Know on Foreign Exchange & Trade Profitably in the FX Market

Forex- Meaning

A plain definition of the term Foreign Exchange would imply, trading of one currency for another by the governments, businesses and residents in two countries. The exchange of currency into another is done at a specific rate as it depends on the value of the currency. As far as the valuation of currency is concerned, it depends on a number of factors such as - trade, investment, tourism, and geopolitical risk. The foreign exchange market also represents central banks, commercial banks, brokers, exporters & importers, immigrants, investors, and tourists.

Structurally, India’s foreign exchange market is not different from that of the global foreign exchange market. When represented hierarchically, the main players of this market and their position, as well as place, can be best described through pictorial representation. Take a look below

Key Points on Foreign Exchange

1. Foreign exchange in simple words implies exchange of native currency to foreign currency of another nation or economic zone. Foreign exchange is closely linked with the global market and the currencies.
2. The process includes management of foreign exchange, methods and the instruments that are used to adjust the payment of debts between two nations, employing norms of different currency systems.
3. The FX market is considered to be an Over the Counter (OTC) market in which trading is done directly between two parties without actually having the need for an exchange.
4. It is one of the largest markets in terms of trading volume as it includes a large spectrum of participants such as banks, international corporations, central banks, investment management firms, hedge funds, retail forex brokers and investors.

As far as the Foreign Exchange Rate is concerned, although most of the exchange rates are free-floating and therefore rise or fall based on supply and demand in the market. There are however some currencies which have restrictions because they are not free floating. Developing countries most often fear free floating of currencies and so the restrictions are prevailing in those countries in order to maintain their exchange rate at the desired level among other things.

In India, for the sake of correct condition related to operation of foreign exchange transactions, an Act by the Reserve Bank of India was introduced. This act is commonly known as FEMA which implies, Foreign Exchange Management Act. The act merges as well as amends law which is related to foreign exchange. The purpose of the act is also to facilitate external trade and payments to further the orderly development and maintenance of foreign exchange market in the country.

Important Features of FEMA

This act extends to the whole of India and applies to all branches, offices, and agencies outside India. It is basically owned as well as controlled by a resident of India and is not applicable to Indian citizen’s resident outside of India. It is also applicable to any violation that’s there under committed outside India by any two people whom this Act is applicable.

1. It is mainly consistent with full current account convertibility and contains provisions for progressive liberalization of capital account transactions.
2. Transparency has come to the fore with this act. It lays down the areas requiring specific permissions of the Reserve Bank/Government of India on acquisition/holding of foreign exchange.
3. It classified the foreign exchange transactions in two categories, namely capital account and current account transactions.
4. It gives power to the Reserve Bank for specifying, in, consultation with the central government, the classes of capital account transactions and limits to which exchange is admissible for such transactions.
5. The act accords complete freedom to a person who is a resident of India or one who was an NRI to control/ own/ transfer any sort of foreign security or for that matter any immovable property that’s situated outside India that the individual acquired while living out of India.
6. The act is a civil law and therefore, breach of this act clearly lays issuance of arrest orders in exceptional cases only. In India the foreign exchange market is a vibrant market has been there for over four decades now and the market is fast growing due to various forward looking steps in economic reforms lately. Today, the Indian foreign exchange market has multiple players who facilitate services related to the exchange of currencies. The number of listed brokers as well as authorized institutions in this line is also increasing with the market widening up with time. One finds many non-bank financial institutions that are however legally authorized to offer trade in the Indian market. By and large, this market is strictly regulated by the Central Government and all the aspects of the trade.

The Indian foreign exchange market consists of 3 tiers. In the first tier, it mainly comprises of transactions between the RBI and the authorized dealers (AD). In the second tier, it mainly comprises the interbank market in which the AD’s deal with each other takes place. The third segment, however, comprises of the transactions between AD’s and their corporate customers.

Types of Foreign Market Operations

1. Spot/ Current Market- In this kind of market, forex operation is of daily basis. In this kind of market, only spot transactions or current transactions are handled.
2. Forward/Derivative Market- In this type of market, the foreign exchange forwards is honored. Aspects such as foreign exchange forwards, currency futures, currency swaps, and currency options are instrumental in this area.
3. Exchange Settlement and Dealings- Here Nostro and Vostro account comes at play. It is through these kinds of accounts that settlement of foreign exchange transaction materializes.

The Nostro account is a kind of account where foreign currency account is maintained by an Indian bank with another bank in abroad. On the other hand, a Vostro account is a type of account which is maintained by a rupee account of a foreign bank abroad with a bank in India.

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Effect of foreign exchange fluctuation on Cross border payments

(This Article was first published by Myforexeye Fintech Pvt Ltd)

Economies across the globe are connected more than ever and cross border trades have become the norm of the day. Most economies are run by selling their produce to other countries while many import oil for their regular running of economies. In either case, there is cross border transaction. The opportunities which a corporate reaches out to are more than the trouble they go through to ensure their payment is made in a complex international system which is governed by many a policy.

What is cross border payment?

