FOREX MANAGEMENT - FX rates, Foreign Investments, Forex risks, USD vs INR

RISK Control and MONEY Management

2011-09-05T09:56:00.000-07:00

Managing YOUR MONEY

Money management is like sex: Everyone does it, one way or another, but not many like to talk about it and some do it better than others. But there’s a big difference: Sex sites
on the Web proliferate, while sites devoted to the art and science of money management are somewhat difficult to find.

There are many, many financial sites on the Web that let you track a portfolio of stocks on a glorified watch list. You enter in your open positions and you get a snapshot, or better yet a live, real-time update, of the status of your stocks based on the site’s most recently available prices. Some sites, like Fidelity’s, provide tools that tell you how your portfolio is allocated among various asset classes such as stocks, mutual funds, bonds and cash.

While such sites get at the idea of money or portfolio management, the overwhelming majority fail to provide the tools required to answer the central question of money management: “When I make a trade, how much do I trade?”

We’ll discuss how to measure and manage trade risk and where to find the tools to help do it in a responsible and profitable manner. The key underlying concept is to limit how much money you are willing to let the market extract from your wallet when you make losing trades.

When any trader makes a decision to buy or sell (short), they must also decide at that time how many shares or contracts to buy or sell the order form on every brokerage page has a blank spot where the size of the order is specified. The essence of risk management is making a logical decision about how much to buy or sell when you fill in this blank.

This decision determines the risk of the trade. Accept too much risk and you increase the odds that you will go bust; take too little risk and you will not be rewarded in sufficient quantity to beat the transaction costs and the overhead of your efforts. Good money management practice is about finding the sweet spot between these undesirable extremes.

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Bank of Russia miscalculated the mortgage

2009-10-05T00:07:00.000-07:00

Russia bank analyzed the Russian market for mortgage lending in the first half of 2009, noting a serious worsening in the situation with the mortgage underwriting in the Russian banks. According to CB, the number of banks, regularly issuing the 'ruble mortgage dropped to 100 players, the currency - up to 11. At the same time for six months they have issued loans upto 55 billion rubles., Which corresponds to four years ago.

Review of the status of the mortgage market in the first half of 2009 was published last week in the new issue of the Bulletin of the Bank of Russia. It is based on data from a new form of reporting on mortgage loans by the Central Bank has put in place from 1 January 2009. According to the review of the Central Bank on 1 July 2009 the number of participants of the primary market of mortgage loans decreased from the beginning of the year at 5.5% - to 568 banks. But only 279 banks in the first half provided the mortgage, the rest simply served previously issued loans. Indeed active players have been even less. As the Central Bank, "regularly gave out" mortgages in rubles about 100 banks in foreign currency - 11.

Bankers believe that statistic overly optimistic. "The real issue 10-15 mortgage banks, - said deputy president of the City Mortgage Bank Igor Zhigunov .- Statistics of the Central Bank is distorted due to the stabilization of restructured loans and loans that are issued by mortgage borrowers who find themselves in a difficult situation." Many banks issue credit for one or two a month, so you should not look at the number of players, and the volume, notes deputy director of Alliance and retail banking at Alfa Bank Ilya Zebari.

Indeed, over the same period in 2008 the amount available in the first half of 2009 residential mortgage loans decreased by 6.1 times, in fact returning to the same period in 2006, said the Central Bank. According to the regulator, for the first half the banks were given 44,045 mortgage loans totaling $ 55.4 billion rubles. According to bankers, the real extent of the reduction of the market is higher.

Bank notes that "the main reason for reducing the volume of mortgage lending was a rise in the cost of credit resources, increasing the risks of investing in fixed assets while reducing the possibility of refinancing previously issued loans. The volume of refinanced mortgages by banks for home loans fell in 2008 to 14,6%, to 99 billion rubles. And the beginning of 2009 have almost tripled - to 33.4 billion rubles. The structure of the refinancing has changed significantly. If in 2008, banks sold to other banks 40% of all refinanced loans, then in 2009 - only 29,7%. The share of refinancing through the Agency for Housing Mortgage Lending, which is the main channel for mortgage refinancing, rose from 22,6% to 47,9%.

The market confirmed the trend of concentration in mortgage refinancing AHML, but more categorical in their assessment than the regulator. "AHML - the only source of refinancing," - said Mr Zebari. Alfa-Bank, before the crisis was beginning to refinance alien mortgage, now he wants and expects to sell its entire portfolio AHML. VTB 24 continues to securitize their mortgage portfolios. This is not market transactions. "The demand for mortgage bonds is not, therefore, these portfolios have a hold on their balance sheets, or use them as collateral for Bank loans", - states Mr. printers.

Debenture capital

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Akin to promissory notes, debentures are instruments for raising long term debt capital. Debentures holders are the creditors of the company. The obligation of the company towards its debenture holders is similar to that of a borrower who promises to pay interest and capital at specified times.

Features

Trustee When a debenture issue is sold to the investing public, a trustee is appointed through a deed. The trustee is usually a bank or an insurance company or a reputable firm of attorneys. Entrusted with the role of protecting the interest of debenture holders, the trustee is responsible to ensure that the borrowing firm fulfils its contractual obligations.

Security Debentures are typically secured by a charge on the immovable properties, both present and future, of the company by way of an equitable mortgage, which is effected by deposit of the title deeds relating to mortgaged assets in favour of the trustees. Debentures not protected by any security are called unsecured or naked debentures.

Redemption Debentures are generally redeemable-perpetual debentures are very rare. The redemption takes place in a pre specified manner. Typically, it occurs between the 5th year and the 9th year. Companies are now required to create a debenture redemption reserve to facilitate timely redemption. A major requirement is that the company should create a Debenture Redemption Reserve equivalent to 50 per cent of the amount of debenture issue before debenture redemption commences.

Interest The interest payment on debentures is a fixed obligation, irrespective of the financial situation of the issuing firm. Typically payable semi-annually, it is a tax-deductible expense.

Right Debentures for Working Capital

Public limited companies can issue "rights" debentures to their share-holders with the object of augmenting the long-term resources of the company for working capital requirements. The key guidelines applicable to such debentures are as follows

The amount of the debenture issue should not exceed (a) 20 percent of the gross current assets, loans and advances minus the long-term funds presently available for financing working capital, or (b) 20 per cent of the paid-up share capital, including preference capital and free reserves, whichever is the lower of the two.

The debt: equity ratio, including the proposed debenture issue, should not exceed 1:1.

The debentures shall first be offered to the existing Indian resident shareholders of the company on a pro rata basis.

Calculating the Cost of Equity Capital

2009-05-31T09:24:00.000-07:00

The cost of debt capital (as well as preference capital) can be calculated fairly easily. This is because it entails a well-defined burden in terms of interest payment and principal payment. Estimating the cost of equity capital, however, is difficult as there is no fixed dividend or principal payment burden associated with it. Equity dividend is payable out of the earnings of the firm at the discretion of the board of directors. Further, the question of repaying the equity capital does not ordinarily arise during the life of the firm. In liquidation, of course, equity shareholders are entitled .to the residual assets of the firm.

Theoretically, the cost of equity is the discount rate which equates the present value of the future dividends to the net amount realized from the issue of equity capital. While it is almost impossible to predict the future dividends, it seems reasonable to assume that dividends would grow over time because firms generally reinvest a significant portiorr-40 to 60 percent of their earnings. Such reinvestment tends to enhance future earnings and dividends. Hence the cost of equity may be calculated as follows

Cost of equity = (Expected dividend per share/ Net price realized from issuing an equity share) + Expected annual rate of growth in dividends

(The formula for cost of equity presented here is derived from equating the present value of a dividend stream which is expected to grow at a constant rate with the present market price per share)

As you may have guessed, the difficulty in applying this formula arises mainly with respect to estimating the growth factor. One can begin with the past growth rate as a starting point. Past trends, however, cannot be expected to continue indefinitely in future. Hence the past growth rate figure will have to be adjusted in the light of assessments regarding future developments. Clearly, there will be varying judgments with respect to future growth. Yet, such a judgment is essential in order to get a handle over cost of capital.

If we assume that the expected annual rate of growth in dividends for Horizon Limited is 10 per cent, we get the following estimate for its cost of equity:

(1.8 / 22.75) + 0.10 = 0.1791 or 17.91 per cent.

Capital Rationing

2009-05-10T20:57:00.001-07:00

The firm may put a limit to the maximum amount that can be invested during a given period of time, such as a year. Such a firm is then said to be resorting to capital rationing. A firm with capital rationing constraints attempts to select the combination of investment projects that will be within the specified limits of investments to be made during a given period of time and at the same time provide greatest profitability.

Capital rationing may be effected through budget ceiling. A firm may resort to capital rationing when it follows the policy of financing investment proposals only by ploughing back its retained earnings. In that case, capital expenditure in a given period cannot exceed to amount of retained earnings available for reinvestment. Management may also introduce capital rationing when a department is authorized to make investments up to a limit beyond which investment decisions will be made by higher level management.

Capital rationing may result in accepting several small investment proposals then accepting a few large investment proposals so that there may be full utilization of budget ceiling. This may result in accepting relatively less profitable investment proposals if full utilization of budget is a primary consideration. Similarly, capital rationing also means that the firm foregoes the next most profitable investment falling after the budget ceiling even though it is estimated to yield a rate of return much higher than the required rate of return. Thus, capital rationing does not lead optimum results.

Capital expenditure control

2009-05-10T20:54:00.000-07:00

Planning and control are inter-linked and consecutive steps for the successful implementation of any programme. Planning done for incurring capital expenditure is followed by control devices to assess the divergences between the expected and achieved results. Control for capital expenditure is expressed keeping in view the above objective.

It may be recalled that capital expenditure is classified into three main forms viz:

1. Expenditure made to reduce costs;

2. Expenditure made to increase revenue;

3. Expenditure which is justified on non-economic grounds.

With exercise control over capital expenditure in any of the above categories, the capital expenditure analysis should concentrate on three types of outlays viz: 1. Major projects, 2. Routine expenditure, and 3. Replacement.

As regards major projects, strategic investment may be made for expansion of productive capacity or achieving product innovation or preparing barriers against capital fluctuations. In the second type of outlay, routine expenditure may be working condition improvement, maintenance expenditure, competition oriented expenditure etc. Thirdly, replacement need may arise to avoid capital wastage for existing equipment to check its disposal value or it may be obsolescence replacement. In all circumstances, proper attention is to be devoted in analyzing the need for the capital expenditure so that it would be curtailed to the minimum required.

One important aspect of control device is to match the demand schedule for the capital and the supply of capital from different sources. Demand comes for capital from all departments and it is at this level control could be exercised to keep the demand at the bare minimum required for the objective inherent in capital investment decisions. Supply of capital, on the other hand, is a scarce commodity and the company has to incur expenditure for availing it. This necessitates for the finance manager to exercise economy in capital expenditure so that optimum benefit could be obtained with the use of scarce capital sources. This establishes the need for capital rationing to impose constraints on capital expenditure under prevailing market conditions and place self-imposed constraints to check the funds being raised from outside agencies like borrowings. Thus, the device of capital rationing is adopted to control capital expenditure.

Planning of Capital Expenditure:

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Capital budgeting is concerned with activities ranging from planning the availability, allocation and control of expenditure or long-term as well as short-term investment funds.

Planning of capital expenditure could be done to finance the capital expenditure plans of the company for short-term or long-term periods and hence the long-term plan budget and short-term plan budget.

As regards long-term plan budget, the period covered under the planning is three to five or more years. The planning for such expenditure assumes a composite form involving all aspects of economic forecasts for the outlook of entire industry in which the company performs with its unit and forecast for the company with probable or expected coverage of market share. On the basis of this forecast plant managers estimate their prospective capital expenditure, the marketing managers plan their market shares, the personnel managers assess the requirements for manpower and technical hands to achieve targeted production results, and the finance managers plans, for the funds to be made available for investment taking into consideration the above requirements. The long-range capital budget is continually revised with changing economic conditions, the marketing conditions, the marketing environment, structure of wages and the inflationary pressures in the economy. It is flexible in nature and oriented towards a long-range growth planning for the company.

As regards short-period Capital budgeting, involving short-range planning for funds, it covers expenditure for a short duration involving the period covered within one or two years. It does not involve large capital expenditure but covers temporary need for funds for different departments within the company depending upon the degree of urgency, profitability and savings to be achieved with reference to the capital costs to be incurred. Short run capital expenditure plans get converted into long-term plans of capital expenditure. Short run capital expenditure plans get converted into long-term plans of capital expenditure. Short-term capital expenditure plan is known as operating budget and is concerned with revenues and expenses related to firms daily operations.

Significance of planning for capital expenditure is derived only with major investment proposals and the use of funds over a long period. The most important factor affecting the planning horizon is the rate of change in technology in the industry. The advancement in technology may warrant capital investment for short as well as long period depending upon the changing pace of technology and technological obsolescence: long-term plan, however, helps the company to analyze its needs and directions into the distant future involving a technological change.

Foreign-Exchange Risk Management

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Foreign-Exchange Risk Management in the older NCR:

Prior to 1991, NCR was organized differently than it is now on a geographic basis. However, it was still considered one of the world’s premier MNEs in terms of the amount of foreign to total revenues. Although the new NCR has an Americas division that includes North America and Latin America, the old NCR had a Latin America/Middle East/Africa geographic region that encompassed the world's most volatile regions at the time.

Foreign-exchange Risk Management under AT& T

Foreign-exchange exposure was greater under AT & T than it was for NCR, but international was a smaller part of its total business, so AT & T started with little real expertise in the area. As AT & T began to expand its foreign revenues, both in terms of exports and imports as well as foreign direct investment, it had to develop policies and procedures for managing exposures. When AT & T acquired NCR, it permitted NCR to retain its foreign currency risk-management responsibilities for foreign operations, but philosophical conflicts arose over the best way to deal with exposures. For example, NCR felt it was important to hedge balance sheet as well as cash flows exposures, whereas AT & T did not feel inclined to hedge balance sheet exposures. In its 1995 annual report, AT & T discussed its general philosophy for hedging foreign-exchange exposures:

We enter into foreign-currency exchange contracts, including forward, option and swap contracts, to manage out exposure to changes in currency exchange rates, principally Canadian dollars, Deutsche marks, pounds sterling and Japanese yen. Some of the contracts involve the exchange of two currencies, according to the local needs of foreign subsidiaries. The use of these derivative financial instruments allows us to reduce our exposure to risk that the eventual dollar net cash inflows and outflows, resulting from the sale of products to foreign customers and purchases from the foreign suppliers, will be adversely affected by changes in exchange rates. Our foreign exchange contracts are designated for firmly committed or forecasted purchases and sales. These transactions are generally expected to occur in less than one year. For firmly committed sales and purchases, gains and losses are recognized as adjustments to the underlying hedged transactions when the future sales and purchases are recognized, or immediately if the commitment is canceled. Gains or losses on foreign exchange contracts that are designated for forecasted transactions are recognized in other income as the exchange rate change.

NCR'S RISK MANAGEMENT STRATEGY

2009-05-06T09:34:00.000-07:00

In 1997, NCR embarked on a new phase of its existence, which began in 1884 when John H. Patterson founded the National Cash Register Company, maker of the first mechanical cash register. The new NCR, which was acquired by AT & T in 1991 and was subsequently spun off from At & T at the end of 1996, is divided into four major business groups:

• Computer System Group

• Communications industry Business Unit

• Financial Systems Group

• Retail Systems Group

The Computer System group develops, manufactures, and markets computer systems. The other three groups represent specific industries targeted by NCR.

NCR generated $8 billion in revenues in 1995, the smallest of the AT&T groups (the new AT & T generated $51 billion in revenues, and Lucent Technologies generated $21 billion in revenues). However, NCR is the most international of the group, generating over 50 per cent of its revenues abroad, whereas AT & T as a whole generated only 10.9 per cent of total revenues from abroad. NCR has 3,79,000 employees worldwide, 19,000 of whom are in the United States. It also has 1100 offices and 31 development and manufacturing locations in more than 130 countries. Its top five countries in revenues are Japan, Germany, Switzerland, the United Kingdom, and France.

NCR's leadership team is divided into product groups, geographic areas (Americas Region, Asia/pacific Region, and Europe and Middle East/Africa Region), and functional areas (such as Global Human Resources, Corporate Strategy, and finance and Administration.). The role of the leadership team is to set the vision, mission, and direction for NCR.

Effective July 1, 1996, Earl C. shanks was hired away from Farley industries Inc. and named as the head of the company's treasury functions. He reports directly to Per-Olof Loof, head of the Financial Systems, Group and member of NCR's leadership team. This was an important appointment, because in 1991 when AT & T acquired NCR, virtually all of NCR's treasury functions were transferred to AT & T. Thus Shank's mission is to rebuild the treasury group from zero. He is responsible for creating a global organization which will manage the company/s worldwide cash flows and foreign-exchange risk, establish adequate borrowing facilities, establish and implement finance and investment objectives and strategies for pension assets and benefits.

In 1990, the last year NCR issued an annual report before the merger, it noted that transfer pricing between geographic divisions is done at market prices. It also emphasized how interdependent its units are: "The methods followed in developing the geographic area data require the use of estimation techniques and do not take into account the extent to which NCR's product development, manufacturing, and marketing depend upon each other. Thus, the information may not be as indicative of results as it would be if the geographic areas were independent organizations".

Similar breakdowns are not found in the AT & T Annual Report, since foreign revenues are only 10.9 per cent of total revenues. AT & T provides revenues, operating income, and identifiable assets for only two geographic segments: United States and other geographic areas. FASB Statement Number 14 does not require the disclosure of geographic segment data if foreign revenues, earnings, and identifiable assets are less than 10 per cent of total revenues. However, AT & 1's Annual Report mentions that foreign revenues in its segment disclosures include only revenues from foreign-based operations. Revenues from all international activities, including the foreign-segment revenues and those from international telecommunications services and export sales, provided 26.2 percent of consolidated revenues in 1995. AT & T had hoped to generate 50 percent of its revenues from abroad by the turn of the century. However, NCR, with nearly 60 percent of its revenues coming from abroad, is clearly more global than AT & T in general.

Prior to the merger, NCR took advantage of foreign capital markets to borrow money. ln its 1990Annual Report, NCR reported notes payable totaling $182 million, classified as short-term borrowings from banks, mainly denominated in foreign currencies. NCR also included long-term obligations denominated in Eurodollars and in Japanese Yen.

If AT & T uses foreign capital markets, it does not disclose much information. AT & T's 1995 Annual Report describes its debt obligations but does not disclose whether any are in a foreign currency. The annual report mentions, however, that a consortium of lenders provides revolving credit facilities to AT & T and AT & T Capital Both AT & T and AT & T Capital maintain lines of credit with different consortiums of primary foreign banks. In addition, AT & T lists its stock on exchanges in Brussels, Geneva, London, Paris, and Tokyo, in addition to several in the United States, so it is gaining access to equity capital abroad.

