1. INTRODUCTION The foreign exchange market has played a vital role in the last decade or so in guiding the purchase and sale of goods, services and raw materials globally. The market directly affects each country’s bond, equities, private property, manufacturing and all assets that are available to foreign investors. The market is a stabilizing factor in the world system of monetary exchange and was created not by design but necessity. There is in excess of one trillion dollars of average daily turnover in the global foreign exchange market. Fifty one percent is in spot transactions followed by thirty two percent in currency swaps and forward outright transaction represents another five percent of the daily turnover. The Bangladesh Taka, which is the domestic currency of Bangladesh and the country’s foreign exchange, had been strictly regulated until the early 1990s. At that time, Bangladesh Bank used to regulate the local currency’s parity against the international currencies. The cross border movement of currencies was also regulated. Bangladesh Bank used to publish a daily foreign exchange rate sheet that had two sets of rates; one being the rates for commercial banks to transact with their customers and the other being rates for the commercial banks to transact with Bangladesh Bank. The year of 1993 saw a significant shift in the country’s foreign exchange regulatory policies and the Bangladesh Taka (BDT) was declared convertible in the current account. Most restrictions related to current account activities were relaxed where commercial banks were given the responsibility to ascertain genuineness of the transactions and the central bank’s prior approval requirements in these regards were withdrawn. The responsibility of exchange rate quotation was left to the commercial banks where Bangladesh Bank only committed support to the commercial banks to plug any net foreign currency gaps in the market at their pre-specified buying and selling rates. To adapt to the changed environment, many banks established dealing rooms and some centralized their foreign exchange and money market activities under a single functional area which is still in its rudimentary stage. 2. FOREIGN EXCHANGE MARKET Foreign Exchange Market is vast in size and scope and exists to fulfill a number of purposes ranging from the finance of cross-border investment, loans, trade in goods and services and of course, currency speculation. 3. TRADING OF FOREIGN EXCHANGE Foreign Exchange Trading may be for "spot" or "forward" delivery. 3.1 A spot contract is a binding obligation to buy or sell a certain amount of foreign currency at the current market rate. 3.2 A forward contract is a binding obligation to buy or sell a certain amount of foreign currency at a pre-agreed rate of exchange, on or before a certain date. 4. TYPES OF FOREIGN EXCHANGE 4.1 Spot Foreign Exchange In the spot a participant in the Foreign Exchange Market will normally ask for a price. Spot dealing has the advantage of being the simplest way to meet all the foreign currency requirements, but it also carries with it the greatest risk of exchange rate fluctuations, as there is no certainty of the rate until the transaction is carried out. The received spot rate will be set by current market conditions, the supply and demand for the currencies being traded and the amount that is being in dealt. The larger the amount being dealt the better the spot rate will be received. A spot deal will settle within two working days after the deal is struck. 4.2 Forward Foreign Exchange The Forward Market requires a more complicated calculation. A forward rate is based on the prevailing spot rate plus (or minus) a premium (or discount) which are determined by the interest rate differential between the two currencies involved. A forward rate will protect against unfavorable movements, but will not allow gains to be made should the exchange rate move in customer’s side in the period between entering the contract and final settlement of the currency. Forward contracts are available for any period up to two years - longer periods are available in certain currencies. 4.3 Translation exposure If any one own an overseas subsidiary, asset of liability, he or she need to think about how to record it on your balance sheet in pounds sterling as fluctuations in exchange rates will affect the value. This type of foreign exchange exposure is known as 'translation' exposure. 4.4 Trading Overseas in Sterling Foreign exchange risk may apply even if both your costs and income are in sterling. If anyone has overseas customers who pay him or her in Sterling, a strengthening in Sterling may make your products too expensive and affect your competitiveness. In essence, by using Sterling abroad he or she is merely passing the foreign exchange risk to your trading partners who may in turn; find someone else to deal with who are prepared to deal in their own currency. 4.5 Emerging Markets Certain markets, particularly in Latin America, Eastern Europe and Asia, still have developing economies compared with Western countries which often mean that they will have restrictions in the form of legal and regulatory frameworks designed to protect their currencies and economies from speculators. This makes trading in these currencies much more difficult than with the major world currencies and you may need to consider dealing in those countries in a 'hard currency' such as the U.S. dollar instead. 