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Bank of America, eps trim2 to 33 cents, revenues of 33.1 billion (+60%)

2009-07-17T06:41:00.000-07:00

Bank of America (BAC.N: Quote) has closed the second quarter with a profit of 3.2 billion dollars, equivalent to 33 cents per share.

Revenues were up 60% to 33.1 billion, the bank said in a note.

Analysts felt by Reuters had led to an estimate of earnings per share of 29 cents and revenues of 33.3 billion.

The school record at end of period accatonamenti of 13.4 billion euros to cover losses on loans, as compared to the first quarter.

The Tier 1 is equal to 11.93%.

The title in preborsa salt, 1, 6% to $ 13.38.

Euribor, yet a new record minimum fixing, three months 0.954%

2009-07-17T06:40:00.002-07:00

The rate on three-month interbank loans has slipped to a new low record at the daily fixing, further away from the reference by 1% from the European Central Bank to reflect the enormous amount of liquidity available.

The rate at three months - the end of the reference to the interbank market - fell to 0.954% today, bypassing the minimum of 0.969% hit yesterday. The rate is six-month backlog at 1.202% from 1.214% while that in one week dropped to 0.369% from 0.373%.

Yesterday, the EONIA was set at 0.358%.

Euribor, yet a new record minimum fixing, three months 0.954%

2009-07-17T06:40:00.001-07:00

May industrial orders +0.4%, -1.1% on turnover months

2009-07-17T06:39:00.000-07:00

In May, the seasonally adjusted index of orders to industry showed an increase of 0.4% on month by -3.6% in April.

In the month of observation, the seasonally adjusted index of sales marked a change equal to -1.1% compared to April, when it shrank by 0.1%.

On an annual basis the orders of May marked a decline of 31% while sales fell 22.8%. The orders are in rough terms, the turnover are adjusted for calendar effects.

Milan stock exchange pending flat quarterly U.S. Italease +25%

2009-07-17T06:32:00.000-07:00

Piazza Affari is essentially flat in mid-session, pending the results of the quarterly Citigroup. One just out of General Electric is below expectations for revenue, but better on the front of profits.

Banc of America announced time you have an earnings per share including extraordinary items of 33 cents.

"Obviously there waiting for this new round of results to see if the positive trend will be confirmed," says a broker.

Around 13.00 the index Ftse / Mib of 0.52% salt, while the FTSE / Mid Cap advances of 0.60%. Volume amounted to 1.1 billion euros to around 13,00.

The indices on the Dow Jones and the S & P's fell slightly, while the Nasdaq is increasing by 0,18%.

Ripping up again today after ITALEASE +49% yesterday - the day after the closing to the takeover launched by parent company Banco Popular, which has failed to achieve the target of 90% which led to the delisting of the lease as in the plans - the title now earns 2.74% to 25.26 euros.

According Cassa Lombarda there are high chances that the people can still reach 90% of their capital Italese, which would allow the Bank to delistare the subsidiary at the end of the capital of one billion euros, since not all minority shareholders would able to subscribe to the recapitalization.

MAIRE also shields the TECNIMONT (+7.67%) on the contract in the UAE from 2.35 billion dollars, announced two days ago. In the wake well Prysmian (2.7%).

FIAT unchanged after the rally of the last sessions. This morning Goldman Sachs has cut its target price on the title to 21 euros from 22, confirming the rating of "neutral. Today, the European auto sector salt, 1, 5%

JP Morgan, best payout buyback that will increase reserves

2009-07-16T07:54:00.000-07:00

Shareholders of JP Morgan (JPM.N: Quote) can expect a buyback "at any moment" when market conditions permit and the repurchase of shares at the moment is a better option than to raise dividends.

Word of the CEO Jamie Dimon, who replied to journalists after the dissemination of quarterly banking colossus. According Dimon is "reasonable" to expect that the group, after a second quarter in which it has set aside some 'less than $ 10 billion, add other reservations about potential losses in the third and fourth quarter.

The CFO Mike Cavanagh, speaking of the newly acquired Washington Mutual (WAMUQ.PK: Quote), then added that the losses so far are in line with original expectations and we do not will require write-downs and other charges.

Dimon also said not to even be considered likely in 2010 to achieve a profit in the credit card division.

Bags Europe, indexes rise on U.S. data, JP Morgan

2009-07-16T07:53:00.000-07:00

The European stock markets remain in positive territory, despite the volatility on Wall Street that changes sign several times, after opening in negative.

To support the European lisitini good figures for the unemployed Use of the week and that JP Morgan in this bag has announced better than expected results for the second quarter, largely due to the compartments' core consumer 'and investment banking.

This news comes on top of the good quarterly results reported by Goldman Sachs and the big technology and Intel to data on economic growth of China and reassure investors about the economic recovery prosepettive.

The data (of JP Morgan) gave a shake to markets, "said Richard Hunter, head dell'equity for Hargreaves Lansdown in London.

'It is too early to define a successful season of quarterly, but the initial signs are positive and show a change in the propensity to take risks on both sides of. "

Eye to the results of major listed companies that have yet to be published, including Google, IBM and the banking giant Citigroup.

Around 16.00 the FTSEurofirst 300 index rises of 0.82%, while the individual lists English Ftse 100 advances of 0.72%, the German Dax 1.17% and the French Cac-40 ' 1.53%.

Among the highlights:

* In terms of rebates NOKIA slipping by more than 11% in Europe, dragging the basket of European technology, having announced declining sales in the quarter and revised downward the outlook for sales in 2009

Ue asset sale could be asked to save banks

2009-07-16T07:52:00.001-07:00

The banks affected by the crisis who are hoping for approval of the state aid may have to sell assets and curb their expansionist aims, according to a draft document on the EU rules on restructuring banks.

The EU competition commissioner Neelie Kroes, is to submit the guidelines July 23. The proposed rules should be in force until the end of 2010.

"The banks receiving state might have to give up subsidiaries or branches, a portfolio of customers or divisions," states the document obtained by Reuters.

Institutions will have up to five years to restructure.

"The renovation involves a withdrawal from activities that remain at a loss in the short term," says the document.

Last month, Kroes said that the British Royal Bank of Scotland and Lloyds, who have received state aid, might have to forgo a large portion of their activities to comply with EU antitrust rules.

The Commission approved the restructuring plans of the German Commerzbank and WestLB, which include the halving of their budgets.

The Commission has so far supported the rescue of 70 banks in the area and a number of institutions will soon submit for approval its restructuring plans.

The document says that the EU executive may limit the expansion of banks in some sectors or geographic areas, with the request for a regular approval for acquisitions.

Tax gold, rejected amendment does not conform to EU standards

2009-07-16T07:48:00.001-07:00

The chair of the House rejected the amendment held inadmissible in order to reduce tax by 1% above the 6% capital gains tax on gold.

The policy says a source explaining that the text was rejected because it does not comply with the European regulatory framework.

"The speakers reserve the right to present a reformulation of the text," says the source.

It is possible that at this point is an amendment deleted in its entirety the article which introduces the capital gains tax on gold, because it criticized the ECB restricts the autonomy of the Bank of Italy.

Tax gold, rejected amendment does not conform to EU standards

2009-07-16T07:48:00.000-07:00

First in continental Europe and third in the world, Italy the first choice by U.S.

