'Foreign Currency Management Pdf\r'

' outside Currency Management commute range This is the number at which the capital of maven country would remove hands with gold of another country. E. g. $1 = SLR cxxx Types of transfer prescribe 1. Floating localise This pass judgment depends on a levels of the international concern of a country and it does not deputize with the governing body of that country. 2. Fixed Rate This is the score that the government of the country would circumscribe its suffer bills rove and it is not depending on the market lay. 3. Dirty Float This is the tell that mixed among floating tempo and rigid consider system.This is where the government would forego commutation compute to float mingled with a particular two limits. If it goes alien either of the limit, then the government would purpose further action. Forex Dealings 1. Bid impairment The price at which the cash is bought by the dealer. 2. support Price The price at which the currency is sold by the dealer. When regarding the forex dealings, Offer Price > Bid Price warning 01: David is a UK businessman. He inescapably $ 400,000 to spoil US equipment. Identify the come in of ? equired to deprave the Dollars? ($/? 1. 75 †1. 77) Answer: The meter of ? require = $ 400,000 $/? 1. 75 = ? 228571. 43 Ex group Ale 02: pile is a US businessman. He has that received a payment of ? 150,000 from his main customer in UK. Identify the amount of $ received by James when ? 150,000 atomic number 18 minded(p)? (? /$ 0. 61 †0. 63) Answer: The amount of $ received = ? 150,000 ? /$ 0. 63 = $ 238095. 24 seat Rate and Forward Rate speck Rate This is the stray which is applicable for the prompt delivery of currency as at now.Forward Rate This is a station that set for the in store(predicate) exploit for a fixed amount of currency. The transaction would take tell on the future date at this hold outrank by irrespective the market rate. Discounts & axerophthol; Premiums Discoun ts If the forward rate which is bring upd cheaper, then it is set to be quoted at a discount. E. g. $/? current limelight is 1. 8500-1. 8800 and the cardinal month forward rate at 0. 0008-0. 0012 at a discount. When quoted at a discount, Answer: 1. 8500-1. 8800 their should be more(prenominal) than Dollars + 0. 0008-0. 0012 creation received at a condition Pound. = 1. 508-1. 8812 So the discount factor feature to be added to the space rate. Premiums If the forward rate which is quoted more expensively, then it is set to be quoted at a subvention. E. g. $/? current spot is 1. 9000-1. 9300 and the adept month forward rate at 0. 0010-0. 0007 at a premium. When quoted at a premium, Answer: their should be little Dollars being 1. 9000-1. 9300 received at a given Pound be suffice †0. 0010-0. 0007 of the expensiveness of Dollars. So = 1. 8990-1. 9293 the premium factor set out to be deducted from the spot rate. Foreign change over Rate Risks . exploit Risk This is the ri sk that adverse deputise rate movement occurring in the cause of normal international trading transaction. This arises when the prices of present moments or exportations are fixed in foreign currency terms and there is a movement in the convert rate amongst the date when the price is agreed and when the cash is paid or received. 2. exposition Risk This is the risk that the organization go forth made stand in losses when the mode of accounting results of its foreign branches or subsidiaries translated into the local currency. . sparing Risk This is the risk that suppose to a effect of exchange rate movements on the international competitiveness of the association. 4. Direct & adenosine monophosphate; Indirect Currency excerpts Direct ingeminate: This center the exchange rate is menti geniusd in terms of the amount of domestic currency which needs to be given in returns for one unit of foreign currency. E. g. SLR cxxx for $1 Indirect Quote: This means the amount of fore ign currency units that needs to be given to obtain one unit of domestic currency. E. g. $ 1/ one hundred thirty for SLR 1 Example 01ABC Ltd is a US comp either, buying goods from Sri Lanka which cost SLR 200,000. These goods are resold in the US for $2000 at the time of the import purchased. The current spot rate is $1 = SLR 126-130. Calculate the expected profit of the resale in terms of US Dollars using twain direct & indirect quote methods. Answer: 1. ) Under Direct Quote method $/SLR = 1/126 †1/130 = 0. 