Posted by admin on July 2, 2009 under Forex Trading | 
The Forex Transactions is a business in which foreign currency is the commodity. Foreign currency cannot be used in other countries than the mother country. The value of United States dollar is the value of any other commodity. Therefore, the foreign currency can be considered as the commodity in Forex Transactions.
Any forex trading has two aspects – purchase and sale. A trader has to purchase goods from his suppliers which he sells to his customers. Likewise, the bank is authorized to deal in forex purchases as well as sells its commodity. Two points need be constantly kept in mind while talking on Forex Transactions.
- The transaction is always talked of from the bank’s point of view, and
- The item referred to is the foreign currency.
Therefore, when we say a purchase, we imply that
- The bank has purchased, and
- It has purchased foreign currency
Similarly, when we say a sale, we imply that
- The bank has sold, and
- It has sold foreign currency.
The quotation for which manifestation of exchange rate is made as the price per unit of foreign currency in terms of the resident currency is termed as home currency quotation or direct quotation. The quotation wherein home currency’s unit is kept constant such a situation is termed as foreign currency quotation where price per unit and exchange rate are denoted in foreign currencies is termed as foreign currency quotation or indirect quotation or currency quotation.
To sum up, Forex Transactions involves all the above elements that may have to be blended in abundant measure for delivery of best results in making appropriate profits.
Posted by admin on July 1, 2009 under Forex Trading |
The dealing room is rightly identified as a profit center for a bank. In these days of reducing spread between the lending and borrowing rates, banks have to look to other sources to improve their bottom lines. Foreign exchange is one area where the potential is vast. The progressive liberalization being introduced in the forex market has improved the scope for dealers to show their skills and earn for their banks. But, at the same time, it may not be forgotten that any scope for profits is associated with the Risks in the Forex Management.
The following are the major Risks in the Forex Managementdealings:
- Open position risk – the position risk refers to the risk of change in exchange rates affecting the overbought or oversold position in foreign currency held by a bank. Hence, this can also be called the rate risk. The risk can be avoided by keeping the position in forex square.
- Cash balance risk – cash balance refers to actual balances maintained in the nostro accounts at the end of each day. Balances in nostro accounts do not earn interest; while any overdraft involves payment of interest. The endeavor should, therefore, be to keep the minimum required balance in the nostro accounts. However, perfection on this count is not possible. Depending upon the requirement for a single currency more than one nostro account may be maintained.
- Maturity mismatches risk – this risk arises on account of the maturity period of purchase and sale contracts in a foreign currency not matching or coinciding. The cash flows from sales and purchases mismatch thereby leaving a gap at the end of each period. Therefore, this risk is also known as liquidity risk or gap risk.
- Fraud risk – frauds may be indulged in by the dealers or by other operational staff for personal gains or to conceal a genuine mistake committed earlier. Frauds may take the form of dealing for one’s own benefit without putting them through the bank, sharing benefits by quoting unduly better rates to some banks and customers, etc. The losses from such fraudulent deals can be substantial.
Thus, there are many more Risks in the Forex Management such as credit risk, country risk, over trading risk, and operational risks that are carefully analyzed.