A cross border payment refers to transactions which are operated in atleast two different countries. The operations may be between individuals, corporates or financial institutions. These countries can be geographically sharing a border or far from each other. The transactions are completed when the entities exchange foreign currency. The daily volume of transaction for a multinational company is huge making them rely on efficient supply chain. Also if payment is to be made to multiple foreign suppliers, then cross border transactions become important. Thus need for automation of cross border payments is high.

Many countries have policies which involve processes which have to be followed while transacting across borders. For example, the European Union has a regulation wherein banks are to charge same to cross border transactions as those applied to domestic transaction where the payments are in Euro. But if the currency is different, then foreign exchange rate is applicable.

With ever changing regulations and policies, and also evolving digitalization the cross border payment scenario is ever changing. The banks generally have fees which are not clearly visible or one has difficulty in tracing the payments. Online payments made though SWIFT (Society for Worldwide Interbank Financial Telecommunications) made the payment fast, but effective payment processes and support are some reasons why one chooses one bank over another.

Each time a payment is made or received, the transaction is exposed to foreign exchange risk. This transaction exposure has to be managed by leveraging on the digital technology. This ensures the real-time payments are made keeping in mind compliance and regulatory security. The technology has reduced the transaction time to a few minutes if not seconds.

Foreign exchange risk

The cross border payments being exposed to Foreign Exchange Risk calls for keeping abreast of the markets with which the deal is made. But simply tracking the economies of both nations is not justified now as the markets are more interlinked than ever before. Social media and news reporters have made the availability of information faster. Thus an event in say Saudi Arabia will affect the movement of currency in Japan. Even though they are not directly connected to each other. Thus Transaction Exposure calls for a closely knitted understanding of the foreign exchange market along with other markets.

Timely tracking of the currencies one is exposed to gives a better understanding of when and how to hedge to ensure foreign exchange risk is mitigated and costing is not affected. One needs to assign the forex treasury portfolio to advisors who would manage this Foreign Exchange Fluctuation.

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What is Bill Discounting?

(This article was First published by Myforexeye Fintech Pvt Ltd)

Bill Discounting is a method of trading the bill of exchange to the financial institution before it gets matured, at a price that is in a smaller amount than its par value. The discount on the bill of exchange will be based on the remaining time for its maturity and also the risk concerned in it.

Bill discounting is a discount/fee which a bank takes from a seller to release funds before the credit period ends. This bill is then conferred to the seller’s client and the full amount is collected. Bill discounting is mostly applicable in scenarios when a buyer buys goods from the seller and the payment is to be made through a letter of credit. It is an arrangement whereby the seller recovers an amount of sales invoice from the financial intermediaries before it’s due. It is a business vertical for all kinds of financial intermediaries such as banks, financial institutions etc.

Bill discounting is a major trade activity. It aids the seller’s get funds earlier upon a small fee or discount. It also helps the bank earn some revenue. When the due date of the credit period comes, the borrower or (seller’s) customer can pay money then.

Bill discounting refers to a method of working capital finance for the seller of goods. It refers to a fee charged by the bank from the seller of the goods to release funds before the end of the credit period. The bill is presented to the customer and the amount is collected by the bank. It is mostly applicable in cases where letter of credit is used as a mode of payment. Bill discounting is also commonly known as invoice discounting or the purchase of bills. It is a major trading activity wherein the seller of the goods gets funds before the term of the letter of credit expires for a small amount charged by the bank as fees.

The fee paid by the seller to the bank or the financial intermediary usually depends upon the time left before maturity of letter of credit for which the bill is discounted and the risk perceived. It also depends a great deal over the credit worthiness of the seller and the past payment history of the buyer of goods.

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Forex Services

Definition: Forex Services

Forex services related to trading of currencies in the globally decentralized or over the counter (OTC) foreign exchange market are forex services. These services are provided for buying, selling or exchanging currencies at determined prices or current currency prices. Since the volume of this financial market is high, there is high fluctuation or volatility in the prices of these currencies.

Participants who avail these Forex Services are financial institutions, exporters or importers, traders, venture capitalists, private equity investors, inbound/outbound travelers, students, etc.

The forex market assists in international trade and investments as it converts currency. So it permits a business in India to import goods from United States of America and pay in US Dollars, USD even though its income is in Indian Rupees, INR. The market supports speculation and evaluations relative to the currency value and the carry trade speculation, based on the interest rate differential between the two currencies. This conversion happens through a forex services provider.

The forex service providers aim to give access to real-time currency rate information to the client in order to ensure transparent transactions when the client exchanges their receivables or payables with the banks. Many a times, the bank charges a margin over and above the currency rates. When there is no cross-check of real-time rates, the banks generally tend to quote a price in favor of the bank thus levying an extra margin to the client.

(This article was first published by Myforexeye Fintech Pvt Ltd)

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8 Forex Money Management Tips You Need To Know

Forex Money Management Tips

Managing forex money is important to increase profits and reduces losses which can arise if not monitored. In the highly fluctuating forex market, the movement of one currency against the other creates opportunities which traders take advantage of Many a times, the risks are overlooked by the amateur traders and they land up losing all their capital. The problem deepens when the invested capital is used as margin and larger sums of money is traded in the currency market looking at possible profits without analyzing the pitfalls. For a beginner in the currency market, it’s iamportant to understand the basics and stick to them to avoid such scenarios.