The objective of NCR's risk-management strategy was to neutralize economic exposure from foreign-currency fluctuations, first through operational strategies and second with foreign-exchange contracts. To illustrate how significance those contracts were, on December 31, 1990 NCR had $1.271 billion in outstanding forward contracts, of which 60 per cent were in European currencies and 40 per cent were in Pacific currencies. There were no contracts in Latin American currencies, because those financial markets were not developed enough for forward contract.

From an organizational standpoint, NCR put a lot of responsibility on the shoulders of group management. Each geographic unit had a group vice president and finance director responsible for the overall risk-management strategy of the group, subject to the approval of top management and corporate treasury. Each of the eight regions that composed the Latin America/Middle East/Africa group had a general manager and a finance director. Once the risk-management strategy and had been determined, the execution of the strategy was left to the local level, where market conditions vary considerably.

RATIONALE OF CAPITAL BUDGETING DECISIONS

2009-05-04T10:25:00.000-07:00

The rationale behind the capital budgeting decisions is efficiency. A firm has to continuously invest in new plant or machinery for expansion of its operations or replace worn out machinery for maintaining and improving efficiency. The main objective of the firm is to maximize profit either by way of increased revenue or by cost reduction. Broadly, there are two types of capital budgeting decisions which expand revenue or reduce cost.

1. Investment decisions affecting revenue: It includes all those investment decisions which are expected to bring additional revenue by raising the size of firm's total revenue. It is possible either by expansion of present operations or the development of new product in line. In both the cases fixed assets are required.

2. Investment decisions reducing costs; It includes all those decisions of the firms which reduces the total cost and leads to increase in its total earnings i.e. when an asset is worn out or becomes outdated, the firm has to decide whether to continue with it or replace it by new machine. For this, the firm evaluates the benefit in the form of reduction in operating costs and outlays that would be needed to replace old machine by new one. A firm will replace an asset only when it finds it beneficial to do so. The above decision could be followed decisions following alternative courses: i.e., Tactical investment decisions to strategic investment decisions to strategic investment decisions, as briefly defined below

3. Tactical investment decisions; It includes those investment decisions which generally involves a small amount of funds and does not constitute a major departure from what the firm has been doing in the past.

4. Strategic investment decisions: Such decisions involve large sum of money and envisage major departure from what the company has been doing in the past. Acceptance of strategic investment will involve significant change in the company's expected profits and the risk to which these profits will be subject. These changes are likely to lead stock-holders and creditors to revise their evaluation of the company.

Factors influencing investment decision

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Capital investment decisions are not governed by one or two factors, because the investment problem is not simply one of replacing old equipment by a new one, but is concerned with replacing an existing process in a system with another process which makes the entire system more effective. We discuss below some of the relevant factors that affects investment decisions:

(i) Management Outlook: lf the management is progressive and has an aggressively marketing and growth outlook, it will encourage innovation and favor capital proposals which ensure better productivity on quality or both. In some industries where the product being manufactured is a simple standardized one, innovation is difficult and management would be extremely cost conscious. In contrast, in industries such as chemicals and electronics, a firm cannot survive, if it follows a policy of 'make-do' with its existing equipment. The management has to be progressive and innovation must be encouraged in such cases.

(ii) Competitor’s Strategy: Competitors' strategy regarding capital investment exerts significant influence on the investment decision of a company. If competitors continue to install more equipment and succeed in turning out better products, the existence of the company not following suit would be seriously threatened. This reaction to a rival's policy regarding capital investment often forces decision on a company'

(iii) Opportunities created by technological change: Technological changes create new equipment which may represent a major change in process, so that there emerges the need for re-evaluation of existing capital equipment in a company. Some changes may justify new investments. Sometimes the old equipment which has to be replaced by new equipment as a result of technical innovation may be downgraded to some other applications, A proper evaluation of this aspect is necessary, but is often not given due consideration. In this connection, we may note that the cost of new equipment is a major factor in investment decisions. However the management should think in terms of incremental cost, not the full accounting cost of the new equipment because cost of new equipment is partly offset by the salvage value of the replaced equipment. In such analysis an index called the disposal ratio becomes relevant.

Disposal ratio = (Salvage value, Alternative use value) / Installed cost

(iv) Market forecast: Both short and long run market forecasts are influential factors in capital investment decisions. In order to participate in long-run forecast for market potential critical decisions on capital investment have to be taken.

(v) Fiscal Incentives: Tax concessions either on new investment incomes or investment allowance allowed on new investment decisions, the method for allowing depreciation deduction allowance also influence new investment decisions.

(vi) Cash flow Budget: The analysis of cash-flow budget which shows the flow of funds into and out of the company may affect capital investment decision in two ways. 'First, the analysis may indicate that a company may acquire necessary cash to purchase the equipment not immediately but after say, one year, or it may show that the purchase of capital assets now may generate the demand for major capital additions after two years and such expenditure might clash with anticipated other expenditures which cannot be postponed. Secondly, the cash flow budget shows the timing of cash flows for alternative investments and thus helps management in selecting the desired investment project.

(vii) Non-economic factors: new equipment may make the workshop a pleasant place and permit more socializing on the job. The effect would be reduced absenteeism and increased productivity. It may be difficult to evaluate the benefits in monetary terms and as such we call this as non-economic factor. Let us take one more example. Suppose the installation of a new machine ensures greater safety in operation. It is difficult to measure the resulting monetary saving through avoidance of an unknown number of injuries. Even then, these factors give tangible results and do influence investment decisions.

Flow of costs

2009-04-30T02:21:00.000-07:00

There are two different approaches, as discussed below, for determining the cost of goods sold in a manufacturing concern.

Absorption costing:

Under the traditional method of accounting all the costs incurred in manufacturing, irrespective of their behavior with respect to volume, are regarded as product costs and included in the cost of the manufactured product. This method is referred to as absorption costing or full costing because the product absorbs the full amount of manufacturing costs. Non-manufacturing costs (distribution costs, research and development costs, financial costs, and administrative costs) are regarded as period costs, to be expensed in the assuming period in which they are incurred or to the amortized over several accounting periods. The flow of costs under absorption costing is shown in Exhibit - 1. Product costs, also known as inventoriable costs, are treated as assets until the product is sold, when they are matched against revenues.

Direct Costing

Direct costing, also referred to as variable costing or marginal costing, has received a great deal of attention in the past few decades. Under this system, manufacturing costs are segregated between those which vary directly with volume and those which are fixed. Only the variable costs (direct material direct labour, and variable manufacturing overhead costs) are used for valuing inventories and determining the cost of goods sold. The remaining manufacturing expenses are treated as period costs. The flow of costs under direct costing is shown in Exhibit - 2.

Cost and Management Accounting – Elements of Cost:

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One of the basic purposes of a system of cost accounting is to determine the cost of products (or services). This information is required, inter alia, for estimating the cost of goods sold and valuing inventories. This chapter discusses the framework for cost determination. It is organized into five sections as follows:

* Elements of cost
* Flow of costs
* Product costing
* Problems in cost determination
* Standard costing

ELEMENTS OF COST

In a manufacturing enterprise the total cost may be divided into two broad categories: manufacturing costs and non-manufacturing costs.

Manufacturing Cost

Cost accounting has traditionally been concerned with manufacturing costs. Only in recent years has the analysis of non-manufacturing costs received more attention. However, the principal focus of cost accounting continues to be on manufacturing costs. The reasons for this are: (i) the general accounting practice is to include only manufacturing costs in the valuation of inventories; and (ii) manufacturing activity is more standardised and routinised compared to non-manufacturing activities (like general administration, marketing and research and development). The three elements of manufacturing costs are material, labour, and manufacturing overhead.

Material A distinction is made between direct materials and indirect materials when the product is the relevant cost objective. Direct materials are those which can be logically and readily identified with the product. Lumber required for manufacturing furniture, steel for manufacturing automobiles, and crude-oil for petroleum products are examples of direct materials. When we talk of material cost of a product, we refer to the cost of direct materials only.

Indirect materials are those which are not readily identified with the product. Examples of indirect materialsare: glues, nails, and tacks. These are included under manufacturing overhead

Labour As in the case of materials, a distinction is made between direct labour and indirect labour. Direct labour represents labour which works directly on the product (the cost objective for our present purposes). Examples of direct labour are: lathe operators, welders, assembly workers. The cost element labour includes the cost of direct labour only. Indirect labour represents labour which does not work directly on the product. Examples: foremen, janitors, watchmen. Indirect labour is included under manufacturing overhead.

Manufacturing Overhead This refers to manufacturing costs other than direct material and direct labour costs. The major items included under manufacturing overhead are indirect materials, indirect labour, factory supplies, utilities depreciation, repairs and maintenance, and rent and insurance.

Non-manufacturing Costs

Cost accountants are now bestowing attention to non-manufacturing costs as well. There is a realisation that these costs need to be analysed more penetratingly for purposes of planning and control. While the sub classification of non-manufacturing costs is not as well defined as for the manufacturing costs, we will, for our purposes, divide them into four components: (i) distribution costs, (ii) research and development costs, (iii) financial costs, and (iv) administrative costs.

Distribution Costs These include costs incurred in marketing-related activities such as selling, distribution, transportation advertising, sales promotion, etc.

Research and Developmental Costs These are incurred for developing new products or processes, improving existing products or processes, and searching for new knowledge. Representing outlays on scientific research and development efforts - not for production and marketing activities - these costs are assuming greater significance with rapid changes in technology.

Financial Costs The principal financial cost is the interest on working capital advance, term loans, and debentures. Other financial costs that may be incurred by a business are commitment fee and bank commission.

Administrative Costs This category includes the cost of general administration and other costs which logically do not fit into other classifications. Important items included under this head are: salaries of top managerial personnel, directors’ fees, public relations expense, general accounting costs, audit and legal fees, and head office expenses.

Financing of a Company

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The important sources of finance are as follows:

Equity Capital this represents the ownership capital provided by equity Share holders who subscribe to the equity shares issue by the firm.

Reserves and surplus: The profits of the company that are ploughed back in the business are referred to as reserves and surplus.

Debenture Capital The debt capital raised by the firm by issuing debentures to investors is called the debenture capital.

Term loans Long-term borrowings from financial institutions and commercial banks mainly for financing fixed assets are referred to as term loans.

Working capital Advances short-term borrowings from commercial banks for financing current assets are called working capital advances.

Trade credit This represents the credit extended by suppliers of raw materials, intermediates, components, etc.

Formation of a Company

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The principal steps involved in setting up of a company are as follows.

A group of individuals, interested in promoting a company, bar themselves together. They are called the promoters.

The promoters prepare two documents: (a) Memorandum Association; and (b) Articles of Association. The former spells or inter alia, the objectives of the company, the amount of capital that the company would be authorized to raise, and the different types of shares the company plans to issue; the latter specifies the rules and regulations for managing the affairs of the company.

The promoters submit the Memorandum of Association and the Articles of Association to the Registrar of companies for the approval.

The Registrar of Companies examines these documents. If he finds them in order, he issues a certificate called the, Certificate of Incorporation, and this brings the company formally into existence.

The company raises funds by issuing shares to the public. Once funds are raised, the company obtain; from the Registrar of Companies a 'certificate of commencement of Business. This enables it to actively commence its business operations.

Security Analysis and Portfolio management

2009-04-28T10:33:00.000-07:00

Security analysis is closely linked with portfolio management. The main objective of Security analysis is to appraise is intrinsic value of security. As already started, there are two basic approaches which are made in the direction viz. (1) Fundamental Approach, and (2) Technical approach. There is third approach known as Efficient Capital Market Theory for assessing market price of a security.

1. The Fundamental Approach: The Fundamental approach suggests that every Stock has an intrinsic value which should be equal to the present value of the future Stream of income from that stock discounted at an appropriate risk related rate of Interest. Estimate of real worth of a stock is made by considering the earnings potential of firm which depends upon investment environment and factors relating to specific industry, competitiveness, quality of management. Operational efficiency, profitability, capital structure and dividend policy. Thus, security analysis is done to evaluate the current market value of particular security with the intrinsic or theoretical value. Decisions about buying and selling an individual security depend upon the conferred relative value. Sinc6 this approach is based on relevant facts, it gives true estimate of the value of a security and it is widely use in estimation of security prices

2. Technical Approach: The other technique of security analysis is known as Technical Approach. The basic assumption of this approach is that the price of a stock depends on supply and demand in the market place and has little relationship with its intrinsic value. All financial date and market information of a given security is reflected in the market price of a security. Therefore, an attempt is made through charts to identify price movement patterns which predict future movement of the security, The main tools used by technical analysis are: (1) The Dow Jones theory which asserts that stock prices demonstrate a pattern over four to five years and these patterns are mirrored by indices of stock prices. The theory employs two Dow Jones Averages - the industrial average and the transportation average. If industrial average is rising, then transport average should also rise. Simultaneous price movement is the maid prediction which may show bullish as well as bearish results (2) Chart Patterns are used along with Dow Jones Theory to predict the market movements. Various types of charts are used for this purpose.

3. Efficient Capital Market Theory: The theory is familiarly known as "Efficient Capital Market Hypothesis: (ECMH). It is based on the assumption that in efficient capital markets prices of traded securities always fully reflect all publicly available information concerning those securities. For market efficiency there are three essential conditions:

(1) All available information is cost free to all market participants,

(2) No transaction costs, and

(3) All investors similarly view the implications of available information on current prices and distribution of future prices of each security.

It has been empirically proved that stock prices behave randomly under the above conditions. These conditions have been rendered unrealistic in the light of the actual experience because there is not only transaction cost involved but brokers have their own information base made available by processing compute fed date. Moreover, information is not costless and all investors do not take similar views.

Research studies devoted to test the ECMH are put into three categories i.e.

(a) the week form theory,

(b) the semi-strong form, and

(c) the strong form.

(a) The Weak Form theory: This theory states that current security prices fully reflect information available in the market regarding historical events of the company Study of the historical sequence of prices, can neither assist the investment analysts or investors to abnormally enhance their investment neither return nor improve their ability to select stocks. It means that knowledge of past patterns of stock prices does not aid investors to make a better choice. Random Walk Theory is the offshoot of this test. The theory states that stock prices exhibit a random behavior.

Random walk Hypothesis; The Hypothesis presupposes that stock prices move randomly. No sure prediction can be made of future movement of stock prices on the basis of given prices at the end of one period. There is no relationship between today's price and tomorrow's price. Price movement is a random. The various statistical tests conducted in U.K. and U.S.A. on stock price have proved that the "extent of dependence between Successive price changes is negligible".

(c) Semi-strong form of Efficient Market Hypothesis: This hypothesis holds that security prices adjust rapidly to all publicly available information such as functional statements and reports and investment advisory reports, etc. All publicly available information, whether good or bad is fully reflected in security prices. The buyers and sellers will raise the price as soon as a favorable price of information is made available to the public; opposite will happen in case of unfavorable piece of information. The reaction is almost instantaneous, thus, printing to the greater efficiency of securities market. lt is to be noted that the semi-strong form of efficient market hypothesis includes that week form of efficient market hypothesis also because internal market information is a part of all publicly available information.

(c) The Strong Form test of the inside information and the Efficiency of the Market: This test is concerned with whether two sets of individuals - one having inside information about the company and the other uninformed could generate random effect in price movements. The strong form holds that the prices reflect all information that is known. It contemplates that even the corporate officials cannot, benefit from the inside information of the company. The market is not only efficient but also perfect. Lt is to be noted that it includes both the weak form and semi-strong form of efficient market hypothesis. The findings are that very few and negligible people are in such a privileged position to have inside information and may make above-average gains but they do not affect the normal functioning of the market.

Efficient Market Hypothesis has put to challenge the fundamental and a technical analyst to the extent that random walk model is valid description of reality and the work of charists is of no real significance is stock price analysis. In practice, it has been observed that markets are not fully efficient in the semi-strong or strong sense. Inefficiencies and imperfections of certain kinds have been observed in the studies conducted so far to test the efficiency of the market. Thus, the scope of earning higher returns exists by using original, unconventional and innovative techniques of analysis. Also, the availability of inside information and its rational interpretation can lead to strategies for deriving superior returns.

Importance of capital budgeting

2009-04-28T10:32:00.000-07:00

Capital budgeting decisions are of paramount importance in financial decision. So it needs special care on account of the following reasons:

1. Long-term Implications: A capital budgeting decision has its effect over a long time span and inevitably affects the company’s future cost structure and growth. A wrong decision can prove disastrous for the long-term survival of firm. On the other hand, lack of investment in asset would influence the competitive position of the firm. So the capital budgeting decisions determine the future destiny of the company.

2. Involvement of large amount of funds: Capital budgeting decisions need substantial amount of capital outlay. This underlines the need for thoughtful, wise and correct decisions as an incorrect decision would not only result in losses but also prevent the firm from earning profit from other investments which could not be undertaken.

3. Irreversible decisions: Capital budgeting decisions in most of the cases are irreversible because it is difficult to find a market for such assets. The only way out will be scrap the capital assets so acquired and incur heavy losses.

4. Risk and uncertainty: Capital budgeting decision is surrounded by great number of uncertainties. Investment is present and investment is future. The future is uncertain and full of risks. Longer the period of project, greater may be the risk and uncertainty. The estimates about cost, revenues and profits may not come true.

5. Difficult to make: Capital budgeting decision making is a difficult and complicated exercise for the management. These decisions require an over all assessment of future events which are uncertain. It is really a marathon job to estimate the future benefits and cost correctly in quantitative terms subject to the uncertainties caused by economic-political social and technological factors.

Kinds of capital budgeting decisions:

Generally the business firms are confronted with three types of capital budgeting decisions. (i) The accept-reject decisions; (ii) mutually exclusive decisions; and (iii) capital rationing decisions.

1. Accept-reject decisions: Business firm is confronted with alternative investment proposals. If the proposal is accepted, the firm incur the investment and not otherwise. Broadly, all those investment proposals which yield a rate of return greater than cost of capital are accepted and the others are rejected. Under this criterion, all the independent proposals are accepted.

2. Mutually exclusive decisions: It includes all those projects which compete with each other in a way that acceptance of one precludes the acceptance of other or others. Thus, some technique has to be used for selecting the best among all and eliminates other alternatives.

3. Capital rationing decisions: Capital budgeting decision is a simple process in those firms where fund is not the constraint, but in majority of the cases, firms have fixed capital budget. So large amount of projects compete for these limited budgets. So the firm rations them in a manner so as to maximize the long run returns. Thus, capital rationing refers to the situations where the firm has more acceptable investment requiring greater amount of finance than is available with the firm. It is concerned with the selection of a group of investment out of many investment proposals ranked in the descending order of the rate or return.

Investment decision – Management Perspective

2009-04-28T10:31:00.000-07:00

Usually, in investment problems, much attention is focused on how to choose among alternative projects, so that one is tempted to believe that this constitutes the only problem in capital decisions. However, if we examine carefully, it is easy to realize that choice among alternatives is only one facet albeit the important facet of the problem from the top management perspective. The other facets are implementation and control as applied to all phases of capital investment, and these are important aspects because in the ultimate analysis, the top management is accountable to Board of directors and owners for the success or failure of investment plans.

