IIBF Certificate in Foreign

Exchange

Tutorial
October 2018
Topics for the Certificate Exam
• Role & Rules of FEDAI
• FEMA- Resident and non resident Individuals
• FEMA- Resident and Non- Resident Entities
• Documentary Credits and Standby Credits
• Export Finance
• Foreign Trade Policy
• Foreign Exchange Remittance, Investment and Accounts Facilities
available to Resident and non resident Indians ( Individuals)
Role of FEDAI
• FEDAI- Foreign Exchange Dealers Association of India
• Established: August 1958- taking over various functions earlier
handled by Exchange Banks Associations operating at major centers.
• Accredited by Reserve Bank of India
• Supporting in framing rules and guidelines on market operations,
regulate the forex dealing operations between various entities, and
development of foreign exchange markets in India.
Role of FEDAI
• Formulating rules and guidelines for AD Banks to ensure level playing
field
• Supporting RBI in furthering the growth of External Sector- EXIM
Trade
• Participating in reviews of UCPDC and other
• Providing trainings, conducting seminars, workshops on various
topics relating to foreign exchange markets and Trade.
• Associating with ICC Paris for providing views on review of UCPDC
and other rules
Role of FEDAI
….2
• Providing guidance to member banks on various issues relating to forex
markets, products and trade.
• Granting accreditation to Forex Brokers
• Promoting Best practices for efficient conduct of Forex Markets in India
• Act as facilitator between member banks and the Reserve Bank of
India, Export promotion bodies, etc.
• Administration of Benchmark Rates:
(i) Base Rates for FCNRB Deposits
(ii) Month End Revaluation Rates
FEDAI Rules
• FEDAI rule covers Standard practices to be followed for :
Forex Dealing operations- Interbank Dealing- Cash, Tom, Spot and Forwards.
Calculation of Exchange Rates- Ready and Forwards.
Exchange Contracts- Booking and Cancellation of forward contracts
Handling of Export and Import Documents – including applicability of Exchange
Rates, Notional Transit Period, Applicability of interest, Crystallization of Bills,
etc.
FEDAI Rules –last updated November 2016
• Rule 1 -Hours of Business
• Rule 2- Export Transactions
• Rule 3-Import Transactions
• Rule 4- Clean Instruments
• Rule 5 – Foreign Exchange Contracts
• Rule 6- Early Delivery, Extension and Cancellation of Foreign Exchange
Contracts
• Rule 7- Business through Intermediaries
• Rule 8- Interbank Settlements
Sample questions on FEDAI Role and Rules
Q 1. Which is not a role of FEDAI-
a. Granting accreditation to Forex Brokers
b. Providing training, to bank officers
c. Formulate Exim policy
d. Act as facilitator between member banks and the Reserve Bank of India
Q 2. FEDAI announces benchmark rates for use by banks
a. Interbank deposit rates
b. Base rates for calculation of NRE deposits
c. Base rates for FCNR B deposits
d. Month end revaluation rates for GSEC held in AFS.
Sample questions on FEDAI Role and Rules
Q 3. Mahashivratri, to be celebrated on 13th Feb 2018 ( Tuesday) is
not on the list of Government holidays for this year, as per
notification. On 29th January, government declares this as an
additional Holiday in Maharashtra, which is approved by the
Governor of Maharashtra under Negotiable Instruments Act. As
per FEDAI Rule 5, Interbank forex deals due on 13th Feb 2018 will
be settled on :
a. Monday 12.2.2018
b. Tuesday 13.2.2018 , as this is not a holiday in other centers.
c. Wednesday 14.2.2018.
Sample questions on FEDAI Role and Rules
Q 4. Former PM Shri Atal Behari Vajpayee died on 16.8.2018. and
the state governments, including Government of Maharashtra,
declared holiday on 17th August 2018 as a mark of respect to the
former PM. As this was announced only a day prior to the holiday,
as per FEDAI Rule 5, Interbank forex deals due on 17th August 2018
would have been settled on :
a. Thursday 16.8.2018
b. Friday 17.8.2018, which was a half day holiday for Central government.
c. Saturday 18.8.2018
d. Monday 20.8.2018
Sample questions on FEDAI Role and Rules
Reasons for answers:
Q1. Exim policy is not a function of FEDAI, the others are.