2009-07-16T07:07:00.000-07:00

For 24% of those who travel the world between 2009 and 2010, Belpaese is preceded by only two percentage points from Great Britain and the Caribbean (26%) but is first in France (17 %), Spain (15%) and Greece (12%).
The Italy earned a position in relation to the results of the last edition of the research, where the Belpaese was in fourth place in the U.S. tourists' preferences for international travel in 2008. "The Italy remains a very popular destination by travelers U.S. commenta-Steffanini David, chief executive of Visa Europe in Italy-and the fact that this trend has been detected during an economic climate does not favor making the proper appreciation of tourism made significant in Italy. "

However, Steffanini says, "despite the U.S. continue to play a primary role in global tourism, the Italy remains a country still linked to cash payments, a method of payment is not appreciated by the Americans in the U.S. as the electronic payment is the daily practice and also used for small expenses. It 'important-underlined in our country, expand its network of acceptance of payment cards at all levels, even in those shops where you usually make payments in cash. The reception of our country would further benefit and Italy would be more attractive to U.S. tourists. "

Visa research has found that when they plan their trips abroad tourists especially Americans rely on technological resources. 74% use the Internet to research and gather information, while 62% book their travel through travel agencies online. Most passengers interviewed mentioned the credit cards and debit as the preferred payment method when they travel abroad (62%) for its facilities' (71%), safety (56%) and facilitates' access to money (54%).

The Belpaese in 2008 sought a share of spending on Visa cards with a value of 1.5 billion dollars, putting Italy in the sixth position of the top ten destinations for U.S. travelers Visa cardholders. Approximately $ 300 million are was spent in the hotel and just over 108 million in the catering sector. Movements in our country have generated transactions on Visa cards for approximately 60 million domestic air flights, nearly 39 million car hire, 35 million in travel agencies, just over 12 million dollars in fuel, more than 10 million for travel by ferries, ships and boats and 1.5 million of toll highways.

The U.S. economic situation has not dampened enthusiasm for travel abroad among the citizens of the United States. About half of respondents (47%) said that difficult times had no impact on their desire to travel abroad and 18% said to be even more eager to make international voyages. However 83% of respondents stated that it intends to change their travel plans to meet at the time of political and economic crisis. 46% of American tourists will travel in the low season, while 31% intend to visit countries with costs much money.

Forex: 9 million stories?

2009-07-13T11:14:00.000-07:00

The market for trading in currencies, a real boom of interest and new traders who every day are discovering the benefits of the currency market, followed by an exponential growth of online brokers. Today is currently experiencing a major consolidation phase.

But how many brokers are able to tell the truth 'in this market to newcomers? What you should know before you open an account on this market?

"The market of forex, the most 'liquid in the world with trillions of volume traded per day, and very high chance' of profit." Unfortunately, there still happens to read phrases like this around the net and the sites of brokers. Unfortunately, precisely. In reality 'of a few facts you explain that these statements are based on a basic misunderstanding. Indeed, the retail trading on the forex retail and 'OTC (Over The Counter). In short the market without a home. A market without symbolic buildings & servers, and centralization of orders.

This reason justifies the fact that the A broker at a certain time is flying the Euro / Dollar at 22 while another offers it to 26. Likewise this explains that your trades are processed from a dealing desk that you confirm the price or could riquotare. But above all it means that you will not be even a part of that statistic. The selling techniques of many brokers and line management still based marketing strategies on these concepts sometimes misleading and not very ethical.

But then so would be 'bad to say the truth' to the young of forex trader? In fact when you open a retail account, all orders are normally received and handled by the dealing desk, which (under normal conditions) should provide their own coverage on interbank circuits. But it would be equally attractive to a potential client to open a trading account with a dealer and that the market and its prices will be determined by the dealing room?

I certainly do not make the forex attractive to the masses of young investors. For this reason, some brokers have a tendency to want to make you believe that you are the most liquid market in the world, open for 24 hours. For the sake of clarity, this does not mean we then say that it is so 'not to betray the currency markets through a dealer . Indeed for small traders the benefits are manifold as the ability 'to open an account with minimum figures, the lever normally more' high, the chance 'to mini and micro lots, the lack of commissions for the benefit of the spread.

All of which interbank circuits (just for banks) would make it impossible to access for small retail traders. E 'and a requirement (at least ethically) that your broker you explain what kind of bid offers and give you a sincere view of the type of tool that will go to operate. While not representing a major flaw, in our opinion this could be indicated as a first sign that your broker is not 'completely honest to you.

G8 new agreements for the global economy.

2009-07-13T11:06:00.000-07:00

The great earth, gathered in the G8 Summit, have betrayed the expectations. The new joint project, called "Global Legal Standards," will see it the biggest global economic powers engaged together in the fight and in contrast to every protectionism in the fight against tax havens and the allocation of greater importance than in the past , work and employment.

Stop, then, the money at the center of economic development, so, instead, to man and work at the center of economic growth and sustainable development. With the approval of the economic statement, the G8 countries may now report to the G20 next month of September in Pittsburgh for the large-scale sharing of rules and actions that will finally close the game with a financial and economic crisis that does not must be repeated.

The new code will ensure the development of the economies of most industrialized countries and emerging ones, must thus be based on ethics, integrity and transparency, and the whole of the crisis, in the era of globalization, can not afford more the adoption of local, but global and supra-national. In essence, the Heads of State and Government of the G8 have agreed that work developed in the G8 financial Lecce, and this will leave for the new rules that can not be written and rewritten in one fell swoop, but with which soon finance professionals need to begin to confront and adapt.

The Italy, in what surely represents a great success against the prevention of systemic crises, has made and will continue to make a great contribution in the wake consolidated relations with the United States. The President of the United States, Barack Obama, in fact, sweeping away every argument mounted by the international press, has openly acknowledged the leadership of the G8 on issues, and has promised the economic intervention of the U.S. in the areas affected by the earthquake dell'Abruzzo .

The Global Legal Standard "" really "in the direction of" Caritas in veritate ", the encyclical of Benedict XVI on social issues and the economy, highlighting the need to combine solidarity to profit for a fairer world, and for the dignity of every human being that should be guaranteed a decent job. Another important agreement signed in the first day of the G8 also the contrast to climate change, given that the countries will strive to break down by 50% by 2050, emissions of carbon dioxide, which must be based on the capabilities of individuals countries, including emerging that most of all when are contributing with their emissions to global warming.

And on it, was signed the commitment to hold a maximum of two degrees Celsius global warming as a result of emissions of greenhouse gases.

Houses and banks in trouble: what could make the bags?

2009-07-13T11:04:00.000-07:00

After a rally that lasted 15 weeks, from March 6 to 11 June for the U.S. stock market, the markets are asking about the possibility that the U.S. lists, especially the one most representative of America as a whole, the S & P500, continue upward. The output of the data on U.S. unemployment, the highest for 26 years, can not but create severe strains on financial markets. The increase in the number of unemployed, unemployment in June rose to 9.5% from 9.4% the previous year, will have a negative impact on the ability of getting into the motorcycle and then end up prolonging the recession that inevitably instead many were sliced to give, perhaps too early to off. Are also negative signals originate from the property.

In the second quarter of the sales of apartments in New York fell by 50% compared with a year earlier, prices were down an average of 18.5% compared to 2008. And do not think that the phenomenon only interest the Big Apple: the Standard & Poor's / Case Shiller, an indicator that monitors the average price of property in the 20 largest U.S. metropolitan areas, fell on an annual basis of 18.12% in month of April the twenty-eighth consecutive decline (the sixteenth consecutive 2 digits). Only the beginning of the season could submit quarterly surprises positively able to remove the fears (and the desire to buy) market, but the forecasts are not encouraging: the estimates that circulate about a decrease in average by about a third of the profits of the second quarter for the companies that make up the S & P500, that decline could be followed by another reduction of 20% in the third quarter to leave the place, only in the last quarter of the year, a significant recovery. Others kept on worrying signs of bullish trend in place since March comes from the banking business. U.S. regional banks, those that offer real estate loans are in trouble, down by about one quarter of the maximum in May (the Phlx KBW Bank Index, representing 24 U.S. banks measured by the Philadelphia Stock Exchange, taking into account the Keefe, Bruyette & Woods Index, after having reached a maximum in May at 43.75 in June fell to 34.57). A similar decline has been the title of the real estate sector (the Phlx Housing reached a maximum at the beginning of May at 99.47 to go down at the end of June at 76.72). These two sectors, representing sectors particularly affected by the crisis, have also demonstrated in the past a good power compared to the precursor list general. A confirmation of the capacity in the Phlx KBW Bank to anticipate turning points in the market need only cite the fact that this basket has been up to town in February 2007, after which began a long descent, then 8 months before than the maximum of the S & P500. The fact that banks and building her head falling back could be an important clue that the rest of the list will, from next week, meeting with a correction.

