Foreign Currency Management Pdf

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Foreign Currency Management

Exchange Rate
This is the rate at which the currency of one country would change hands with currency of another country. E.g. $1 = SLR 130

Types of Exchange Rate
1. Floating Rate This rate depends on a levels of the international trade of a country and it does not interfere with the government of that country.

2. Fixed Rate This is the rate that the government of the country would set its own currency rate and it is not depending on the market rate. 3. Dirty Float This is the rate that mixed between floating rate and fixed rate system. This is where the government would allow exchange rate to float between a particular two limits. If it goes outside either of the limit, then the government would take further action.

Forex Dealings
1. Bid Price The price at which the currency is bought by the dealer. 2. Offer Price The price at which the currency is sold by the dealer. When regarding the forex dealings, Offer Price > Bid Price

Example 01: David is a UK businessman. He needs $ 400,000 to buy US equipment. Identify the amount of £ required to buy the Dollars? ($/£ 1.75 - 1.77) Answer: The amount of £ required = $ 400,000 $/£ 1.75 = £ 228571.43

Example 02: James is a US businessman. He has just received a payment of £ 150,000 from his main customer in UK. Identify the amount of $ received by James when £ 150,000 are given? (£/$ 0.61 – 0.63) Answer: The amount of $ received = £ 150,000 £/$ 0.63 = $ 238095.24

Spot Rate and Forward Rate
Spot Rate This is the rate which is applicable for the immediate delivery of currency as at now. Forward Rate This is a rate that set for the future transaction for a fixed amount of currency. The transaction would take place on the future date at this agreed rate by disregarding the market rate.

Discounts & Premiums
Discounts If the forward rate which is quoted cheaper, then it is set to be quoted at a discount. E.g. $/£ current spot is 1.8500-1.8800 and the one 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 Dollars + 0.0008-0.0012 being received at a given Pound. = 1.8508-1.8812 So the discount factor have to be added to the spot rate.

Premiums If the forward rate which is quoted more expensively, then it is set to be quoted at a premium. E.g. $/£ current spot is 1.9000-1.9300 and the one month forward rate at 0.0010-0.0007 at a premium. When quoted at a premium, Answer: their should be less Dollars being 1.9000-1.9300 received at a given Pound because - 0.0010-0.0007 of the expensiveness of Dollars. So = 1.8990-1.9293 the premium factor have to be deducted from the spot rate.

Foreign Exchange Rate Risks
1. Transaction Risk This is the risk that adverse exchange rate movement occurring in the cause of normal international trading transaction. This arises when the prices of imports or exports are fixed in foreign currency terms and there is a movement in the exchange rate between the date when the price is agreed and when the cash is paid or received.

2. Translation Risk This is the risk that the organization will made exchange losses when the accounting results of its foreign branches or subsidiaries translated into the local currency. 3. Economic Risk This is the risk that suppose to a effect of exchange rate movements on the international competitiveness of the company.

4. Direct & Indirect Currency Quotes Direct Quote: This means the exchange rate is mentioned in terms of the amount of domestic currency which needs to be given in returns for one unit of foreign currency. E.g. SLR 130 for $1 Indirect Quote: This means the amount of foreign currency units that needs to be given to obtain one unit of domestic currency. E.g. $ 1/130 for SLR 1

Example 01
ABC Ltd is a US company, 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...
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