Q2 Option a & b are Rupee rates and Option d is for portfolio valuation-not
related to FEDAI functions .

Q3 . Known Holiday- settlements on previous day

Q4 Un known holiday- settlements on next working day

FEDAI Rule 2- Export Transactions
• Application of Exchange Rates –Export Bills Purchased/ discounted/
Negotiated Bill buying Rates/ contracted Rate.
• Interest for Normal Transit Period to be recovered upfront.
--Crystallisation and recovery:
• Banks own policy-- normally 30th day from the due date.
• Crystallisation at TT Buying Rate
• Realisation of bills crystallised earlier- at TT buying Rate.
• Applicability of Interest as per RBI guidelines
• Normal Transit period- linked to concessional interest rates
FEDAI Rule 3- Import Transactions
• Application of Exchange rates- Bill selling rate /Contracted
Rate
• Crystallisation of Bills under LC –Banks policy- generally 10
days.
• Application of Interest Rates: Linked to commercial rates of
interest , as applicable to domestic advances.
Sample questions: Export /Import Transactions
Q 4. Crystallisation of Export Bills: Rate at which crystallization is done
a. TT Buying Rate
b. Bill buying Rate
c . TT Selling Rate
d. Bill Selling Rate

Q 5. Rate at which payment of a crystallised bill is paid to customer

a. TT Buying Rate
b. Bill buying Rate
c. TT Selling rate
d. Bill selling rate
Sample questions: Export /Import Transactions
Q6. In case of an export bill for USD 25000.00, drawn on a buyer in UK, with tenor
as 90 days from date of shipment, how many days of NTP will be allowed to
calculate the NDD of the bill:
a. 25 days ( as for bills drawn in foreign currencies)
b. 5 days as provided for LC reimbursement under TT
c. Zero days
d. 120 days.
Sample questions: Export /Import Transactions
Q7. A bill for USD 10,000 drawn on a US buyer, on 90 days DA basis, is
discounted by the Bank. At what rate and for how interest will be applied on
this transaction, concessional rate being 7 %, Normal rate being 10% and
overdue rate 12 %, taking that the bill got realized after 125 days. :
a. At concessional interest for 90 days and normal rate for remaining days at
the time bill is realized.
b. At Concessional rate for 115 days and overdue rate for remaining period at
the time bill is realized .
c. Upfront at Concessional rate for 115 days and overdue rate for remaining
period at the time bill is realized.
d. Upfront for 90 days and normal rate for 35 days upfront.
Sample questions on FEDAI Role and Rules
Reasons for answers:
Q4 . Crystallisation of Export bills - @ Opposite TT Rate

Q5 Once bill is crystallised, the F C exchange risk is with exporter, hence,

payment at TT Buying rate.

Q6 . NO Transit period, if link date is a known fixed date- shipment date here.