The trend of the graph of the S & P500 appear to collect the uncertainties of the market: from the top first reported in May, the index has designed a bearish head shoulders, a figure that marks a potential reversal of the upward trend since March designed. The drop below 880 area completes the picture, showing a first goal for the decline in area about 800, then a further decline of 10% of media critics. Graphic analysis in practice is to use the amplitude of the configurations of inversion, in this case the width of the head back about 75 points, as the meter with which to assess the potential for movement to the completion of the formation. A minimum target, in this case a downgrade, you get to imagine that the index will proceed in the direction the signal just sent a width at least equal to that of the figure that is left behind. The problem is that the target rate so established is not necessarily the destination of the movement, but only the first point from which you could see attempts to stop the trend of recent activation. In the case of the S & P500 in area 800 is also retracing 50% of the rise from minimum in March. Thus returns in that area, a decline of 15% of the top in June, would not impair the keeping of the bullish trend seen in the second quarter of this year. Retracing in 50%, 2 / 3 the maximum of the previous movement (in the case of the S & P500 2 / 3 of retracing are in area 770) are considered remedial and may be open, once completed, the resumption of the main trend . The breach of support represented by 2 / 3 of retracing the previous upward instead are seriously fear for the health of the rise itself. In this case then the picture that comes from the chart is that a fall by a further 10-15% of critical media area 880 but it is likely that, if limited to those levels, should not prevent a subsequent resumption of classes . Far more dark clouds will descend instead on the horizon in case of area falls below 770.
Very similar considerations you can make watching the graph dell'Eurostoxx 50, where it is equally clear that for the S & P500, the presence of a head drawn back down from the top of the beginning of May. Violation of 2340 completes the picture, the target downwards, taking into account the scale of the head behind it, is in area 2100, representing between 50% and 66% of retracing the rise from minimum in March (media respectively area in 2165 and 2030). Down to the European area in 2100, up to 2030, should not be underestimated, but even then viewed with much apprehension, as they may yet prove to be a physiological correction of the upward (wide, in the order of 50% is not good to forget keep the movement in the right perspective) by the minimum in March. In the area came down in 2030 could introduce a broader bearish phase, intended at best to return the minimum in March (for the area in 1765 Eurostoxx 50) but with a high risk that even exceeded those levels. And for what concerns the Ftse Mib index, representing the basket of securities with greater capitalization of the domestic scene? In this case the figure that overcome the upward trend seen by the minimum of March belongs to a different type, it is a double maximum and not a head away, but the implications are the same. The Ftse Mib share it touched 20,702 on 11 May and again the same levels (20,593 to be exact) on 11 June, then going down June 22 below the minimum term in relation to peak in May and June, to share support 18752. Violation of the maximum of twice completed the figure suggests that the achievement of at least 16,850 area. Returns on those levels are the lesser evil which could incur index: 50% of retracing the rise from minimum in March is in fact to 16,500, while approximately 15,030 is the base of an obvious gap left by the bullish price March 23 . Descents to fill this gap would still leave the door open, as in the two previous cases, with a subsequent resumption of the rise. Area under 15,000 would be prudent to begin to assume a new, extended period of decline, to be tackled with the equity portfolios reduced to lowest terms.

Using the Internet for Making the Best Auto Insurance Deal

2009-07-04T13:19:00.001-07:00

Auto insurance not only allows you to cover you automobile against various kinds of risks but also fulfils the legal need made by the law that no vehicle can run on Indian roads without being insured. At presents there are numerous companies that offer auto insurance policies. For getting an automobile insured, a person needs to pay some charges. This amount is known as premium and is characterized by means of a quote referred to as auto insurance quote. Different insurance companies offer different premium amount and other discounts and privileges .It becomes the responsibility of the customer to compare the entire insurance quote so as to obtain the most affordable auto insurance available.

The whole process involves comparison, analysis of all the quotes and selection of the best among many. This comparison can be made by discussion with brokers and agents of auto insurance firms. Another simplest and efficient method of comparison is to surf websites that give online auto insurance quotes. This is done by means of Internet .The websites contain quotes related to several leading companies. From the information provided on these websites one can look for quotes that meet his requirements and coverage needs. This technique of comparison turns out to be helpful but on the other hand is very time consuming.

All you need to do is give them the information they require and list the particular type of insurance plan you are looking for. Depending upon the information that you have entered, you will receive many quotes within a few days .You can select the quotes that interest you the most. Esurience is one of the leading auto insurance companies in United States. It provides services in about 28 states in total. All quotes are provided online and that too free of cost. It takes only a few minutes to provide quotes. You can later access these quotes anytime as they are saved automatically for any future references. It also informs a person about auto insurance providing him with tips to make a wise decision.

Progressive is another insurance provider in United States. Online quotes for several companies can be accessed on telephone in an easy manner. It provides effective services to more than 40000 insurance agents and brokers located all over the country.

How To Find The Best Travel Insurance Cover Online

2009-07-04T13:16:00.000-07:00

Are you on a holiday or traveling on business purposes or pursuing your studies abroad? Whatever your purpose may be, you must have travel insurance, while traveling overseas. International travel involves a certain amount of risk. If you need treatment abroad, but are not equipped with sufficient money, you will be confronted with a difficult situation. Travel insurance will be of great help during such emergencies. Cover yourself with the best travel insurance policies, when you plan to travel abroad.

A travel insurance policy not only covers medical treatments while you are abroad, but also relieves of any kind of reimbursement immediately by providing cover damages caused due to loss of passport and loss or delay of baggage along with the standard medical coverage that you obtain. It is wise to secure yourself with the best travel insurance
policies, whenever you plan to travel abroad and have a hassle-free travel experience.

Most of the general insurance companies today offer holiday insurance cover and the best way to find out about travel insurance plans is to browse online and compare all the travel insurance policies and rates available in the market before you make your final choice. Many sites provide you the list of credible travel insurance companies and also help you to choose the one that you feel is suitable for you. You just need to fill in your profile details, the type of your trip, the place where you are planning to travel, the premium you can pay and the number of days covering your travel or holiday, in order to get the best policies, rates and cover online, offered by some of best travel insurance company brands.

If you are thinking about getting the best travel insurance, it is best to buy online. Many big players of travel insurance sector have been recognized as popular travel insurance companies. These big players will also give you a free recommendation online on the best travel policy with best coverage at best rates you should choose. These travel insurance policies will help you deal with any difficult situations while you are traveling abroad. These policies essentially cover insurance against unforeseen situations and medical emergencies while traveling abroad. Notable travel and holiday insurance companies offer policies, namely Travel companion, Individual Overseas Plan, Student Companion, Travel Elite, Travel Assist, Student Medical Insurance
and others. These policies essentially cover insurance against unforeseen situations and medical emergencies abroad. Get an instant quote from any Travel insurance website online. You can find out the premium rates with the help of this quote.