Let us examine in brief how investment decisions are influenced by management perspective. Obviously, we have to start with the company objectives which provide the broad guidelines to policies, plans and operations. A possible objective might be to maximize return on investment in which case the management might seek to minimize investment by selecting only a few capital projects that yield the highest returns. On the other hand, the objective may be to maximize sales volume and in that case all capital investment that yield a net profit (may be small) would be made without undue concern. If the management is guided by a growth objective, expansionary investment involving high capital cost would be undertaken.

Within the board company objectives, top management also reviews the competitive position of the company and if the competition is sharper, the management looks out continuously to evaluate and upgrade the equipments to achieve greater efficiency at least cost. In big companies, the management sets out policies to guide lower levels of management in the search for evaluation of and initiation of capital projects.

Top management has also to keep watch on company funds which finance investments. It cannot allow funds to lie idle just because suitable project is not at hand. The cost of idle funds is substantial and hence the need for looking out for suitable investment opportunities. If such opportunities exist then the management must spare funds and if existing finds are inadequate it should raise funds externally. It should be remembered that if there is no profitable investment opportunity with in the company, the dividend policy of the company should be liberal. Funds for capital investment must be arranged on a long-term basis otherwise borrowings short and investing long can lead to lack of liquidity and consequent troubles. The major source of long-term funds are long-term borrowing, new equity capital (sale of stock) and retained earnings. Sometimes, a change in the inventory system also releases funds by effecting reduction in inventory to be carried. The selection of the right source of funds is again influenced by management’s own belief and value judgement and such other factors like outsider control, dilution of equity, price earnings ratio, cost of funds etc.

And finally, the top management is usually concerned with implementation and control aspects of investment projects. Specific responsibilities are to be assigned to specific individuals or cells and project reports have to be carefully studies. In big projects, improved methods like programme evaluation review technique (PERT) or critical path method (CPM) may be used.

Need for Capital Investment

2009-04-28T10:25:00.000-07:00

Need for Capital Investment:

This is probably the logical question and the answer to that is rather easy. The following factors give rise to the need for capital investments:

1. Wear and tear of old equipments.

2. Obsolescence

3. Variation in product demand necessitating change in volume of production.

4. Product improvement requiring capital additions.

5. Learning-curve effect

6. Expansion.

7. Change of plant site.

8. Diversification.

9. Productivity improvement.

Some of these factors are self-explanatory. However, we add a few explanatory lines on a few of these factors. Obsolescence occurs when alternative methods of equipments for performing a function become available which are significantly better either in terms of quality of newness of the product or plant safety. In a high consumption economy like U.S.A, this problem is acute. In an economy like India, the problem of obsolescence is still rare. Only in certain investments for manufacturing export products (e.g, garments, jute goods, cotton textiles), this problem exists. Product improvements require changes in equipments and this problem is also not an important factor in influencing capital investment decisions in India, expecting changes special product qualities like radios, transistors, televisions etc.

Learning curve consideration influences capital decisions in the sense that new equipments might be such as to cut down learning time and effect considerable saving on training expenses. For reasons such as expansion, new sources of raw materials, new markets, labour conditions, transportation or termination of a lease, an entire plant may have to be relocated. The cost of removing a plant is enormous and management may decide to undertake modernization through a complete new layout and equipment purchases. Many progressive companies seek out new markets and new products. They may even like to acquire another company for purpose of diversification. All these major capital investments. In some industries, wage escalation may force management to acquire labour-saving equipment machinery to effect saving on wages and at the same time improve productivity.

What is capital budgeting?

2009-04-27T22:33:00.000-07:00

In modern times, the efficient allocation of capital resources is a most crucial function of financial management. This function involves organization’s decision to invest its resources in long-term assets like land, building facilities, equipment, vehicles, etc. All these assets are extremely important to the firm because, in general, all the organizational profits are derived from the use of its capital in investment in assets which represent a very large commitment of financial resources, and these funds usually remain invested over a long period of time. The future development of a firm hinges on the capital investment projects, the replacement of existing capital assets, and/or the decision to abandon previously accepted undertakings which turns out to be less attractive to the organization than was originally thought, and divesting the resources to the contemplation of new ideas and planning. For new projects such as investment decisions of a firm fall within the definition of capital budgeting or capital expenditure decisions.

Capital budgeting refers to long-term panning for proposed capital outlays and their financing. Thus, it includes both raising of long-term funds as well as their utilization. It may, thus, be defines the “firm’s formal process for acquisition and investment of capital”. To be more precise, capital budgeting decision may be defined as “the firms’ decision to invest its current find more efficiently in long-term activities in anticipation of an expected flow of future benefit over a series of years.” The long-term activities are those activities which affect firms operation beyond the one year period. Capital budgeting is a many sided activity. It contains searching for new and more profitable investment proposals, investigating, engineering and marketing considerations to predict the consequences of accepting the investment and making economic analysis to determine the profit potential of investment proposal. The basic features of capital budgeting decisions are:

1. Current funds are exchanged for future benefits;

2. There is an investment in long-term activities; and

3. The future benefits will occur to the firm over series of years.

What are securities?

2009-04-27T22:14:00.001-07:00

Securities may be defined as instruments issued by seekers of funds in the investment market to the providers of funds in lieu of funds.

These instruments proma facie provide evidence of ownership to the holder of the instrument. The owner is entitled to receive all the benefits due on the instrument and to retrieve his investment at the time of redemption. Securities can broadly be divided into two categories. Debt Securities and Equity Securities. However, Section 2(h) of Securities Contract (Regulation) Act, 1956, defines Securities as under:

Securities include –

1. Shares, scripts, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or any incorporated company or body corporate.

Derivative

Units or any other instrument issued by any collective investment scheme to the Investors in such a schemes.

Security receipt as defined in clause (zp) of Section 2 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

Units or any other such instrument issued to the investors under any mutual fund scheme.

2. Government Securities

3. Such other instruments as may be declared by the Central Government to be Securities and,

4. Rights or Interests in Securities.

What is investment?

2009-04-27T21:52:00.000-07:00

Investment may be defined as a conscious act on the part of a person that involves deployment of money in securities issued by firms with a view to obtain a target rate of return over a specific period of time.

It is conscious activity in that the investor is expected to be aware of the various avenues of investment available in the market. He makes a comparison of the returns available from each avenue, the element of risk involved in it and then makes the investment decision that he perceives to be the best having regard to the time frame of the investment and his own risk profile.

In reality however, the level of consciousness or awareness on behalf of the investor is not always perfect. Hence the entire investment decisions end up being sub-optimal leading to a persistent effort on the point of the investor to locate alternate avenues of investment that would provide optimal return. This tendency is aided by the fact that fresh investment opportunities keep on appearing in the market with the emergence of new seekers of funds. This is how the cycle of investment moves on.

Investment differs from speculation. Speculation also involves deployment of funds but it is not backed by a conscious analysis of pros and cons. Mostly it is a spur of the moment activity that is promoted and supported by half-backed information and rumors. Speculative deployment of funds is generally prevalent in the secondary equity market. What attracts people to speculation is a rate of return that is abnormally higher than the prevailing market rates. The balancing of risk and return nevertheless operates in speculative activity also and as such the risk element in speculation is very high.

Investment differs from gambling and betting also. But gambling and betting are games of chance return in which dependent upon a particular event happening. Here also, there is no place for research-based activity. The high level of returns provides the incentive for deployment of funds. The risk element in gambling or betting is very high and is known in advance to the players.

The Industrial Development bank of India (IDBI)

2009-04-26T20:29:00.000-07:00

The Industrial Development bank of India (IDBI) was established on July 1, 1964 under an Act of Parliament as the principal financial institution for industrial development in the country. IDBI caters to the growing and diverse needs of medium and large scale industries with the main objective of providing financial assistance and coordinating the working of institutions engaged in financing, promoting and developing industries.

IDBI provides direct finance by way of term loans, both in rupees and foreign currencies besides providing support by way of underwriting and direct subscription to shares/ debentures and in the form of deferred payment guarantees. It also refinances term loans given by state-level institutions/banks to medium scale units and rediscounts/ discounts bills of exchange and promissory notes arising out of sale/ purchase or machinery and equipment. IDBI also extends loans to and makes investments in shares and bonds of various financial intermediaries. In response to the growing needs of various segments of industry and on-going changes in the financial sector, IDBI has been taking several steps to re-orient its business strategies and expand the range of its products and services. Besides asset-based financing and equipment leasing, IDBI also provides merchant banking, debenture trusteeship and forex services to cater to the varied needs of the clients. The Bank continued to undertake a wide range of promotional activities relating to programmes for new entrepreneurs, consultancy services for small and medium enterprises and programmes designed for accredited voluntary agencies for economic upliftment of the underprivileged. Its wholly-owned subsidiary, Small Industries Development Bank of India (SIDBI) provides assistance to the small scale sector.

Term Loans from Financial Institutions and Banks:

2009-04-24T20:52:00.000-07:00

The bulk of term finance required by large and medium industry is provided by term lending institutions which include all India Institutions viz. Industrial Development Bank of India (IDBI), Industrial Finance Corporation of India (IFCI), Industrial Reconstruction Bank of India (IRBI), Small Industries Development Bank of India (SIDBI), etc.

Financial Institutions channel the funds mobilized by them into productive avenues. They make available funds in bigger lots to needy industrial sector. These institutions act as conduits through which scattered savings are aggregated and out to productive channels. Besides, financial institutions help in allocation of funds between different industries and different sectors of the economy in consonance with the priorities laid down in the plans. They, finance to those industries which seek to make a strong base for accelerating the pace of industrialization and foster fast economic development. Today, financial institutions are an instrument in developing the backward areas through rapid industrialization by providing long term finance on concessional rates and help entrepreneurs in selection of projects and make available technical know-how at cheaper rates.

Term loans from financial institutions and banks are a syndicated activity. For big projects financial institutions provide finance on a consortium basis and commercial banks also join them where ‘gap’ is left in financing arrangements of the project costs.

The All-India Financial Institutions comprise six All-India Development banks (AIDBs), three Specialized Financial Institutions (SFIs) and there Investment Institutions. At the state level, there are 18 State Financial Corporations (SFCs) and 28 State Industrial Development Corporations (SIDCs)

Among the AIDBs, IDBI, IFCI, IRBI and SCICI provide financial assistance to medium and large industries, whereas SIDBs caters to the needs of small and tiny industries. The AIDBs also undertake promotional and developmental activities. Of the SFIs, RCTC and TDIC provide risk capital, venture capital and technology development finance and TFCI extends finance to hotels and tourism-related projects. Among the investment institutions, LIC takes care of the business of life insurance, whereas GIC offers general insurance facilities. Both LIC and GIC deploy their funds in accordance with the priorities set out for them. UTI mobilizes the savings of the society through sale of units and channelises them into corporate investments. The investment institutions are major players on the secondary market; they also extend assistance to the corporate sector by way of term loans/ underwriting/ direct subscription to equity and debentures. The SFSs provide finance mainly to small and medium enterprises, whereas SIDCs cater to the needs of medium assistance, the SFCs and SIDCs also play a promotional and developmental role.

With the increasing integration of Indian Economy with the global economy, the financing requirements of corporate sector have undergone tremendous change, and accordingly, financing institutions in India have re-oriented their policies and product range with much sharper customer focus to suit the varied needs of the corporate. With a view to leverage new opportunities thrown open by the developments in the economy, the financial institutions have set up several subsidiaries/ associate institutions offering a wide range of new products and services covering areas such as commercial banking, consumer finance, and investor and custodian services, broking, venture capital financing, infrastructure financing, registrar and transfer services, credit rating and E-commerce.

Steps involved in successful forex trading

2009-04-11T02:21:00.000-07:00

Around 95% of all Forex traders lose money. We are not just talking about it Newbies. If the foreign exchange trading for life as a hobby or just for fun, odds are against success. This is just one surprising fact. However, the remaining 5% of Forex traders manage to pay some costs and lucky few who actually earn money in the currency markets - constantly!

As well as TV programs, said ... "How'd they do this, anyway?"

This is the million dollar question, right? Countless books, seminars and exhibitions were hosted for the answer to this question. This sad reality is that thousands of books were written and countless seminars and interviews were conducted in an attempt to respond to questions from the magic. In reality the situation is that there is no magic formula, no single Holy Grail of Forex trading.

What makes the success of traders, as well as the rest of us did not understand that simple. They have dominated the process of winning when several factors combine to create a personalized and consistent results. They have dominated the process of entry.

The trade process is as follows:

Strategy> Money> Car Domain

Here are some simple tips Forex education which will help you to master the Forex:

Forex Success Tip # 1 - You must have a plan

You must have a written business plan that details all aspects of trading. When you go to the shop, in the amount of risk, strategies for entry and exit, or just a few names. To become a (profitable) Forex trader has to trade arena plan their business plan.

Simplicity rules! Do not make this plan very difficult. A sheet of paper on the mission for you and your business plan should be sufficient. Nothing more is probably too complicated.

Forex Success Tip # 2 - Focus on your personal Psychology

Knowing that you will master the discipline required to execute the trade with high quality sound money management techniques. Lack of discipline in lieu of the fatal operation. Go on the way to identify personal attitudes toward risk and your money. Get intimate with your strengths and weaknesses as a trader, and build a business plan strategies to minimize weaknesses and maximize their strength.

Different personalities lend themselves to different styles of negotiations. Familiar with all the different styles and over time begin to gravitate toward a certain style. Do not fight the impulse as I did. I insisted that he was a day trader, but only limited results. I found my victory percentages are much higher when you swing trades. Guess what is my bread and butter strategies now!

Forex Success Tip # 3 - Have realistic expectations about their

It is difficult, I know! I am on the Internet every day and how amazing advertising. Intermediaries provide free education (the fox in the chicken, if you ask me), forums of all different styles of negotiations and the future. Gurus pushing their system as "the one" who will make big bucks. How to get through all that noise?

Let me say loud and clear now - the whole world is right and the whole world is wrong. You'll need to make a personal commitment to become a successful trader, finding a market that works for you and expect a slow and steady to build wealth through Forex.

What works for me May not work for you. Expect to go through a period of research in which to learn and at the same time, research on the dealer. Please open and not paying attention to all the noise outside.

Forex Success Tip # 4 - Be patient

Rome was not built in one day, and not their own. In fact, I say that all my students, while studying to become a successful Forex traders should not only look at your account balance as an indicator of success or failure.

Through monitoring and increasing their share of trade in high-quality, a much better barometer of their progress as the balance of your account. Cause and effect of the rule here. Over time, when you increase your chances through the implementation of quality routes your account will respond accordingly.

Keep the focus on the process and its results it will blow your mind.

Success Tip # 5 - Managing money is a major priority

I would rather have an excellent strategy, and weak cash in reverse technique. This issue deserves its own blog to do justice. Limit their exposure (see the "danger") allows you to stay in the game and allow the laws of probability to work.

Let's take a casino for example. Require frequent machine players to earn money. Why? They have a game that has more than 50% chance to win money for a house. The more people who play the slots, the greater the benefits of casinos.

Casino risk control by the boards of payment (always in favor of the house!) And increases your chances for a role in maintaining slot machines (read "free drinks"). As a dealer, you should limit the risk by only constitute 1% - 3% of capital available to a single trade. When you execute trades with a sufficiently high probability that the strategy is also clean, as the casinos - but only to stay in the game long term.

In conclusion, surgery is not easy to change. This is a difficult job and that will test the limits of their patience and perseverance. If someone tells you otherwise .., buyers beware! This can be very profitable and rewarding business if done properly. After all it is a profession that requires a learning curve and experience is no different from an airline pilot or engineer. Understanding how to focus and learn the game allows you to get all the benefits advertised. Forex education is your will to dominate the process of Forex Trading.

Benifits of using Automated forex trading system

2009-04-09T07:32:00.000-07:00

If you are serious about foreign exchange, foreign exchange or trade, a mechanism for monitoring and controlling their business, without having him around the clock. That's where the automated Forex systems can help a lot. Many of the software for automatic currency have been developed to make trading life easier. We will explore the uses of these systems and see how it can work for you.

Save time tracking Forex

With automated Forex, you can analyze your Forex in real time and make changes to your real account - all through one program. Many of the new system to connect to the signals that are generated by foreign-exchange trading systems. Signals go to your account in real, so you can learn more about their open positions and manage your Forex of a place. These days trade signals can be much easier to manage from day to day when you can not take the time to check all of their trading systems or the opening and closing positions, as required. This is a professional adviser has the right system to your computer!

No hands in the trade needs

With automated Forex, there is no need to practice on Forex trading. Software for you. And the good news is that you continue to work while you sleep! Making trades day or night, so you can rest easy while the software keeps the currency on the trade date and cost.

Save and earn more money with Forex Automation

Time management is the key to success in Forex. Automated Forex gives you the ability to save and earn more money, because you do not lose important opportunities for Forex trading as when you control your trading systems all on your own. As a trader, you can have multiple trading systems in different markets (EUR-USD and others), and is still with them when they successfully automate. Commercial software systems for many of you, enabling you to reduce your business risk and the level of their equity curve.

Practice Forex

Some automated Forex systems allow you to create practice accounts so you can learn how to properly use the system without risk. This is much better that the formal errors from the account and virtual money to lose money as you're learning! If you are not able to create a practice that has its own automated system to find a software program or online application with which you can practice.

Trader psychology is not a factor

Automated Forex transcends their own thoughts and analyzes the market using actual data related to the Forex market. Your own trading psychology could cause you to be costly decisions because emotions or thoughts about the eruption on the market. You may be too emotionally involved to make their own business, sometimes. Automated Forex but will do it for you, help you overcome this problem. Automated exchange transactions, can have peace of mind knowing that your mali "expert advisor" is always watching and shopping for you!

To maximize the benefits of your initial investment, then you need to buy the best you can get in foreign currency, these are the two best on the market.

How to develop an effective Forex Strategy

2009-04-09T07:17:00.000-07:00

People who have seen trade in the currency markets, all agree that it is not easy to make money in currency trading. Making money through foreign exchange trading is not as easy as some thought May was to be.

Many people are led to believe that forex is easy money, but this claim is only from people who want to sell their software for Forex. The truth is that even when you have all the tools you need to change, it remains up to you to ensure that you will win or lose some money. Forex strategy is important in the currency trading regardless of the level of knowledge about the software and everything you have. Here are some tips on how to develop effective strategies.

Take a look at some locations

There are sites that offer help in creating an effective strategy for foreign exchange. Most of them require a membership. Others are offered for free, but there is no guarantee that it will create a strategy May as effective as can be. At the end of the strategy is their own decision. You'll be one to make sure that you use the strategy will produce the result you want. It is therefore important that before we have a clear goal that is achievable and realistic at the same time. Achievable is quite difficult to define as Forex trading offers unlimited opportunities to win. Realistic goal would depend on what you can do with the knowledge and you may have with the help of tools.