Q7 Concessional rate for NDD ( NTP plus DA period), and overdue if not
realized within the NDD. ( Notional Due date)
FEDAI Rule 5- Foreign Exchange Contracts
• Contracts for Definite amounts and periods
• Option period and Delivery-
• At the discretion of the customer/Merchant- whether buyer or seller.
• Known holiday – delivery on previous working day ,
• Suddenly declared holiday- subsequent working day.
• Forwards- 30 days/ one month option-
• Full Month -1st to 31 March, 16th Feb to 15th March,
• 8th March to 31st March.
• Fixed date – Monday 26.2.2018, Wednesday 31.1.2018.
FEDAI Rule 6- Early Delivery, Extension,
Cancellations
• Responsibility of Customer to give/ take delivery of F C on the given
date or on or before the maturity date of Contract.
• Optional for a Bank to Accept early delivery and/or extend contract.
• Banks accepts/ gives early delivery- can recover swap difference and
interest on outlay of funds, if any.
• Extension: Existing contract to be cancelled at appropriate rate and
new contract booked for the desired period.
• Cancellation at applicable opposite TT Rate.
FEDAI Rule 6-Early Delivery, Extension,
Cancellations
• Difference between contracted rate and cancellation rate to be
recovered from the customer.
• Payment of Gain- only if contract is cancelled within the period, on or
before the maturity date.
• Swap Cost /Gain: to be recovered/ passed on – whether or not actual
swap is done by the Bank or NOT.
• Interest on Outlay of funds: Bank to recover interest on Rupee outlay,
if any , occurred on doing the Swap for extention of Contract.
Similarly, interest on inflow of funds, if any, to be passed on to the
customer.
Sample questions: Export /Import Transactions
Q8. A Ltd. has entered into a contract for export of one container Silica
powder covering approx. 1000 mt at a price of USD 50 per MT, for
shipment in November 2018. Based on the fineness of power, the
quantity in gunny bags that can be stuffed in a container could vary
from 95 Mt to 105 MT. A Ltd wants to hedge the exchange risk,
considering the volatility in rates these days. Bank B, will book forward
contracts for which one of the following options:
a. USD 50000
b. USD 45000- USD 55000
c. Approx 50000.
Sample questions: Export /Import Transactions
Q.9. If A Ltd has booked contract for USD 50,000, but was not able to
ship the goods in time and wants to cancel the contract, what rate will
the Bank apply to Cancel the contract:
a. Bill buying Rate
b. TT Buying Rate
c. TT Selling Rate
d. Bill selling rate
Sample questions: Export /Import Transactions
Q10. If the forward contract is booked on 1.10.2018, at 72.80 for
delivery Full November, and cancelled on 22.10. 2018, at 73. 20, what
will be the exchange difference that A Ltd. Will gain/ loose from this
transaction.
a. Gain 0.40 paise per USD
b. Loose 0.40 paise per USD
c. No Gain or loss as the contract is cancelled before the start of
Delivery period.
Sample questions on FEDAI Role and Rules
Reasons for answers:
Q8 . Contract to be booked for f definite amount.

Q9 Cancellation of forward contract at opposite TT rate.

Q10. Contract –agreed to sell USD at 72.80, now agreeing to buy at 7320- loss
of 40 paise.
Introduction to Exchange Rate Mechanism
• Exchange Rate- EXCHANGE of currencies- rate at which one currency is
exchange with another currency.
• Purchase / Sale rates
• InterBank/ Merchant Rates
• Cash/Tom/Spot/Forward Rates
• Direct Quote/Indirect Quote:
• Direct- When Base currency is USD 1 unit- 1USD = INR 72.75, 1 USD = 7.8262
HKD, 1 USD =113.98 JPY .
• Indirect- when Base currency, a non USD currency is fixed and USD is
Variable- 1 AUD = 0.7220, 1 GBP=1.3035, 1 EUR =1.1570.
Introduction to Exchange Rate Mechanism
• Factors effecting Exchange Rates:
• Fundamental Factors- Balance of Payment, Economic growth Rate,
Fiscal Policy, Monetary Policy, Interest Rates, Political Issues- stability
in policies, politics, etc.
• Technical Reasons: Unrealistic value of currency due to government
policies, Freedom or restriction in movement of capital, Huge
surpluses, large inflows/ outflows, Capital tends to move from surplus
to deficit areas, from lower yielding to higher yielding currencies,.
• Speculation: movement in demand / supply due to expected future
price, expectation of revaluation, devaluation, etc. TRADING.
Introduction to Exchange Rate Mechanism
• Premium and discount
• If forward value of a currency is higher(Costlier) than its spot value- it is
known to be at Premium- USD 1=Spot 72.75/76, 1 month forward difference
10/12: 72.85/72.88.
• If forward value of a currency is lower (Cheaper) than its spot value- it is
known to be at Discount -in the above case INR forward is at a discount to
USD. AUD /USD Spot 0.7210/0.7230, 1 month forwards 1.00000/ 1.2000-
Rate will be 0.7200/7110

• Here, Interest rate for INR and AUD are higher than USD interest rates.
( besides demand /supply gaps)
Introduction to Exchange Rate Mechanism
Maxims:
• Buy LOW, Sell HIGH
• Take MORE/ Give LESS
• DEDUCT Margins when selling to customers, ADD Margins when
buying from Customers.
• Currency with Higher interest rate will generally be at a discount,
while that with lower interest rate at a premium.
• Add Premium/ Deduct Discount from Spot rate to get Forward rate.
• Pass lower premium/ charge higher premium, inverse for Discounts.
Sample questions: Exchange Rate Arithmetic

Case . Credit of USD 100,000 received in Nostro maintained with Chase NY. , against a bill sent for
collection. Exporter asks for Credit in current account. Exchange rate on the given day is
72.66/68. Margin to be charged 8 paise.
Q 11. Which rate will be applied
a. TT Selling
b. Bill buying
c. TT Buying
d. Bill Selling.

