidity of this market, especially that of the major

currencies, helps ensure price stability. Traders can almost always open or
close a position at a fair market price.
 Because of the lower trade volume, investors in the stock market are more
vulnerable to liquidity risk, which results in a wider dealing spread or larger
price movements in response to any relatively large transaction.
100:1 LEVERAGE
 100:1 leverage is commonly available from online FX dealers, which
substantially exceeds the common 2:1 margin offered by equity brokers. At
100:1, traders post $1000 margin for a $100,000 position, or 1%.
 While certainly not for everyone, the substantial leverage available from
online currency trading firms is a powerful, moneymaking tool. Rather than
merely loading up on risk as many people incorrectly assume, leverage is
essential in the Forex market. This is because the average daily percentage
move of a major currency is less than 1%, whereas a stock can easily have a
10% price move on any given day.
 The most effective way to manage the risk associated with margined trading is
to diligently follow a disciplined trading style that consistently utilizes stop
and limit orders. Devise and adhere to a system where your controls kick in
when emotion might otherwise take over.
LOWER TRANSACTION COSTS
 It is much more cost-efficient to trade Forex in terms of both commissions and
transaction fees. FOREX.com charges NO commissions or fees whatsoever,
while still offering traders access to all relevant market information and
trading tools. In contrast, commissions for stock trades range from $7.95-
$29.95 per trade with online discount brokers up to $100 or more per trade
with full service brokers.

 Another important point to consider is the width of the bid/ask spread.
Regardless of deal size, forex dealing spreads are normally 3-4 pips (a pip is
.0001 US cents) in the major currencies. In general, the width of the spread in
a forex transaction is less than 1/10 that of a stock transaction, which could
include a .125 (1/8) wide spread.
PROFIT POTENTIAL IN BOTH RISING AND FALLING MARKETS
 In every open FX position, an investor is long in one currency and shorts the
other. A short position is one in which the trader sells a currency in
anticipation that it will depreciate. This means that potential exists in a rising
as well as a falling market.
 The ability to sell currencies without any limitations is another distinct
advantage over equity trading. In the US equity markets, it is much more
difficult to establish a short position due to the Zero Up tick rule, which
prevents investors from shorting a stock unless the immediately preceding
trade was equal to or lower than the price of the short sale.

FOREX VS. FUTURES
 The global foreign exchange market is the largest, most active market in the
world. Trading in the forex markets takes place nearly round the clock with
$1.9 trillion changing hands every day. It is the main event.
 The benefits of forex over currency futures trading are considerable. The
dissimilarities between the two instruments range from philosophical realities
such as the history of each, their target audience, and their relevance in the
modern forex markets, to more tangible issues such as transactions fees,
margin requirements, access to liquidity, ease of use and the technical and
educational support offered by providers of each service. These differences are
outlined below:
 More Volume = Better Liquidity. Daily currency futures volume on
the CME is just over 2% of the volume seen every day in the forex
markets. Incomparable liquidity is one of many advantages that forex
markets hold over currency futures. Truth be told, this is old news.
Any currency professional can tell you that cash has been king since
the dawn of the modern currency markets in the early 1970's. The real
news is that individual traders from every risk profile now have full
access to the opportunities available in the forex markets.
 Forex markets offer tighter bid to offer spreads than currency
futures markets. By inverting the futures price to compare it to cash,
you can readily see that in the USD/CHF example above, inverting the
futures dealing price of .5894 - .5897 results in a cash price of 1.6958 -
1.6966, 8 pips vs. the 5-pip spread available in the cash markets.
 Forex markets offer higher leverage and lower margin rates than
those found in currency futures trading. When trading currency

futures, traders have one margin rate for "day" trades and another for
"overnight" positions. These margin rates can vary depending on
transaction size. When trading cash markets, you have access to the
same margin rates day and night.
 Forex markets utilize easily understood and universally used terms
and price quotes. Currency futures quotes are inversions of the cash
price. For example, if the cash price for USD/CHF is 1.7100/1.7105,
the futures equivalent is .5894/ .5897; a methodology followed only in
the confines of futures trading.
Currency futures prices have the added complication of including a
forward forex component that takes into account a time factor, interest
rates and the interest differentials between various currencies. The
forex markets require no such adjustments, mathematical manipulation
or consideration for the interest rate component of futures contracts.
 Forex trades executed through FOREX.com are commission free.
Currency futures have the added baggage of trading commissions,
exchange fees and clearing fees. These fees can add up quickly and
seriously eat into a trader's profits.
 In contrast, currency futures are a small part of a much larger market; one that
has undergone historical changes over the last decade.
 Currency futures contracts (called IMM contracts or international
monetary market futures) were created at the Chicago Mercantile
Exchange in 1972.
 These contracts were created for the market professionals, who at that
time, accounted for 99% of the volume generated in the currency
markets.
 While some intrepid individuals did speculate in currency futures,
highly trained specialists dominated the pits.
 Rather than becoming a hub for global currency transactions, currency
futures became more of a sideshow (relative to the cash markets) for