Why Travel Insurance is a Must

2009-07-04T13:15:00.000-07:00

Travel insurance is necessary for your vacation packages and without it all your travel dreams cannot come true. Travel insurance is essential for a traveler as it covers your medical and financial expenses and losses incurred on your domestic or international travel. It’s usually arranged at the time of booking the trip and covers the exact duration of the trip.

Many travel agents offer insurance, as part of their travel packages but it will be worth for you if you arrange it on your own through an online source. You can search for a good insurance policy and choose between single and multi trip insurances. If you plan to travel once in a year, then travel insurance of single trip policy will be suitable. But if you have plans to travel frequently then you can consider taking multi trip insurance policy. Continuous insurance can be bought from travel agents, travel suppliers like tour operators, cruise lines and companies offering travel insurance.

A multi trip insurance policy is commonly referred as annual insurance travel policy and can save big money in the long run. While arranging for insurance policies for travel, be clear with what the insurance coverage is provided along with the inclusions and exclusions. Always remember to look at other things also if you look for a compromise between your travel insurance coverage and the premium to be paid. Never assume that a policy with cheap premium will not offer good insurance coverage. This may work in reverse also. A policy taken at a higher price need not cover all aspects of insurance coverage required by you.

As a traveler you face lot of problems and risks while traveling like loss of property and money, trip cancellation, natural calamities, accidents, occasionally death and terrorist attacks. You cannot prevent these risks or stop your travel plan but you can reduce the risk involved by taking travel insurance policies.

The concept of travel insurance is very simple. You pay a travel insurance premium to the company and they in turn covers for your loss of valuables, accidents and unforeseen things.

Travel insurance: buying wise

2009-07-04T13:12:00.000-07:00

Buying travel insurance before you go away is the easiest way to ensure that your holiday will go smoothly. Should you have an accident or fall ill while abroad, or encounter any other problem, you want to make sure that you will be looked after.

Amazingly, 15% of Brits still risk traveling abroad
without travel insurance, which could result in financial ruin if they required medical treatment. To be returned to the UK in an emergency could cost you thousands of pounds so make sure you have adequate and appropriate travel insurance for your trip.

Travel insurance does not only look after you in the worst possible scenario, it will also provide you with a safety net against common problems such as lost or delayed baggage, flight delays, missed departure or cancellation.

Different insurers offer different levels of cover and it is important to shop around online before you buy. Below is a comparison of the advertised benefits of three single trip travel
insurance policies. Each of these insurers is also able to tailor a travel insurance policy to meet your specific needs and more information is available on their websites.

If you are planning to make more than two trips this year, these insurers suggest that you consider a multi-trip or annual policy. More information about these policies and more can be found on their websites.

FOREX MANAGEMENT - ESSENTIAL ELEMENTS

2008-10-25T07:23:00.000-07:00

Forex management may be defined as the science of management of generation, use and storage of foreign currencies in the process of exchange of one currency into other called exchange.

The above definition of Forex Management has the following essential elements:

A) It is part of management science:

Forex management is part of the broader management science. It is a scientific discipline requiring scientific and analytic orientation. The techniques of management are applied to the broad spectrum of foreign currencies. This broad spectrum refers to all the currencies of the world excluding the domestic currency. These techniques include planning for Forex, organization of forex and control of forex. We use the terms forex and foreign exchange interchangeably. The planning part includes budgetting for forex, organization refers to utilization of forex and control part focuses on creation of forex reserves.The tools of forex management are akin to domestic currency management but the level of analytical skills required for it is slightly higher because of the existence of spot, forwards and futures markets unlike the domestic currency area. Operations in the forex market require quicker response time because of the greater volatility in exchange rates.

B) It refers to generation of Forex:

Forex is generated from International Trade Transactions. When a company exports goods or services, it earns forex. When goods or services are imported by a country, forex is consumed. If he exports of a country are more than the imports, the forex would be accumulated in reserves of the country. If the imports are more than the exports, the result would be forex deficit which was to be met by international borrowings. Either way, the forex needs to be generated. Generation of forex is a more difficult proposition because of variation in international trade practicies and extent of competition.

C) It pertains to use of Forex:

Forex management is concerned with the use of forex in meeting the requirements of the user groups. The tools of cash management come handy in using forex. The process of use of forex involves identification of suppliers of goods and services, negotiation of terms and conditions of the transaction and culmination of trnasaction with the exchange of goods and services with forex. Because of relative uncertainity about availability and volatility in its rates, advance tie-up of forex is made through forward purchase contracts. In this entire process, close track of exchange rates needs to be maintained.

D) It covers storage of forex:

Forex management involving firm level forex storage could be done through forward purchase contracts or through deposits in foreign currency bank accounts. At the national level, forex storage shortage is done through forex reserves which are held in the form of Gold, Special Drawing Right (SDRs) of IMF and foreign currencies. While some amount of foreign exchange reserves need to be maintained to meet unforeseen contigencies, excessive accretion to reserves involve a cost which is sometimes justified on other economic consideration at the firm's level. Forex is stored for meeting future import liabilities, whether certain of contigent. While storing forex, it is important to bear in mind the actual cost of storage and opprotunity cost of not using the forex elsewhere. Depending upon availibility of forex, if the opportunity cost is more that the cost of storage, then it is better not to store it.

SCOPE OF FOREX MANAGEMENT

2008-10-25T07:21:00.000-07:00

Forex Management has quite a wide scope of operation. We can cover in its ambit all those transactions which involve use of forex. Let us consider the following illustrations:

** A Citizen of India travels abroad on a business visit and purchased foreign currency from an authorized dealer.

** An Indian citizen goes to USA for a period of three years under an employment contract. He periodically remits US dollars to his bank account in India.

** An Indian Student subscribes to a British Scientific magazine and pays for it through an international credit card held by him.

** An Indian Industrialist imports raw material from Malaysia for his plant under a Letter of Credit arrangement provided by his bank.

** A Sports goods manufacturer of India exports his consignment to Europe and gets paid for it in foreign currency received through banking channels.

** Indian subsidary of a Multinational corporation imports white goods in completely knocked down (CKD) from the chinese affiliate. After reassembling these goods, the same are exported to Europe.

** The world Bank disburses aid to an Indian State under an infrastructure developement project.

The above illustrations shows how individuals, companies and states transact in forex. When goods are services are imported into a country, these are paid for in the currency of the country on a short visit, he needs foreign currency of that country for meeting his expenses. When he stays in that country for a longer duration for employment purposes, he earns foreign currency of that country. When an Indian firm exports goods to Europe, it is earning foreign exchange. Thus when goods and services are sent abroad by India, foreign currencies are earned by them.

Forex management being involved in all the trade and non-trade transactions involving forex, it is essential to have a broad idea of international banking and trading practices. Since the transactions are taking place among counter parties from different countries, a standardized format of documentation is used to minimise errors.

Apart from the transaction value, forex management finds scope as a mode of investment. Because of the frequent and often miniscule fluctuation in forex values, enough arbitrage and speculative opportunities crop up in forex market for astute investors. There are many expert forex dealers specializing in trading of forex

SIGNIFICANCE OF FOREX MANAGEMENT

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Business operations in countries across the globe have been in existence for centuries, but an unprecedented growth in world wide production and distribution of a large number of capital, intermediate and consumer goods has been witnessed in the past fifty years. At present most of the countries are economically related to each other through a complex network of trade, foreign investment and international loans.

The emergence of WTO and the process of global integration has reinforced the importance of International trade, cross border financial flows and consequently foreign currency transactions. Each country has its own currency and each significance of forex management lies in the study and maintenance of the exchange levels.