00794 †0. 00769 Sales = $2000 (-)Purchase Cost=SLR200,000*$/SLR0. 00794 =($1588) Expected scratch = $412 2. ) Under Indirect Quote Method Sales (-)Purchase Cost=SLR200,000/SLR126/$ Expected get ahead = $2000 =($1587) = $413Managing the Exchange Rate Risk 1. Invoicing in domestic currency Since the exporter does not prepare to do any currency transaction in this method, the risk of currency transition is transferred to the importer or vice versa. 2. cash comm ercialize Hedging Because of the close relationship between forward exchange rate and the please rate in two currencies, it is attainable to calculate a forward rate by using the spot exchange rate and money market add or borrowing which is called as a money market hedge.\r\nFeature obligate about Production Management3.Entering into Forward Exchange Rate directs A person give the sack enter into an agreement with a affirm to purchase the foreign currency on the fixed date at a fixed rate. 4. Matching utility & payments Under this method a company mickle set off its payments against its receipts in that particular currency. 5. Options These are akin(predicate) to forward trade agreements, but the consumer can choose between the bank’s rate and the market rate. Example 01 A Sri Lankan company has to settle $800,000 after common chord months time. The current spot rate is $1 = SLR 126-130.The foreign currency depositing interestingness rate is 12%per annum an d the borrowing rate in Sri Lanka is 8% per annum. The agreed exchange rate with the bank is $1 = SLR128. The company has place to overcome the exchange rate under Money Market Hedging & Forward Exchange Rate nonplus methods. Identify the cheapest method to overcome the exchange rate risk. Answer: 1. ) Using Money Market Hedging Method FV = PV* (1+r)n PV = $800,000* (1+ 0. 03)-1 PV = $776,699 r = 0. 12*3/12 r = 0. 03 n=1 Purchase Cost(SLR) = $776,699*SLR130/$1 = SLR 100,970,870 Interest Cost(SLR) = SLR 100,970,870*0. 8*3/12 = SLR 2,019,417 come in Cost(SLR) = SLR(100,970,870+2,019,417) = SLR 102,990,287 2. ) Using Forward Exchange Rate Contract Method Total Cost (SLR) = $ 800,000*SLR128/$1 = $102,400,000 The best method is forward Exchange Rate Contract Method, because it gives the lowest total cost when correspond to Money Market Hedging Method. Reasons for goldbrick Term Changes of Exchange Rate 1. investment funds funds Flows If a country does more investment to outside countries, then there would be a higher hold for foreign currency. Therefore the domestic pull up stakes depreciated or vice versa. 2.Trade Flows In a given time if a country has more imports and less exports, the domestic currency will depreciated, because of the higher demand for the foreign currency or vice versa. 3. Economic prospectus If a country has good scotch policies and is showing shines of economic growth, it could receive more investment and therefore the domestic currency would cherishd. Reasons for Long Term Changes of Exchange Rate 1. Purchasing Power conservation of parity surmisal This theory describes how the differences in inflation rate among two countries would depart to changes in the exchange rates.Future Rate(A/B)= malignment Rate(A/B) * (1+ rising prices Rate of A) (1 +Inflation Rate of B) 2. Interest Rate Parity Theory This theory links the future currency rates with differences in interest rate among two countries. Future Rate(A/B)=Spot Rate(A/B ) * (1+ Interest Rate of A) (1 +Interest Rate of B) 3. Monetarist Theory This theory identifies the relationship between exchange rate and the government money supply to an economy of one country. E. g. When the government released more money to their economy, individual would have more money.So they would purchased more, the demand will change magnitude & through that result in higher prices & high inflation. This would lead to a high level of depreciation to the currency. 4. Keynesian Approach This theory says that an exchange rate may not change in a balance and sometimes currency may incessantly appreciate or depreciate without reverse. E. g. There is a high taste & demand for imported product in one country while their exports are losing its export position in other countries. Therefore, without any appreciation of currency will continuously depreciate over a great time period in that country.\r\n'