Q12. What rate will be applied for this transaction:

a. 72. 74, b. 72.76, c. 72.60, d. 72.58
Sample questions: Exchange Rate Arithmetic
• Q13. What changes if this payment is as Advance against Exports.
a. Exchange rate at which the transaction is to be done
b. Type of Rate at which this transaction is to be done
c. Nothing changes.

Q14. What if 50% of the amount is to be kept in EEFC account, for

sending remittance of an import bill?
Sample questions: Exchange Rate Arithmetic
Q15.Forward Contract to be booked for delivery January 2019- Value
USD 50,000.00 , when rates are: Spot IB 72.64/ 65
• Forward premium; Spot Oct: 600/ 800 ps,
• Spot November: 2000/2200ps
• Spot December : 3600/3800ps
• Spot January : 5500/5600ps
• Calculate forward rate- For Export Advance payment to be received
during the month of January 2019 and For Import Bill payment
delivery January 2019. Margins TT 10 paise, Bill 12 paise
Sample questions: Exchange Rate Arithmetic
Forward purchase contract TT – delivery January 2019
• Spot rate 72.6400
• Add Premium ( for December ) 0.3600
73.0000
• Less Margin 0.1000
Rate to be quoted 72.9000
Sample questions: Exchange Rate Arithmetic
Forward Sale contract for import bill – delivery January 2019
• Spot rate 72.6500
• Add Premium ( for March ) 0.5600
73.2100
• Add Margin 0.1200
Rate to be quoted 73.3300
Sample questions on FEDAI Role and Rules
Reasons for answers:
Q11. c. For inward remittance- TT Rate applicable when, funds seen in nostro
Q12. d- Maxim Buy low for purchase - less margin to be charged.
Q13. Purpose of inward remittance does not changer the way we calculate
exchange rate- No change.
Q14. Rate ill be applied only for the 50% being converted in INR.
Q15. Maxims for Direct rates -Buy low- sell high, Pass lower premium- charge
higher premium, deduct margin for purchase, add margin for sale.
Sample questions: Exchange Rate Arithmetic
Q16. Forward Contract Cancellation:
• On 25.1.2019 ,customer comes to cancel the contract , at what rate
can the Forward purchase contract be cancelled , if rates on
25.1.2019 are as under:
• Spot 73.88/90 fwd. Spot Jan 03/04, Spot Feb 17/18, Margin 10 ps.
• Purchase contract to be cancelled as under:
• 73.90 + 10=74.00 USD 50,000- INR 37,00,000 ( sold USD)
• Booked at 72.90-INR 36,45,000 ( Bot USD)
• Difference to be recovered : 55,000.
Introduction to Exchange Rate Mechanism
• Interest on Outlay of funds:
When forwards are cancelled before the due date or in case of early
delivery of contract currency, Bank may have to go in for a reverse
swap to cover the earlier position. In case of adverse movement in
rates, higher amount of counter currency ( INR) will have to be paid
upfront by the Bank.
Sample questions: Exchange Rate Arithmetic
Q17. Taking earlier example:
If the contract booked for January , is cancelled during the month of
January- no interest on outlay is recoverable.
If this forward contract is cancelled on 10.12.2018, when spot is
73.40/50 and spot December is 10/12, the rate applicable would be
73.50 plus 12 = 73.62 plus margin of 10 paise = 73.72.
• Contract booked at 72.90 ( INR 36,45,000)for delivery January, and
cancelled at 73.72,(INR 36,86,000) Bank will charge interest on outlay
on Rs 41000, @ say 12%. –Rupee applicable rate.
Derivatives
• Derivative: is an instrument or a product whose value changes with
change in one or more underlying variable, eg., Stocks, Currencies,
Commodities, interest rates.
• The value of these financial instruments are derived from the values
of underlying exposure.
• Derivative instruments offer a vehicle to manage risks, arising out of
uncertainties , inability to visualize the potential state on some future
date.
• Basic derivatives in foreign exchange markets include- forwards,
Swaps, Options, and Futures.
Forward Contracts
• Forward Contract is a binding agreement between two parties to
purchase and sell a specific quantity of foreign currency at a specified
price at a specified future date ( range of dates).
• The risk of probable loss, arising out of adverse movement of price of