Some of the key points to know while managing forex money management are –

Wait for right opportunity and do not chase the market – often the new traders in the forex market, are excited seeing the fluctuation in the market and tend to trade more than required. It may leave one with a bitter experience and heavy losses. Trading is not meant to be done every day. Rather studying the market to determine the direction gives clarity. Thus one should not chase the market for opportunities but study the trend and then invest or trade.

Determine risk per trade – the amount one is ready to risk in a single trade is the risk per trade. One should not go more than two-three percent of the account on one trade in order to have a cushion when the markets go against the investment.

Losses should be booked before they accumulate – not all market calls will prove to be fruitful and lead to profit. Not often do we hear of all trading calls being right. To be on the safer side, one should cut the losses short and the profit making investments can be continued. Entering a trade position is just as important as exiting the same. Unless timely action isn’t taken, one losing trade call can erase the profits made from many previous calls. Pinning the hope on a trend reversal may encourage the traders to book profits early and also hold on to losing trades.

Be cautious while leveraging – while leveraging is a good tool for increasing your profits manifolds, it also equally enhances the chances multiplying your losses. Every time a trade is entered into, before looking at the possible profits, one must understand the losses which may have to be booked. Protecting one’s capital should be the main principle than seeing soaring profits.

Always use stop loss orders – in order to improve the profitability while managing the risk, the market order ideally should be with stop losses. This helps to understand the possible gains and losses even before they occur. Pre-determined stop losses ensure that the loss making open positions are squared before they get in deep red.

Trailing stops to lock-in profits – to maximize the benefit of profits, a combination of different stop loss orders should be used. A trailing stop loss is used to book profits when the market trend is strong. This automatically keeps locking the profits while the trend is a friend and the trailing stop loss level will move the stop loss levels.

Read more detail Source Reference: Remarkable step of Money Management Forex

Buyers Credit against Standby Letter of Credit (SBLC)

(This article was originally published on Myforexeye Fintech Pvt Ltd)

As per Ex Finance Minister of India, Mr Arun Jaitley’s detailed report presented in the parliament, there were fraudulent letter of undertakings (LOUs) issued by Nirav Modi’s companies between March 2011 and May 2017. Furthermore, 16 fake LOUs per month over the course of six years were traced contributing to fraud perpetuated by jewellers Nirav Modi and Mehul Choksi. This was then that RBI had decided to discontinue the practice of issuance of Letter of Undertaking (LOUs) / Letter of Comfort (LOCs) for trade credits for imports into India with immediate effect. (Source:-Report)

However, considering the fact that India is an import driven country, the Reserve Bank of India(RBI) circular clearly stated that banks may continue to issue Letter of Credit (LCs) and issue bank guarantee for Trade Credit subject to compliance with RBI guidelines. Thus, bank guarantees (also known as Standby letter of Credit - SBLC) backed Buyer’s Credit is what Importers in India have started availing in order to access affordable cost of borrowing to make timely payments to their supplier for goods imported.

(For detailed reference to know the difference between Suppliers Credit and Buyers Credit, do refer to our previous article).

SBLC Backed Buyer’s Credit-Insight

Ever since the Reserve Bank of India had decided to discontinue the process of issuance of LOU/LOC for Buyers Credit, it is now the use of Standby Letter Of Credit (SBLC) which is used to arrange Buyer’s credit.

This facility is provided to the importers by few Indian Bank situated overseas (funding banks) as per the guidelines issued by the RBI. It is a guarantee issued by banks in India on behalf of the clients. The issuing bank guarantees the payment to the funding bank if the client fails to make the payment.

The RBI had introduced changes in the existing Trade Credit norms recently by issuing A.P. (DIR Series) Circular No. 23 dated March 13, 2019. Myforexeye’s Trade Finance Research department had covered the changes in the circular for your reference. Click here to get the highlights in detail.

Source Reference: Click Here

How Prolonged Inflation Can Affect Foreign Exchange Rate

Inflation is not just one factor which causes volatility in foreign exchange rate, yet it is considered to be one of the major influencing factors. This is mainly because, inflation hits hard on the value of a currency through its negative effect. A particular currency of any country becomes weaker compared to the other currencies as its purchasing demand lowers down.

Inflation- Meaning

Common explanation of the term inflation refers to a persistent rise in prices over time. It indicates a free market principle of supply and demand. When the demand for a product is greater than the supply (in a free and open market) in such situations, the prices of that product tends to increase. Inversely, when supply is greater than demand in such a situation we find prices go down. Simply put, with too much of product supply in the market each unit loses value.

Technically speaking, inflation is not so much about an increase in prices, but the decrease in the buying power of the dollar. Investors who deal with international goods or services are hugely affected by forex rates. The higher inflation rates can cause exchange rate depreciation, potentially leading to higher import prices.

It even leads to higher inflation and more depreciation in the foreign exchange rate. This is relatively a rare situation and should not be often observed, provided that periods with high inflation are usually met with an increase in domestic interest rates.

This article was first published by Myforexeye

Source: https://bit.ly/2OqrMIs