hedgers and arbitragers on the prowl for small, momentary anomalies
between cash and futures currency prices.
 In what appears to be a permanent rather than cyclical change, fewer
and fewer of these arbitrage windows are opening these days. And,
when they do, they are immediately slammed shut by a swarm of
professional dealers.
 These changes have significantly reduced the number of currency futures
professionals, closed the window further on forex vs. futures arbitrage
opportunities and so far, have paved the way to more orderly markets. And
while a more level playing field is poison to the P&L of a currency futures
trader, it's been the pathway out of the maze for individuals trading in the
forex markets.

TYPES OF FOREIGN EXCHANGE MARKET
 AUTHORIZED DEALERS 47
 FULL FLEDGE MONEY CHANGERS 47
 RESTRICTED AUTHORIZED DEALERS 52
TYPES OF FOREX MARKET
INDIAN FOREX MARKET
RESERVE BANK OF INDIA
Authorized Full Fledged Restricted Restricted
Dealers Money Money Authorized
Changers Changers Dealers
Authorized to sell foreign exchange to:
1. Exporters 1. Travelers Discontinued Recently introduce
2. Importers 2. Foreign Tourists after 31st
License yet to be
3. Non-residents 3. Business Travelers December issued by RBI
4. NRIs (Purchase & Sale) 2012

AUTHORIZED DEALER
 There are 84 Commercial Banks and 1 State Co-operative Bank and 2 Urban
Co-operative this all are permissible current and capital account transaction.
 Authorized Dealers major activities are to buy and sell foreign exchanges
apart from this they are given rights to issue demand draft which FFMCs are
not getting.
 The company which fulfill the below criteria get eligibility for Authorized
Dealers.
Sl.
No.
Category of
license (Number)
Entities Eligibility Major
Activities
1 Authorized
Dealers
Commercial Banks,
State Co-op Bank,
Urban Co-op Banks
No Change
1) License to conduct
Banking business in
India.
2) Report from the
concerned regulatory
department of RBI.
All current
and capital
account
transactions
according to
RBI directions
issued from
time-to-time.
FULL FLEDGE MONEY CHANGER (FFMCs).
 Payment for Foreign Exchange sold to public exceeding Rs.50, 000/- should
be received by crossed Cheque only.

 FFMC should not hold huge idle balances in Foreign Currency.
 All transactions with other FFMCs / Ads should be settled in account payee
Cheque only.
 If written off any foreign currency exceeding US $ 2000 in calendar year RBI
permission must require.

RBI GUDELINES ON FOREX BUSINESS
 Memorandum instructions (FLM) issued to FFMC (Full Fledge Money
Changers) by RBI under Section 73(3) of Foreign Exchange Regulations Act,
1973 (46 of 1973).
 As per the FLM, FFMCs are required to maintain following forms.
 FLM 1 (daily summary and Balance Book)
 FLM 2 (daily currency wise summary and Balance Book)
 FLM 3 (register of FOREX purchased from public)
 FLM 4 (register of FOREX purchased from Ads/Authorized money
changers)
 FLM 5 (register of sales of FOREX to public)
 FLM 6 (register of sales of FOREX to Ads/ Authorized
Moneychangers)
 FLM 7 (Register of TCs surrendered to Ads/Authorized
Moneychangers)
 FLM 8 (summary statement of purchases and sales of foreign
currency notes during the month)-TO BE SUBMITTED TO RBI
EVERY MONTH.
FLM-8:
 Monthly consolidates statements for all its offices in form FLM-8 so as to
reach Reserve Bank not later than 10th
of the succeeding/next month.
 FFMC, should submit to the Reserve Bank a monthly statement including
details of Receipt/Purchase of US $ 10,000/- or equivalent and above per
transactions within 10 days of the close of the previous month. FFMCs should
include transactions of their franchisees in the statement.