Every good or service reaching us from abroad involves forex. Knowledge if the forex management can help avoid harmful effects of International events and perhaps even profit from these events. With the advent of globalization and liberalization the scope for international trade and international financing has increased tremendously. International trade has grown more quickly than trade in general. This has put up both benefits and challenges.

The principal benefit for international trade has been in the form of the gain in standard of living it has permitted. The gain has come from exploiting relative efficiencies of production in different countries. The challenges of international trade are the introduction of exchange rate risk and country risk. Various methods and markets have evolved that allow firms to avoid of reduce these risks.

The after effect of developement of international trade has been swift movement of funds from one finance centre to the other. There has been investment by multinationals in the third world countries in the form of capital outlays. All this has necessitated the need for a better understanding of the mechanism og forex inflows.

Forex managent has become a more important subjects because of an increased globalization of financial markets. The benefits of the increased flow of capital between nations include a better international allocation of capital and greater opportunities to diversify risk. However, globalisation of investment has meant new risks from exchange rates, political actions and increased interdependence of financial conditions in different countries.

FOREX MANAGER

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The development in international trade have resulted in the emergence of a new brand of manager called the forex manager. The forex manager is a category apart from the finance manager or the treasury manager. He deals in currency and money but not of one country. He has to transact with a number of counter parts both in the domestic and abroad. He is face to face with special kind of risk. Yet his vocation is full of opportunities and challenges.

For effective management of forex transactions, the forex manager is expected to have the following skills:

A) Awareness of historical developement of world trade:

The Forex manager must have a fair idea of as to how the world trade has reached its present status. The shifting power of alliances, emergence and decline of economic superpowers, present political situations, trade patterns etc. should be known. This knowledge base enables the manager to view the current situation in proper perspective.

B) Ability to forecast future trends:

The Forex Manager must be in a position to derive an accurate forecast of the future trends in international trade flows and exchage rare patterns. This forecast helps the manager to prepare his forex budget.

C) Comparitive Analysis Skills:

The forex manager should be able to carry out a comparative analysis of costs of domestic and imported raw materials, price of local sales and export sales, shipping rates, insurance costs etc. in order to determine whether it is expedient to produce locally or to outsorce.

D) In-depth knowledge of forex market:

The forex manager is expected to have in-depth knowledge of functioning of foreign exchange markets, their rules and regulations, the size of their operation, the profile of active currencies, strength and weakness of the domestic currency etc. in order to achieve better pricing of deals.

E) Knowledge of interest rates:

Since interest rates have a direct bearing upon exchange values, awareness about the domestic and international interest rates enables the forex manager to form an accurate opinion about the forward premia.

F) Willingness to undertake risk:

Armed with the knowledge and awareness about international financial and trade patterns, currency positions and interest rates, the forex manager should have the ability to undertake reasonable level of risks with a view to profit from forex exposures.

G) Hedging strategies:

The forex manager should be in a position to hedge his positions to the best extent possible. To achieve this, a sense if timing is essential in the background of ever changing world of exchange values

FOREIGN EXCHANGE MARKET - CURRENCY DEALERS

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The foreign exchange market is a market in which currencies are bought and sold against each other. In other words, foreign exchange market is the market where the currency of one country is exchanged for the currency of another country. It is the largest market in the world having daily turnover of over US $3.2 trillion. The market is an over the counter market. There is no single market place or an organised exchange (like a stock exchange) where traders meet and exchange currencies. The dealers sit in their dealing room of major commercial banks around the world and communicate with each other through telephones, computer terminals and SWIFT mechanism. The forex market is a wholesale market called the inter-bank market. Commercial banks are the market makers. Corporations use the foreign exchange market for a variety of purposes relating to their operation like payment for imports, conversion of export receipts, hedging of receivables and payables, payment of interest on foreign currency loans, placement of surplus funds etc.

Forex market operates at three levels. At the first level are the currency dealers or money changers who provide for encashment or travelers cheques and release of small amount of forex to travellers. The money changers quote the buying and selling rates for various currencies. An illustration of the quote is given below:

Terms:

* T.C Buying - Rate at which Foreign Currency Travellers cheques’ deposited by the customer is converted into rupees

* T. C. Selling - Rate applicable when a customer buys Foreign Currency Travellers’ cheques from the bank

Picture Source: http://www.ratesfx.com/rates/rate-inr.html

FOREIGN EXCHANGE MARKET - SPOT FOREIGN EXCHANGE MARKET

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Far larger than the money changer market is the spot foreign exchange market which is at the second level. This market is involved with the exchange of currencies held in different currency denominated bank accounts. The spot exchange rate, which is determined in the spot market, is the number of units of one currency per unit of another currency, where both currencies are in the form of bank deposits. The deposits are transferred from sellers' to buyers' accounts. "Delivery" or "Value" or actual transfer is "spot" or "immediate". Usually it takes one or two days. This distinguishes the spot market from the forward market. Spot exchange rates are determined by the demand supply equations of the currencies being exchanged.

The inter-bank foreign exchange market is the largest financial market in the world. After adjusting for double counting so that purchased by one bank and the corresponding sale by the second bank is counted only once, average daily turnover is over $1 Trillion. The phenomenal size of the market can be put in perspective by noting, for example, the foreign exchange turnover exceeds that of all the world's stock markets combined. Indeed it takes over 2 months average trading on the New York Stock Exchange to match 1 day of trading in forex.

The forex market is an informal arrangement of the larger commercial banks and a number of foreign exchange brokers. The banks are linked by telephone, telex, computers and satellite communications network called the Society of Worldwide International Financial Telecommunications (SWIFT). This computer based communications system, based in Brussels, Belgium links banks and brokers in just about every financial center. The banks and brokers are in almost constant contact, with activity in some financial center or other 24 hours a day. Because of speed in communications, significant events have virtually instantaneous impacts everywhere in the world.

The efficiency of the spot forex market is revealed in the extremely narrow spreads between buying and selling prices. These spreads can be smaller than a tenth of a percent of the value of currency exchanged.

FOREIGN EXCHANGE RATES

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Exchange rates is the price of one country's money in terms of other country's money. When we say that exchange rate of Indian Rupee is 42.23 per US Dollar (22:13 IST), we mean that 42.23 Indian Rupees are required to purchase one US Dollar. When this exchange rate becomes 43 we say that the value of Indian Rupee depreciated against the US Dollar. On the other hand when the exchange rate becomes 42 we mean that Indian Rupee has appreciated against the US Dollar. Assuming that there are no exogenous factors restricting the changes in exchange rates, their movement can be traced to pure demand and supply. When Indian rupee depreciates against the US Dollar, it indicates that demand for later is more than its supply. Similarly when the supply of US Dollar is more than its demand, it declines in value against the Indian Rupee.

Currency of a country is used for transactions with foreigners. Each country in the world has its own currency. Theoretically, a country should transact with all foreign entities on a one-to-one basis, i.e. for all imports from a foreign country, the host country should be paid in its currency. But practically this is not possible because it involves keeping record of a multitude of exchange rates and associated payment problems. Therefore, most of the countries chose a common currency for trade amongst themselves. The U.S Dollar has emerged as the strongest currency for the past sixty years and as such is used as the payement medium for most of the world trade. In the European Union the Euro has established itself as the common currency of about 25 countries.

It is clear that the currency of a country is evaluated against a common currency for external transactions. In case of countries having dominant economic power, trade would be held in currency. Hence a country is required to trade in U.S Dollar or in other dominant currencies like Euro, Pound or the Japanese Yen. Account of a country's external trade is kept in the form of a balance of payement account which is a double book entry system. Receipts of foreign currencies are credited to this account while payemnts in foreign currency are debited to this account. The balance sheet in this account shows a positive or a negative figure depending upon whether the receipts of foreign currency are more or less than the payments.

