1.1.

Introduction:
Risk management in forex trading makes the difference between the survival or sudden death with forex
trading. Proper risk management is very much essential for successful forex trading. Risk management
in forex trading is a combination of multiple ideas or techniques to control or minimise the trading risk
and exchange rate risk. It can be done by limiting the trade lot size, different hedging strategies, trading
only during certain hours or days, or knowing when to take losses.
Forex risk management is one of the most debated topics in trading. Traders on one hand want to reduce
the potential loss, but on the other hand, they also want to get benefitted the most out of a single trade.
It's no secret that in order to gain the highest returns one need to take greater risks. This is where the
concept of proper risk management arises.
The Forex market is one of the biggest financial markets on the planet, with everyday transactions
totaling more than 1.4 trillion US dollars. Banks, financial institutions and individual investors therefore
have the potential to make huge profits and losses. The survival or death of a trader in the currency
market revolves so much around the efficiency of the risk management strategies.
Risk management is all about keeping the risk under control. More controlled the risk is, the more
flexible one can be when needed. Forex trading is about opportunity. Traders need to be able to act
when those opportunities arise. Using proper risk management actions, strategies and precautions,
traders can limit the risk and continue to trade. Losses are common in forex trading, even for the most
experienced, and the key for successful forex trading is understanding and managing the forex risk
through proper risk management techniques.

1.2. Review of Literature:

A fairly significant body of research literature exists in the domain of Risk management in forex trading.

 Denis Limo (2014) from University of Nairobi in his study on “The Effect of Foreign Exchange Risk
Management on the Financial Performance of Commercial Banks in Kenya” concluded that the
mean of Forward Contracts is relatively high at as compared to other variables. The high volatility
indicated that there was a higher risk in financial performance of the commercial banks.
 Peter Mbabazi Mbabazize, Twesige Daniel and Isaac Emukule Ekise (2014) in their study on “The
Role Of Foreign Exchange Risk Management On Performance Management Of Exporting Firms In
Developing Countries: A Case Study Of Uganda’s Exporting Firms” have indicated a moderate
applicability level of foreign exchange risk management (FERM), low level of financial performance
and a significant positive relation between FERM and performance of exporting firms. It also
recommended that the exporting firms should constantly assess their exposure to foreign exchange
risk, which can guide them towards a suitable currency risk management.

1
  Samuli Luostarinen (2011) in his master’s thesis on “Framework for Evaluating Foreign Exchange
Exposure Management Practices of Non-Financial Companies: A managerial approach” showed that
company size, quantity of FX exposure and the number of foreign currencies used by a company in
its operations have positive relationships with the sophistication of prevailing FX exposure
management practices. The study found out that there are significant variations in managing
practices of companies with similar FX exposure profiles.
 A guide to managing foreign exchange risk (2009) published by CPA Australia Ltd which is one of
the world’s largest accounting bodies with more than 122,000 members of the financial, accounting
and business profession in 100 countries provides an overview of the issues associated with
understanding and managing foreign exchange risk.
 Sathya Swaroop Debasish (2008) in his study on “Foreign Exchange Risk Management Practices – A
Study in Indian Scenario” concluded that there is a wide usage of derivative products for risk
management and the prime reason of hedging is reduction in volatility of cash flows. Further, in
terms of the external techniques for risk hedging, the preference is mostly in favour of forward
contracts, followed by swaps and cross-currency options The article throws light on various concerns
of Indian firms regarding derivative usage and reasons for non-usage, apart from techniques of risk
hedging, risk evaluation methods adopted, risk management policy and types of derivatives used.
 Michael Papaioannou (2006) in his article on “Exchange Rate Risk Measurement and Management:
Issues and Approaches for Firms” concludes that measuring and managing exchange rate risk
exposure is important for reducing a firm’s vulnerabilities from major exchange rate movements,
which could adversely affect profit margins and the value of assets. It also outlines a set of widely
accepted practices in managing currency risk and presents some of the main hedging instruments in
the OTC and exchange-traded markets.
 A survey report by Ubindi Billy Stephen (2006) on “Foreign Exchange Risk Management Practices
by Forex Bureaus in Kenya” found out that forex bureaus, regardless of their size, extensively
utilized most of the conventional hedging instruments.
 The article “Foreign Exchange Risk Management” published by Bank of Jamaica in 2005 suggested
that the management of each organisation is responsible for managing and controlling the
organisation’s exposure to foreign exchange risk in accordance with the foreign exchange risk
management program.
Keeping these in background the paper is an attempt to study the various hedging tools used by the banks to
measure and manage foreign exchange exposure.