Consult expert

It is possible to develop its own strategy as they grow in knowledge in relation to foreign trade is concerned. You Forex strategy is a clear step by step plan of action that will lead to achieving your goal. You can seek help from people who know more currency trading you. This May be required to enroll in classes or tutoring forex course. Just make sure you have the right experts for your specific needs. There are many mentors who can be found on the Internet. You know how good because their denial is recognized by many people at different sites. You can visit the site and discussion forums to find these people.

Join this group

Another way to properly develop an effective strategy currency per group with similar interests. There are many people on the internet that you want to talk with foreign exchange trader like you who could get the necessary information. They, in turn, provide valuable information about your business experience, which you can find help in the development of its strategy.

It would be very difficult if you are passionate enough to do so. The first step to a successful strategy is always a clear goal. His goal on the right path and let him do the right decision. Whatever happens always return to its target and that will take care of their feet again. His change strategy must be flexible enough to allow changes and improvements as they go on the road.

Forex trading logs - what u need to know

2009-04-09T07:06:00.000-07:00

Forex trading requires close monitoring of various aspects of society. It can sometimes be difficult to keep all essential and necessary in the mind. It is important to have a way to analyze and evaluate their actions in order to run smoothly. One of the most important tools when it comes to forex trading is a record. Register of trade and helps you keep putting all the major tasks and operations. It is a very effective approach, you can easily get wins by household chores, especially when the business in the selection.

A change of registration of trade can be a simple table with the items of the network, such as date, price, number of open lots, exit price, not on the initial level of protection, goods, quantity, and so on. Although the majority of traders are using the diaries to register as a commercial, there are standard registers that are designed specifically for trade. Some records are in the form of books, while others are digital. May both have the same shape, but differ with the convenience and flexibility.

Along with the digitization of business and accounting practices, more and more business owners are turning to business records. Spreadsheet programs can do a very good record of operations for your company, and come with a host of computing and data management capabilities. Updating information in the registry can easily be automated allows great flexibility. Some of the programs for spreadsheet use common that can be used to create a simple registration of trade include Microsoft Excel and Lotus 1-2-3.

There are also many Forex trading software available on the market that can help in various tasks related to the changes, including the maintenance of the logbook. This software will most likely include market analysis and prediction tools, as well as entry and management capabilities, providing a decent package to manage its foreign exchange business.

Register of Commerce can help you improve your business and weaknesses to make the best of company. However, this is the first to ask why and what to do entrances and exits to the registry. If not, it is difficult to know what went wrong or what went right. Make sure you have a box to put comments after a period of trading. This will play a significant role in the adoption of important decisions regarding the strategies for adaptation in their business profitable trade.

How to hire a trusted forex broker?

2009-04-09T05:16:00.000-07:00

You can find out the exchange operations. May there be a sustainable system for you. You can do everything in its own right. But still there are some advantages of hiring a professional broker Forex trading.

For starters, do not have to rely on smaller seeds, so insignificant, can trade for less, and most of the marginal benefits. Agent should be able to get more return on investment. Secondly, you can try risky speculative trading.

You can ask a favor to his agent in trade deals with the less conventional plant that can rake in more profits. Finally, your agent can create your Forex financial portfolio, which is essential for creating long-term gains - rather than one or two quick profit.

The question is now: how to hire an intermediary trusted Forex trading?

Here are some tips:

1. Basic research in depth. Very good indicator of a reliable agent that, if he or she or the company is number one for all clients at once. This means that the business is going great, and that people are willing to put their money in the hands of the corridor.

Of course, there are still some risks associated with any hiring agent to represent him. However, their chances of success are much better than helping to find addresses for yourself (if you do not have a strong background in operations, changes), or if you hire a broker with little or no credentials.

Ask friends and relatives on the references, always in contact with the regulator whether the broker together is really listed as certified and legitimate. You can also visit their office and ask for confirmation and permission to work. If the corridor discourages personal visits, or no licenses and permissions set on the wall in the office (as they should be), you should just a corridor in the lower list.

2. Consult directly with a broker who is supposed to manage their affairs. Great Customer Service is always a good indicator of a good working relationship with you and your future agent. So, if you search around, make sure you do not forget that time of day.

If you are moving from one form to another broker, or none of them give any answer to your most basic questions, then you are better with some of you seriously consider your business. Sometimes even the most well-meaning brokerage firm May disappoint you give you a good talking to attract individuals to join its list of clients, and then moved to a novice who is still in its wheels. Before signing any contract, make sure you know, and have a connection to the agent in charge of their own.

3. Speaking of contracts, it is important that the attorney review the proposed contract before signing anything. Many people do not consider retaining an attorney for this purpose, but it is a crucial step to ensure the future of Forex trading.

You must know the legal limits of your relationship with your agent, and at the same time, which can be passive toward an agreement is sealed. It is therefore important to retain a lawyer with extensive experience in financial matters, especially in the exchange operations. If something is wrong with the whole contract, you can have your lawyer write a second draft, and negotiate a new contract with the agent.

Do forex trading robots really work ?

2009-04-08T05:05:00.000-07:00

Forex is a huge industry today. Successful traders make huge profits everyday in forex trading. Unfortunately, many people who do not know what they are doing to lose too much money. If it was easy, everyone would do this, right?

Recently, several companies come out with what they call Forex robot traders. What are the robots, computers, or better still, they do all the calculations when you buy and sell. It was supposed to take all the guesswork from the equation for you. Just open the program and put it on autopilot and hour just to cash in your bank account. Ahh, if it were only that simple. I will not lie, these robots are very good and can make money with them, but, as everything has its drawbacks. Here are some I found.

First, only works on systems MT4 robot MT4, and services that have automatic warning buy / sell system are not limited to a specific platform.

Second, MT4 EA are based on a purely mathematical formula (the combination of simple and exponential averages). Forex is an automated alert independent learning based on neural networks and genetic algorithms, as well as entry requires a lot of parameters (such as days of the week, part of the year, prices in other currencies, gold prices, the oil prices, holidays, etc.).

MT4 EA can not (or perhaps they can, but not so complicated system that requires high computing power, which is impossible to get the PC). EA typically takes into account only the story of a couple and as it is. We believe that the market can not be described with simple mathematical model with one parameter. This is a non-linear system like weather or flowing water.

Although the big robots, they are limited to what you can do. I suggest that the program Operations will be ready for a change of use of signals. They can earn money on Forex without thinking. This is a modern, more efficient and earn money today. It can be used anyone in all the countries of the world. All you need is access to the Internet several times a week, a few minutes each time. That's it. In this way you can capture the market for all currencies, not only of MT4.

Can we expect profits from automated forex robots ?

2009-04-08T04:13:00.000-07:00

Since its invention of the automated Forex software has become so popular among Forex traders. This software is also called Forex robot. A trading robot has been designed to simplify operation. You can create different Forex transactions even without your supervision.

However, you must take into account that the majority of forex robots lose in the market. It is important, therefore, choose the Forex robots that really work for you.

Ultra Care hyped for automated systems

Better be careful with automated systems or forex robots which promise instant wealth for you. Most of these programs are usually double-hyped promise of Forex profit each month, without reduction.

It would be impossible to have a forex system, without reduction. On the Forex market is high risk and market volatility. Currency fluctuations in the prices so that you can win time, but there are times when losses are incurred.

So, if developers Forex robot to say that your system does not have a reduction, your robot is probably a scam. Even the most successful and profitable forex trader can experience withdrawal. It is a natural hazard in the currency market and can not be avoided.

How can you benefit from the shops Robot

You can get a lot of robot automated currency in the long term. A trading robot is actually a strategic tool. On what to look for an automated system that can provide at least 50 percent of annual profits.

Automated system with a history of 80 to 100 percent annualized gain would be ideal. However, it must make a thorough investigation of this type of automated system to determine whether the projected benefits are correct.

A robot Forex trading does not eliminate the withdrawal, but can be reduced to a minimum 20 percent. A good automated system should also have a maximum period of two months. These capabilities will ensure that your account will not be exposed to greater market risk.

Other benefits you can receive from Robots Automated

With increasing profitability and minimize risk, you will be able to simplify their daily business activities through the use of automated bots. All you need to do is to configure the system according to a pre-logic. Forex robot can then take care of their business even while sleeping.

Automation of their business activities and allow you to keep abreast with the activities in the international currency market. On the Forex market is open 24 hours a day and it would be impossible for you to stay glued to the computer at any time of day.

If you have a Forex robot, you'll never miss an opportunity to any May occur in the market. The business, therefore, can be very effective. Such an effect could lead to long-term gains in the market.

Forex robots and automated systems can actually make money for you. While selecting the right software, you can become a huge commercial success using automated Forex trading software

Risk Management strategies in Forex

2009-04-08T03:34:00.000-07:00

All companies are open to a certain degree of risk. These risks are often the result competitiors prices, exchange rates, raw material prices, interest rates, among others. To ensure that your business does not go down, effective risk management strategies must be implemented. On the currency market is not different. Although statistics show that almost 70% of all currency trading success, is 30%, which is a concern.

An exchange rate risk is the potential gain or loss arising as a result of trading in currency markets. To ensure that the risk of May to be incurred is significantly reduced, each operator must take the risk management strategies of foreign exchange. These strategies for the management of exposures should be well understood, internalized and adapted to work better to protect themselves from unnecessary risks and to ensure that the performance of profitable Forex.

There are some guidelines to lessen the risk of foreign exchange. One of them is to understand that the value of any currency always remains the same, which changes often and it has an impact on companies and individuals involved in international business. Two is that these changes in exchange rates affect the value of its assets, liabilities and their cash flow.

Risk management strategies

Profit targets

When trading currencies on the market, it's better not let your greed get the better of you. Have a pre-profit targets and stop further commercial success after these goals. This creates a principle of business discipline because the Forex market is a speculative market, you do not know what will happen tomorrow. Therefore, the release as soon as possible and to live in the store another day.

Limit losses

Not all trades were successful. In this case, it ensures that your agent knows your starting point for a loss. This will assist in controlling risks. It also gives advance knowledge of the amount of risk that has emerged in the worst happens.

Enter your stop and limit orders with precision.
Stop for trade should not be too close to market prices, as little fluctuation in prices can trigger an order. Limit orders to trade, but not too much should not be too close to market prices.

Understanding the complexity of the Forex market Forex is the best bargaining tool that you can own. Take the time to adjust the sound level of revenue for your business.

Internal funds as source of finance

2009-04-01T10:22:00.000-07:00

Internal finance is also known as self financing by a company. Internal finance includes the funds generated within the corporate unit irrespective of the nature of source. In other words the extent of profitability after tax, the size of dividend payments and the amount of depreciation provided for along with the reserves and surplus all contribute to the sources of internal funds and these funds can be used by a company financing the cost for acquisition of fixed assets, expansion modernization or diversification, etc. There exists a controversy whether depreciation should be taken as a source of funds. Whatever may be the outcome of such controversy, the fact remains that the depreciation is a sum that is set apart out of profits and retained within the business and finance the capital needs in the normal business routine, and as such depreciation in true academic sense be deemed as a source of internal finance.

Sources of Total Finance

Sources of Internal Finance

Paid up capital

- Equity and

- Preference

Reserves and surplus

- including Share Premium

Secured Loans

Unsecured loans

Current Liabilities and Provisions

Depreciation Provision

Bonus issue of shares paid-up

Bonus issue of preference shares

Reserves and Surpluses

Provision including provisions for depreciation.

Amongst all the sources of internal finance, main source is depreciation on an average as revealed by some research studies done by research scholars. The second source is reserves and surplus and lastly the bonus issue of preference shares or equity shares.

As regards depreciation, the term denotes the funds set apart for replacement of worn-out assets. Depreciation is a deduction out of profits of the company calculated as per accounting rules on the basis of estimated life of each assets each year to total over the life of the assets to an amount equal to to original value of the assets. Although depreciation is meant for replacement of particular assets but generally it creates a pool of funds which are available with a company to finance its working capital requirements and sometimes for acquisition of new assets including replacement of worn-out plant and machinery. Depreciation is an expenditure recorded in the accounting system of a company and is allowed to be deducted while arriving at the net profits of the company subject to adherence of the percentages of allowable depreciation fixed under the tax laws.

Surplus are total sum of the left overs from various accounts in the accounting system of a company i.e. the "surplus" is the remaining part of the net income after distribution of dividends to the shareholders. A company is required to transfer 10% of the profit to reserves while declaring divident which could be more depending upon the profitability of the company.

A company can distribute dividend out of the surplus but according to the rules as prescribed from time to time by the Government. Surplus is accumulated from other sources besides the remainder of earned income which are known as capital surplus and surplus arising from revaluation of assets. The entire surplus belongs to the equity holder as part of the net worth. The main source of surplus remain the net profits from operations at a close of accounting period, past accumulated profits, conversion of unnecessary reserves, and non operating income. Surplus remain an important source of capital for both newly promoted companies and established companies. Surplus adds to the credit standing of newly promoted company to establish a market price for its equity shares. For an established company it becomes source of finance for comparison / diversification motivated schemes. Surplus also supplement the reserves.

Reserve, surplus and provisions, both form good sources of financing internally the development programmes within the company without much depending upon outside funds through borrowing. They meet the fixed and working capital requirements within the industry. Internal financing through utilisation of company's own funds is also known as ploughing back of profits. Besides, internal funds help the company in number of ways viz

1. Achieve a suitable dividend policy and enlisting the support of the public;

2. help internal finance of projcts without resumption of borrowings;

3. deficiencies in liability and reserves are fulfilled out of the retained income;

4. it is used for retiring bond or debentures for building up sinking funds for redemption of debt.

Thus, reserves and surplus add to the capital formation at micro level. The main determinants of internal funds are corporate earnings, taxation and corporate savings, and the dividents policy of the company.

Company Deposits and Benefits to the Depositors

2009-04-01T09:51:00.000-07:00

Indian financial system has a popular practice of acceptance of fixed deposit from the public by all the type of manufacturing firm and non-banking financial companies in the private sector.

The term deposit has been defined in 58A of the Companies Act 1956, as any deposit of money with and includes any amount borrowed by a company but shall not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India.

Now-a-daya public deposits are a prominent source of finance to the companies. Non-banking companies and even big group of companies resort to acceptance of deposits from public owing to number of advantages available like:

1. Funds are available at low cost.

2. There is no need to provide security.

3. Process is very simple and no restrictive covenants are involved.

4. Restrictions put by the RBI on financial institutions to advance, to prevent hoarding and black marketing leads the companies to accept deposits from the public.

5. Tax deductibility of interest paid on deposits.

Benefits to the Depositors:

1. High rate of interest

2. Maturity period is relatively short.

The companies (Acceptance of Deposit) Rules, 1975 require the companies to comply with the following for accepting deposits:

1. Limit upto which deposit can be accepted.

2. Maximum interest and brokerage payable, on deposits.

3. Maintenance of liquid assets.

4. Issue of advertisement or statement in lieu of advertisement,

5. Form to be supplied to the company,

6. Receipt to be supplied by the company.

7. Register of deposits

8. Return to be filed with the Registrar

9. Penalties for default.

Understanding The Difference Between Debentures And Stocks And Bonds

2009-03-16T10:59:00.000-07:00

A debenture is an unsecured loan you offer to a company. The company does not give any collateral for the debenture, but pays a higher rate of interest to its creditors. In case of bankruptcy or financial difficulties, the debenture holders are paid later than bondholders. Debentures are different from stocks and bonds, although all three are types of investment. Below are descriptions of the different types of investment options for small investors and entrepreneurs.

Debentures And Stocks

When you buy stocks, you become one of the owners of the company. Your fortunes rise and fall with that of the company. If the stocks of the company soar in value, your investment pays off high dividends, but if the stocks decrease in value, the investments are low paying. The higher the risk you take, the higher the rewards you get.

Debentures are more secure than stocks, in the sense that you are guaranteed payments with high interest rates. The company pays you interest on the money you lend it until the maturity period, after which, whatever you invested in the company is paid back to you. The interest is the profit you make from debentures. While stocks are for those who like to take risks for the sake of high returns, debentures are for people who want a safe and secure income.

Debentures And Bonds

Debentures and bonds are similar, but bonds are more secure than debentures. In the case of both, the company pays you a guaranteed interest that does not change in value irrespective of the fortunes of the company. However, bonds are more secure than debentures, and carry a lower interest rate. In the case of bonds, the company provides collateral for the loan. Moreover, in case of liquidation, bondholders will be paid off before debenture holders.

A debenture is more secure than a stock, but not as secure as a bond. In case of bankruptcy, you have no collateral you can claim from the company. To compensate for this, companies pay higher interest rates to debenture holders.

Additional Help

All investments including stocks, bonds, and debentures, carry an element of risk. If you are unsure of the investment options that are best for your business, then you can ask a small business consultant who will guide you to the best investment options available to you. Investing wisely today can pay heavy dividends tomorrow. Do as much research as possible on the company you're investing in, whether that investment is in stocks, bonds, or debentures. Research is a sure fire way to reduce risk and increase profits.

Importance of Debentures

2009-01-12T06:41:00.000-08:00

Importance of debentures and bonds in the capital structure of a company is very significant particularly due to the following reasons:

1. Debentures holders or suppliers of loan capital have no controlling interest in the company.

2. Finance is available for a fixed period with certainly and thus the company can adjust its investment plans suitably by taking into account the funds available.

3. It enhances the earnings of equity holders through the operation of financial leverage.

4. In depressed market conditions debentures provide a good source of finance for a company and is beneficial to the investors.

5. It provides long-term finance to company on easy and cheap terms. The cost of debt is lower than cost of equity or preference shares as interest is tax deductible.

6. Debenture help in mobilization of savings from public particularly from those investors who are risk aversive.

Debentures as a source of finance suit companies which have regular earnings to service the debt, have higher proportion of fixed assets in their assets structure which offers adequate security and motivates investors. The company has to ensure maintenance of prudent debt equity ratio.

Recent trend in the issue of debentures has been quite encouraging because of the following factors viz.

1. Support from investment institutions is adequately available. LIC, UTI, GIC and others have been in field to invest public funds in the debenture issues;

2. Emergence of institutions acting as trustees for debentures holders have reposed confidence in the investing public for the security of their money and safeguard of their interest as creditors;

3. Institutional underwriters, merchant banks in public and private sector have come up to render successful underwriting services to the investor as well as the needy companies;

4. Investors preference to high yielding securities with minimum risk has encouraged issue of debentures by the companies.

5. Cost of raising money through debenture is minimum as against the cost involved in other sources of finance;

6. Debenture issuing company is obliged now to create a debenture redemption fund to protect the interest of debenture holders.

Debentures and Bonds

2009-01-08T22:54:00.001-08:00

The companies Act, 1956, defines debentures as "including debentures stock, bonds and any other securities of a company whether constituting a charge on the assets of the company or not". The terms debentures and bonds are interchangeable, and represent loan component in the capital structure of the company. Providers of debenture capital are known as debenture holder. They are creditors of the company and have no right in the company except for payment of interest on their loans and repayment of the loans in accordance with the terms and conditions on which they are issued. The company can raise money against issues of debentures as authorised under its Memorandum of Association and Articles of Association.

