International Monetary System (IMS)

International Trade
Concept
Developed Countries
Developing Countries requirement of funds
Problems in International Trade
Liquidity
Adjustment
Stability
Balance of Payments
Indias BoP Position in 1991
The productivity and efficiency of public sector banks had suffered,
portfolio deteriorated and profitability eroded by 1990 to very low
levels. Customer service was on the lowest ebb and technology
outmoded. Many banks were running at loss or on very low profits.
The entire macro financial system was under severe stress. Indian
Bonds had been rated junk. International credit ratings of the country
were downgraded and as a result, access to external borrowings was
denied. Confidence of International Financial Community had
eroded. The instance of India pledging gold with the Bank of
England and the Bank of France in 1991 for a short-term loan of $
405 million was a testimony of Indias weak Balance of Payments
position and also of the lack of confidence of the international
financial community. There was therefore, no other option for India,
but to act swift to restore and improve upon its economic position and
to redress the imbalances. Various reformatory measures were
therefore, undertaken in the fields of foreign trade, tax system,
industrial policy, financial and other sectors.
Spectacular Improvement in BoP by 2005
With a spectacular come back, India witnessed a
GDP growth rate of 8.5 percent in 2003-04 as
against global GDP growth rate of 5.1 percent,
favourable sentiment in international financial
markets, upgradation of the sovereign rating by
Standard and Poors Rating Services in 2004-05
and recorded the fifth largest accumulated stock
on international reserves in the world (sufficient
to finance about 14 months of imports) by
March, 2005 at $ 141.5 billion, a total reversal of
the sorry state of affairs of the economy in 1991.
Typical BOP Statement
A. Current Accounts
Goods Account
Exports (+)
Imports ()
Balance on Goods Account = A(I)
Services Account
Receipts as interest and dividends, tourism receipts for travel and financial
charges (+) Payments as interest and dividends , tourism payments for
travel and financial charges ()
Balance on Services Account = A(II)
Unilateral Transfers
Gifts, donations, subsidies received from foreigners (+)
Gifts, donations, subsidies made to foreigners ()
Balance on Unilateral Transfers Account = A(III)
Current Account Balance: A(I) + A(II) + A(III)

B. Long-term Capital Account
Foreign Direct Investment (FDI)
Direct investment by foreigners (+)
Direct investment abroad ()
Balance on Direct Foreign Investment = B(I)
Portfolio Investment
Foreigner's investment in the securities of the country (+)
Investment in securities abroad ()
Balance on Portfolio Investment = B(II)
Balance on Long-term Capital Account = B(I) + B(II)
Private Short-term Capital Flows
Foreigners' claim on the country (+)
Short-term claim on foreigners ()
Balance on Short-term Private Capital Account = B(II)
Overall Balance: [A(I) + A(II) + A(III) +[B(I) + B(II) + B(III)
C. Official Reserves Account
Decrease or increase in foreign exchange reserves.

Problem
You are required to find out the overall balance, showing clearly
all the sub-balances from the following data:
1) UC Corporation of the USA invests in India Rs 3,00,000 to modernize its
Indian subsidiary.
2) A tourist from Egypt buys souvenirs worth Rs 3,000 to carry with him.
He also pays hotel and travel bills of Rs 5,000 to Delhi Tourist Agency.
3) The Indian subsidiary of UC Corporation remits, as usual, Rs 5,000 as
dividends to its parent company in the USA.
4) This Indian subsidiary of UC Corporation sells a part of its production in
other Asian countries for Rs 1,00,000.
5) The Indian subsidiary borrows a sum of Rs 2,00,000 (to be paid back in a
year's time) from the German money market to resolve its urgent liquidity
problem.
6) An Indian company buys a machine for Rs 1,00,000 from Japan and 60 per
cent payment is made immediately; the remaining amount is to be paid
after 3 years.
7) An Indian subsidiary of a French Company borrows Rs 50,000 from the
Indian public to invest in its modernization programme.