CONCURRENT AUDIT REPORT
MONTHLY AUDIT:
 Single Branch FFMCs having turn over of more than US $ 1, 00,000 or
equivalent and multiple Branch FFMCs.
QUARTERLY AUDIT:
 Single Branch having turnover of less than US $ 1 lac or equivalent.
 FFMCs should submit a statement certifying that the Concurrent Audit and the
Internal Control Systems are working satisfactorily.
 Specimen signature of Authorized officials every year.
 Written off statement:
 Written off any currency up to US $ 2000 in a calendar year should be
submitted to Reserve Bank in April every year.
DOCUMENTS FOR RENEWAL OF FFMC LICENCE
FFMC – LICENCE RENEWAL DOCUMENTS:
1. A copy of the latest audited balance sheet with a Chartered Accountant’s
certificate for net owned Funds as on date….)
2. C.R. Form Bankers in a sealed cover.
3. A declaration to the effect that no proceedings have initiated by the ED/DRI
and no criminal cases are pending against the agency.
4. List of Authorized Signatories.

5. Original License issued earlier.
6. Certificate issued under Shops & Establishment Act.
7. Provisional Balance Sheet as on date……..
N.B.: All documents should be submitted before one month.
FFMC – DOCUMENTS FOR BRANCH / ADDITIONAL
LOCATION
1. Net owned Funds – Rs.50 lakhs.
2. A copy of the latest audited balance sheet with a Chartered Accountant’s
certificate for net owned Funds as on date…)
3. C.R. Form Bankers in a sealed cover.
4. A declaration to the effect that no proceedings have initiated by the ED / DRI
and no criminal cases are pending against the agency.
5. List of Authorized Signatories.
6. Original License issued earlier.
7. Certificate issued under Shops & Establishment Act.
8. Provisional Balance Sheet as on date….
DOCUMENTS REQUIRED FOR FRANCHISEESHIP BY FFMC
1. Form RMC – F.
2. Franchisee agreement between both the parties.
3. Application by franchisee on their letterhead for their willingness to work as
franchisee under the name of FFMC.
4. Copy of Certificate issued under Shops & Establishment Act in the name of
Franchisee.
5. Undertaking by the directors of FFMC to take due diligence while selecting
franchisee.

6. Undertaking by the directors of FFMC to comply with all the provisions of the
Franchising Agreement / Prevailing RBI regulations regarding money
changing.
7. Undertaking by the franchisee for reporting of transactions on monthly basis
to their franchisor and for inspection once in a year. This condition also
include in “ Franchisee ship Agreement “
8. Undertaking for surrender of foreign exchange to the FFMC by the proposed
franchisee within 7 days from the date of its purpose.
Note:
(1) Franchisee can be given only for RMC business.
(2) FFMC cannot be appointed as franchisee under other FFMC.
Validity of the Agreement should not exceed the validity of the FFMC Licensee.
RESTRICTED AUTHORIZED DEALERS (RAD)
NEW CASES OF RESTRICTED AD
 RBI is considering liberalizing in licensing policy
 Well functioning FFMCs with strong financials that demonstrate good
governance with minimum net owned funds of Rs. 10 crores may be
considered for Restricted AD’s license.
 The Following Current Account Transactions & Prohibits
Schedule-I Remittance out of Lottery
[Rule.3] Example: Winning

Schedule-II Require Prior Approval of Ministry, Govt. of India
[Rule.4] Example: Cultural Tours.
Schedule-III Require Prior Approval of RBI
[Rule.5] Example: Private Visits
-
Exceeding US $ 10,000
 Some of the Ceilings Pertaining to Miscellaneous Remittances:
US Dollars
1. Travel Quota 10,000
2. Business Travel 25,000
3. Donations 5,000
4. Gifts 5,000
5. Employments 1,00,000
6. Emigration 1,00,000
7. Maintenance of Close
Relative 1,00,000

RBI GUIDELINES
 CURRENT RBI GUIDELINES 54
 LATEST RBI GUIDELINES 56
(A) CURRENT RBI GUIDELINES
 RBI GUIDELINES ON FOREX BUSINESS – BUYING OF
FOREIGN CURRENCY
 RBI GUIDELINES ON FOREX BUSINESS – SELLING
OF FOREIGN CURRENCY
 RBI GUIDELINES OF FOREX BUSINESS – CASH
MEMO
RBI GUIDELINES ON FOREX BUSINESS - BUYING
 Buying of Foreign Currency from public
 As per FLM instructions Ads/FFMCs can freely purchase foreign currently
up to USD10000 and beyond that CDF (currency declaration form) should
be verified.
 On purchase of FOREX from any person, FFMC is required to issue
ENCASHMENT CERTIFICATE in prescribed format.
 As per rule 6DD (m) of I.T. Act, cash transaction cap of Rs.20000/- dose
not apply to FOREX purchase transaction by any AD/FFMC.

