International Trade Finance

Spot and Forward Foreign Exchange Rates

There are two types of foreign exchange rates, namely the spot rate and forward rates ruling in the foreign exchange market. The spot rate of exchange refers to the rate or price in terms of home currency payable for spot delivery of a specified type of foreign exchange. The forward rate of exchange refers to the price at which a transaction will be consummated at some specified time in future.

In modern times the system of forward rate of foreign exchange has assumed great importance in affecting the international capital movements and foreign exchange banks play an important role in this respect by matching the purchases and sales of forward exchange on the part of would be importers and would be exporters respectively.… Read the rest

Abey Francis

Fixed-Rate Currency Swaps and Currency Coupon Swaps

Fixed-Rate Currency Swaps

A fixed rate currency swap consists of the exchange between two counter-parties of fixed rate interest in one currency in return for fixed rate interest in another currency. Following are the main steps to all currency swaps:

  1. Initial Exchange for the Principal: The counter-parties exchange the principal amounts on the commencement of the swap at an agreed rate of exchange. Although this rate is usually based on the spot exchange rate, a forward rate set in advance of the swap commencement date can also be used. This initial exchange may be on a notional basis of alternatively a physical exchange.
… Read the rest
Abey Francis

Introduction to International Trade Finance

Financing international trade is a complex process, involving many variables, ranging from corporate policy and marketing strategy to exchange risk and general borrowing conditions. The reason behind the complexity of financing international trade is that trade involves two countries with different currencies and jurisdictions. In addition, payments must be made at a distance and across time, so the exporter, the importer, or both need credit during part or all of the period form the initial manufacture of goods by the exporting firm to the time of the final sale and collection by the importer. The main objective of a good corporate export financing policy should be financing the greatest possible amount of sales with the greatest possible management simplicity and with minimal risk.… Read the rest

Abey Francis

Purchasing Power Parity (PPP) Theory of Exchange Rate

Purchasing Power Parity Theory (PPP) holds that the exchange rate between two currencies is determined by the relative purchasing power as reflected in the price levels expressed in domestic currencies in the two countries concerned. Changes in the exchange rate are explained by relative changes in the purchasing power of the currencies caused by inflation in the respective countries. The concept of Purchasing power parity theory (PPP) is traced to David Ricardo, but the credit for stating the law in an orderly manner is given to the Swedish economist Gustav Cassel who proposed it in 1918 as a basis for resumption for normal trade relations at the end of First World War.… Read the rest

Abey Francis

The Capital Account component in Balance of Payments (BoP)

Capital account records public and private investment, and lending activities. It is the net change in foreign ownership of domestic assets. If foreign ownership of domestic assets has increased more quickly than domestic ownership of foreign assets in a given year, then the domestic country has a capital account surplus. On the other hand, if domestic ownership of foreign assets has increased more quickly than foreign ownership of domestic assets in a given year, then the domestic country has a capital account deficit. It is known as “financial account”. IMF manual lists out a large number of items under the capital account.… Read the rest

Abey Francis

The Current Account Component in Balance of Payments (BoP)

The Current Account Component

The Current Account records a nation’s total exports of goods, services and transfers, and its total imports of them. The current account is subdivided into two components (1) balance of trade (BoT), and (2) balance of invisibles (BOIs).

Structure of Current Account in India’s BOP Statement

A. CURRENT ACCOUNT

I. Merchandise (BOT): Trade Balance (A-B)

A. Exports, f.o.b.
B. Imports, c.i.f.

II. Invisibles (BOI): (a + b + c)

a. Services

i. Travel
ii. Transportation
iii. Insurance
iv. Govt. not elsewhere classified
v. Miscellaneous

b. Transfers

i. Official
ii. Private

c. Income

i. Investment Income
ii. Compensation to employees

Total Current Account = I + II

1.… Read the rest
Abey Francis