Other things being equal, the presumption is that a country having a deficit balance of payements position would have a weakening national currency and vice versa. A deficit in the balance of payement account results in more demand for foreign currencies. Hence their value vis-a-vis the domestic currency increases.

India's balance of payements account for the year 2004-05 is given below as an illustration:

BALANCE OF PAYMENT ACCOUNT - EXPLANATORY NOTES

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Balance of payments is a statistical statement that systematically summarises, for a specific time period, the economic transactions of an economy with the rest of the world.

- Merchandise credit relate to export of goods while Merchandise debit represent import of goods

- Travel covers expenditure by non-resident travellers during their stay in the country and expenditure incurred by resident travellers abroad.

- Transportation covers receipts and payments on account of International transportation services.

- Insurance comprises receipts and payments relating to all types of insurance services as well as reinsurance.

- Miscellaneous covers receipts and payment in respect of all other services such as communication services, construction services, software services, technical know-how, royalties etc.

- Transfers (official, private) represents receipts and payment without a quid pro quo.

- Investment Income transactions are in the form of interest, divident, profit and other for servicing of capital transactions. Investment income receipts comprise interest received on loans to non-residents, divident/profit received by indians on foreign investment, reinvested earnings of Indian FDI companies abroad, interest received on debuntures, floating rate notes (FRNs), Commercial Papers (CPs), fixed deposits and funds held abroad by ADs out of foreign currency loans/export proceeds, payment of taxes by non-residents/refunds of taxes by foreign governments, interest/discount earnings on RBI investment etc. Investment income payments comprise payment of interest on non-resident deposits, payment of interest of loans from non-residents, payment of divident/profit to non-resident share holders, reinvested earnings of the FDI companies, payment of interest on debuntures, FRNs, CPs, fixed deposits, Government securities, charges on special Drawing Rights (SDRs) etc.

FOREIGN INVESTMENT

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Foreign Investment has two components, Namely

1. Foreign direct investment (FDI).
2. Portfolio Investment.

Foreign direct investment (FDI) to and by India up to 1999-2000 comprise mainly equity capital. In line with international best practices, the coverage of FDI has been expanded since 2000-01 to include, besides equity capital reinvested earnings (retained earnings of FDI companies) and 'other direct capital' (inter-corporate debt transactions between related entities). Data on equity capital include equity of unincorporated entities (mainly foreign bank branches in India and Indian bank branches operating abroad) besides equity of incorporated bodies. Data on reinvested earnings for the latest year are estimated as average of the previous two years as these data are available with a time lag of one year. In view of the above revision, FDI data are not comparable with similar data for the previous years. In terms of standard practice of BoP compilation, the above revision of FDI data would not affect India's overall BoP position as the accretion to the foreign exchange would not undergo any change. The composition of BoP, however, would undergo changes. These changes relate to investment income, external commercial borrowings and errors and omissions. In case of reinvested earnings, there would be a contra entry (debit) of equal magnitude under investment income in the current account. 'Other Capital' reported as part of FDI inflow has been carved out from the figure reported under external commercial borrowings by the same amount. 'Other Capital' by Indian companies abroad and equity capital of unincorporated entities have been adjusted against the errors and omissions for 2001-01 and 2001-02

Portfolio Investment mainly includes FIIs' investment, funds raised through GDRs/ADRs by Indian companies and through offshore funds. Data on investment abroad, hitherto reported, have been split into equity capital and portfolio investment since 2000-01.

External Assistance by India denotes aid extended by India to other foreign governments under various agreements and repayment of such loans. External Assistance to India denotes multilateral and bilateral loans received under the agreements between Government of India and other Governments/International institutions and repayments of such loans by India, except loan repayment to erstwhile 'Rupee area' countries that are covered under Rupee Debt Service.

Commercial Borrowings covers all medium/long term loans. Commercial Borrowings by India denotes loans extended by the Export Import Bank of India (EXIM Bank) to various countries and repayment of such loans. Commercial Borrowings of India denotes drawls/repayment of loans including buyers credit, suppliers credit, floating rate notes (FRNs), commercial paper (CP) bonds, foreign currency convertible bonds (FCCBs) issued abroad by the Indian corporate etc. It also includes India Development Bonds (IDRs), Resurgent India Bonds (RIBs), India Millennium Deposits (IMDs).

Short term loans denotes drawal in respect of loans, utilized and repayments with a maturity of less than one year.

Banking capital Comprises of three components:
- Foreign assets of commercial banks (ADs)
- Foreign liabilities of commercial banks (Ads)- others.

'Foreign Assets' of commercial bank consists of (i) foreign currency holdings, and (ii) rupee overdrafts to non-resident banks. 'Foreign liabilities' com commercial banks consists of (i) Non-resident deposits, which comprises receipt and redemption of various non-resident deposit schemes, and (ii) liabilities other than non-resident deposits which comprises rupee and foreign currency liabilities to non-resident banks ans official and semi-official institutions. 'Others' under banking capital include movement in balances of foreign central banks and international institutions like IBRD, IDA, ADB, IFC, IFAD etc, maintained with RBI as well as movement in balances held abroad by the embassies of India in London and Tokyo.

Rupee Debt service includes principal repayments on account of civilian and non civilian debt in respect of Rupee Payment Area (RPA) and interest payment thereof.

Other Capital comprises mainly the leads and lags in export receipts (difference between the custom data and the banking channel data). Besides this, other items included are funds held abroad, India's subscription to international institutions, quota payments to IMF, remittances towards recouping the losses of branches/subsidiaries and residual item of other capital transaction not included elsewhere.

Movement in reserves comprises changes in the foreign currency assets held by the RBI and SDR balances held by the Government of India. These are recorded after excluding changes on account of valuation. Valuation changes arise because foreign currency assets are expressed in US dollar terms and they include the effect of appreciation/depreciation of non-US currencies (such as Euro, Sterling, Yen) held in reserves.

Apart from the fundamental demand and supply equation that determines exchange values, there are other determinants of exchange rates. Some of these factors are discussed in the next post...

FACTORS AFFECTING FOREIGN EXCHANGE RATES

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Foreign Exchange being a commodity likes any other commodities the exchange rates tend to fluctuate from time to time. There are various factors that cause the fluctuation in the rates of exchange. These factors can be divided into several following groups. These groups can affect the exchange rates on a short term as well as long-term basis.

1. Fundamental Factors:

The fundamental factors include all such events that affect the basic economic and fiscal policies of the concerned government. These factors normally affect the long-term exchange rates of any currency. On short-term basis on many occasions, these factors are found to be rather inactive unless the market attention has turned to fundamentals. However, in the long run exchange rates of all the currencies are linked to fundamental causes. The fundamental factors are basic economic policies followed by the government in relation to inflation, balance of payment position, unemployment, capacity utilization, trends in import and export, etc. Normally, other things remaining constant the currencies of the countries that follow the sound economic policies will always be stronger. Similar for the countries which are having balance of payment surplus, the exchange rate will always be favourable. Conversely, for countries facing balance of payment deficit, the exchange rate will be adverse. Continuous and ever growing deficit in balance of payment indicates over valuation of the currency concerned and the dis-equilibrium created can be remedied through devaluation.

2. Political and Psychological factors:

Political and psychological factors are believed to have an influence on exchange rates. Many currencies have a tradition of behaving in a particular way for e.g. Swiss franc as a refuge currency. The US Dollar is also considered a safer haven currency whenever there is a political crisis anywhere in the world.

