The basic structure of an interest rate swap consists of the exchange between two counter-parties of fixed rate interest or floating rate interest in the same currency calculated by reference to a mutually agreed notional principal amount. This principal amount, which would normally equate to the underlying assets or liabilities being “swapped” by the counter-parties, is applicable solely for the calculation of the interest to be exchanged under the swap. At no time it is physically passed between the counter-parties. The counter-parties are able to convert an underlying fixed rate asset/ ...

The exchange value of a currency, or the rate of exchange, fluctuates with changes in demand and supply. The factors which affect the demand for and the supply of a currency are many and varied. There are some factors which operate in the short period and have influence on day-to-day- fluctuations in rates of exchange. The commercial and financial relationship between trading countries is now extensive and payments on various accounts fall, due for early settlement. These payments constitute the short-term demand and supply in regard to currencies. There are, however, changes in currency and ...

Hedging with Forex Futures Tenders make use of the market for forex futures/foreign currency futures in order to hedge their foreign exchange risk. For instance suppose a US importer importing goods from India for 1 million Rupees and he needs this amount for making payment to the exporter. He will purchase Rupee at a future settlement date. By holding a futures contact, the importer does not have to worry about  any change in the spot rate  of the Rupee over time. On the other hand, if the US exported exports goods to an Indian firm and has to receive Rupee for the exports, the exporter ...

The Indian Foreign Exchange (Forex) market is characterized by constant changes and rapid innovations in trading methods and products. While the innovative products and ways of trading create new possibilities for profit, they also pose various kinds of risks to the market. Central banks all over the world, therefore, have become increasingly concerned of the scale of foreign exchange settlement risk and the importance of risk mitigation measures. Behind this growing awareness are several events in the past in which foreign exchange settlement risk might have resulted in systemic risk in ...

1 & 2. Exposure and Risk: Exposure is a measure of the sensitivity of the value of a financial item (asset, liability or cash flow) to changes in the relevant risk factor while risk is a measure of variability of the value of the item attributable to the risk factor. Let us understand this distinction clearly. April 1993 to about July 1995 the exchange rate between rupee and US dollar was almost rock steady. Consider a firm whose business involved both exports to and imports from the US. During this period the firm would have readily agreed that its operating cash flows were very ...

Currency options provide corporate treasurer another tool for hedging foreign exchange risks arising out of firms operations. Unlike forward contract, options allow the hedger to gain from favorable exchange rate movements, while been unprotected from unfavorable movements. However forward contracts are costless while options involve up front premium cost. Examples are: a) Hedging a Foreign Currency with calls. In late February an American importer anticipates a yen payment of JYP 100 million to a Japanese supplier sometime late in May. The current USD/JYP spot is 0.007739 (which implies a ...