5. HISTORY OF FOREIGN EXCHANGE MARKET OF BANGLADESH With the demise of the foreign currency exchange rates during the 1970’s and after the collapse of the Breton Woods Agreement, the world economy has undergone drastic changes. This has signaled an increase in currency market volatility and trading opportunity. The foreign exchange market has played a vital role in the last decade or so in guiding the purchase and sale of goods, services and raw materials globally. The market directly affects each country’s bond, equities, private property, manufacturing and all assets that are available to foreign investors. The market is a stabilizing factor in the world system of monetary exchange and was created not by design but necessity. There is in excess of one trillion dollars of average daily turnover in the global foreign exchange market. Fifty one percent is in spot transactions followed by thirty two percent in currency swaps and forward outright transaction represents another five percent of the daily turnover. Foreign exchange rates also play a major role in determining who finances government deficits, who buys equities in companies and literally effects and influences the economic scenario of every nation to cope with the foreign exchange risk in an open market economy. The market has its own momentum and therefore it is crucial to follow a universal time tested policy to tackle the forces behind the free market system with minimal risk involvement. The Bangladesh Taka, which is the domestic currency of Bangladesh and the country’s foreign exchange, had been strictly regulated until the early 1990s. At that time, Bangladesh Bank used to regulate the local currency’s parity against the international currencies. The cross border movement of currencies was also regulated. Bangladesh Bank used to publish a daily foreign exchange rate sheet that had two sets of rates; one being the rates for commercial banks to transact with their customers and the other being rates for the commercial banks to transact with Bangladesh Bank. The year of 1993 saw a significant shift in the country’s foreign exchange regulatory policies and the Bangladesh Taka (BDT) was declared convertible in the current account. Most restrictions related to current account activities were relaxed where commercial banks were given the responsibility to ascertain genuineness of the transactions and the central bank’s prior approval requirements in these regards were withdrawn. The responsibility of exchange rate quotation was left to the commercial banks where Bangladesh Bank only committed support to the commercial banks to plug any net foreign currency gaps in the market at their pre-specified buying and selling rates. Many circulars and guidelines were issued at that time to communicate the changes as well as to guide the market participants. Subsequently, a new “Guidelines for Foreign Exchange Transactions” was issued summarizing instructions as of 31s t December, 1996 replacing the old Exchange Control Manual (1986 edition). From May31, 2003, the Bangladesh Taka exchange rate was declared floating and the band of the central bank’ US Dollar buying selling rate was withdrawn. To adapt to the changed environment, many banks established dealing rooms and some centralized their foreign exchange and money market activities under a single functional area which is still in its rudimentary stage. 6. EXCHANGE RATE SYSTEMS Exchange rate systems can be classified according to the degree by which exchange rates are controlled by the government. Exchange rate systems normally fall into one of the following categories: i. Fixed Exchange Rate ii. Floating Exchange Rate iii. Pegged Exchange Rate 6.1 Fixed Exchange Rate: In a fixed exchange rate system, exchange rates are either held constant or allowed to fluctuate only within very narrow boundaries. If an exchange rate begins to move too much, governments intervene to maintain it within the boundaries. In some situations, a government will devalue its currency while in other situations it will revalue its currency against other currencies. Advantages: Minces are able to engage in international trade without worrying about the future exchange rates. It reduces the risk of doing business in that country too. Disadvantages: The government may manipulate the value of the currency. Also, a fixed exchange rate system may make each country more vulnerable to economic conditions in other countries. 6.2 Floating Exchange Rate: Floating rate systems can be further classified into 2 subcategories: 6.2.1 Freely floating exchange rate system: Also known as a clean float. In a freely floating Exchange rate system, exchange rate values are determined by market forces without intervention by the governments. Advantages: A major advantage of this system is the insulation of a country from the inflation or unemployment problems in other countries. An additional advantage of this system is that a central bank is not required to constantly maintain ER within specified boundaries. Disadvantages: A country’s economic problems can sometimes be compounded by freely floating ER. Under such a system, Minces would need to devote substantial resources to measuring and managing exposure to ER fluctuations. 6.2.2 Managed float exchange rate system: Also known as a dirty float. It is similar to a freely floating system in that exchange rates are allowed to fluctuate on a daily basis and there are no official boundaries. It is similar to a fixed rate system in that governments can and sometimes do intervene to prevent their currencies from a sharp fall. Advantage: It prevents a crash in the value of the currency, should it happen. Disadvantage: Some criticize such a policy as it seeks to protect the home currency at the expense of others. 