currencies, can be avoided with Forward contracts.
• The Contract is an obligation on the buyer to take delivery of the
currency and on the seller to provide delivery of the currency, on a
given date at a given price. Contract is binding on both parties.
• Forward contracts are OTC contracts- over the counter. / made to
order contracts.
Forward Contracts
Example: On 1.1.2018 , an Exporter gets order for export of Shoes at USD
40000, @ USD 40 per pair, when USD/INR is at 67.00, and costing made
accordingly. The delivery is to be made in June 2018. The payment of this DP
consignment is expected anytime between 10th and 31st July.
• Spot USD 67.00/02- as on 5.1.2018 Forwards Spot June 65/67.
• Forward can be booked at 67.00 plus 65 ps premium,67.65( ignoring
margins).
• If exposure is kept open- any adverse movement in price of USD/INR below,
would effect the profit margins of the exporter.
• If Forward contract is booked at 67.65, the downside risk is covered for the
exporter , with additional income of 0.65 ps per USD, in the form of
premium.
Futures
• Futures are similar to Forward Contracts, except that these are
standardized and are traded on Exchanges.
• As for Forward contracts, the buyer and seller are under obligation to
give and take delivery of underlying, at a specified date at the
specified rate.
• Futures Exchange is one of the party in Futures Deal- Exchange is a
market place where other parties can buy or sell contracts, as per
their requirements/ views.
• Contracts are specific in lot size, and delivery dates/ periods.
Futures
• Example :
• Futures contract size of say USD 100,000 or USD 250, 000, each, with
delivery periods of 1, 3, 6, 9, 12 months. Contract expires on last
Thursday on contract months.
• An exporter can hedge on Futures Exchange by Buying a Sell Contract
for a specified month, in lots of USD 100,000 each.
Options
• An Option Contract is a right to BUY or Sell a contracted underlying on
a given date , at a pre- agreed price.
• The buyer gets the right, but is not under obligation to perform under
the contract.
• This right to the buyer , comes at a price-known as option Premium.
• The seller is under obligation to perform under the contract, if the
same is exercised by the buyer.
Options
Option holder: is the buyer of option contract
Option Writer: the seller of the contract
Option premium: the price for buying an option.
Call option: right to buy a currency /underlying
Put option: Right to sell a currency /underlying
Strike Price : Price at which the right to buy/ sell is decided/ fixed.
American Option : Right can be exercised on or before the maturity date.
European Option: Right can be exercised only on the given Maturity Date.
Options
• Example:
• An exporter receives an order for USD 400,000 for supply of Yarn to
Italy. The shipment is to be done in May 2018, and pricing of the
order was based on USD INR current rate of 63.50 .
• The Exporter has started processing of the goods to be supplied, and
has planned well to keep the overall costs within the costing
prepared by him. However, he is not sure of the value of USD/INR
rates when exports are made and payment is received, and does not
want to lock the rates at this level, as there is a probability of
USD/INR going down.
Options
• The Forward rate for booing of forward contract for the month of June
2018 offered to him is 64.35 (63.75 plus premium of 60 ps).
• However, his advisors are seeing USD /INR going back to over 64.50 in
near future.
• Bank has quoted a premium of 0.25 paise for option contract for USD
400,000 with strike rate of 63.75.
• The exporter plan to go in for an Option to hedge this exposure,
thinking that if the rate moves in his favour , and goes beyond 64.05 ,
he would get benefit of upside, while if the rate remains at same level,
he can always exercise the option and get 63.75. ( net being 63.50)
Options
• In the Money: the strike price is less than the price of underlying.

• Out of the Money: The strike price is more than the price of
underlying.