Debenture stock is the consolidated mass of debenture capital for the sake of convenience. Debenture stock differs from debentures in form rather than in substance.

The difference classes of debentures are:

1. Security

Uncensored / Naked Debentures
Secured Debentures.
Convertible Debentures.
Partially Convertible Debentures.

2. Repayment of Capital

Redeemable Debentures.
Irredeemably Debentures

3. Transfer

Bearer Debentures.
Registered Debentures.

Debentures may be secured or unsecured and companies frequently issue both kinds of debentures. Secured debentures bear charge on certain assets of the company viz., both existing and future, upon which the debenture holders may look in the event of default on interest payment/repayment of loan installment. Unsecured debenture holders on the other hand, are entitled to repayment equally with ordinary secured creditors and rank in priority for their repayment vis-a-vis unsecured creditors. In the event of liquidation the unsecured debenture holders rank after secured debentures/loans equally with general creditors and before share capital. Trustees are appointed for unsecured loan stock in the same way as for secured debenture stock but they hold to assets and simply watch the interests of stock holders particularly with regard to restrictions on borrowings which are included in the terms of issue of debentures.

Both these types of debentures may be convertible or non-convertible. Convertible debentures are those which carry a right of being converted into equity capital of the company in a phased manner on fixed dates, whereas this privilege is not available to non-convertible debentures. The difference between the two, from the point of view of security, is that convertible debenture stock carries a lower coupon rate than the non-convertible loan stock because the former carries the right of conversion into equity shares at some future date. Debentures of some companies are quoted on Stock Exchange.

Other classification of debentures include redeemable and irredeemable debentures or perpetual debentures. Debentures which are repayable on the expiry of the term of the loan are called redeemable debentures. These debentures can be reissued on redemption. When a company re-issues the redeemed debentures it keeps the old debentures alive by transferring them to a nominee of the company who transfers them back and re-issue to the new holders. The perpetual debentures shall not be paid back and become redeemable only on winding up of a company or on appointment of recoverer as per the terms of agreement of the issue of debentures.

Another way of classification is bearer debentures and registered debentures. Bearer debentures are negotiable instrument and are transferable by mere delivery like share warrants. The holders of such debentures is entitled to claim interest and recover the principal when due. He is a holder in due course unless contrary is proved. A person who acquires them in a due course gets a good title. No stamp duty is paid on transfer of such debentures as these are not required to be registered in the name of the holder. On the other hand, registered debentures are required to be registered in the name of the holder in the register of the company. They are transferable in the same manner as the shares. The interest payment and the payment of installments of principal sum are made to the holders, whose names appear in the register of debenture holders.

In the last few years, another instrument has gained immense popularity, i.e. partially convertible debentures. Combining the features of both types of debentures and equity shares, the instrument provided an opportunity to the corporate sector to fix a lower premium on the issues of the company.

Management of Foreign Exchange Transactions

2009-01-03T19:52:00.000-08:00

Several measures were undertaken by the Reserve Bank to liberalise foreign exchange transactions by residents during 2004-05. The condition that shares should be offered at a concessional price for the acquisition of foreign securities by residents under the Employees Stock Option Plan (ESOP) was dispensed with. Shares acquired under the ESOP were allowed to be sold without obtaining prior permission of the Reserve Bank, provided the proceeds thereof are repatriated to India.

With a view to promoting Indian Investments overseas, the ceiling of overseas investment by Indian entities was raised from 100 percent to 200 percent of their net worth under the automatic route. Corporates were granted general permission for conversion of the ECBs into equity with the exception of import payable deemed as ECBs and subject to prescribed reporting requirements. General permission was also granted for transfer of shares and convertible debentures (excluding financial services sector) subject to compliance with the terms and conditions and reporting requirements for transfer by a person resident in India to a person resident outside India and vice versa.

The foreign exchange market remained generally stable during 2004-05. In response to the switches in capital flows during the year, the rupee moved in a relatively wide range of Rs. 43.36 to Rs.46.46 per US dollar during the year. The rupee appreciated by 2.2 percent against the US dollar on an annual average basis while it weakened against the euro, the pound sterling and Japanese yen by 4.5 percent, 6.3 percent and 2.6 percent, respectively, during 2004-05. Reflecting these cross currency movements, the nominal effective exchange rate (NEER) depreciated by 1.9 percent during 2004-05.

The turnover in both the merchant and inter bank segments of the foreign exchange market increased sharply, reflecting the strong growth in merchandise trade, services and capital flow. While the merchant turnover increased from US $ 54.0 billion in April 2004 to US $ 88.6 billion in March 2005, the interbank turnover increased from US$ 195.7 billion to US $ 237.0 billion during the same period. The ratio of inter-bank to merchant turnover hovered in the range of 2.7 - 3.6 during the year, indicative of orderly market conditions.

According to the BIS Triennial Survey, the average daily turnover in the International markets rose to US $ 2.4 trillion in 2004 from US $ 1.6 trillion in 2001. India's share in global foreign exchange turnover has been increasing, although it still remains quite low...

Forex management – Recent developments, Indian forex market:

2008-12-31T09:25:00.000-08:00

Recent developments in forex management in India are undergoing rapid transformation. It is increasingly getting integrated within the broad ambit of financial markets. Over the last fifteen years, momentus changes have happened in the financial sector. The global foreign exchange markets have grown manifold in the recent years. The BIS Triennial Central Bank Survey on forex and derivatives markets 2004 indicates a substantial rise in activity in foreign exchange markets across the world. Average daily turnover at US 1.9$ Trillion in April 2004 showed an increase of 57% and 36% at current and constant exchange rates, respectively compared to April 2001, reversing the fall in global trading volumes between 1998 and 2001.

Both global factors, such as search for yield and a secular deepening in Asian financial markets contributed to the strong growth. In this context, it is important to note that the share of trading between banks and financial customers rose significantly from 28 percent in 2001 to 33 percent in 2004. However, the currency composition of turnover has not changed significantly. The US dollar was on one side of 89 percent of all transactions, followed by the Euro (37 percent), the Yen (20 percent) and the Pound Sterling (17 percent).

In terms of currency pairs, US dollar/ Euro continued to be by far the most traded currency pairs in April 2004, according for 28 percent of global turnover, followed by US dollar/ Yen with 17 percent and US dollar/ Pound Sterling with 14 percent. The percentage share of the Indian Rupee, though minuscule, has almost trebled to constitute 0.3 percent of total daily turnover.

Indian Forex Market

In an open economy environment, the foreign exchange market assumes critical importance for stability of the financial system since banks’ balance sheets are influenced by the foreign capital inflow and various other external transactions directly or indirectly through credit exposures. The Indian forex market has widened and deepened since the 1990s on account of implementation of various measures recommended by the High Level Committee on Balance of payments in 1993 (Chairman: Dr. C. Rangarajan), the Expert Group on Foreign Exchange Markets in India in 1995 (Chariman: Shri O.P. Sodhani) and the Committee in Capital Accounting Convertibility in 1997 (Chairman: Shri S.S. Tarapore).

With the transaction to a market-determined exchange rate system in March 1993 and the subsequent gradual liberalization of restrictions on various external transactions, ensuring orderly conditions in the forex market in India has become one of the key objectives. The Reserve Bank has undertaken various measures towards development of spot as daily turnover increased to US $ 12.1 billion in 2004-05 (April-March) from US $ 3.7 billion in 1996-97. The top 30 banks in India account for approximately 90 percent of the overall turnover in the market.

Foreign Exchange market in India

2008-12-23T22:40:00.000-08:00

Foreign Exchange market in India:

The forex market in India is regulated by Reserve Bank of India. Participants in this market are the Authorized Money Changers and the Authorized Dealers.

Authorized Money Changers:

In order to provide facilities for encashment of foreign currency to visitors from abroad, especially foreign tourists, Reserve Bank has granted licenses to certain established firms, hotels and other organizations permitting them to deal in foreign currency notes, coins and travellers cheques subject to directions issued to them from time to time. These firms and organisations who are generally known as "authorized money changers" fall into two categories, viz. "Full-fledged money changers" who are authorized to undertake both purchase and sale transactions with the public and "Restricted money changers" who are authorized only to purchase foreign currency notes, coins and travellers cheques, subject to the condition that all such collections are surrendered by them in turn to an authorised dealer in foreign exchange / full fledged money changer.

Authorised Dealers in Foreign Exchange:

Authorisations in the form of licenses to deal in foreign exchange are granted to banks which are well equipped to undertake foreign exchange transactions in India. Authorisations have also been granted to certain financial institutions to undertake specific types of foreign exchange transactions incidental to their main business.

Turnover in the Foreign Exchange market has two components, merchant transactions, i.e. transaction undertaken by importers and exporters and inter-bank transactions. The Inter-bank transactions are much larger as compared to the merchant transactions. The transactions are either Foreign currency / Indian Rupee or Foreign Currency / Foreign Currency.

The nature of transactions in case of merchant transactions in Spot, Forward and Forward Cancellation whereas in case of inter-bank transactions, it is Spot, Swap and Forward.

A specimen of transaction is given below:

Economy and monetary union in Europe

2008-12-23T22:16:00.000-08:00

The 1992 Maastricht Treaty on European set the framework for forming and Economic and Monetary Union (EMU) with a single currency, the euro and single monetary policy defined by common independent authority, The European Central Bank. EMU creates various operating risks for IBRD because significant changes will have to be implemented including currency conversion, modification of payment and settlement systems, re-denomination of currencies and financial report in changes. The main challenge posed by EMU is the extended transition period (three years) when payments can be made in each participating member state in euro and in the previous national currency which remains a sub denomination of the euro during the transition. IBRD has created an international euro task force which is working in conjunction with various business unit groups to identity and address the changes required by the introduction of the euro. Management expects that a plan will be adopted and changes will be International Scenario implemented on a schedule which meets the EMU start date of January 1, 1999.

Asian Currencies Climb as Stocks Rally; Won, Rupiah Lead Gains

2008-12-18T01:24:00.000-08:00

Asian currencies advanced, led by South Korea’s won and Indonesia’s rupiah, as a surge in regional stocks this month added to speculation investors are returning to emerging markets.

Eight of the 10 most-active Asian currencies outside Japan gained as U.S. interest rates as low as zero may prompt global investors to buy higher-yielding assets. The won, Asia’s worst performer this year, rose to a six-week high as overseas funds bought 533 billion won ($412 million) more Korean shares than they sold so far in December. The rupiah climbed to the highest level in almost seven weeks.

“Asia seems to be attracting an uptick in equity flows,” said Dwyfor Evans, a strategist with State Street Global Markets in Hong Kong. “There’s just a lot of cheap money out there at the moment.”

The won gained 2.2 percent to 1,295.75 per dollar as of 12:54 p.m. local time, according to Seoul Money Brokerage Services Ltd. It touched 1,288.95, the strongest since Nov. 5. The Indonesian currency added 1.3 percent to 10,887. The Malaysian ringgit rose 1.3 percent to 3.4837 per dollar.

Asian stocks rose for a second day after the Federal Reserve said on Dec. 16 it will use “all available tools” to help resume growth in the world’s biggest economy. The Fed said it will target a federal funds rate of between zero and 0.25 percent.

The MSCI Asia Pacific Index of regional shares is up 9.8 percent in December, headed for its biggest monthly gain since June 1999. The last time the index ended a month higher was in April this year.

‘Yen Intervention’

The yen fell from near a 13-year high against the dollar after Japanese Finance Minister Shoichi Nakagawa said the government is ready to take action in the foreign-exchange market if needed. The Japanese currency also declined toward a five-week low versus the euro on speculation Japan will sell its currency to protect overseas earnings of its exporters.

“We are at such low levels now that yen intervention becomes a possibility,” said Saburo Matsumoto, senior manager of foreign-exchange sales at Sumitomo Trust & Banking Co. in Tokyo.

Japan’s currency fell to 87.55 per dollar in Tokyo from 87.24 yen late yesterday in New York, when it rose to 87.14, the highest level since July 1995. Against the euro, it dropped to 126.31 from 125.80 yesterday. The yen may decline to 88 per dollar today, Matsumoto said.

Malaysia’s Ringgit

Malaysia’s ringgit rose for a fourth day to reach a two- month high. The currency appreciated as much as 1.5 percent to 3.4780 per dollar, the strongest level since Oct. 14, according to data compiled by Bloomberg.

The ringgit has weakened 5 percent this year, headed for its first annual loss since Bank Negara Malaysia abandoned a fixed- exchange rate of 3.8 to the dollar in July 2005.

A global recession prompted investors to flee emerging markets this year in favor of safer assets such as the U.S. dollar, sending the Korean won down 28 percent and India’s rupee almost 17 percent. Thailand’s baht dropped 14 percent, the rupiah 13.7 percent and the Philippine peso 11.5 percent.

The Taiwan dollar rose to a two-month high today after overseas investors bought more of the island’s shares than they sold on seven of the last eight trading days.

Taiwan’s currency is “relatively stable,” the central bank said yesterday after the currency rose 1 percent, the biggest gain since Oct. 30.

The Taiwan dollar and other “perceived-riskier currencies are doing quite well,” said State Street’s Evans. “The U.S. will do whatever’s necessary to kick-start the economy and the countries that stand to gain most are the exporters such as Taiwan.”

The local dollar rose as much as 0.9 percent to NT$32.440 versus the U.S. currency, the strongest since Oct. 16, before trading at NT$32.465, according to Taipei Forex Inc.

‘Bias Toward Peso’

The Philippine peso advanced to the highest in more than two months as economists in a Bloomberg News survey forecast Bangko Sentral ng Pilipinas will reduce the rate it pays banks for overnight deposits to 5.75 percent today from 6 percent. The Federal Reserve’s reduction of its benchmark rate this week widened the premium offered by the Philippines to the most in four years.

“We are seeing a bias toward the Philippine peso due to the interest-rate differential,” said Lito Biacora, vice president for treasury at Bank of the Philippine Islands in Manila. “The recent aggressive Fed cut is supporting the high-yield currencies and the market is pricing in a less aggressive rate cut in the local currency.”

The peso strengthened as much as 0.7 percent to 46.55 per dollar, the highest since Sept. 29, before trading at 46.66 in Manila, according to Tullett Prebon Plc. The peso is headed for its first annual decline in four years and the biggest drop since 2000.

Elsewhere, Singapore’s dollar strengthened 1.5 percent to S$1.4362 against the U.S. currency. Thailand’s baht advanced 0.2 percent to 34.46. Vietnam’s dong traded at 16,985 versus 16,983 yesterday.

Recommendations by Committee on Capital account convertibility

2008-12-05T02:44:00.000-08:00

The committee's recommendations for a phased liberalization of controls on capital outflows and inflows over the three-year period, inter alia, include:

i) Indian Joint Ventures/Wholly-Owned Subsidiaries (JVs/WOSs) should be allowed to invest up to US $ 50 Million in ventures abroad at the level of the authorized dealers (ADs) in Phase I with transparent and comprehensive guidelines set out by the Reserve Bank. The existing requirement of repatriation of the amount of investment by way of divident, etc., within a period of 5 years may be removed. Furthermore, JVs/WOSs could be allowed to be set up by any party and not be restricted to only exporters/exchange earners.

ii) Exporters/exchange earners may be allowed 100 per cent retention of earnings in Exchange Earners Foreign Currency (EEFC) accounts with complete flexibility in operation of these accounts including cheque writing facility with Phase I

iii) Individual residents may be allowed to invest in assets and financial markets abroad up to US $ 25,000 in Phase I with progressive increase to US $ 50,000 in Phase II and US $ 1,00,000 in Phase III,. Similar limits may be allowed for non-residents out of their non-repatriable assets in India.

iv) SEBI registered Indian Investors may be allowed to set up funds for investments abroad subject to overall limits of US $ 500 million in Phase I, US $ 1 billion in Phase II and US $ 2 billion in Phase III.

v) Banks may be allowed more liberal limits in regard to borrowings from abroad and deployment of funds outside India. Borrowings (short and long-term) may be subject to an overall limit of 50 percent of unimpaired Tier I capital in Phase I, 75 percent in Phase II and 100 percent in Phase III with a sub-limit for short-term borrowing. In case of deployment of funds abroad, the requirement of section 25 of Banking Regulation Act and the prudential norms for open position and gap limits would apply.

vi) Foreign direct and portfolio investment and disinvestment should be governed by comprehensive and transparent guidelines, and prior Reserve Bank approval at various stages may be dispensed with subject to reporting by ADs. All non-residents may be treated on part for purposes of such investments.

vii) In order to develop and enable the integration of forex, money and securities markets, all participants in the spot market should be permitted to operate in the forward markets; FIIs, non-residents and non-resident banks may be allowed forward cover to the extent of their assets in Indial; all-India financial institutions (FIs) fulfilling requisite criteria should be allowed to become full fledged Ads; currency futures may be introduced with screen based trading and efficient settlement systems; participation in money market in Government securities the role of primary and satellite dealers should be increased; fiscal incentives should be provided for individuals investing in Government securities; the Government should set up its own Office of Public Debt.

viii) There is a strong case for liberating the overall policy regime on gold; banks and FIs fulfilling well defined criteria may be allowed to participate in gold markets in India and abroad and deal in gold products.

The Committee has also stated that the timing and sequencing of capital account convertibility would be greatly facilitated by the proposed changes in the legislative framework governing foreign exchange transactions.

Capital account convertibility - Indian Case

2008-11-28T05:23:00.000-08:00

Capital account convertibility is one of the essential parameter not only for an effective integration of the financial market of domestic economy to the world economy but also for India's maturing as mega world economic power in the prevailing environment of competition, deregulation and diffusion of information technology. Capital account convertibility of full convertibility in simple term refers to an economic tool expected to engender more efficient capital flows and catalyse growth impulses and enable the society to achieve a stable balance between its internal and external prices. The basic objective of capital account convertibility is to:

1. Deepen and integrate financial markets;
2. Raise the access to global savings;
3. Discipline domestic policy markets; and
4. Allow greater freedom to individual decision making.

A more open capital account will facilitate higher availability of larger capital stock, supplementing domestic resources thereby leading to higher growth and reducing the cost of capital and also facilitating access to the international financial market.

In a developing economies aspiring for high rate of economic growth and development, capital account convertibility brings capital account liberalization i.e. no restrictions on capital inflows and capital outflows. This exposes the economy to the volatility of cross border capital movements. The experiences of Latin America demonstrates that useless macro-economic fundamentals are in line with those in the rest of the world, such capital account liberalization is not sustainable. The macro-economic fundamentals include rate of infiction, interest rate, fiscal deficits, balance of payments equilibrium and adequate supervision over bank. India has a long way to go before all this is ensured, primarily because the domestic economic reforms have yet to take full hold. Indian Government have already permitted the full convertibility of rupee on current account. Full convertibility on capital account is yet to be materialized.