6.3 Pegged Exchange Rate: Under such a system, the value of the home currency is pegged to a foreign currency. The pegged currency moves in line with that currency to which it is fixed against other currencies. Some currencies such as the Argentine peso or the Chinese Yuan are pegged against a single currency (US dollar) while some others are pegged against a composite of currencies such as the composite of European currencies. Advantage: If a country conducts most of its trade with another country then pegged system yields benefit to both these countries as it virtually eliminated the exchange rate risk. Disadvantage: The risk associated with depreciation of that currency to which it is pegged. 7. Determinants of FX rates The following theories explain the fluctuations in FX rates in a floating exchange rates regime (In a fixed exchange rate regime, FX rates are decided by its government): 7.1 International parity conditions: Relative Purchasing Power Parity, interest rate parity, Domestic Fisher effect, International Fisher effect. Though to some extent the above theories provide logical explanation for the fluctuations in exchange rates, yet these theories falter as they are based on challengeable assumptions which seldom hold true in the real world. 7.2 Balance of payments model: This model, however, focuses largely on tradable goods and services, ignoring the increasing role of global capital flows. It failed to provide any explanation for continuous appreciation of dollar during 1980s and most part of 1990s in face of soaring US current account deficit. 7.3 Asset market model: Views currencies as an important asset class for constructing investment portfolios. Assets prices are influenced mostly by people’s willingness to hold the existing quantities of assets, which in turn depends on their expectations on the future worth of these assets. The asset market model of exchange rate determination states that “the exchange rate between two currencies represents the price that just balances the relative supplies of, and demand for, assets denominated in those currencies.” None of the models developed so far succeed to explain FX rates levels and volatility in the longer time frames. For shorter time frames (less than a few days) algorithm can be devised to predict prices. Large and small institutions and professional individual traders have made consistent profits from it. It is understood from above models that many macroeconomic factors affect the exchange rates and in the end currency prices are a result of dual forces of demand and supply. The world's currency markets can be viewed as a huge melting pot: in a large and ever-changing mix of current events, supply and demand factors are constantly shifting, and the price of one currency in relation to another shifts accordingly. No other market encompasses (and distills) as much of what is going on in the world at any given time as foreign exchange. Supply and demand for any given currency, and thus its value, are not influenced by any single element, but rather by several. These elements generally fall into three categories: economic factors, political conditions and market psychology. 8. HISTORICAL OVERVIEW OF EXCHANGE RATE SYSTEM OF BANGLADESH Exchange rate regime of Bangladesh can be characterized mostly as a fixed rate system imposed and influenced by the government. Given an existing nominal exchange rate, the corresponding real effective exchange rate was estimated. If the real effective exchange rate (REER) as estimated on the basis of current par value significantly diverged from the desired REER, corrective response was initiated by changing the nominal exchange rate. The exchange rate Policy decisions, though notified in all cases by the Bangladesh Bank, were made on behalf of and in close consultation with the Ministry of Finance. Bangladesh Bank did not have the sole authority over determining the exchange rate policy. Up to 24th May 2001, Bangladesh Bank used to announce specified buying and selling rates. From 3rd December 2000 Bangladesh Bank adopted the practice of declaring a 50 poisha (0.50 Taka) band within which buying and selling transactions were to be undertaken; this band was widened to Taka 1.00 from 25th May 2001. Even during the fixed regime, as mentioned earlier, Bangladesh pursued an active exchange rate policy. This activism is reflected in the frequency of nominal exchange rate changes announced by the Central Bank. From 1983 onwards, there have been as many as 89 adjustments in the exchange rate of which 83 were downwards and only six were upward. Until recent past, fixed exchange rate system was prevailing in Bangladesh in which case the central bank of the country could devalue the local currency. To better protect the external competitiveness of Taka and to enhance the resilience of the economy in responding to shocks, Bangladesh formally stepped over to market based exchange rate for the Taka from 31st May 2003 (Annual Report, BB, 2002-03) 9. AN OVERVIEW OF INTERNATIONAL TRADE IN BANGLADESH 9.1 Exchange Rate More than a decade Bangladesh pursued a flexible exchange rate policy. Beforehand, the exchange rate of Taka used to be attuned from time to time to keep it competitive based on the rate of inflation and movement of exchange rates as well as trade weights with partner countries. In recent times, the Government has taken an audacious step in exchange rate management. Bangladesh stepped into introducing fully market based exchange rate since May 31, 2003. Introduction of free float exchange rate did not fetch in any major instability in the economy so far. Although the US dollar linger stronger against Taka during the period of late 2003 through April 2004 but the situation after that did not aggravate and the value of Taka remained stable between May 2004 to August 2004. Since August 2004 Taka showed stability