• At the money ; the strike price is equal to the price of the underlying.
SWAPS
• SWAP- Simultaneous exchange ot two streams :
• Simultaneous Purchase and Sale of currency/ commodity/interest
rate….An agreement between two counterparties to swap or
exchange the obligation on two or more streams of asset, in such a
way that both of them gain. Swaps are normally OTC contracts where
one of the counterparty is a Bank or an Financial institution.
• BUY USD 250,000 Spot and sell USD 250,000 delivery May 2018.
• Sell USD 500,000 Feb.2018 and BUY USD 500,000 delivery March.
• Sell Cash / But spot
• Buy Fixed rate Interest and Sell floating Rate interest rate.
RECAP
• Role of FEDAI
• FEDAI Rules
• Exchange Rate Mechanism
• Ready and forward rates
• Calculation of Rates
• Derivatives
• Forward, Futures, Options, Swaps.
FEMA-Investment by Individuals
Purchase /Sale of Shares /Debentures on a stock exchange on
Repatriable and or non-repatriable basis under Portfolio Investment
Scheme:
• Through recognized broker
• Designated bank/branch- designated NRE/NRO account.
• PIS route up to 5% of paid up capital/ paid up value of each series of debentures of
listed companies.
• Reporting by Bank’s link office on daily basis.( upload on OFRS site of RBI)- for
monitoring of overall investment limits-Caution at threshold minus 2%- BAN LIST on
reaching the limits-
• Individual limits to be monitored by respective banks.
FEMA-Investment by Individuals
Investment on non repatriable Basis:
• Subscription to public issues or private placements –without Limits,
• Payment from NRE/FCNR/NRO accounts or fresh inward remittance.
• Sale proceeds to be credited to NRO account, net of Taxes.
• Proceeds, including original investments, not permissible for
repatriation abroad or credit to NRE /FCNR account.
FEMA-Investment by Individuals
Securities other than Shares or Convertible Debentures:
On Repatriable Basis: Dated Government Securities, Treasury Bills,
Units of Domestic Mutual funds, Bonds issued by PSU, and shares in
PSU being divested by Government of India.
On Non- repatriable Basis: Dated Government Securities, Treasury Bills,
Units of Domestic Mutual funds/ Money Market Mutual Funds, Non
convertible Debentures,
NRIs NOT ALLOWED TO INVEST IN SMALL SAVINGS SCHEMENT, INCL.
PPF, OF GOVENRMENT OF INDIA.
FEMA-Investment by Individuals
• NRIs can invest in tier I and Tier II instruments issued by Banks in India- subject
to conditions- max 24% in each issue with individual ceiling of 5%.
• Investment in Immovable property: Any number of residential or commercial
properties by NRIs,
• Acquiring of properties by citizens of Pakistan, Bangladesh, Sri lanka,
Afghanistan, China, Iran, Nepal, Bhutan- NOT ALLOWED. Can take on a max. 5
year lease.
• Investment in Partnership firms/Proprietorship Concern- on non repatriation
basis. ( prior approval of RBI required for investment on Repatriable basis).
• Deposits other than Bank Deposits- Not allowed from inward remittances.
• Deposits from NRO accounts, not representing inflow, are permitted.
Prohibited transactions – Rule 3
• Remittances out of lottery winnings
• Remittances out of income from Racing, Riding, etc.
• Remittance for purchase of Lottery tickets, Banned/Proscribed magazines, football
pols, sweepstakes, etc.
• Payment of commission on exports made towards equity investment in Joint
Ventures/WOS abroad of Indian Companies.
• Remittance of dividend , ny any company where dividend balancing is applicable.
• Payment of commission on exports under Rupee State Credit route , ( allowed upto
10% of Invoice value on exports of Tea and Tabacco).
• Payment related to Callback services.
• Remittance of interest income on funds held in NRSR Account Scheme.
Recap
• Regulatory Requirements under FEMA- Individuals
• LRS and other facilities
• Non resident Accounts – NRE, FCNR, NRO
• Loans to NRI
• Investment in Shares/ Convertible Debentures by Non Residents
• Investments in other securities
• Investments on Repatriable / non-repatriable basis
• Prohibited Transactions ( Rule 3)