3. Technical Factors:

The various technical factors that affect exchange rates can be mentioned as under:

(a) Capital Movement: The phenomenon of capital movement affecting the exchange rate has a very recent origin. Huge surplus of petroleum exporting countries due to sudden spurt in the oil prices could not be utilized by these countries for home consumption entirely and needed to be invested elsewhere productively. Movement of these petro dollars, started affecting the exchange rates of various currencies. Capital tended to move from lower yielding to higher yielding currencies and as a result the exchange rates moved.

(b) Relative Inflation Rates: It was generally believed until recently that one prima-facie direction for exchange rates to move was in the direction adjusted to compensate the relative inflation rates. For instance, if a currency is already overvalued, i.e., stronger than what is warranted by relative inflation rates, depreciation sufficient enough to correct that position can be expected and vice versa. It is necessary to note that exchange rate is a relative price and hence the market weighs all the relevant factors in a relative term, (in relation to the counterpart countries). The underlying reasoning behind this conviction was that a relatively high rate of inflation reduces a country's competitiveness in international markets and weakens its ability to sell in foreign markets. This will weaken the expected demand for foreign currency (increase in supply of domestic currency and decrease in supply of foreign currency). But during 1981-85 period exchange rates of major currencies did not confirm the direction of relative inflation rates. The rise of the dollar persistently for such a long period discredited this principle.

(c) Exchange rate policy and intervention: Exchange rates are also influenced in no small measure by expectation of changes in regulation relating to exchange markets and official intervention. Official intervention can smoothen an otherwise disorderly market but it is also the experience that if the authorities attempt half-heartedly to counter the market sentiments through intervention in the market, ultimately more steep and sudden exchange rate swings can occur. In the second quarter of 1985 the movement of exchange rates of major currencies reflected the change in the US policy in favour of co-ordinated exchange market intervention as a measure to bring down the value of dollar.

(d) Interest Rates: An important factor for movements in exchange rates in recent years has been difference in interest rates; i.e. interest differential between major countries. In this respect the growing integration of the financial markets of major currencies, the revolution in telecommunication facilities, the growth of specialized asset managing agencies, the deregulation of financial markets by major countries, the emergence of foreign exchange trading etc. having accelerated the potential for exchange rates volatility.

4. Speculation

Speculation or the anticipation of the market participants many a times is the prime reason for exchange rate movements. The total foreign exchange turnover worldwide is many a times the actual goods and services related turnover indicating the grip of speculators over the market. Those speculators anticipate the events even before the actual data is out and position themselves accordingly in order to take advantage when the actual data confirms the anticipations. The initial positioning and final profit taking make exchange rates volatile. These speculators many a times concentrate only on one factor affecting the exchange rate and as a result the market psychology tends to concentrate only on that factor neglecting all other factors that have equal bearing on the exchange rate movement. Under these circumstances even when all other factors may indicate negative impact on the exchange rate of the currency if the one factor that the market is concentrating comes out positive the currency strengthens.

5. Others
The turnover of the market is not entirely trade related and hence the funds placed at the disposal of foreign exchange dealers by various banks, the amount which the dealers can raise in various ways, banks' attitude towards keeping open position during the course of a day, at the end of the day, on the eve of weekends and holidays, window dressing operations as at the end of the half year to year, end of the month considerations to cover operations for the returns that the banks have to submit the central monetary authorities etc. - all affect the exchange rate movement of the currencies

DETERMINATION OF EXCHANGE RATES

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There is no generally accepted theory or model to determine exchange rates. However, there are certain approaches which provide a general frame-work for analysis of exchange rates which are discussed below:

(a) Balance of Payments: If payments by a country for its imports of goods and services and invisibles are out of step with its receipts for exports of goods and services and invisible, two possibilities arise. One foreign currency payments exceed receipts and there is a deficit. This puts the home currency of the country under downward pressure against foreign currencies. Two, there is a surplus and there is an upward pressure on the home currency. In the former case, the home currency tends to depreciate, and in the later to appreciate, against foreign currencies.

(b) Demand and supply: The demand for a foreign currency to pay for imports, etc, and the supply of a foreign currency by way of receipts on account of exports, etc. vary at various rates of exchange. The rate which equilibrates the demand and supply should be the rate of exchange.

(c) Purchasing power parity: This theory maintains that free international trade equalises prices of tradable goods in different countries. So, a product will sell for the same price in common currency in all countries. Different rates of changes in prices i.e. different inflation rates must eventually induce off-setting changes in exchange rates in order to restore approximate price equality. Mathematically, the rate (or the expected rate) of change of the exchange rate should equal the rate (or the expected rate) of change of the inflation rate. Evidence shows that there do exist disparities between changes in observed exchange rates and those in inflation rates in the short-run. But, the theory should hold in the long-run.

(d) Interest rate: Interest rates are often highly related with inflation rates, and interest rate differentials between countries may be the result of inflation rate differentials. Therefore, interest rate differentials are also used as an important determinant of exchange rates.

Interest rates in a country are determined, under free market conditions, by supply of and demand for money. Funds flow across countries in search of opportunities for higher returns. These flows between any two countries cause opposite changes in demand of and supply for their respective currencies. According to the theory of International Fisher Effect, the exchange rate of a currency with higher interest rate will depreciate to offset the interest rate advantage achieved by foreign investments till an equilibrium is achieved.

Investments abroad have to be converted into home currency on maturity. Exchange rate may have changed in the meanwhile. An investor may make a forward sale of funds to be rapatriated on maturity. The process of investing abroad for higher returns and making a forward sale of the proceeds is known as covered interest arbitrage. An investment abroad will be undertaken if the return from interest rate differential exceeds the forward margin (difference between the forward and spot exchange rates). In general terms, the forward rate of the foreign currency will contain a discount (premium) if its interest rate is higher (lower) that that of the home currency. Covered interest arbitrages will go on fill the market forces realign the forward margins with the interest rate differentials.

(e) Relative Income Levels: If income level in a country raises and that in her trading partner remains unchanged, the demand by the former for the goods of the later may increase. That is, the former would need more units of currency of the later, while their supply remains unchanged. This would put upward pressure on the exchange rate of the later. There can be different configurations of the relative income levels and of corresponding exchange rates.

(f) Market expectations: Like other financial markets, foreign exchange markets react to any news that may have an effect on exchange rates in future. Expected developments regarding polity, economy etc. of a country are used to figure out how exchange rates would move. These peeps into future impinge on the present as well as the future spot rates.

INTER-RELATIONSHIP OF VARIABLES AFFECTING EXCHANGE RATES

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Interest rate, inflation rates, forward margins, exchange rates and expectation across nations are inter-related as shown in the diagram below.

The diagram suggests that interest rates vary across countries because of varying expectations with regards to their rates of inflation. Under perfect competition, funds would move to a country where real interest rate (nominal interest rate less inflation rate) is higher, till the forces of demand and supply equiliberate them. In other words, the difference in interest rates between countries is equal in equilibrium to the expected difference in the inflation rates.

The expected difference in inflation rates between two countries equals, in equilibrium, the expected movement in spot rates. The forward rate for a given period, say 6 months, should equal the spot rate 6 months hence. The difference between the forward rate and the present spot represents the interest element for the period of the forward rate. In reality, the future spot rate would usually be higher or lower than the forward rate

Exchange rate movements overtime are influenced by various factors not only those mentioned above but also by market imperfections arising out of official intervention in markets, exchange control restrictions, custom barriers, etc.

EXCHANGE RATE QUOTES

2008-10-25T06:13:00.000-07:00

Every firm and individual operating in international environment is concerned with foreign exchange i.e, the exchange of foreign currency into domestic currency and vice-a-versa. Generally, the firm's foreign operations earn income denominated in some foreign currency, however, the shareholders expect payment in domestic currency and therefore, the firm must convert the foreign currency into domestic currency.