and from August 2004 to March 2005 Taka showed some resilience against US Dollar. Despite the rapid development of private sector with increasing credit flow; much higher growth in import of capital machinery and primary goods due to devastating flood and hike of the oil price in international market were mainly responsible for the fluctuation of exchange rate. Due to constant monitor and supervision by the central bank of Bangladesh and booster of greenback into foreign exchange market the exchange rate remained stable. On June 30, 2004 the official and interbank market exchange rate of Taka-Dollar remained firm, whereas, the value of Taka was 59.30 and 61.50 correspondingly. Even though, in open market the dollar was charged comparatively more than interbank market exchange rate. However, on June 30, 2004 the exchange rate of dollar was moving upward slightly from Tk. 61.00 to 62.20 in this market. The exchange rates of Taka per US Dollar during the last decade is presented in table 1 in appendix. 9.2 Foreign Exchange Reserve The development of export earring and significant raise of remittance from the expatriate of Bangladeshis and June 30, 1999 the foreign exchange reserve was US$ 1523 million, which was lower than the previous year by 12.42 percent but it was increased in next year by 5.17%more than the same date of previous year. After introducing the free floating exchange rate in Bangladesh on May 31, 2003 the reserved of foreign exchange was US$ 2470 million. 10. REASONS FOR CHANGING THE FIXED RATE SYSTME TO FLOATING Some of the reasons the ER system was changed are discussed below: Balance of Payments dis-equilibrium can automatically be restored to equilibrium. When the economy experiences a balance of payments deficit, there is excess demand for the foreign currency and the exchange rate of the local currency depreciates. This may have the effect of automatically restoring equilibrium. In such case, the value of local commodities falls from foreigners’ perspective making them more attractive abroad hence increasing export and value of foreign goods increases from domestic perspective making them less attractive locally. Both could lead to an improvement in the balance of payments situation. May decrease inflationary pressures and improve international competitiveness. A floating exchange rate can reduce the level of inflation in LDCs like Bangladesh. Allowing the exchange rate to float freely should ensure that exports do not become uncompetitive. The basic idea comes from the Purchasing Power Parity theory. A high rate of inflation tends to make the exports uncompetitive. To keep pace with the other markets in South Asia where India (in1998), Pakistan (in 2000) and Sri Lanka (in 2001) have already introduced the floating rate system. (Islam, 2003) Donors had also been putting pressure on Bangladesh to go for the floating exchange rate system and reportedly, obtaining foreign assistance from them also depended somewhat on introducing the new floating exchange rate system. Hence, it can be argued that pressure from the IMF and the World Bank was an important factor behind the regime change. Involvement of the government would stop under the new system where market forces determine the actual price of taka rather than the finance ministry or the central bank. 11. CURRENT EXCHANGE RATE SYSTME OF BANGLADESH The Bangladesh Bank (BB) set foreign currency exchange rate band free from any regulation on May 29, 2003. It came into effect, officially from June 1, Saturday, when banks started to fix buying and selling rates of dollar and other currencies according to supply and demand situation under the free-float system. The BB however said that it would keep an eye on the market and intervene in money market and US dollar selling and purchase transactions whenever needed. The BB also said that it would deal with banks on dollar on a case-to-case basis. Though the official change came on May 29, BB was effectively pursuing the freely floating rates and did allow the banks to determine the rates for the past one year. The observed volatility was not significant during this period, which encouraged the BB to take this long awaited step. The attraction of a floating exchange rate system is, that at least in theory it provides a kind of automatic mechanism for keeping the balance of payments in equilibrium. Besides, progressive devaluation of the Bangladesh currency, arising out of the fixed exchange rate, has been a regular feature during the last three decades. The devaluations and their effects on the economy subjected the governments to regular criticism by those affected by the same. Under the floating rate system, the need for such official devaluation of the currency will cease. However, the finance minister indicated that the new exchange rate system will not be totally devoid of official influence. The Bangladesh Bank is likely to resort to buying and selling of foreign currency from time to time to indirectly play a stabilizing role in exchange rate operations. For example, when the floating exchange rate system was made operational in Pakistan, the same led to a jump in the exchange rate of the Rupee by ten or fifteen per cent on the first day. Thus, Bangladesh had provision for similar safeguards. (Summarized: The Daily Star, “Free floats the exchange rate”, March 3, 2016, The New Nation, “Operating the floating exchange rate”, April 2, 2016; The Daily Star and The New Nation are two of the leading national English daily newspapers of Bangladesh) The exchange rates of Taka for inter-bank and customer transactions are set by the dealer banks themselves, based on demand-supply interaction. The Bangladesh Bank is not present