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1.3. Rationale of the Study:
 The purpose of the project is to study about the different risks prevailing in the foreign exchange
market and the different risk management strategies and techniques used by Bank of India to
control or minimize the trading risk and exchange rate risk.
 The study focuses on the analysis and interpretation of export and import data available from the
forex turnover report of Bank of India.
 Risk management is all about keeping the risk under control. The study emphasizes on using
proper risk management actions, strategies and precautions, by which traders can limit the forex
risk and continue to trade.
1.4. Objectives of the study:

The objectives of the study are as follows:-

 To study the conceptual aspects of foreign exchange and forex trading.

 To have in depth understanding of the documents required in export and import.
 To understand the different types of foreign exchange risks.
 To learn about the different foreign exchange risk management practices used by the forex
department of Bank of India to mitigate foreign exchange risk exposures.
1.5. Research Methodology:
 Sources of Data:
The data collected was purely secondary in nature which primarily includes banks own forex
turnover report, websites, research papers, periodicals and RBI circulars.
 Time Frame:
For the purpose of data analysis three years forex turnover data of Bank of India has been taken i.e.,
from 2015 to 2018.
 Statistical Technique:
Trend Analysis has been used to know the percentage change in the amount of exports and imports
of Bank of India in relation to the base year (2015-2016).
 Scope of the study:
The study aims to provide an outlook on managing the risk that banks face because of various
reasons. Foreign exchange is an integral part of doing international business. Their role is often
accepted as necessity, while the importance of risk associated with uncertain future fluctuations in
foreign exchange market is dismissed.
The scope of this study is limited to the Foreign Exchange Risk Management and the way Bank of
India manages it. It has nothing to do with any kind of forecasts about the currency movements.

3
1.6. Limitations of the study:

 The study is confined just to the foreign exchange risk but not the total risk.
 It does not take into consideration all Indian banks foreign exchange risk.
 The hedging techniques are studied only which the bank adopted to minimize foreign exchange risk.
 Some of the information is confidential in nature that could not be divulged for the study.
 This study is based on secondary sources of information which are affected by inherent limitations of
authencity and accuracy.

1.7.Chapter plan:
The project is divided into following 10 chapters:
 Chapter 1: This chapter is regarding the introduction to the project. It consists of Rationale of the
study, Objectives of the study, Research Methodology used for completing the project and
limitations of the study.
 Chapter 2: This chapter explains about the concept of foreign exchange market and the main
participants of forex market. It also gives a brief idea about Nostro, Vostro and Loro Accounts.
 Chapter 3: This section contains an overall idea about Bank of India, its history, the mission,
vision and quality policy of Bank of India and the products and services of Bank of India.
 Chapter 4: This chapter explains about the Documentary Letter of Credit and Foreign
Remittances.
 Chapter 5: This chapter describes about the foreign exchange rate and its types and the factors
affecting the foreign exchange rates.
 Chapter 6: This section gives an idea about the different foreign exchange risks for banks.
 Chapter 7: This chapter explains about the foreign exchange exposure and its classification.
 Chapter 8: This chapter analyses the export-import data of Bank of India for the last three years
collected from the forex turnover report.
 Chapter 9: This chapter explains about the foreign exchange risk management and the methods
of managing foreign exchange risk used by banks.
 Chapter 10: This chapter contains the findings, conclusions and suggestions derived from the
study and the references used for the completion of the project.

