In the modern era, many countries claim to be running a floating exchange rate. However, many of these countries actively limit fluctuation in the external value of their national monies. This behaviour has been dubbed āfear of floatingā, several reasons exist for it. Firstly, there is the āoriginal sinā problem. Many emerging economies are unable to borrow overseas in their domestic currency. This leads to an accumulation of foreign debt liabilities that are unhedged. If there is a sharp depreciation in these nationsā exchange rate, the domestic currency value of their external debt will be altered and thus their economies net worth will also change. Secondly, policymakers in emerging markets suffer from a chronic lack of credibility. The economies may Continue reading
Forex Trading
De jure and De facto Exchange Rate Regimes
de jure Exchange Rate Regimes The de jure exchange rate regimes can be defined as what a countries government āclaimsā to do and in regard with the bipolar view, supports it and shows that countries are generally moving towards either corner of the bipolar view of fixed exchange rate or floating exchange rate. The de jure exchange rate regimes are important as a way of what the central bank communicates to the public as this is likely to have bearing on the outcome. By having a de jure fixed exchange rate and a de facto floating exchange rate, the breach of commitment will likely have negative consequences. On the other hand, having a de jure floating exchange rate and a Continue reading
Current Exchange Rate Regimes
An exchange rate is the price of one currency in terms of another currency. As in the case of any other goods, the price of a currency is affected by supply and demand. As demand for a currency increases (or supply decreases) its price will rise. This is referred as an appreciation. Conversely, as demand for a currency decreases, or supply increases, its value will depreciate. The prospect of large and rapid swings in exchange rates introduces uncertainty into the business environment. Ā A well-functioning international monetary system ensures stability in the exchange rates. The central element of the international monetary system involves the arrangements by which exchange rates are set. The purpose of an exchange-rate system is to facilitate Continue reading
Organization of Foreign Exchange Department
The Foreign Exchange department, which is also being called as the International Banking Division, is one of the important departments of the banks operating in international market. In India also all scheduled commercial banks, both in the nationalized or non-nationalized sectors, do have Foreign Exchange departments, both at their principal offices as well as offices, in metropolitan centers. This department functions independently under the overall change of some senior executive or a senior officer well-versed in foreign exchange operations as well as in the rules and regulations in force from time to time pertaining to foreign exchange transactions advised by various government agencies. The principal function of a Foreign exchange department is to handle foreign inward remittances as well as Continue reading
RBI’s Role in Risk Management and Settlement of Transactions in the Foreign Exchange Market
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 global financial markets, including the failure of Bankhaus Herstatt in 1974 and the closure of BCCI SA in 1991. The foreign exchange settlement risk arises because the delivery of Continue reading
Some terms and concepts related to foreign exchange market
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 sensitive to the rupee-dollar exchange rate, i.e.; it had significant exposure to this exchange rate; at Continue reading