in the market on a day-to-day basis and undertakes purchase or sale transactions with the dealer banks only as needed to maintain orderly market conditions. The exchange rates are used as reference rates to purchase or sale transactions for Bangladesh Bank with Government or different International Organization. But USD/BDT buying and selling rates represent previous day interbank market's highest and lowest exchange rates. Recent Reference Exchange Rates: Currency Buying Selling 20th April, 2016 A. USD/BDT Rates (based on interbank transaction) USD 78.4000 78.4000 B. Cross Rate SGD 58.2900 58.3333 SEK 9.6478 9.6511 JPY 0.7140 0.7141 GBP 112.3550 112.3864 EUR 88.5058 88.5528 CAD 61.9518 61.9763 AUD 61.0658 61.1050 12. FACILITIES Foreign Exchange Market allows currencies to be exchanged to facilitate international trade and financial transactions. Evolution of the market in Bangladesh is closely linked with the exchange rate regime of the country. It had virtually no foreign exchange market up to 1993. BANGLADESH BANK, as agent of the government, was the sole purveyor of foreign currency among users. It tried to equilibrate the demand for and supply of foreign exchange at an officially determined exchange rate, which, however, ceased to exist with introduction of current account convertibility. Immediately after liberation, the Bangladesh currency taka was pegged with pound sterling but was brought at par with the Indian rupee. Within a short time, the value of taka experienced a rapid decline against foreign currencies and in May 1975, it was substantially devalued. In 1976, Bangladesh adopted a regime of managed float, which continued up to August 1979, when a currency-weighted basket method of exchange rate was introduced. The exchange rate management policy was again replaced in 1983 by the trade-weighted basket method and US the dollar was chosen as intervention currency. By this time a secondary exchange market (SEM) was allowed to grow parallel to the official exchange rate. This gave rise to a kerbed market. Up to 1990, multiple exchange rates were allowed under different names of export benefit schemes such as, Export Bonus Scheme, XPL, XPB, EFAS, IECS, and Home Remittances Scheme. This led to a wide divergence between the official rate and the SEM rate. The situation also gradually gave rise to a number of conflicting regulations, poor risk management, and various types of implicit or explicit government guarantees to the users of foreign exchange. This resulted in a number of macro-economic imbalances prompting the government to adjust the official rate in phases and to liquidate its difference. Currency trading is the world's largest market. As people learn more and find ways to invest, the market will continue to grow. All trades that take place in the foreign exchange market involve the buying of one currency and the selling of another currency simultaneously. This is because the value of one currency is determined by its comparison to another currency. This paper will summarize the function of the world’s major currency exchange markets as well as the positive and negative aspects of using gold standard. The foreign exchange market is the market in which national currencies are traded.   As in any market, a price must exist at which trade can occur (Woodbury 1999). An exchange rate is the price of a unit of domestic currency against a foreign currency. If the exchange rate of the US dollar is higher than the Japanese yen, the US dollar has depreciated and the yen has appreciated. Domestic residents in an open economy often complete international transaction.   For example, American car dealers buy Japanese cars to sell. Transactions such as this require one or more participants to acquire a foreign currency. The American dealer may purchase cars from Japan but must pay in yen. It is then up to the American dealer to convert the yen in to US dollars to determine if the transaction is profitable. (Woodbury, 1999) Money markets are places where monies can be bought, sold or borrowed. As stated earlier, the foreign exchange market is when one currency is traded for another currency. It is the largest market in the world for trading cash value, trading between large banks, central banks, currency speculators, multinational corporations and governments. (Ball et al, 2005) The foreign exchange market is said to be unique due to its trading value, the liquidity of the market, the large number and variety of traders in the market, how they are wide spread geographically, and because of its long trading hours. Foreign exchange market facilitates transactions between countries, businessmen, or even corporations around the world. Foreign exchange market is brought about by trading among countries with different currencies. It operates 24 hours a day catering businesses around the world. Technology, also, plays a big role in the success of this market. This market is important because it enables individuals or businesses to transfer purchasing power, it provides credit for goods in transit, and it minimizes foreign exchange risk. This paper also discusses the transactions that take place in the market, as well as the participant of the market. This paper also gives brief information about the gold standard as the form of exchange. 