4
2.1. Introduction to foreign exchange market:
Foreign exchange is the exchange of one currency for another or the conversion of one currency into another
currency. Foreign exchange also refers to the global market where currencies are traded virtually around the
clock. The term foreign exchange is usually abbreviated as "Forex" and occasionally as "FX."
The foreign exchange market is a decentralized worldwide market. The participants in the foreign exchange
market include central banks, commercial banks, brokers etc. The central banks monitor market movements
and sentiments and intervene according to government policy. The function of buying and selling of foreign
currencies in India is performed by authorized dealers / moneychangers appointed by the RBI. The foreign
exchange departments of the major banks are linked across the world on a 24 hour basis. Major commercial
centers are London, Amsterdam, Frankfurt, Milan, Paris, New York, Toronto, Bahrain, Tokyo, Hong Kong
and Singapore.
Foreign exchange dates back to ancient times, when traders first began exchanging coins from different
countries. However, the foreign exchange itself is the newest of the financial markets. In the last hundred
years, the foreign exchange has undergone some dramatic transformations. The Bretton Woods Agreement,
set up in 1944, remained intact until the early 1970s. Trading volume has increased rapidly over time,
especially after exchange rates were allowed to float freely in 1971. In 1971, the Bretton Woods Agreement
was first tested because of uncontrollable currency rate fluctuations, by 1973 the gold standard was
abandoned by president Richard Nixon, currencies where finally allowed to float freely. Thereafter, the
foreign exchange market quickly established itself as the financial market. Before the year 1998, the foreign
exchange market was only available to larger entities trading currencies for commercial and investment
purposes through banks, now online currency trading platforms and the internet allow smaller financial
institutions and retail investors access a similar level of liquidity as the major foreign exchange banks, by
offering a gateway to the primary market.
The FOREX refers to the Foreign Currency Exchange Market in which over 4,600 International Banks and
millions of small and large speculators participate worldwide. Every day this worldwide market exchanges
more than $1.7 trillion in dozens of different currencies. With such volume, it can be assumed that the forex
market is extremely volatile, changing at a moment’s notice, depending on conditions within that country.
The foreign exchange market is undisputedly the world's largest market place with the average daily
turnover in excess of US$4 Trillion. Operating 24 hours a day, 5 days a week the foreign exchange market
does not operate on a regulated exchange, therefore is known as an OTC transaction.
The global foreign exchange market is the largest and the most liquid financial market in the world, with
average daily volumes in the trillions of dollars. Foreign exchange transactions can be done for spot
or forward delivery. There is no centralized market for forex transactions, which are executed over the
counter and around the clock.
One of the prime advantages to trading foreign exchange is the sheer volume of market participants, in turn
creating liquidity which cannot be matched by any regulated exchange - traded product or instrument. Like
5
trading the share market, in theory the buying and selling of currencies is extremely simple - buy low, sell
high and vice versa; however in practice learning the basics is essential before putting your hard earned cash
on the line.
When you are trading Forex you are trading one currency against another. Most people have experienced
this when visiting another country with a different currency. Because the rate for which you can trade your
money fluctuates over time, it is also possible to earn money with currency trading. The only rule you have
to follow says ‘buy low, sell high’. This is not as easy as it sounds as it is never know in advance what
would be considered ‘low’ and ‘high’. However, if the factors influencing the rate of a currency are known,
predictions can be made about the future rate of this currency. An important aspect to know when trading is
called the ‘spread’ of the currency. This is the difference between the rate to buy and the rate to sell the
currency. This is expressed in ‘pips’, which is the smallest unit of price of a currency: 0.0001 of a currency
unit.
2.2. Predicting the Forex Market:
The Forex market is very complicated and affected by many factors. Nevertheless, the price is always a
result of all supply and demand forces.
The demand and supply is influenced by several elements which can be put into three categories:
1. Economic Factors: This means the economic conditions and economic policy of a currency zone.
The economic policy includes fiscal policy and monetary policy. The economic conditions consist of
government budget deficits or surpluses, balance of trade levels and trends, inflation levels and
trends and economic growth and health.
2. Political Conditions: This influence can be seen very strong during election time. Also in political
unstable countries this is a major influence on the currency price.
3. Market Psychology: This is a major influence in day trading. Currency speculators immediately
react to the announcement of a specific economic number. This often results in a market being
‘oversold’ or ‘overbought’.
The Foreign Exchange business in India is regulated closely by the RBI. With Exchange Control
Regulations, the RBI ensures that involvement in the Foreign Exchange business is restricted to certain
sections of the business community only.
2.3. Main Participants of Forex Market:
 Corporate: Importers, Exporters and Customers for genuine trades or merchant transactions.
 Banks: Banks in India are permitted to buy and sell currencies abroad in cover of customer
requirements. They have also been permitted to initiate positions abroad too. Overseas banks call
banks in India to cover their Indian rupee requirements.
 Overseas Traders: One authorized dealer dealing with another to generate profit or cover its open
exposure.