The foreign exchange transaction (i.e, for the sale and purchase of foreign currencies) takes place in foreign exchange market, which provides a mechanism for transfer of purchasing power from one currency to another. This market is not a physical entity like the Mumbai Stock Exchange or a trading center; rather it is network of telephones among banks, foreign exchange dealers and brokers etc.

For example, a trader in Delhi may buy foreign exchange, say U.S. $, from a bank in Mumbai for making payment to a U.S. supplier against the purchases made. The bank in Mumbai, in turn may purchase the U.S. $ from a New York bank, which in turn may purchase from some other bank in New York itself or at some other center and so on. As the foreign exchange market provides transactions in a continuous manner for a large number and volume of sales and purchases, this market is an efficient one. Minute differences in exchange rates at different center may get eliminated without time lag.

In the foreign exchange market, the price of any currency may be quoted in terms of several currencies. It is important to realize that every price or exchange rate is relative. For example, if U.S. $ is worth Rs. 44, then it also implies that Re. 1 is worth $ 1/44. All foreign exchange rates in this way are related to each other in a reciprocal way. In other words, the value of $/Re. is just the reciprocal of the value of Re./$.

Quotations in the foreign exchange market are generally made in terms of local currency or the domestic currency in terms of per unit of a foreign currency. For example, the exchange rates of Re. in India may be quoted in terms of $, say Re./$ = Rs.44/$. It means that one $ is worth Rs.44. A change in price of one currency implies, therefore, a change in price of the other currency that appears in the quote. For example, if the price of Re. against the $ moves from Rs.44/$ to Rs.43.5/$, one can say that Re. has appreciated relative to $ by Re. 0.50. This is the same as saying that $ has depreciated relative to the Re.

There are two major ways of offering exchange rate quotes. There are called the direct quote and indirect quote. These quotes are given after the exchange value has been established according to the practice being followed by a country. If the country follows a fixed rate of parity between its currency and a foreign currency, then the changes in parity value of that currency shall determine changes in the value of the domestic currency vis-a-vis other foreign currencies. These performances of the domestic economy is not reflected in the valuation of its currency. This is one extreme side of absolute rigidity in fixation of exchange data. The other extreme is allowing the exchange value of the national currency to float independently according to market forces without any intervention from the Central Bank. In between these two extremes, there are many intermediate arrangements for determination of exchange values...

INTERMEDIATE ARRANGEMENTS FOR DETERMINATION OF EXCHANGE VALUES

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There are many intermediate arrangements for determination of exchange values. These arrangements are being listed below:

A) Domestic currency pegged to one foreign currency

Under this arrangement, the exchange rate of one currency is pegged to a dominant foreign currency, usually the U.S. dollar. For example the Argentine peso was till recently pegged to the US dollar in the ratio 1:1, due to the economic depression that started in the year 1999.

B) A currency pegged to a basket of currencies

The currency of a country may be pegged to a basket of currencies. The basket is generally formed by the currencies of major trading parties to make the pegged currency more stable than if a single currency peg is used. Trade, services and major capital flows may be used as currency weights while calculating the basket. The Indian Rupee is linked to a basket of currencies.

C) Flexibility limited in terms of a single currency

In this system, the value of the currency is maintained within certain margins of the peg. Some Middle Eastern countries follow this system and maintain their currency within a limit of the per against the U.S. dollar.

D) Pegged to some indicators

Under this arrangement, the currencies adjust more or less automatically to changes in the selected indicators. A common indicator is the real effective exchange rate (REER) that reflects inflation adjusted changes in the currency against major trading parties.

This category also includes cases where the exchange rate is adjusted according to a pre-announced schedule.

E) Managed Float

Central bank of a country decides the exchange rate in this system. The rates are revised from time to time depending on forex reserves, developments in parallel exchange markets, the real effective exchange rate etc.

F) Independent Float

In this system market forces determine the exchange rate. Most of the developed countries follow this system of exchange rate.

Currencies in the foreign exchange market may be transacted for immediately delivery or for a postponed delivery and consequently, there are two types of rates in the market. These are Spot Exchange Rates and Forward Exchange Rates

SPOT EXCHANGE RATES

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A spot exchange rate is a rate at which currencies are being traded for delivery on the same day. For example, and Indian Importer may need U.S. $ to pay for the shipment that has just arrived. He will have to purchase the $ in the market to make payment for the import. The rate at which he will buy the $ in the market is known as the spot exchange rate. He will make the payments in terms of Rs. and gets in turn the U.S. $ which will be paid to the foreign exporter. The spot exchange rate therefore, for a currency is the current rate at which once currency can be immediately converted into another currency. For example, a spot rate of $0.6912/Euro indicates that one Euro can be converted into $0.6912 in the market place at present. In most of the cases, the spot exchange rates are set by the demand and supply forces in the foreign exchange market.

In the spot exchange market, the quote may be denoted as direct or indirect. A direct quote indicates the number of units of the domestic currency required to buy one unit of foreign currency. That is, in Mumbai, the typical exchange rate quote indicates the number of Re. needed to buy one unit of a foreign currency e.g., Re. Per $ or Re. per Euro etc. The quotes in the spot market in New York are given in the terms of U.S. dollar and in Tokyo, the rates are given in the terms of Yen.

An indirect quote indicates the number of units of foreign currency that can be exchanged for one unit of the domestic currency. For example, in New York, the rates may be given as £ per $ or Euro per $ etc. As already stated, that the foreign exchange rates are relative to each other, the direct quote and indirect quote are related to each other in an inverse relationship i.e., an indirect quote is the inverse of a direct quote. So,

Indirect Quote = 1 / Direct Quote

In International transactions, both the direct quote and indirect quote are used. For example, if the direct quote of Euro in U.S. is Euro/$ = Euro 1.037 and American importer has to pay Euro 1,000 to a German Firm, then how many $ will be required by the American importer? In this case, the quote for $/Euro may be obtained as the inverse of Euro/$ i.e., 1/1.037 = 0.9643. So, he will require $0.9643 x 1,000 = $964.32 to pay for the German firm.

TYPES OF SPOT RATES

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Generally, in the spot exchange market, two types if spot rates may be quoted.

* Ask Price

* Bid Price

Ask Price:

The Ask price is the rate at which the foreign exchange dealer ‘asks’ its customers to pay in local currency in the local exchange of the foreign currency. In other words, ask price is the selling rate or the offer rate and refers to the rate at which the foreign currency can be purchased from the dealer.

Bid Price:

Bid Price is the rate at which the dealer is ready to buy the foreign currency in exchange for the domestic currency. So, the bid price is the rate which the dealer is ready to pay in domestic currency in exchange for the foreign currency and therefore, it is the buying rate. The dealer sells the foreign currency for more than what they are ready to pay for buying it. Normally, the direct ask price is greater than the direct bid price and the difference between the two is known as the ask-bid spread.
The ask-bid spread depends upon the breadth and depth of the market for that currency and the volatility of the currency. In case, when there is a large volume of transactions and the trading is continuous in any currency, the spread is small and may range between 0.1% to 0.5%. The spread is much higher for infrequently traded currencies. This spread compensates the dealer for holding the risky foreign currency and for providing the service of converting currencies. The bid spread is usually stated as a percentage cost of transacting in the foreign exchange market and may be computed as follows:

% Spread = ((Ask Price – Bid Price) / Ask Price) x 100

For example, if the ask price of $/£ is $1.6646 and the bid price is $1.6629, then the % spread may be ascertain as follows:

% Spread = ((1.6646 – 1.6629)/ 1.6646) x 100 = 0.1%