13. CENTRALIZED FOREIGN EXCHANGE MARKET ACTIVITIES: A financial organization’s balance sheet is formed from its core activities. However, as perfection in the balance sheet is almost impossible, organizations require access to the wholesale market to plug in gaps and mismatches (though, wholesale activities are primarily for managing gaps and mismatches, this is also done for proprietary trading and arbitrage purposes). As the two types of wholesale activities i.e. foreign exchange and money market are heavily interdependent, these are required to be housed in the same area. This means that an organization’s foreign exchange and money market activities are to be unified in the same department for efficiency. The above discussion and the listing of functions of an ideal treasury (on the previous section) clarifies that an organization’s foreign exchange and money market activities are needed to be centralized at a single treasury reporting to the head of that department. For example when a foreign exchange dealer is doing a USD/BDT deal, this would involve the local currency money market funding position and need to take/ give feedback from/ to the money market desk. When these two functions are centralized in the same treasury department, the foreign exchange dealer, in completing the deal, can exchange the feedback with the money market dealer with ease and in a timely manner. As we know that inter-bank dealing is highly time critical, the money market dealer can make an optimum decision in an efficient way when s/he receives the information at the earliest possible time. Similarly, the foreign exchange dealer can immediately pass on the foreign currency funding information to the relevant money market dealer who can immediately make an efficient decision of the foreign currency funds effected through the USD/BDT deal. 14. FOREIGN EXCHANGE RISK The key risk areas of a financial institution can be broadly categorized into: - Credit risk - Market risk and In view of the significance of the market risk and in order to aggregate all such risks at a single department and to bring expertise in such functions, the concept of treasury has evolved. Today’s financial institutions engage in activities starting from import, export and remittance to complex derivatives involving basic foreign exchange and money market to complex structured products. All these require high degree of expertise that is difficult to achieve in the transaction originating departments and as such the expertise is housed in a separate department i.e. treasury. The main risks treasuries have to manage in the financial markets are credit risk i.e. the settlement of transactions and market risk, which includes liquidity risk and price risk. Some of the risks that are to be monitored and managed by a treasury can be defined as follows: 14.1 Credit risk Arises from an obligor’s failure to perform as agreed. Interest rate risk - Arises from movements in interest rates in the market. The interest rate exposure is created from the mismatches in the interest reprising tenors of assets and liabilities of an organization. This risk is generally measured through Earnings at Risk Measures (EAR) i.e. the potential earning impact on the balance sheet due to interest rate shifts in the market. Liquidity risk - Arises from an organization’s inability to meet its obligations when due. The liquidity exposure is created by the maturity mismatches of the assets and liabilities of the organization. This risk is measured through tenor wise cumulative gaps. Price risk - Arises from changes in the value of trading positions in the interest rate, foreign exchange, equity and commodities markets. This arises due to changes in the various market rates and/ or market factors. Compliance risk - Arises from violations of or non-conformance with laws, rules, regulations, prescribed practices, or ethical standards. Strategic risk- Arises from adverse business decisions or improper implementation of them. Reputation risk or franchise risk - Arises from negative public opinion. The activities of a treasury can be categorized into four major functions as follows: Foreign exchange Money market Asset Liability Management & Fixed Income Some of the typical products that would fall under treasury’s functions can be listed as follows: Spot foreign exchange Forward foreign exchange Currency swap Interest rate swap Forward rate agreement Non-deliverable forward exchange FX options Overnight deposits Term deposits Coupon securities Discounted securities Following is a list of some of the common functions that today’s treasuries perform: Statutory management Limits monitoring and management Adherence to various internal as well as regulatory policies Minimization of risk Optimization of risk return through specialization Monitoring & management of various Balance Sheet gaps Monitoring & management of various foreign exchange and money market positions Monitoring & management of various cash flows and cash positions Funding of the Balance Sheet at optimum prices The head of the treasury department is the main driver of the ALCO activities/ discussions Propose interest rate matrix to the ALCO Propose various investment options to the ALCO Analyze various economic trends and propose Balance Sheet Strategy to the ALCO Quotation of various foreign exchange rates to customers Dealing in foreign exchange for position covering as well as for own account trading Various funding activities through currency swaps Close liaise with regulators Provide structured treasury solutions to customer Remain vigilant for any arbitrage opportunities Marketing activities for future business growth Proposals/ renewals for various internal limits Estimate daily P&L and work with reporting unit in resolving any difference Record/ maintain all foreign exchange and money market positions and check for differences with system generated/ back-office reports To support the activities of treasury, an independent treasury back office is required to function reporting through a different organizational chain. Some of the major functions