6
  Authorized Dealers v/s RBI: This occurs only when the RBI intervenes in the market and not in the
normal course.
RBI restrictions in terms of participation in foreign currencies are as under:
 Corporate:
o Individuals as per the Exchange Control Manual (Retail)
o Importers, Exporters and Borrowers of Foreign Currencies (Wholesale)
 Banks/Others:
o Money Changers (RMC’s and FFMC’s) licensed by the RBI to buy/sell Foreign Currency
Notes and Travelers’ Cheques from individuals (Retail)
o Banks licensed by the RBI to carry out foreign exchange business on a commercial wholesale
level, called the Authorized Dealers.
 Brokers: Brokers are permitted to bring together buyers and sellers but cannot trade for their own
account. This means they have to strike the deal with the buyers and sellers simultaneously.
2.4. Nostro, Vostro and Loro accounts:

In interbank transactions, foreign exchange is transferred from one account to another account and from one
centre to another centre. Therefore, the banks maintain three types of current accounts in order to facilitate
quick transfer of funds in different currencies. These accounts are Nostro, Vostro and Loro accounts
meaning ‘our’, ‘your’ and ‘their’. A bank’s foreign currency account maintained by the bank in a foreign
country and in the home currency of that country is known as Nostro account or ‘our account with you’. For
example, An Indian bank’s Swiss franc account with a bank in Switzerland. Vostro account is the local
currency account maintained by a foreign bank. It is also called ‘your account with us’. For example, Indian
rupee account maintained by a bank in Switzerland with a bank in India. The Loro account is an account
wherein a bank remits funds in foreign currency to another bank for credit to an account of a third bank. It is
also called ‘their account with them’. For example, An Indian Bank say BoI wants to transact with a foreign
bank say HSBC, but doesn’t have any account, while SBI maintains an account with HSBC in U.K. Then
BoI could use SBI account for the purpose of a transaction.

The Reserve Bank uses SWIFT as the messaging platform to settle its trade and send financial messages to
the counterparties, banks with whom nostro accounts are maintained, custodians of securities and other
business partners. All international best practices with respect to usage of SWIFT are ensured. Further,
additional security measures in this regard have also been put in place.

2.5. Chapter Summary:

The foreign exchange market is the market in which participants are able to buy, sell, exchange and
speculate on currencies. Foreign exchange markets are made up of banks, commercial companies, central
banks, investment management firms, hedge funds, and retail forex brokers and investors. The Foreign
7
Exchange business in India is regulated closely by the RBI. With Exchange Control Regulations, the RBI
ensures that involvement in the Foreign Exchange business is restricted to certain sections of the business
community only.