The Reserve Bank of India on 29.02.1997, appointed a Committee on Capital Account Convertibility under the Chairman of S.S. Tarapore. The Committee submitted its report for consideration of the Government and Reserve bank on 30.05.1997.

The Committee on Capital Account Convertibility was give the following terms of reference: (i) to review the International experience in relation to capital account convertibility (CAC), (ii) to recommend measures for achieving CAC, (iii) to specify the sequence and time-frame for such measures, and (iv) to suggest domestic policy measures and changes in institutional framework.

Against the backdrop of stable and sustainable growth in India and progress achieved in entrenching structural reforms, the Committee has recommended a phased implementation of CAC over a three-year-period: Phase I (1997-98), Phase II (1998-99) and Phase III (1999-2000). The committee has suggested that the implementation for each phase should be on a careful and continuous monitoring of certain preconditions/signposts and certain important attendant variables identified from the lessons of the International experiences and the specifics of the Indian situation.

The preconditions/signposts recommended by the committee include:

i) Fiscal consolidation in the form of gradual reduction in the Centre's Gross fiscal deficit to GDP ration to 3.5 percent in 1999-2000 accompanied by a reduction in the States' deficit as also a reduction in the quasi fiscal deficit, introduction of a Consolidated Sinking Fund (CSF);

ii) Mandated inflation rate for the three-year period at an average of 3-5 percent with an early empowering of the Reserve Bank to have full independence to achieve the inflation rate mandated by the Parliament,

iii) Consolidation of financial system with full deregulation in interest rate in 1997-98, gradual reduction in the average effective cash reserve ration (CRR) to 3 percent in 1999-2000, reducing in gross non-performing assets (NPAs) to 5 percent in 1999-2000 and conversion of the weak banks into narrow banks;

iv) Monitoring of attendant macro-economic indicators e.g. the exchange rate, the balance of payments, the adequacy of reserves while determining the appropriate timing and sequencing of CAC and strengthening of the financial system; and

v) Prepare the financial system for CAC in terms of bringing about a level playing field between various participants in the financial system, removing market segmentation, uniform treatment of resident and non-resident liabilities for purpose of reserve requirements, improving risk management systems in the financial system, introduction of more stringment capital adequacy standards and prudential norms, effective supervisory system and greater autonomy for banks and financial institutions.

On the exchange rate policy, the Reserve Bank should have a monitoring band of +/-5 percent around the neural Real Effective Exchange Rate (REER). While the REER band would be declared, the Reserve bank should ordinarily intervene as and when REER is outside the band. In view of growing internationalisation of the Indian Economy, over the three-year period, external sector policies should be designed to ensure a rinsing trend in the current receipts (CR) to GDP ratio from the resent level of 15 percent as well as to reduce the debt-service ratio to 20 percent..

Capital account convertibility - Convertibility of rupee

2008-11-21T03:08:00.000-08:00

Capital account and, by extension, full convertibility of the rupee has emerged as an often debated issue in the context of the liberalization process in India.

It is worth nothing, at the outset, that India is not alone in its endeavor to make its currency convertibility, nor is it the only country which is facing the daunting task of overcoming several hurdles on its way to full currency convertibility. Indeed, only the developed economics of North America, Western Europe, Japan and Australia have joined the race towards full convertibility. A number of Latin American, Central European and Asian Countries, however, have joined the race towards full convertibility. Aside from India, the list of these countries include Argentina, China, Chile, Columbia, Indonesia, Malaysia, Philippines, Republic of Korea and Thailand. Importantly, these countries are not at the same stage of currency convertibility. The Korean currency, for example, is much convertible than the Chinese currency. Indeed, it is important to note at the outset that the issue is not a matter of choice between convertibility and non-convertibility. There exists a wide spectrum between these two extremes, and India and the aforementioned countries lie at various points of this spectrum. The important issue, in other words, is to decide the extent to which a currency (say, the rupee) will be convertible at a point of time, and the pace at which it will attain higher levels of convertibility in the future.

In order to appreciate the meaning and the implication of currency convertibility, however, one has to first take into consideration two different aspects. A currency, it has to be noted, can be convertible on the current account of balance of payments (BOP), and/or on the capital account of BOP. The currency is deemed fully convertible if it is convertible on both these accounts. A clear understanding of the notion of convertibility, therefore, entails an understanding of the current and capital accounts of BOP.

As such, the current account of the BOP comprises trade in goods and services. In other words, the current account balance takes into account exports, imports, and net foreign income from unilateral transfers. The capital account of the BOP, on the other hand, takes into account cross-border flow of funds that are associated with financial or other assets in the trading countries. For example, the direct and portfolio investments made by foreign investors, in India, are captured by the capital account balance of the BOP. The capital account also encompasses foreign investments of Indian companies, foreign aid and bank deposits of Non-resident Indians (NRI).

A currency is deemed convertible on the current account if it can be freely converted into other convertible currencies for purchase and sale of commodities and services. For example, if the rupee is convertible on the current account an Indian firm should be able to freely convert rupee into Yen (JPY) to purchase mods from a Japanese Company. Similarly, a German company should be able to freely convert the mark (DM) into rupee to pay an Indian software consultancy firm for its services. It is evident that the ideal of free trade lies at the heart of current account convertibility.

Capital account convertibility, on the other hand, implies the right to transact in financial and other assets with foreign countries without restriction. For example, if a currency is convertible on the capital account, the residents of the domestic currency may freely convert it into other (convertible) currencies to purchase and maintain bank accounts abroad. Similarly, residents of other countries should also be able to freely convert their currencies into the domestic currency to purchase domestic capital and money market instruments. In other words, capital account convertibility is associated with the vision of free capital mobility.

Convertibility as an issue, and subsequently as a goal, was a priority in the agenda of the member countries of the International Monetary Fund (IMF) which was born out of the Bretton Woods Agreement. During the Bretton Woods period, "[t]he term convertibility [was] used in two different contexts: convertibility into gold and convertibility into other currencies. Only the United States maintained gold convertibility during Bretton woods... Convertibility into other currencies for current account transaction purposes was a main goal of Bretton Woods and was reached, to a large extent, early on in the system; however, the agreements to the IMF allowed more flexibility with regard to the imposition of exchange controls on capital account transactions. The flexibility was partly a result of a prevailing feeling that short-run speculative capital flows could be potentially destabilising and governments should therefore have the freedom to resist them."

Owing to other reasons, developing countries have historically not had convertible currencies. Typically, their currencies have been partially convertible on the current account and the capital of the BOP, the rationale for the choice being embedded in the macroeconomic realities and the policy perspectives of the countries concerned. In India, the rupee was made convertible on the current account in August 1994. However, the currency as yet has limited convertibility on the capital account, and that indeed is the centre of a countrywide debate. What might be the rationale behind the aforementioned choice: making rupee convertible on the current account while maintaining exchange control for capital account transactions? What, indeed, are the policy implications of free capital mobility that is associated with capital account and have full convertibility? Is India ready for full currency convertibility?

Mechanics of Forex Trading

2008-11-19T03:49:00.000-08:00

Forex trading is an important aspect of forex management. It is basically concerned with various forex operations including purchase and sale of currencies of different countries in order to meet payments and receipts requirements as a result of foreign trade. Forex trading is done either in retail market or in whole sale market (also called inter bank market). Under retail market, the traveler and tourists exchange one currency for another in form of currency notes or traveller cheques. Here, the total turnover and average transaction size are very small. The spread between buying and selling price is large. Whereas wholesale market of inter bank market is a market with huge turnover. The major market participants of this market include commercial banks, corporation and central banks.

In the inter bank market deals are done on the telephone or on electronic media. Suppose bank A wishes to buy the British Pound sterling against the US dollar. A trader in bank A might call his counterpart in bank B and ask for a price quotation. If the price is acceptable they will agree to do the deal and both will enter the details the amount bought/sold, the price, the identity of the counter party etc. - in their respective banks' computerized records systems and go on to the next transaction. Subsequently, written confirmations will be sent containing all the details. On the day of settlement, bank A will turn over a US dollar deposit to bank B and B will turn over a sterling deposit to A. The traders are out of the picture once the deal is agreed upon and entered in the record systems. This enables them to do the deals very rapidly. At the international level inter-bank settlement is effected through the Clearing House Inter bank Payment System (CHIPS), located at New york.

When asked to quote a price between a pair of currencies, say pound sterling and dollar, a trader gives a "two-way quote" i.e. he quotes two prices: a price at which he will buy a sterling in exchange for dollars and a price at which he will sell a sterling for dollars. The enquirer does not have to specify whether the wants to sell or buy pounds against dollars; as mentioned above, the marker is ready to take either side of the transactions. Thus his quotation can be represented as (the numbers are hypothetical);

$/£: 1.7554-1.7560 or 1:7554/1.7560

The number on the left of the hyphen or the slash is the amount of dollars the trader will pay to buy a pound. This is the trader's bid rate for a pound sterling (against dollar). The number on the right is the amount of dollars the trader will require to sell a pound. This is the trader's ask rate (also called the offer rate). For a quote given above the Bid-ask spread is 0.0006 dollar or 0.06 cent per pound. This margin is the market maker's compensation for the costs incurred and normal profit on capital invested in the dealing function.

In a normal two-way market, a trader expects "to be hit" on both sides of his quote in roughly equal amounts. That is, in the pound-dollar case above, on a normal business day the trader expects to buy and sell roughly equal amount of pounds (and of course dollars). The Bank's margin would then be the bid-ask spread.

But suppose during the course of trading a trader finds that he is "being hit" on one side of his quote much more often than the other side. In our pound-dollar example this means that he is either buying many more pounds than he is selling or vice versa. This leads to the trader building up "a position". If he has sold (bought) more pounds than he had bought (sold) he is said to have net short position (long position) in pounds. Given the volatility of the exchange rates, maintaining a short or long position for too long can be a risky proportion. For instance, suppose that a trader has build up a net short position in pounds of 1,00,000. The pound suddenly appreciates from say $1.7500 to $1.7520, this implies that the bank's liability increases by $2000 ($0.0020 per pound for 1 million pounds). Of course, a pound depreciation would have resulted in a gain. Similarly, a net long position leads to a loss if it has to be covered at a lower price and gain if at a higher price. (By "covering a position" we mean undertaking transactions what will reduce the net position to zero. A trader net long in pounds must sell pounds to cover; a net short must buy pounds).

The potential gain or loss from a position depends upon the size of the position and the variability of exchange rates. Building and carrying such net positions for long durations would be equivalent to speculation and bank exercise tight control over their traders to prevent such activity. This is done by prescribing the maximum size of net positions a trader can build up during a trading day and how much can be carried overnight.

In an ordinary foreign exchange transaction, no fees are charged. The bid-ask spread itself is the transaction cost. Also, unlike the money or capital markets, where different rates of interest are charged to different borrowers depending on their creditworthiness, in the wholesale foreign exchange market no much distinction is made. Default risk - the possibility that the counter party in a transaction may not deliver in its side of the deal is handled by prescribing limits on the size of positions a trader can take with different corporate customers.

Communications pertaining to international financial transactions are handled mainly by a large network called Society for Worldwide Inter Bank Financial Telecommunication (SWIFT). This is a non-profit Belgian cooperative with main and on the location, a bank can access a regional processor or a main center which then transmits the information to the appropriate location.

Exchange rate forecasting

2008-11-15T23:39:00.000-08:00

An exchange rate, as seen previously, is the price of one currency expressed in terms of another currency. The exchange rate among countries are affected by a large number of factors like rate of inflation, growth prospects, political stability, and economic policies. Most of these factors are difficult to predict in advance. As a result, the future exchange rates, like most of the events, become uncertain. Participants in the international markets therefore, face problems, in making decisions which are based on future exchange rates. For example, future exchange rates may be required by the companies to hedge against potential losses, arranging short-and long-term funds, performing investment analysis, and to assess earnings of a foreign subsidiary. The quality of decision, in such cases, depends on the accuracy of exchange rate projections.

The percentage change between the current and the forecasted exchange rates may be calculated to find our appreciation or depreciation in the currency. A positive percentage change represents currency appreciation whereas a negative percentage change shows depreciation.

The exchange rates may be fixed or floating. Different methods are used to forecast fixed and floating exchange rates. The floating exchange rates, as discussed previously are determined by the market focus of demand and supply. These are not influenced by government intervention. Fixed exchange rates, on the other hand, are decided by the regulating agencies.

The floating exchange rates may be forecasted with the help of various methods. Fundamental and technical analysis are commonly used for this purpose. Fundamental analysis studies the relationship between macro economic variables (such as inflation rates, national income growth, and changes in money supply) and exchange rates to forecast the latter. Technical analysis uses past prices and volume movements to project future currency exchange rates. The technical analysis may produce useful results if the past trend is repeated. The companies normally use technical analysis for short-term forecasts. but, they use fundamental analysis for long-term projections. The primary methods of technical analysis are charting and mechanical rules. The reliability of the forecasts may be found out on the basis of forecasting error which is calculated by square root error. The root square error is computed with the help of the following formula:
Where RSE is the root square as a percentage of realized value; FV is the forecasted value and RV is the realized value.

Fixed exchange rate forecasts are based on the study of government decision-making structure. Attempts is made to determine the pressure to devalue he currency of the nation and the ability of the government to sustain the disequilibrium.

Forecasting fixed exchange rates requires an assessment of balance-of-payments disequilibrium on the basis of key economic variables such as inflation, money supply, international reserves, gap between official and market rates, and the balance of foreign trade. The change in the exchange rate required to restore the balance of payment equilibrium is estimated with the help of forward exchange rates, free market rates and the purchasing power parity principle. The capacity of the country to resist or postpone the use of corrective measures is evaluated on the basis of the ability to borrow hard currencies and the availability of international reserves. Attempt is also made to project the policies which may be followed by the Government to correct the position of the nation.

Thus, exchange rates are forecasted to make various decisions by the companies which require foreign exchange. These forecasts are made separately for the fixed and floating exchange rates with the help of different methods. Percentage change between forecasted and current exchange rates may be calculated to find out appreciation or depreciation in the currency.

Managing forex exchange rate risk

2008-11-13T07:18:00.000-08:00

Changes in exchange rate give rise to foreign exchange risk, the firms dealing with other currencies usually face foreign exchange risk. Firms that import and export often need to make commitments to buy or sell the goods for delivery at some future time, with the payment to be made in foreign currency. Likewise, firms operating foreign subsidiaries receive payment from these subsidiaries in foreign currency and have to convert this receipt into domestic currency. In addition, the firm may also be exposed to political and regulatory risk of the other countries.

As soon as, a firm enters into a transaction that exposes it to the cash flows in a foreign currency, it is exposed to exchange rate risk. The financial manager can either leave the firm exposed to these risk and assume that the shareholders would be able to diversify away the risk; or can hedge the risk using a variety of options available. However, the options available to a firm for hedging against exchange risk are subject to the following:

a) Shareholders composition: For the shareholders to be able to diversify away foreign exchange risk that flows to the firm, they must be having internationally diversified portfolio. Thus, an investor who holds shares of the U.S. as well as the British firm may not be affected much by the movements in $/Yen rate because of offsetting effects of his investment. If on the other hand, if the shareholders are not internationally diversified, then the firm should try to diversify the risk itself.

b) Diversification across countries: Some firms accomplish a diversification of different kind by exposing to many countries and many currencies. For example Coca Cola having operations in a number of countries is less likely to be concerned about hedging the exchange rate risk.

c) Hedging risk: The cost of hedging risk in some currencies is less than hedging in other currencies or cost of hedging for a shorter period may be less than the cost of hedging for a longer period. Other thinks remaining same, the greater the cost of hedging risk, the less likely it is that the firms will be able to hedge.

The introduction of floating exchange rates in the early seventies has motivated companies to develop strategies to protect their bottom line from the adverse consequences of exchange rate fluctuations. An action that removes foreign exchange risk is said to cover that risk. The covering of foreign exchange exposure imposes certain costs on the companies. The companies have to strike a balance between foreign exchange risks and the costs of covering them. The systems to manage foreign exchange risks are guided by many factors in the companies, e.g., degree of centralization of foreign exchange transactions, accounting systems, responsibility for developing and complementing strategies, types of exposures to be managed system of formulation of corporate objectives and the design of the follow-up system to evaluate exchange risk management. Two of these most significant factors are discussed below:

i) Degree of centralization: In some of the companies, the policies to manage foreign exchange risk are decided at the head-office and the strategies are developed and implemented at the operating level. In the system, the administrative cost to manage foreign exchange may be low. However, the strategy may not be properly co-ordinated in the absence of perfect inter-divisional netting. In other companies, the policies as well as strategies are formulated at the head quarters. The implementation of the policies, in these companies, is done by the operating units. This system may involve high administrative costs but it is more effective. These companies are able to utilize various exposure management techniques. This system also helps in having maximum centralization of all the activities in the foreign exchange management system. However, it involves, like the first system, higher administrative costs and requires frequent reporting by various operating units.

ii) Statement of objectives: The primary objective of foreign exchange risk management is to eliminate or reduce variations in the future earnings of a company due to unexpected currency fluctuations. The companies, to achieve this objective, should identify the types of exposures, which they would like to monitor. Moreover, they should convert this primary objective into a number of specific operational goals related to the types of exposures being managed. The operational objective of translation exposure management, for instance, may be to minimize half-yearly fluctuations in earnings due to exchange rate variations. The acceptable total cost of exposure management (including the cost of management time) should also be included in the statement. moreover, proper exposure management would save the company from excessive speculation.

Relationship between spot and forward rates

2008-10-25T07:07:00.000-07:00

A study of the relationship between spot and future rates would help in determining the degree and the extent of predictability of the former on the basis of the later.

The collective judgment of the participants in the exchange market influences the appreciation or depreciation in the future spot price of a currency against other currencies. The forward premium or discount is also affected by the interest rate differential between two countries, differences in the rates of inflation between them, and the degree to which inflation rate differential is translated into interest rate differential in the expected time horizon. Moreover, the relationship between spot and forward rates may be affected by the efficiency of the financial and exchange markets in two countries. Controls, restrictions and other interventions which can affect adjustments in exchange, and interest and inflation rates differential also influences the spot and forward rates.

Theoretically, in the efficient market and absence of intervention of control in the exchange or financial markets, the forward rate is an accurate predictor of the future spot rate. These requirements are, generally, satisfied if the following three conditions are found:

1. Interest rate parity:
According to interest rate parity principle, the forward premium (or discount) on currency of a country vis-a-vis the currency of another country will be exactly offset by the interest rate between the countries. The currency of the country with lower interest rate is quoted at a forward premium and vice-versa.

2. Purchasing Power Parity (PPP):
According to the PPP Principle, the currency of a country will depreciate vis-a-vis the currency of another country on the basis of differential in the rates of inflation between them. The rate of depreciation in the currency of the country would roughly be equal to the excess inflation rate in the country over the other country.

3. International Fisher Effect:
The interest rate differential between two countries, according to the Fisher effect, will reflect differences in the inflation rates in them. The high interest country will experience higher inflation rate.