of a treasury support unit are as follows: Input, verification and settlement of deals Preparation of currency positions (of previous day -end) and report to dealers prior to commencement of day’s dealings Reconciliation of currency positions Rate appropriateness function for all deals done Revaluation of all foreign exchange positions at a pre-determined frequency Managing discrepancies and disputes Daily calculation for adherence to statutory maintenance Reconciliation of nostro accounts Claim/ pay good value date effect of late settlements Monitor for dealer’s adherence to various internal and regulatory limits Monitor for dealer’s adherence to various counterparty limits Prepare and monitor all balance sheet gaps Report any limit excesses Various internal and regulatory reporting 14.2 Market Risk Market risk is defined as the potential change in the current economic value of a position (i.e., its market value) due to changes in the associated Underlying market risk factors. Trading positions are subject to mark-to market accounting, i.e., positions are revalued based on current market values and, for on-balance sheet positions, reflected as such on the balance sheet; the impact of realized and unrealized gains and losses is included in the income statement. 15. SEPARATE TRADING AND RISK MANAGEMENT UNITS The traders are required to operate within prescribed risk limit framework where a different group of people known as the market risk managers, have responsibilities of identifying the risk areas and their appropriate limits. The roles and responsibilities of these two departments in term of controlling and managing risk are: 15.1 Traders/ Risk-Taking Units: Maintain compliance with the market risk limit policies and remain within their approved independent market risk limit framework at all times Ensure no limit breaches and arrange for pre-approval of any higher limit requirements Inform the market risk management unit of any shifts in strategy or product mixes that may necessitate a change in the market risk limit framework Seek approval from the market risk management unit prior to engaging in trading in any new product 15.2 Market Risk Management: Review policy at least annually and update as required Independently identify all relevant market risk factors for each risk taking unit Develop proposals for the independent market risk limits/ triggers, in conjunction with the risk-taking units Ensure that limits/ triggers are appropriately established Independently monitor compliance with established market risk limits/ triggers Ensure ongoing applicability of the market risk limits/ triggers; formally review framework at least annually If applicable, review and approve limit frameworks, as well as limit change requirements Review and approve any temporary limit requirements Recommend corrective actions for any limit excesses Maintain documentation of limit breaches, including corrective action and resolution date. 16. MANAGING YOUR FOREIGN EXCHANGE RISK Once you have a clear idea of what your foreign exchange exposure will be and the currencies involved, you will be in a position to consider how best to manage the risk. The options available to you fall into three categories: 16.1 Do Nothing: You might choose not to actively manage your risk, which means dealing in the spot market whenever the cash flow requirement arises. This is a very high-risk and speculative strategy, as you will never know the rate at which you will deal until the day and time the transaction takes place. Foreign exchange rates are notoriously volatile and movements make the difference between making a profit or a loss. It is impossible to properly budget and plan your business if you are relying on buying or selling your currency in the spot market. 16.2 Take out a Forward Foreign Exchange Contract: As soon as you know that a foreign exchange risk will occur, you could decide to book a forward foreign exchange contract with your bank. This will enable you to fix the exchange rate immediately to give you the certainty of knowing exactly how much that foreign currency will cost or how much you will receive at the time of settlement whenever this is due to occur. As a result, you can budget with complete confidence. However, you will not be able to benefit if the exchange rate then moves in your favor as you will have entered into a binding contract which you are obliged to fulfill. You will also need to agree a credit facility with your bank for you to enter into this kind of transaction. 16.3 Use Currency Options: A currency option will protect you against adverse exchange rate movements in the same way as a forward contract does, but it will also allow the potential for gains should the market move in your favor. For this reason, a currency option is often described as a forward contract that you can rip up and walk away from if you don't need it. Many banks offer currency options which will give you protection and flexibility, but this type of product will always involve a premium of some sort. The premium involved might be a cash amount or it could be factored into the pricing of the transaction. Finally, you may consider opening a Foreign Currency Account if you regularly trade in a particular currency and have both revenues and expenses in that currency as this will negate to need to exchange the currency in the first place. The method you decide to use to protect your business from foreign exchange risk will depend on what is right for you but you will probably decide to use a combination of all three methods to give you maximum protection and flexibility. 