8
3.1. About Bank of India:
Bank of India (BoI) is a financial services provider commercial bank founded in the 1906 on September
7th. It has its head-quarters in Mumbai, Maharashtra, India. It is a type of a public company providing
retail as well as commercial banking facility to the consumers. Government-owned since nationalization
in 1969, it is one of India's leading banks, with 5086 bank-branches including 306 specialized branches.
These branches are controlled through 54 Zonal offices and 8 national banking groups. There are 60
branches and 5 subsidiaries and 1 joint venture abroad. It is India’s 4th largest PSU bank, after State bank
of India, Punjab National Bank and bank of Baroda. In July 1969 bank of India was nationalized with 13
other banks.
BoI is a founder member of SWIFT (Society for Worldwide Inter Bank Financial Telecommunications)
in India which facilitates provision of cost-effective financial processing and communication services.
The Bank completed its first one hundred years of operations on 7th September 2006 and now it is 111
years young public sector bank. It has occupied and enviable position as compared to its peer banks like
Bank Of Baroda, Punjab National Bank, Canara Bank etc.
3.2. History of Bank of India:
1906: Founded with Head Office in Mumbai.
1921: BoI entered into an agreement with the Bombay Stock Exchange to manage its clearing house.
1946: BoI opened a branch in London, the first Indian bank to do so. This was also the first post World
War II overseas branch of any Indian bank.
1950: BoI opened branches in Tokyo and Osaka.
1951: BoI opened a branch in Singapore.
1953: BoI opened a branch in Kenya and another in Uganda.
1953: BoI opened a branch in Aden.
1955: BoI opened a branch in Tanganyika.
1960: BoI opened a branch in Hong Kong.
1962: BoI opened a branch in Nigeria.
1967: The Government of Tanzania nationalized BoI's operations in Tanzania and folded them into the
government-owned National Commercial Bank, together with those of Bank of Baroda and several other
foreign banks.
1969: The Government of India nationalized the 14 top banks, including Bank of India. In the same year,
the People's Democratic Republic of Yemen nationalized BoI's branch in Aden, and the Nigerian and
Ugandan governments forced BoI to incorporate its branches in those countries.
1970: National Bank of Southern Yemen incorporated BoI's branch in Yemen, together with those of all
the other banks in the country; this is now National Bank of Yemen. BoI was the only Indian bank in the
country.
1972: BoI sold its Uganda operation to Bank of Baroda.
9
1973: BoI opened a representative office in Jakarta.
1974: BoI opened a branch in Paris. This was the first branch of an Indian bank in Europe.
1976: The Nigerian government acquired 60% of the shares in Bank of India (Nigeria).
1978: BoI opened a branch in New York.
1970s: BoI opened an agency in San Francisco.
1980: Bank of India (Nigeria) Ltd, changed its name to Allied Bank of Nigeria.
1986: BoI acquired Paravur Central Bank (Karur Central Bank or Parur Central Bank) in Kerala in a
rescue.1987: BoI took over the three UK branches of Central Bank of India. CBI had been caught up in the
Sethia fraud and default and the Reserve Bank of India required it to transfer its branches.
2003: BoI opened a representative office in Shenzhen.
2005: BoI opened a representative office in Vietnam.
2006: BoI plans to upgrade the Shenzen and Vietnam representative offices to branches, and to open
representative offices in Beijing, Doha, and Johannesburg. In addition, BoI plans to establish a branch in
Antwerp and a subsidiary in Dar-es-Salaam, marking its return to Tanzania after 37 years.
2007: BoI acquired 76 percent of Indonesia-based PT Bank Swadesi.
Source: “100 Years Success Story of Bank Of India”
3.3. Bank of India’s Mission:
“To provide superior, proactive banking services to niche markets globally, while providing cost-effective,
responsive services to others in our role as a development bank, and in so doing, meet the requirements of
our stakeholders”.
3.4. Bank of India’s Vision:
“To become the bank of choice for corporate, medium businesses and up market retail customers and to
provide cost effective developmental banking for small business, mass market and rural markets”.
3.5. Quality Policy of Bank of India:

10
3.6. Products and Services of Bank of India:
In spite of being a public sector bank, this bank has got all kinds of products and services, which one can get
in a modern bank. With their firm adherence to the policy of caution and prudence, they have been one of
the leaders in introducing different kinds of innovative banking services and solutions. Following are the
different services offered by BOI in India:
3.6.1. Ancillary Services:
Some of the popular supplementary services offered by the bank are as follows:
 Depository Services
 Gold Coin
 Insurance (Domestic travel, health, education etc.)
 Mutual Fund
 Remittance
 Safe Custody
 Safe Deposit Locker
 Star Cash Management Service
3.6.2. Cards:
Apart from the normal credit or debit cards, this bank even offers valued visa or master cards to its
worldwide customers. The names of some of the cards offered by this Indian bank are given below:
 Bank of India Master Card
 Bank of India VISA Card
 Gift Card
 Platinum Debit Card
 VISA Electron
3.6.3. Deposit Schemes:
BoI offers varied types of deposit schemes like savings accounts, current accounts, salary accounts, fixed
deposits, term deposits, recurring deposits, double benefit deposits, income certificates (Both quarterly and
monthly) and many more. Some of these products are:
 Jai Jawan Salary Plus Accounts
 Star Benefit C. D. Plus Accounts
 Star Diamond Savings Account
 Star Flexi Recurring Deposit Scheme
 Star Power Salary Account
 Star Sunidhi Tax Saving Deposit Scheme
 Star Suraksha S. B. Plus Account