 FFMCs can freely purchase FOREX from any other AD/FFMC but
payment of the same should be made only by way of crossed Cheque/draft.
RBI GUIDELINES ON FOREX BUSINESS - SELLING
 Selling of Foreign Exchange
 AD/FFMC can sell FOREX to general public as per following limits:
Sale against Basic Travel Quota (BTQ)
Travelers proceeding to Bangladesh, Bhutan & NEPAL-not exceeding
USD50.
 Travelers proceeding to other countries- (maximum
USD10000( currency maximum USD2000 balance compulsorily
by way of TC)
Sale against Business Visits (LERMS)
 FOREX can be released against business visits sponsored by
firms/organizations/companies maximum USD25000 per trip
(currency maximum USD2000 balance compulsorily by way of TC)
HOWEVER, ENTIRE FOREX LIMIT CAN BE AVAILED BY WAY OF
TRAVELLERS CHEQUE FOR ANY TYPE OF ABROAD VISIT
 Documents required for release of FOREX
 Valid Passport, Visa and confirmed Air Ticket- for BTQ release
 LERMS Letter of Co.’s letter head as per prescribed format.
RBI GUIDELINES OF FOREX BUSINESS – CASH MEMO
 CASH MEMO

Money changers are required issue a Cash Memo on their letter head
against each sale of FOREX. Each cash memo should be serially
numbered and prepared in duplicate.
 Rates of exchange are to be displayed at a prominent place at the business
place of AD/FFMC.
 Inspection of transaction by RBI
 Any office authorized by RBI can any time inspect books of
accounts of AD/FFMC.
 Renewal of License
 FFMC should apply for renewal of license at least 3 months
in advance of the expiry of current license.
 Submission of statement to RBI
 Money changers should submit their FLM 8 to the office of
RBI not later than 10th
of succeeding month along with
supporting documents.
(B) LATEST RBI GUIDELINES
 ANTI-MONEY LAUNDERING GUIDELINES FOR
AUTHORIZED MONEY CHANGER
 LICENSING POLICY FOR AUTHORIZED PERSONS:
LIBERALIZATIONS
ANTI-MONEY LAUNDERING GUIDELINES FOR
AUTHORIZED MONEY CHANGER

1. MONEY LAUNDERING
 The offence of money laundering has been defined in section 3 of the
Prevention of money laundering Act, 2002 (PMLA) as “whosoever directly or
indirectly attempts to indulge of knowingly assists or knowingly is a party or
is actually involved in any process or activity connected with the proceeds of
crime and projecting it as untainted property shall be guilty of offence of
money-laundering”.
 In common man’s language, money laundering can be called a process by
which money or other assets obtained as proceeds of crime are exchanged for
“clean money” or other assets with no obvious link to their criminal origins.
2. ANTI-MONEY LAUNDERING GUIDELINES
 The purpose of prescribing Anti-Money Laundering Guidelines is to prevent
the system of Authorized Money Changers (AMCs) engaged in the purchase
and / or sale of foreign currency notes/Travelers cheques from being used for
money laundering. Therefore, Anti-Money Laundering (AML) measures
should include.
a. Identification of Customer according to “Know Your Customer” norms,
b. Recognition, handling and disclosure of suspicious transactions,
c. Appointment of Money Laundering Reporting Officer (MLRO),
d. Staff Training,
e. Maintenance of records,
f. Audit of transactions.
 The following paragraphs contain broad guidelines to enable AMCs to
formulate and put in place a proper policy framework for AML measures.