It should, however, be noted that even if these conditions are satisfied, the future spot rate might not be identical to the forward rate. Random differences between the two rates may be found.

CROSS RATE FOR A CURRENCY

2008-09-20T07:57:00.000-07:00

The cross rate for a currency is the exchange rate based on the exchange rate of two other currencies. The exchange rate between two currencies calculated on the basis of the rate of these two currencies in terms of a third currency is known as a cross rate. For example, an American trader gives the following quotations in New York: $0.99/Euro and $1.80/£, then the cross rates Euro/£ or £/Euro may be ascertained as follows:

Euro/£ = ( Euro / $ ) x ( $ / £)

= (1 / 0.99) x 1.80
= Euro 1.818 / £

Similarly, £ / Euro = ( £ / $ ) x ( $ / Euro )

= (1 / 1.80) x 0.99
= £ 0.555 / Euro

The forward rate is a price quotation to deliver the currency in future. The exchange rate is determined at the time of concluding the contract, but payment and delivery are not required till maturity. Foreign exchange dealers and banks give the forward rate quotations for delivery in future according to the requirements if their clients. Generally, the forward quotations are given for delivery in 30 days, 90 days, and 180 days. But, the quotations may be given up to 2 years. Sometimes, forward contracts with maturities exceeding two years are also arranged by the dealers to meet specific requirements of their clients. Quotations are normally given for major currencies, but dealers also provide forward quotations for other currencies on the specific request of their clients.

The forward rate for a currency may be higher of lower than the spot rate. Forward rate may be higher than the spot rate if the market participants expect the currency to apprecuate vis-a-vis the other currency, say USD. The currency, in such case is called trading at a forward premium. If the forward rate is lower than the spot rate, the participants expect the currency to depreciate vis-a-vis the USD. The currency in this case is said to be 'trading at forward discount'.

TYPES OF SPOT RATES

2008-09-20T07:50:00.000-07:00

Generally, in the spot exchange market, two types if spot rates may be quoted.

* Ask Price

* Bid Price

Ask Price:

The Ask price is the rate at which the foreign exchange dealer ‘asks’ its customers to pay in local currency in the local exchange of the foreign currency. In other words, ask price is the selling rate or the offer rate and refers to the rate at which the foreign currency can be purchased from the dealer.

Bid Price:

Bid Price is the rate at which the dealer is ready to buy the foreign currency in exchange for the domestic currency. So, the bid price is the rate which the dealer is ready to pay in domestic currency in exchange for the foreign currency and therefore, it is the buying rate. The dealer sells the foreign currency for more than what they are ready to pay for buying it. Normally, the direct ask price is greater than the direct bid price and the difference between the two is known as the ask-bid spread.

The ask-bid spread depends upon the breadth and depth of the market for that currency and the volatility of the currency. In case, when there is a large volume of transactions and the trading is continuous in any currency, the spread is small and may range between 0.1% to 0.5%. The spread is much higher for infrequently traded currencies. This spread compensates the dealer for holding the risky foreign currency and for providing the service of converting currencies. The bid spread is usually stated as a percentage cost of transacting in the foreign exchange market and may be computed as follows:

% Spread = ((Ask Price – Bid Price) / Ask Price) x 100

For example, if the ask price of $/£ is $1.6646 and the bid price is $1.6629, then the % spread may be ascertain as follows:

% Spread = ((1.6646 – 1.6629)/ 1.6646) x 100 = 0.1%

SPOT EXCHANGE RATES

2008-09-20T05:54:00.001-07:00

A spot exchange rate is a rate at which currencies are being traded for delivery on the same day. For example, and Indian Importer may need U.S. $ to pay for the shipment that has just arrived. He will have to purchase the $ in the market to make payment for the import. The rate at which he will buy the $ in the market is known as the spot exchange rate. He will make the payments in terms of Rs. and gets in turn the U.S. $ which will be paid to the foreign exporter. The spot exchange rate therefore, for a currency is the current rate at which once currency can be immediately converted into another currency. For example, a spot rate of $0.6912/Euro indicates that one Euro can be converted into $0.6912 in the market place at present. In most of the cases, the spot exchange rates are set by the demand and supply forces in the foreign exchange market.

In the spot exchange market, the quote may be denoted as direct or indirect. A direct quote indicates the number of units of the domestic currency required to buy one unit of foreign currency. That is, in Mumbai, the typical exchange rate quote indicates the number of Re. needed to buy one unit of a foreign currency e.g., Re. Per $ or Re. per Euro etc. The quotes in the spot market in New York are given in the terms of U.S. dollar and in Tokyo, the rates are given in the terms of Yen.

An indirect quote indicates the number of units of foreign currency that can be exchanged for one unit of the domestic currency. For example, in New York, the rates may be given as £ per $ or Euro per $ etc. As already stated, that the foreign exchange rates are relative to each other, the direct quote and indirect quote are related to each other in an inverse relationship i.e., an indirect quote is the inverse of a direct quote. So,

Indirect Quote = 1 / Direct Quote

In International transactions, both the direct quote and indirect quote are used. For example, if the direct quote of Euro in U.S. is Euro/$ = Euro 1.037 and American importer has to pay Euro 1,000 to a German Firm, then how many $ will be required by the American importer? In this case, the quote for $/Euro may be obtained as the inverse of Euro/$ i.e., 1/1.037 = 0.9643. So, he will require $0.9643 x 1,000 = $964.32 to pay for the German firm.

INTERMEDIATE ARRANGEMENTS FOR DETERMINATION OF EXCHANGE VALUES

2008-09-12T06:34:00.000-07:00

There are many intermediate arrangements for determination of exchange values. These arrangements are being listed below:

A) Domestic currency pegged to one foreign currency

Under this arrangement, the exchange rate of one currency is pegged to a dominant foreign currency, usually the U.S. dollar. For example the Argentine peso was till recently pegged to the US dollar in the ratio 1:1, due to the economic depression that started in the year 1999.

B) A currency pegged to a basket of currencies

The currency of a country may be pegged to a basket of currencies. The basket is generally formed by the currencies of major trading parties to make the pegged currency more stable than if a single currency peg is used. Trade, services and major capital flows may be used as currency weights while calculating the basket. The Indian Rupee is linked to a basket of currencies.

C) Flexibility limited in terms of a single currency

In this system, the value of the currency is maintained within certain margins of the peg. Some Middle Eastern countries follow this system and maintain their currency within a limit of the per against the U.S. dollar.

D) Pegged to some indicators

Under this arrangement, the currencies adjust more or less automatically to changes in the selected indicators. A common indicator is the real effective exchange rate (REER) that reflects inflation adjusted changes in the currency against major trading parties.

This category also includes cases where the exchange rate is adjusted according to a pre-announced schedule.

E) Managed Float

Central bank of a country decides the exchange rate in this system. The rates are revised from time to time depending on forex reserves, developments in parallel exchange markets, the real effective exchange rate etc.

F) Independent Float

In this system market forces determine the exchange rate. Most of the developed countries follow this system of exchange rate.

Currencies in the foreign exchange market may be transacted for immediately delivery or for a postponed delivery and consequently, there are two types of rates in the market. These are Spot Exchange Rates and Forward Exchange Rates.

EXCHANGE RATE QUOTES

2008-08-31T22:03:00.000-07:00

Every firm and individual operating in international environment is concerned with foreign exchange i.e, the exchange of foreign currency into domestic currency and vice-a-versa. Generally, the firm's foreign operations earn income denominated in some foreign currency, however, the shareholders expect payment in domestic currency and therefore, the firm must convert the foreign currency into domestic currency.

The foreign exchange transaction (i.e, for the sale and purchase of foreign currencies) takes place in foreign exchange market, which provides a mechanism for transfer of purchasing power from one currency to another. This market is not a physical entity like the Mumbai Stock Exchange or a trading center; rather it is network of telephones among banks, foreign exchange dealers and brokers etc.

For example, a trader in Delhi may buy foreign exchange, say U.S. $, from a bank in Mumbai for making payment to a U.S. supplier against the purchases made. The bank in Mumbai, in turn may purchase the U.S. $ from a New York bank, which in turn may purchase from some other bank in New York itself or at some other center and so on. As the foreign exchange market provides transactions in a continuous manner for a large number and volume of sales and purchases, this market is an efficient one. Minute differences in exchange rates at different center may get eliminated without time lag.

In the foreign exchange market, the price of any currency may be quoted in terms of several currencies. It is important to realize that every price or exchange rate is relative. For example, if U.S. $ is worth Rs. 44, then it also implies that Re. 1 is worth $ 1/44. All foreign exchange rates in this way are related to each other in a reciprocal way. In other words, the value of $/Re. is just the reciprocal of the value of Re./$.

Quotations in the foreign exchange market are generally made in terms of local currency or the domestic currency in terms of per unit of a foreign currency. For example, the exchange rates of Re. in India may be quoted in terms of $, say Re./$ = Rs.44/$. It means that one $ is worth Rs.44. A change in price of one currency implies, therefore, a change in price of the other currency that appears in the quote. For example, if the price of Re. against the $ moves from Rs.44/$ to Rs.43.5/$, one can say that Re. has appreciated relative to $ by Re. 0.50. This is the same as saying that $ has depreciated relative to the Re.

There are two major ways of offering exchange rate quotes. There are called the direct quote and indirect quote. These quotes are given after the exchange value has been established according to the practice being followed by a country. If the country follows a fixed rate of parity between its currency and a foreign currency, then the changes in parity value of that currency shall determine changes in the value of the domestic currency vis-a-vis other foreign currencies. These performances of the domestic economy is not reflected in the valuation of its currency. This is one extreme side of absolute rigidity in fixation of exchange data. The other extreme is allowing the exchange value of the national currency to float independently according to market forces without any intervention from the Central Bank. In between these two extremes, there are many intermediate arrangements for determination of exchange values...

INTER-RELATIONSHIP OF VARIABLES AFFECTING EXCHANGE RATES

2008-08-31T21:02:00.000-07:00

Interest rate, inflation rates, forward margins, exchange rates and expectation across nations are inter-related as shown in the diagram below.

The diagram suggests that interest rates vary across countries because of varying expectations with regards to their rates of inflation. Under perfect competition, funds would move to a country where real interest rate (nominal interest rate less inflation rate) is higher, till the forces of demand and supply equiliberate them. In other words, the difference in interest rates between countries is equal in equilibrium to the expected difference in the inflation rates.

The expected difference in inflation rates between two countries equals, in equilibrium, the expected movement in spot rates. The forward rate for a given period, say 6 months, should equal the spot rate 6 months hence. The difference between the forward rate and the present spot represents the interest element for the period of the forward rate. In reality, the future spot rate would usually be higher or lower than the forward rate.

Exchange rate movements overtime are influenced by various factors not only those mentioned above but also by market imperfections arising out of official intervention in markets, exchange control restrictions, custom barriers, etc.

DETERMINATION OF EXCHANGE RATES

2008-08-22T04:06:00.001-07:00

There is no generally accepted theory or model to determine exchange rates. However, there are certain approaches which provide a general frame-work for analysis of exchange rates which are discussed below:

(a) Balance of Payments: If payments by a country for its imports of goods and services and invisibles are out of step with its receipts for exports of goods and services and invisible, two possibilities arise. One foreign currency payments exceed receipts and there is a deficit. This puts the home currency of the country under downward pressure against foreign currencies. Two, there is a surplus and there is an upward pressure on the home currency. In the former case, the home currency tends to depreciate, and in the later to appreciate, against foreign currencies.

(b) Demand and supply: The demand for a foreign currency to pay for imports, etc, and the supply of a foreign currency by way of receipts on account of exports, etc. vary at various rates of exchange. The rate which equilibrates the demand and supply should be the rate of exchange.

(c) Purchasing power parity: This theory maintains that free international trade equalises prices of tradable goods in different countries. So, a product will sell for the same price in common currency in all countries. Different rates of changes in prices i.e. different inflation rates must eventually induce off-setting changes in exchange rates in order to restore approximate price equality. Mathematically, the rate (or the expected rate) of change of the exchange rate should equal the rate (or the expected rate) of change of the inflation rate. Evidence shows that there do exist disparities between changes in observed exchange rates and those in inflation rates in the short-run. But, the theory should hold in the long-run.

(d) Interest rate: Interest rates are often highly related with inflation rates, and interest rate differentials between countries may be the result of inflation rate differentials. Therefore, interest rate differentials are also used as an important determinant of exchange rates.

Interest rates in a country are determined, under free market conditions, by supply of and demand for money. Funds flow across countries in search of opportunities for higher returns. These flows between any two countries cause opposite changes in demand of and supply for their respective currencies. According to the theory of International Fisher Effect, the exchange rate of a currency with higher interest rate will depreciate to offset the interest rate advantage achieved by foreign investments till an equilibrium is achieved.

Investments abroad have to be converted into home currency on maturity. Exchange rate may have changed in the meanwhile. An investor may make a forward sale of funds to be rapatriated on maturity. The process of investing abroad for higher returns and making a forward sale of the proceeds is known as covered interest arbitrage. An investment abroad will be undertaken if the return from interest rate differential exceeds the forward margin (difference between the forward and spot exchange rates). In general terms, the forward rate of the foreign currency will contain a discount (premium) if its interest rate is higher (lower) that that of the home currency. Covered interest arbitrages will go on fill the market forces realign the forward margins with the interest rate differentials.

(e) Relative Income Levels: If income level in a country raises and that in her trading partner remains unchanged, the demand by the former for the goods of the later may increase. That is, the former would need more units of currency of the later, while their supply remains unchanged. This would put upward pressure on the exchange rate of the later. There can be different configurations of the relative income levels and of corresponding exchange rates.

(f) Market expectations: Like other financial markets, foreign exchange markets react to any news that may have an effect on exchange rates in future. Expected developments regarding polity, economy etc. of a country are used to figure out how exchange rates would move. These peeps into future impinge on the present as well as the future spot rates.

FACTORS AFFECTING FOREIGN EXCHANGE RATES

2008-08-15T08:11:00.000-07:00

Foreign Exchange being a commodity likes any other commodities the exchange rates tend to fluctuate from time to time. There are various factors that cause the fluctuation in the rates of exchange. These factors can be divided into several following groups. These groups can affect the exchange rates on a short term as well as long-term basis.

1. Fundamental Factors:

The fundamental factors include all such events that affect the basic economic and fiscal policies of the concerned government. These factors normally affect the long-term exchange rates of any currency. On short-term basis on many occasions, these factors are found to be rather inactive unless the market attention has turned to fundamentals. However, in the long run exchange rates of all the currencies are linked to fundamental causes. The fundamental factors are basic economic policies followed by the government in relation to inflation, balance of payment position, unemployment, capacity utilization, trends in import and export, etc. Normally, other things remaining constant the currencies of the countries that follow the sound economic policies will always be stronger. Similar for the countries which are having balance of payment surplus, the exchange rate will always be favourable. Conversely, for countries facing balance of payment deficit, the exchange rate will be adverse. Continuous and ever growing deficit in balance of payment indicates over valuation of the currency concerned and the dis-equilibrium created can be remedied through devaluation.

2. Political and Psychological factors:

Political and psychological factors are believed to have an influence on exchange rates. Many currencies have a tradition of behaving in a particular way for e.g. Swiss franc as a refuge currency. The US Dollar is also considered a safer haven currency whenever there is a political crisis anywhere in the world.

3. Technical Factors:

The various technical factors that affect exchange rates can be mentioned as under:

(a) Capital Movement: The phenomenon of capital movement affecting the exchange rate has a very recent origin. Huge surplus of petroleum exporting countries due to sudden spurt in the oil prices could not be utilized by these countries for home consumption entirely and needed to be invested elsewhere productively. Movement of these petro dollars, started affecting the exchange rates of various currencies. Capital tended to move from lower yielding to higher yielding currencies and as a result the exchange rates moved.

(b) Relative Inflation Rates: It was generally believed until recently that one prima-facie direction for exchange rates to move was in the direction adjusted to compensate the relative inflation rates. For instance, if a currency is already overvalued, i.e., stronger than what is warranted by relative inflation rates, depreciation sufficient enough to correct that position can be expected and vice versa. It is necessary to note that exchange rate is a relative price and hence the market weighs all the relevant factors in a relative term, (in relation to the counterpart countries). The underlying reasoning behind this conviction was that a relatively high rate of inflation reduces a country's competitiveness in international markets and weakens its ability to sell in foreign markets. This will weaken the expected demand for foreign currency (increase in supply of domestic currency and decrease in supply of foreign currency). But during 1981-85 period exchange rates of major currencies did not confirm the direction of relative inflation rates. The rise of the dollar persistently for such a long period discredited this principle.

(c) Exchange rate policy and intervention: Exchange rates are also influenced in no small measure by expectation of changes in regulation relating to exchange markets and official intervention. Official intervention can smoothen an otherwise disorderly market but it is also the experience that if the authorities attempt half-heartedly to counter the market sentiments through intervention in the market, ultimately more steep and sudden exchange rate swings can occur. In the second quarter of 1985 the movement of exchange rates of major currencies reflected the change in the US policy in favour of co-ordinated exchange market intervention as a measure to bring down the value of dollar.

(d) Interest Rates: An important factor for movements in exchange rates in recent years has been difference in interest rates; i.e. interest differential between major countries. In this respect the growing integration of the financial markets of major currencies, the revolution in telecommunication facilities, the growth of specialized asset managing agencies, the deregulation of financial markets by major countries, the emergence of foreign exchange trading etc. having accelerated the potential for exchange rates volatility.

4. Speculation

Speculation or the anticipation of the market participants many a times is the prime reason for exchange rate movements. The total foreign exchange turnover worldwide is many a times the actual goods and services related turnover indicating the grip of speculators over the market. Those speculators anticipate the events even before the actual data is out and position themselves accordingly in order to take advantage when the actual data confirms the anticipations. The initial positioning and final profit taking make exchange rates volatile. These speculators many a times concentrate only on one factor affecting the exchange rate and as a result the market psychology tends to concentrate only on that factor neglecting all other factors that have equal bearing on the exchange rate movement. Under these circumstances even when all other factors may indicate negative impact on the exchange rate of the currency if the one factor that the market is concentrating comes out positive the currency strengthens.

5. Others

The turnover of the market is not entirely trade related and hence the funds placed at the disposal of foreign exchange dealers by various banks, the amount which the dealers can raise in various ways, banks' attitude towards keeping open position during the course of a day, at the end of the day, on the eve of weekends and holidays, window dressing operations as at the end of the half year to year, end of the month considerations to cover operations for the returns that the banks have to submit the central monetary authorities etc. - all affect the exchange rate movement of the currencies.