International Monetary System (IMS) - Evolution
- Gold Standard 1876
- The System of Bretton Woods (1944-71)
- International Monetary Fund
- International Bank for Reconstruction and Development
IBRD (The World Bank)
- Gold Exchange Standard.
- IMS since 1971
- Fixed Exchange Rates
- An Eclectic Currency Arrangement The Birth of the Euro
The Design of the Gold Exchange System
(1934)
Foreign Exchange Markets
Concepts
Foreign Exchange Market
Requirement of foreign currency
Equilibrium and Disequilibrium in FEM
Balancing of Disequilibrium
Participants in FEM
Quotation in FEM (as on 21
st
Nov. 2012)
Direct ` 55.10 =US$ 1(in India)
US $1.59 = 1(in US)
Indirect $ 1 = 0.6289
` 1 =$ 0.018
` 1 = 0.011

Two Way Quote
Buying (Bid price) and Selling (Ask price)
$1 = ` 55.10 ` 56.25

Spread = Ask price - Bid price

Percent spread =

100
price ask
price bid price ask

Cross Currency Rates

Is the direct relationship between two non-home
currencies in a foreign exchange market.
Ex: US $1.59 = 1(in US)
conversion to Indian Currency
$ 1 = ` 55.10
1 = ` 55.10 x 1.59 = ` 87.60
OR ` 55.10x 1.59 = 1
` 1 = 1 / 87.6= 0.01141

Settlements
Business Day is a day on which both banks are open for
business / settlement.
Contract Date Date of agreed deal over telephone.
Premium and Discount on a Currency.
Cash Rate or Ready Rate Exchange of currencies on the
date of the deal - Telegraphic transfer or cash or value-day
deal.
Tom Rate Exchange of currencies on next working day
(also called Tomorrow Rate).
Spot Rate(SR) Exchange of currencies on second
working day
Forward Rate(FR) Exchange of currencies after a certain
period from the date of the deal (more than two days).

Calculation of Spread
(as on 21-11-2012)
Cross
Currency
Spot 1 month 3 months 6 -months
` / $ 55.10 / 25 36 / 49 92 / 56.04 56.67 / 79
Calculation of Premium or Discount
Premium or discount of a currency in the forward
market on the spot rate (SR) is calculated as follows:

Premium or Discount (Per Cent)
= [FR SR) / SR] x (12/n)x 100*
Where n is the number of months forward
If FR > SR, it implies premium
< SR, it signals discount
Arbitrage in Case of Forward Market
(or Covered Interest Arbitrage)
If the Interest rate differential is
greater than the premium or
discount, place the money in the
currency that has higher rate of
interest or vice-versa.
Illustrative Problem
Spot Rate : `. 55.10 = $ 1
6 month forward rate: Rs. `.56.67 = $ 1
Annualised interest rate on 6 month rupee : 6%
Annualised interest rate on 6 month dollar : 3%
Calculate the arbitrage possibilities

Steps for Calculation of Arbitrage Possibility
1. Calculate the annualised discount / premium
2. Calculate the interest rate differential
3. Compare 1 and 2
4. Apply the following formula
If the Interest rate differential is greater than the premium or discount,
place the money in the currency that has higher rate of interest or vice-
versa.
5. Borrow Currency A (at interest) for a required period.
6. Convert Currency A to Currency B at spot rate.
7. Place Currency B in the money market for the required the period.
8. Enter into a forward contract.
9. Sell Currency B with interest for the specified period in the forward
market.
10. Convert the proceeds of B in to currency A.
11. Repay the Debt taken at 5 above with interest.
12. Calculate the gain.


American Depositary Receipts
Fluctuation in Exchange Rates
Rate of
inflation in
the
country A
higher
than that
in the
country B

Imports of
the
country A
increase
while its
exports
decrease

Trade
balance of
the
country A
tends to be
in deficit

Currency
of the
country A
tends to
depreciate

INTERNATIONAL CASH MANAGEMENT
Teltrexs Interaffiliate Cash Receipts and Disbursements Matrix ($000)
a
Net denotes the difference between total receipts and total disbursements for each affiliate
Teltrexs Interaffiliate Foreign Exchange Transactions without Netting ($000)
Bilateral Netting of Teltrexs Interaffiliate
Foreign Exchange Transactions ($000)
Multilateral Netting of Teltrexs Interaffiliate
Foreign Exchange Transactions ($000)
Flow of Teltrex's Net Cash Receipts from Transactions
with External Parties with a Centralized Depository ($000)