3. KNOW YOUR CUSTOMER (KYC) – IDENTIFICATION OF
CUSTOMERS
 All transactions should be undertaken only after proper identification of the
customer. Photocopies of proof of identification should invariably be
retained by the AMC after verifying the document in original. Full details
of the and address as well as the details of the identity document provided
should also be kept on record.
 If a transaction is being undertaken on behalf of another person, identification
evidence of all the persons concerned should be obtained and kept on record.
4. PURCHASE OF FOREIGN EXCHANGE
a) For encashment of foreign currency notes and/or Travelers Cheques up to
USD 500 or its equivalent, production of passport need not be insisted upon
and any other suitable document of identification like ration card, driving
license etc. can also be accepted.
b) For verification of the identity of customer for encashment in excess of USD
500 or its equivalent, a photo identity document such as passport, driving
license, PAN card, voter identity card issued by the Election Commission, etc.
should be obtained.
c) Requests for payment of sale proceeds in cash may be acceded to the extent of
USD 1000 or its equivalent per transaction. All encashment within one month
may be treated as single transaction for the purpose. In all other cases AMCs
should make payment by way of ‘Account Payee’ cheque / demand draft only.
d) Where the amount of forex tendered for encashment by a non-resident or a
person returning from abroad exceeds the limits prescribed for Currency
Declaration Form (CDF), the AMC should invariably insist for production of
declaration in CDF.
5. IN ALL CASES OF SALE OF FOREIGN EXCHANGE,
IRRESPECTIVE OF THE AMOUNT INVOLVED,

 For identification purpose the passport of the customer should be insisted upon.
The sale of forex should be made only on personal application and
identification. Payment in excess of Rs.50, 000/- towards sale of foreign
exchange should be received only by account payee cheque / demand draft.
 All purchases by a person within one month may be treated as single
transaction for the purpose. Encashment Certificate, wherever required, should
also be insisted upon.
6. ESTABLISHMENT OF BUSINESS RELATIONSHIP
 Relationship with a business entity like a company / firm should be established
only after obtaining and verifying suitable documents in support of name,
address and business activity such as certificate of incorporation under the
Companies Act, 1956, MOA and AOA, registration certificate of a firm (if
registered), partnership deed, etc.
 A list of employees who would be authorized to transact on behalf of the
company / firm and documents of their identification together with their
signatures, should also be called for.
 Copies of all documents called for verification should be kept on record.
7. SUSPICIOUS TRANSACTIONS
 The AMC must ensure that its staff is vigilant against money laundering
transactions at all times. An important part of the AML measures is
determining whether a transaction is suspicious or not. A transaction may be
of suspicious nature irrespective of the amount involved.
 Some possible suspicious activity indicators are given below.

 Customer is reluctant to provide details/documents on frivolous
grounds.
 The transactions is undertaken by one or more intermediaries to protect
the identity of the beneficiary or hidden their involvement.
 Large cash transactions.
 Size and frequency of transactions is high considering the normal
business of the customer.
 Change in the pattern of business transacted.
The above list is only indicative and non exhaustive.
8. APPOINTMENT OF MONEY LAUNDERING REPORTING OFFICER
(MLRO)
 An MLRO may be appointed by every AMC for monitoring transactions
and ensuring compliance with the AML Guidelines issued by the Reserve
Bank from time to time. The MLRO will also be responsible or reporting
of suspicious transaction/s to the Financial Intelligence Unit (FIU). Any
suspicious transaction/s, if undertaken, should have prior approval of
MLRO.
 The MLRO shall have reasonable access to all the necessary information/
documents, which would help him in effective discharge of his
responsibilities.
 The responsibility of the MLRO may include:
 Putting in place necessary controls for detection of suspicious
transactions.
 Receiving disclosures related to suspicious transactions from
the staff or otherwise.
 Deciding whether a transaction should be reported to the
appropriate authorities.

 Training of staff and preparing detailed guidelines/handbook
for detection of suspicious transactions.
 Preparing annual reports on the adequacy or otherwise of systems and
procedures in place to prevent money laundering and submit it to the Top
Management within 3 months of the end of the financial year.
9. REPORTING OF SUSPICIOUS ACTIVITY
 To the extent possible, all suspicious transactions should be reported to the
MLRO before they are undertaken.
 Full details of all suspicious transactions, whether put through or not, should
be reported, in writing, to the MLRO.
 Any transaction which seems suspicious may be undertaken only with prior
approval of MLRO.
 If the MLRO is reasonably satisfied that the suspicious transaction has/may
have resulted in money laundering he should make a report to the appropriate
authority viz. the FIU.
10. STAFF TRAINING
 All the managers and staff of the AMC must be trained to be aware of the
policies and procedures relating to prevention of money laundering, provisions
of the PMLA and the need to monitor all transactions to ensure that no
suspicious activity is being undertaken under the guise of money changing.
 The steps to be taken when the staff come across any suspicious transactions
(such as asking questions about the source of funds, checking the
identification documents carefully, reporting immediately to the MLRO, etc)
should be carefully formulated by the AMC and suitable procedure laid down.