FOREIGN INVESTMENT

2008-08-10T08:40:00.000-07:00

Foreign Investment has two components, Namely

1. Foreign direct investment (FDI).
2. Portfolio Investment.

Foreign direct investment (FDI) to and by India up to 1999-2000 comprise mainly equity capital. In line with international best practices, the coverage of FDI has been expanded since 2000-01 to include, besides equity capital reinvested earnings (retained earnings of FDI companies) and 'other direct capital' (inter-corporate debt transactions between related entities). Data on equity capital include equity of unincorporated entities (mainly foreign bank branches in India and Indian bank branches operating abroad) besides equity of incorporated bodies. Data on reinvested earnings for the latest year are estimated as average of the previous two years as these data are available with a time lag of one year. In view of the above revision, FDI data are not comparable with similar data for the previous years. In terms of standard practice of BoP compilation, the above revision of FDI data would not affect India's overall BoP position as the accretion to the foreign exchange would not undergo any change. The composition of BoP, however, would undergo changes. These changes relate to investment income, external commercial borrowings and errors and omissions. In case of reinvested earnings, there would be a contra entry (debit) of equal magnitude under investment income in the current account. 'Other Capital' reported as part of FDI inflow has been carved out from the figure reported under external commercial borrowings by the same amount. 'Other Capital' by Indian companies abroad and equity capital of unincorporated entities have been adjusted against the errors and omissions for 2001-01 and 2001-02

Portfolio Investment mainly includes FIIs' investment, funds raised through GDRs/ADRs by Indian companies and through offshore funds. Data on investment abroad, hitherto reported, have been split into equity capital and portfolio investment since 2000-01.

External Assistance by India denotes aid extended by India to other foreign governments under various agreements and repayment of such loans. External Assistance to India denotes multilateral and bilateral loans received under the agreements between Government of India and other Governments/International institutions and repayments of such loans by India, except loan repayment to erstwhile 'Rupee area' countries that are covered under Rupee Debt Service.

Commercial Borrowings covers all medium/long term loans. Commercial Borrowings by India denotes loans extended by the Export Import Bank of India (EXIM Bank) to various countries and repayment of such loans. Commercial Borrowings of India denotes drawls/repayment of loans including buyers credit, suppliers credit, floating rate notes (FRNs), commercial paper (CP) bonds, foreign currency convertible bonds (FCCBs) issued abroad by the Indian corporate etc. It also includes India Development Bonds (IDRs), Resurgent India Bonds (RIBs), India Millennium Deposits (IMDs).

Short term loans denotes drawal in respect of loans, utilized and repayments with a maturity of less than one year.

Banking capital Comprises of three components:
- Foreign assets of commercial banks (ADs)
- Foreign liabilities of commercial banks (Ads)
- others.

'Foreign Assets' of commercial bank consists of (i) foreign currency holdings, and (ii) rupee overdrafts to non-resident banks. 'Foreign liabilities' com commercial banks consists of (i) Non-resident deposits, which comprises receipt and redemption of various non-resident deposit schemes, and (ii) liabilities other than non-resident deposits which comprises rupee and foreign currency liabilities to non-resident banks ans official and semi-official institutions. 'Others' under banking capital include movement in balances of foreign central banks and international institutions like IBRD, IDA, ADB, IFC, IFAD etc, maintained with RBI as well as movement in balances held abroad by the embassies of India in London and Tokyo.

Rupee Debt service includes principal repayments on account of civilian and non civilian debt in respect of Rupee Payment Area (RPA) and interest payment thereof.

Other Capital comprises mainly the leads and lags in export receipts (difference between the custom data and the banking channel data). Besides this, other items included are funds held abroad, India's subscription to international institutions, quota payments to IMF, remittances towards recouping the losses of branches/subsidiaries and residual item of other capital transaction not included elsewhere.

Movement in reserves comprises changes in the foreign currency assets held by the RBI and SDR balances held by the Government of India. These are recorded after excluding changes on account of valuation. Valuation changes arise because foreign currency assets are expressed in US dollar terms and they include the effect of appreciation/depreciation of non-US currencies (such as Euro, Sterling, Yen) held in reserves.

Apart from the fundamental demand and supply equation that determines exchange values, there are other determinants of exchange rates. Some of these factors are discussed in the next post...

BALANCE OF PAYMENT ACCOUNT - EXPLANATORY NOTES

2008-08-09T10:29:00.000-07:00

Balance of payments is a statistical statement that systematically summarises, for a specific time period, the economic transactions of an economy with the rest of the world.

- Merchandise credit relate to export of goods while Merchandise debit represent import of goods

- Travel covers expenditure by non-resident travellers during their stay in the country and expenditure incurred by resident travellers abroad.

- Transportation covers receipts and payments on account of International transportation services.

- Insurance comprises receipts and payments relating to all types of insurance services as well as reinsurance.

- Miscellaneous covers receipts and payment in respect of all other services such as communication services, construction services, software services, technical know-how, royalties etc.

- Transfers (official, private) represents receipts and payment without a quid pro quo.

- Investment Income transactions are in the form of interest, divident, profit and other for servicing of capital transactions. Investment income receipts comprise interest received on loans to non-residents, divident/profit received by indians on foreign investment, reinvested earnings of Indian FDI companies abroad, interest received on debuntures, floating rate notes (FRNs), Commercial Papers (CPs), fixed deposits and funds held abroad by ADs out of foreign currency loans/export proceeds, payment of taxes by non-residents/refunds of taxes by foreign governments, interest/discount earnings on RBI investment etc. Investment income payments comprise payment of interest on non-resident deposits, payment of interest of loans from non-residents, payment of divident/profit to non-resident share holders, reinvested earnings of the FDI companies, payment of interest on debuntures, FRNs, CPs, fixed deposits, Government securities, charges on special Drawing Rights (SDRs) etc.

FOREIGN EXCHANGE RATES

2008-08-09T09:38:00.000-07:00

Exchange rates is the price of one country's money in terms of other country's money. When we say that exchange rate of Indian Rupee is 42.23 per US Dollar (22:13 IST), we mean that 42.23 Indian Rupees are required to purchase one US Dollar. When this exchange rate becomes 43 we say that the value of Indian Rupee depreciated against the US Dollar. On the other hand when the exchange rate becomes 42 we mean that Indian Rupee has appreciated against the US Dollar. Assuming that there are no exogenous factors restricting the changes in exchange rates, their movement can be traced to pure demand and supply. When Indian rupee depreciates against the US Dollar, it indicates that demand for later is more than its supply. Similarly when the supply of US Dollar is more than its demand, it declines in value against the Indian Rupee.

Currency of a country is used for transactions with foreigners. Each country in the world has its own currency. Theoretically, a country should transact with all foreign entities on a one-to-one basis, i.e. for all imports from a foreign country, the host country should be paid in its currency. But practically this is not possible because it involves keeping record of a multitude of exchange rates and associated payment problems. Therefore, most of the countries chose a common currency for trade amongst themselves. The U.S Dollar has emerged as the strongest currency for the past sixty years and as such is used as the payement medium for most of the world trade. In the European Union the Euro has established itself as the common currency of about 25 countries.

It is clear that the currency of a country is evaluated against a common currency for external transactions. In case of countries having dominant economic power, trade would be held in currency. Hence a country is required to trade in U.S Dollar or in other dominant currencies like Euro, Pound or the Japanese Yen. Account of a country's external trade is kept in the form of a balance of payement account which is a double book entry system. Receipts of foreign currencies are credited to this account while payemnts in foreign currency are debited to this account. The balance sheet in this account shows a positive or a negative figure depending upon whether the receipts of foreign currency are more or less than the payments.

Other things being equal, the presumption is that a country having a deficit balance of payements position would have a weakening national currency and vice versa. A deficit in the balance of payement account results in more demand for foreign currencies. Hence their value vis-a-vis the domestic currency increases.

India's balance of payements account for the year 2004-05 is given below as an illustration:

FOREIGN EXCHANGE MARKET - SPOT FOREIGN EXCHANGE MARKET

2008-08-09T09:04:00.000-07:00

Far larger than the money changer market is the spot foreign exchange market which is at the second level. This market is involved with the exchange of currencies held in different currency denominated bank accounts. The spot exchange rate, which is determined in the spot market, is the number of units of one currency per unit of another currency, where both currencies are in the form of bank deposits. The deposits are transferred from sellers' to buyers' accounts. "Delivery" or "Value" or actual transfer is "spot" or "immediate". Usually it takes one or two days. This distinguishes the spot market from the forward market. Spot exchange rates are determined by the demand supply equations of the currencies being exchanged.

The inter-bank foreign exchange market is the largest financial market in the world. After adjusting for double counting so that purchased by one bank and the corresponding sale by the second bank is counted only once, average daily turnover is over $1 Trillion. The phenomenal size of the market can be put in perspective by noting, for example, the foreign exchange turnover exceeds that of all the world's stock markets combined. Indeed it takes over 2 months average trading on the New York Stock Exchange to match 1 day of trading in forex.

The forex market is an informal arrangement of the larger commercial banks and a number of foreign exchange brokers. The banks are linked by telephone, telex, computers and satellite communications network called the Society of Worldwide International Financial Telecommunications (SWIFT). This computer based communications system, based in Brussels, Belgium links banks and brokers in just about every financial center. The banks and brokers are in almost constant contact, with activity in some financial center or other 24 hours a day. Because of speed in communications, significant events have virtually instantaneous impacts everywhere in the world.

The efficiency of the spot forex market is revealed in the extremely narrow spreads between buying and selling prices. These spreads can be smaller than a tenth of a percent of the value of currency exchanged.

FOREIGN EXCHANGE MARKET - CURRENCY DEALERS

2008-08-06T09:24:00.001-07:00

The foreign exchange market is a market in which currencies are bought and sold against each other. In other words, foreign exchange market is the market where the currency of one country is exchanged for the currency of another country. It is the largest market in the world having daily turnover of over US $3.2 trillion. The market is an over the counter market. There is no single market place or an organised exchange (like a stock exchange) where traders meet and exchange currencies. The dealers sit in their dealing room of major commercial banks around the world and communicate with each other through telephones, computer terminals and SWIFT mechanism. The forex market is a wholesale market called the inter-bank market. Commercial banks are the market makers. Corporations use the foreign exchange market for a variety of purposes relating to their operation like payment for imports, conversion of export receipts, hedging of receivables and payables, payment of interest on foreign currency loans, placement of surplus funds etc.

Forex market operates at three levels. At the first level are the currency dealers or money changers who provide for encashment or travelers cheques and release of small amount of forex to travellers. The money changers quote the buying and selling rates for various currencies. An illustration of the quote is given below:

Terms:

* T.C Buying - Rate at which Foreign Currency Travellers cheques’ deposited by the customer is converted into rupees

* T. C. Selling - Rate applicable when a customer buys Foreign Currency Travellers’ cheques from the bank.

The above rate indicate the amount of Indian Rupee that would be exchanged per foreign currency. The column "Cash Buying" indicates that the money-changers would be willing to buy the currency at the indicated rates. Rates under "Cash Selling" column indicate the amount of Indian Rupees that would be paid to these dealers for purchasing a unit of the currency. We note that there is substantial difference or spread between the buying and selling rates. These spreads are large because the dealers need to cover their operational costs on the transactions which are relatively small in volume. Secondly, the dealers are required to hold different currencies for servicing their customers. This involves opportunity or inventory cost plus risk premium for change in values. Hence the spread is large enough to cover these costs.

The following table shows the foreign exchange rates quotes from the internet. For example, if you want to buy Australian Dollar, a bank will sell one Australian Dollar for INR 38.685825.

Indian Rupees, Wednesday, August 6th 2008, 23:37 IST
Picture Source: http://www.ratesfx.com/rates/rate-inr.html

FOREX MANAGER

2008-08-06T08:38:00.000-07:00

The development in international trade have resulted in the emergence of a new brand of manager called the forex manager. The forex manager is a category apart from the finance manager or the treasury manager. He deals in currency and money but not of one country. He has to transact with a number of counter parts both in the domestic and abroad. He is face to face with special kind of risk. Yet his vocation is full of opportunities and challenges.

For effective management of forex transactions, the forex manager is expected to have the following skills:

A) Awareness of historical developement of world trade:

The Forex manager must have a fair idea of as to how the world trade has reached its present status. The shifting power of alliances, emergence and decline of economic superpowers, present political situations, trade patterns etc. should be known. This knowledge base enables the manager to view the current situation in proper perspective.

B) Ability to forecast future trends:

The Forex Manager must be in a position to derive an accurate forecast of the future trends in international trade flows and exchage rare patterns. This forecast helps the manager to prepare his forex budget.

C) Comparitive Analysis Skills:

The forex manager should be able to carry out a comparative analysis of costs of domestic and imported raw materials, price of local sales and export sales, shipping rates, insurance costs etc. in order to determine whether it is expedient to produce locally or to outsorce.

D) In-depth knowledge of forex market:

The forex manager is expected to have in-depth knowledge of functioning of foreign exchange markets, their rules and regulations, the size of their operation, the profile of active currencies, strength and weakness of the domestic currency etc. in order to achieve better pricing of deals.

E) Knowledge of interest rates:

Since interest rates have a direct bearing upon exchange values, awareness about the domestic and international interest rates enables the forex manager to form an accurate opinion about the forward premia.

F) Willingness to undertake risk:

Armed with the knowledge and awareness about international financial and trade patterns, currency positions and interest rates, the forex manager should have the ability to undertake reasonable level of risks with a view to profit from forex exposures.

G) Hedging strategies:

The forex manager should be in a position to hedge his positions to the best extent possible. To achieve this, a sense if timing is essential in the background of ever changing world of exchange values.

SIGNIFICANCE OF FOREX MANAGEMENT

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Business operations in countries across the globe have been in existence for centuries, but an unprecedented growth in world wide production and distribution of a large number of capital, intermediate and consumer goods has been witnessed in the past fifty years. At present most of the countries are economically related to each other through a complex network of trade, foreign investment and international loans.

The emergence of WTO and the process of global integration has reinforced the importance of International trade, cross border financial flows and consequently foreign currency transactions. Each country has its own currency and each significance of forex management lies in the study and maintenance of the exchange levels.

Every good or service reaching us from abroad involves forex. Knowledge if the forex management can help avoid harmful effects of International events and perhaps even profit from these events. With the advent of globalization and liberalization the scope for international trade and international financing has increased tremendously. International trade has grown more quickly than trade in general. This has put up both benefits and challenges.

The principal benefit for international trade has been in the form of the gain in standard of living it has permitted. The gain has come from exploiting relative efficiencies of production in different countries. The challenges of international trade are the introduction of exchange rate risk and country risk. Various methods and markets have evolved that allow firms to avoid of reduce these risks.

The after effect of developement of international trade has been swift movement of funds from one finance centre to the other. There has been investment by multinationals in the third world countries in the form of capital outlays. All this has necessitated the need for a better understanding of the mechanism og forex inflows.

Forex managent has become a more important subjects because of an increased globalization of financial markets. The benefits of the increased flow of capital between nations include a better international allocation of capital and greater opportunities to diversify risk. However, globalisation of investment has meant new risks from exchange rates, political actions and increased interdependence of financial conditions in different countries.

SCOPE OF FOREX MANAGEMENT

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Forex Management has quite a wide scope of operation. We can cover in its ambit all those transactions which involve use of forex. Let us consider the following illustrations:

** A Citizen of India travels abroad on a business visit and purchased foreign currency from an authorized dealer.

** An Indian citizen goes to USA for a period of three years under an employment contract. He periodically remits US dollars to his bank account in India.

** An Indian Student subscribes to a British Scientific magazine and pays for it through an international credit card held by him.

** An Indian Industrialist imports raw material from Malaysia for his plant under a Letter of Credit arrangement provided by his bank.

** A Sports goods manufacturer of India exports his consignment to Europe and gets paid for it in foreign currency received through banking channels.

** Indian subsidary of a Multinational corporation imports white goods in completely knocked down (CKD) from the chinese affiliate. After reassembling these goods, the same are exported to Europe.

** The world Bank disburses aid to an Indian State under an infrastructure developement project.

The above illustrations shows how individuals, companies and states transact in forex. When goods are services are imported into a country, these are paid for in the currency of the country on a short visit, he needs foreign currency of that country for meeting his expenses. When he stays in that country for a longer duration for employment purposes, he earns foreign currency of that country. When an Indian firm exports goods to Europe, it is earning foreign exchange. Thus when goods and services are sent abroad by India, foreign currencies are earned by them.

Forex management being involved in all the trade and non-trade transactions involving forex, it is essential to have a broad idea of international banking and trading practices. Since the transactions are taking place among counter parties from different countries, a standardized format of documentation is used to minimise errors.

Apart from the transaction value, forex management finds scope as a mode of investment. Because of the frequent and often miniscule fluctuation in forex values, enough arbitrage and speculative opportunities crop up in forex market for astute investors. There are many expert forex dealers specializing in trading of forex.

FOREX MANAGEMENT - ESSENTIAL ELEMENTS

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Forex management may be defined as the science of management of generation, use and storage of foreign currencies in the process of exchange of one currency into other called exchange.

The above definition of Forex Management has the following essential elements:

A) It is part of management science:

Forex management is part of the broader management science. It is a scientific discipline requiring scientific and analytic orientation. The techniques of management are applied to the broad spectrum of foreign currencies. This broad spectrum refers to all the currencies of the world excluding the domestic currency. These techniques include planning for Forex, organization of forex and control of forex. We use the terms forex and foreign exchange interchangeably. The planning part includes budgetting for forex, organization refers to utilization of forex and control part focuses on creation of forex reserves.

The tools of forex management are akin to domestic currency management but the level of analytical skills required for it is slightly higher because of the existence of spot, forwards and futures markets unlike the domestic currency area. Operations in the forex market require quicker response time because of the greater volatility in exchange rates.

B) It refers to generation of Forex:

Forex is generated from International Trade Transactions. When a company exports goods or services, it earns forex. When goods or services are imported by a country, forex is consumed. If he exports of a country are more than the imports, the forex would be accumulated in reserves of the country. If the imports are more than the exports, the result would be forex deficit which was to be met by international borrowings. Either way, the forex needs to be generated. Generation of forex is a more difficult proposition because of variation in international trade practicies and extent of competition.

C) It pertains to use of Forex:

Forex management is concerned with the use of forex in meeting the requirements of the user groups. The tools of cash management come handy in using forex. The process of use of forex involves identification of suppliers of goods and services, negotiation of terms and conditions of the transaction and culmination of trnasaction with the exchange of goods and services with forex. Because of relative uncertainity about availability and volatility in its rates, advance tie-up of forex is made through forward purchase contracts. In this entire process, close track of exchange rates needs to be maintained.

D) It covers storage of forex:

Forex management involving firm level forex storage could be done through forward purchase contracts or through deposits in foreign currency bank accounts. At the national level, forex storage shortage is done through forex reserves which are held in the form of Gold, Special Drawing Right (SDRs) of IMF and foreign currencies. While some amount of foreign exchange reserves need to be maintained to meet unforeseen contigencies, excessive accretion to reserves involve a cost which is sometimes justified on other economic consideration at the firm's level. Forex is stored for meeting future import liabilities, whether certain of contigent. While storing forex, it is important to bear in mind the actual cost of storage and opprotunity cost of not using the forex elsewhere. Depending upon availibility of forex, if the opportunity cost is more that the cost of storage, then it is better not to store it.

Directories

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