17. CURRENT REGULATIONS 17.1 Investments Foreign investors are free to make investment in Bangladesh in the industrial enterprises excepting a few reserved sectors e.g. defense equipment. Permission is not required to set up an industrial venture in collaboration with local investors or wholly owned by the foreign investors. To avail the facilities & institutional support provided by the government, entrepreneurs should apply to the Board of Investment for registration. 17.2 Repatriation of investment funds, dividends and profits There is no restriction on the repatriation of capital invested in Bangladesh. Foreign companies including banks, insurance companies and other financial institutions are free to remit their post tax profits to their country of origin without prior approval of Bangladesh Bank (the central bank). No permission is needed for remittances of dividend income to non-residents on their investment in Bangladesh. 17.3 Securities Import/ Export Regulations There is no restriction under the Foreign Exchange Regulation Act on the import Of securities into Bangladesh. Securities can be exported or taken out of Bangladesh without general or special permission of the Bangladesh Bank. Residents in Bangladesh who are holders of foreign securities and who wish to send the securities to banks, brokers or agents abroad for the purpose of sale, transfer etc. should apply to the Bangladesh Bank through an Authorized Foreign Exchange Dealer for necessary export permit. Permission for transfer of such securities will be granted provided the Authorized Dealer gives an undertaking that the securities will be received back in Bangladesh within a specified period, or in the case of sale, the foreign currency proceeds of the sale will be repatriated to Bangladesh. Bangladesh Bank also considers applications for the exchange of foreign shares and/or securities held by residents abroad. Applications for this purpose should be made through an Authorised Dealer or Stock and Share Broker. Such applications will be considered favorably provided the Bangladeshi shares/securities to be imported from abroad are approximately of the same market value as foreign shares and/or securities that are desired to be exported. 17.4 Investment Restrictions 17.4.1 Direct Investment By non Residents A non-resident can invest in the primary market. At present a quota of 10% of the total amount of IPO are reserved for Non-Resident Bangladeshis (NRBs). Non-resident Bangladeshi may apply either directly by enclosing a foreign demand draft drawn on a bank payable at Dhaka, or through a nominee by paying through a foreign currency deposit account maintained in Bangladesh. Investment in the secondary market can be made through a licensed stock broker and custodian bank. 17.4.2 Indirect Investment By non-residents Non-residents may buy Bangladeshi Securities in Bangladesh against freely convertible foreign currency remitted from abroad through the banking channel. Transaction related to such investment including repatriation of dividend, interest earning and sales proceed are made through a Non-resident Investor’s BDT Account (NITA). 18. CONCLUDING REMARKS Central banks from emerging market economies these days have considerably more experience with foreign exchange market intervention than their developed country counterparts. The range of techniques and tactics deployed is clearly wider than has been the case with intervention by developed economies over the last three decades or so. That is especially the case in three areas: the use of direct controls, consistent with the stage of development of many of these financial markets; the sale of option contracts by auction; and the use of foreign currency debt denomination or indexation as a supplementary tool (the latter two techniques featuring in Latin America). However, the great majority of intervention across the group takes conventional forms, with spot transactions in the most liquid part of the wholesale market predominating. Although intervening central banks within the emerging market group tend to rate their interventions as quite successful, and although they devote substantial resources to monitoring their foreign exchange markets, in general they are loathe to attribute success to the selection and use of “clever” tactics. To be sure, a number of instances can be found where monitoring procedures have helped with the timing and structure of intervention. But equally, the view to be obtained through intensive monitoring remains murky and the ability to predict outcomes remains limited. As one participant at the meetings suggested, the selection of technique and tactics is an ongoing process of adaptation with no small amount of trial and error. 19. REFERENCE Bangladesh Bank. (2002-2003). Annual Report 2002-2003, Dhaka, Bangladesh. Bangladesh Bank. (2007). Quoted in www.banglaembassy.com.bh/FDI%20in%20Bangladesh.htm. A Review of Bangladesh’s Development 1996, Centre for Policy Dialogue/University Press Limited, Dhaka. Bangladesh Economic Review, Ministry of Finance, Dhaka. ADB, 2002a (March), Quarterly Economic Update, (Dhaka, Bangladesh Resident Office) Bangladesh Bank, 2002(January), Economic Trends (Dhaka, Statistics Department of Bangladesh Bank. “Exchange Rate Uncertainty and Foreign Trade”, European Economic Review, 33, 1241-1264. “The Impact of Generalized Floating on Trade Flows and Reserve Needs, Selected Asian Developing Countries,” New York Garland Publishers. Bangladesh Bank (2005). Annual Report 2004-2005. http://web.worldbank.org/ (Official Website of the World Bank. The Website has been used to collect some of the data that have been used in the paper) http://www.forextradingea.org/foreign-exchange-market-forex-2009/ http://en.wikipedia.org/wiki/Foreign_exchange_market  PAGE 21