The AMCs should have an ongoing training programmed for consistent
implementation of the AML measure.
11. AUDIT/COMPLIANCE
 The concurrent auditor should check all transaction to verify that they have
been done in compliance with the anti-money laundering guidelines and have
been reported as required. Compliance on the lapses, if any, recorded by the
concurrent auditor should be put up to the Board.
 A certificate from the Statutory Auditor on the compliance with AML
guidelines should be obtained at the time of preparation of the Annual Report
and kept on record.
12. MAINTENANCE OF RECORDS
 The following documents should be preserved for a minimum period of five
years.
 Records including identification obtained in respect of all transactions.
 Statements/Registers prescribed by the Reserve Bank from time to
time.
 All Inspection/Audit/Concurrent Audit Reports.
 Annual reports of the MLRO submitted to the Top Management in
terms of paragraph 8 above.
 Details of all suspicious transactions reported in writing or otherwise to
the MLRO.
 Details of all transactions involving purchase of foreign exchange
against payment in cash exceeding Indian Rupees 10,00,000 from
inter-related persons during one month.
 All correspondence/reports with the appropriate authority in
connection with suspicious transactions.
 References from Law Enforcement Authorities, including FIU, should
be preserved until the cases are adjudicated and closed.

LICENSING POLICY FOR AUTHORIZED PERSONS:
LIBERALIZATIONS
 Foreign Exchange Management Act (FEMA) stipulates that all foreign
exchange transactions are required to be routed only through the entities that
are licensed by the Reserve Bank to undertake such transactions. Such entities
are defined as Authorized persons in Section 10 of the Act. Under current
dispensation, such authorized person may be:
a. A Commercial bank (AD), or
b. A Money changer (FFMC), or
c. Any financial institution authorized for limited kind of transactions, depending on
their activity, or
d. Any other entity authorized by the Reserve Bank.
ENHANCED ACCESS TO COMMON PERSON
 With the progressive liberalization in foreign exchange related transactions
common person can now undertake variety of current account transactions
without approaching the Reserve Bank. A large segment of population is
increasingly getting connected with forex transactions of an expanding nature
on individual accounts. Taking into account the day-today needs of (a)
common persons for undertaking various transactions, (b) tourists for better
encashment services and (c) requests received from existing FFMCs there is a
felt need for widening and rationalizing the intermediate tier of authorized
persons which is licensed to undertake foreign exchange transactions to meet
the day-to-day needs. These would cater to tourists for encashment and
common persons for release of foreign exchange for medical treatment,
education, employment, travel related transactions and in general a large
variety of current account transactions that are not trade transactions
 Therefore, with a view to liberalizing and rationalizing the scope of activities
currently undertaken by the authorized persons an internal Group consisting of

Shri H. Bhattacharya, CGM-I-C, DEIO, Shri G. Padmanabhan, CGM-I-C, DIT
and Shri Vinay Baijal, CGM, FED was constituted to study the related issues
and make recommendations keeping in view the need for enhanced as well as
wider access and accompanying safeguards, especially reporting requirements.
 The observations and recommendations of the Group are detailed in following
paragraphs.
LEGAL FRAME WORK
 Section 10 (1) of FEMA enables Reserve Bank to authorized any person to be
known as Authorized Person (AP), to deal in foreign exchange or foreign
securities, as an Authorized Dealer (AD), Money Changer (MC) or Offshore
Banking Unit (OBU) or in any other manner as it deems fit. The Bank has
therefore wide discretion to authorize a person as AD or MC or OBU or in any
other manner, and all such persons would be known as 'authorized person.'
Within the broad categories of AD or MC or OBU, it may be permissible to
have sub-categories. There should however be clear eligibility norms for the
classification and the norms should have nexus with the object of
classification.
 The authorization is subject to the conditions laid down therein. The
conditions may be for the purpose of ensuring continued eligibility for
conducting the authorized business, and/or relatable to the conduct of
business. While there may be standard conditions uniformly applicable to all
APs or applicable to APs in a category/sub-category, there may also be special
conditions applicable in a particular case on the facts thereof.

EXISTING ARRANGEMENT
 The Reserve Bank has currently authorized 976 entities as authorized persons
in following categories:
Category of license (
Number)
Entities Major Activities
Authorized Dealers
(87)
Commercial Banks - 84;
State Co-operative Bank - 1;
Urban Co-operative Bank - 2.
All permissible current and
capital account transactions
Financial Institutions
(9)
Financial Institutions “ 4
(EXIM, IFCI, SIDBI ,CCIL)
Factoring Agencies “ 5
Activities related to financing
of international trade
undertaken by these institutions
Full Fledged Money
Changers
(879)
Department of Post
Urban Cooperative Bank “ 9
Other FFMCs “ 869
Sale/Purchase of foreign
exchange for private and
business visits abroad
Others
(1)
Thomas Cook India Ltd. Specified non trade related
current account transactions
Total (976)
 Details of the various activities that each of these categories can undertake are
given in Annex-1
Authorized
Dealers
(87)
FFMCs
(879)
Financial Institutions
(9)
Others
(1)
All
permissible
Sale/Purchase
of foreign
SIDBI, EXIM and IFCI 1. Sale/purchase of foreign
exchange for private and

current and
capital
account
transactions
exchange for
private and
business
travel
1. Transactions relating to
foreign currency borrowing/
lending debt servicing and
trade finance (both fund and
non-fund based) which are
incidental to the normal
functions.
2. Maintaining foreign
currency accounts with
banks, correspondents
abroad.
3. Investing surplus foreign
currency balances in
accordance with RBI/GoI
guidelines in force.
4. Buying/selling foreign
exchange in the domestic as
well as international
markets in cover of
transactions which are
incidental to permitted
foreign exchange
transactions.
5. Entering into forward
contracts and other risk
management products on
behalf of clients as also for
own balance sheet
management.
business travel, including
for medical treatment,
participation in
conferences/exhibitions/fair,
competitions, training,
education abroad,
membership of International
Organizations etc..
2. Remittances by tour
operators / travel agents to
overseas agents / principals
/ hotels, Film shooting,
3. Reimbursement of travel
expenses of foreign
nationals on business visits
to India, / temporarily
engaged by organizations in
India., Payment of crew
wages, Remittance towards
cultural tour where prior
approval has been obtained
from the Ministry of Human
Resource Development,
Remuneration for visiting
professionals who are on a
short-term assignment in
India.
4. Remittance for
educational tie up
arrangements with
universities abroad,

6. Maintaining open
exchange/gap positions
arising on account of the
above transactions up to the
limits approved
7. Offering long dated
foreign currency-rupee
swaps to clients/non-clients
8. Availing temporary
overdrafts from the
correspondent banks for
activities related to
negotiation of payment
under the letter of credit,
other payments etc.
9. Undertaking foreign
currency rupee sell/buy
swaps
10. Extending pre and post-
shipment credit facility.
(only SIDBI)
Clearing Corporation of
India Ltd. (CCIL)
1. Maintaining foreign
currency accounts with a
settlement bank outside
India.
2. Accept foreign currency
examination fees etc.
5. Visa/Emigration/
Emigration Consultancy
Fees, assessment fees for
overseas job applications
etc.
6. Maintenance of close
relatives abroad.

deposits from Authorised
Persons who are members
of CCIL
3. Invest the foreign
currency funds placed as
deposits by the clearing
members in US $ Treasury
Bills/Notes or other US
Government Securities.
4. Avail one or more Lines
of Credit from the
settlement bank outside
India to facilitate the
clearing operations.
5. Access the domestic
forex markets, either
directly or through an
Authorised Dealer, in case
of default by any of the
clearing members or for
making remittances
incidental to forex clearing
and settlement operations.
Factoring agencies
a. Provide import factoring,
assuming all the relevant
obligations enjoined on
Authorised Dealers in
respect of import

transactions as per extant
exchange control
regulations.
b. Handling of all
Import/Export documents
relating to factoring services
and forfeiting transactions.
c. Acceptance and release of
GR Forms.
d. Maintenance of Nostro
Account balances
commensurate with the
business needs.
e. Undertaking forex cover
operations purely to hedge
exposures occasioned by
factoring/forfeiting.
f. Make payments towards
various charges incidental
to factoring/ forfeiting to
overseas
associates/forfeiting
agencies.
g. Export factoring to be
provided on 'with recourse
basis' and forfeiting on
'without recourse basis'.
h. In cases where exporters

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