11
3.6.4. Bank of India Loans:
The following are the names of the loans provided by the different branches of BOI located all over the
country:
 Star Autofin
The Scheme provides loan for purchasing 2/4 wheeler vehicles (like car, scooter, motorcycle etc.).
 Star Educational Loan
The Educational Loan Scheme aims at providing financial support from the bank to deserving/
meritorious students for pursuing higher education in India and abroad.
 Star Holiday Loan
To meet the expenses (like airfare/Train/Bus charges, expenses for accommodation, sightseeing,
etc.) for going for pilgrimage/tours/excursions etc. undertaken/to be undertaken by
Self/spouse/children/ parents/family members/close relatives of proponent within India or abroad.
 Star Home Loan
This type of Bank of India Loans provides loans to purchase a Plot for construction of a House, to
purchase/construct house/flat, as well as for renovation/repair/alteration/addition to house/flat,
furnishing of house, Takeover of customer's Housing Loan extended by other Banks/F.Is /NBFCs at
highly flexible and liberal terms and conditions.
 Star I. P. O.
This type of loan is to subscribe to IPO including through book-building.
 Star Mortgage Loan
This scheme provides loan/overdraft facility against mortgage of property at low rate of interest. The
product provides an opportunity to customers to borrow against a fixed asset (mortgage of property)
at a short notice without much paper work/attendant hassles.
 Star Mitra Personal Loan
The objective of this type of Bank of India Loans is to help Physically Challenged persons to
function independently and the purpose is to purchase durable and sophisticated aids / appliances
that promote their physical and social rehabilitation.
 Star Pensioner Loan Scheme
The target Customers of this type of Bank of India Loans are the Regular Pensioners or Family
Pensioners drawing regular monthly pension through the branch and the eligibility is retired
employees (other than dismissed/compulsorily retired).
 Star Personal Loan
Under the Bank of India Personal Loan system the Star Personal Loan Scheme provides loans to
meet various Personal requirements of customers and their family. Bank offers loans for marriage
expenses, medical expenses, educational expenses, purchase of consumer durables etc. Maximum

12
 quantum of advance is Rs.10.00 lakhs, depending upon the income, with very attractive interest rate
and easy repayment plan.
3.6.5. N.R.I. Banking of BOI:
Besides the different deposit schemes for NRIs, this bank in India offers varied other types of international
banking services, some of which are mentioned below:
 F. C. N. R. (Foreign Currency Non-resident) Accounts
 Forex Card
 Integrated Treasury
 N. R. E. (Non-resident External) Accounts
 Star e-Remit
NRI Deposit Schemes:
Non Resident Indians (NRIs) have a choice of two schemes for depositing their savings with Bank of India,
which are: -
 Foreign Currency Non Resident Accounts
 Non-Resident External Accounts
NRI -Yield Enhancing Scheme:
BOI provides Yield Enhancing Schemes for NRIs at their Overseas Branches.
3.6.6. Foreign Currency Deposit Schemes:
Eligible Depositors: All individual Indian Residents will be allowed to open such account. However, the
facility will not be available to corporate/partnership firm/trusts, HUF etc. registered / based in India.

Currency of the account: Account will be maintained in GBP, USD and EURO Currencies.
Nature of Account: Fixed Deposit for a period of 1 month (minimum) 3 months, 6 months and 1 year
(maximum).
Minimum amount of Deposit: Minimum amount of deposit will be as follow: USD - 5000/- GBP - 5000/-
EURO – 5000/-.
3.6.7. Online Services:
The different kinds of online services offered by BOI are as follows:
 Bill Payment
 Fund Transfer (Inter-bank)
 Internet Banking
 Mobile Banking
 Share Trading
 Tax Payment
 Ticket Booking

13
3.7. Bank of India USA:
Bank of India is a premier and one of the oldest Commercial Banks In India, with presence all over India as
also in the world. The Bank was established in September 1906 and has been maintaining a position of pride
among the top 5 commercial banks in the country. Today the Bank has over 2594 branches spread all over
India and 23 branches/offices overseas - in 10 countries, spanning all time zones.
The Bank of India USA branches, New York Branch and San Francisco Agency have been operating in the
USA since December 1978 and December 1977 respectively. Bank Of India has been established in 1906
and is headquartered in Mumbai (Bombay), India with global assets of about USD 22 Billion.
It has a network of over 2524 branches spread over the length and breadth of India. Besides this, Bank Of
India has branches in international commercial centers like London, Tokyo, Singapore, Hong Kong, Paris,
etc. and is well-versed in international trade.
The BOI USA branches, New York and San Francisco have a team of banking professionals who come
from different parts of India. These officers are very well-versed with the intricacies of India-Related Trade
and having had adequate exposure in US, are familiar, confident, and comfortable, Doing Business The
American Way. Since they have good rapport with key personnel in the Banking Sector In India, Bank Of
India is in a position, unlike any other international bank here, to move things in India, should there be snags
for any reason.
Services available at the San Francisco Agency to Send Money in India:
 Export/Import Trade Services
 Import/Export Bills for Collection
 Standby & Commercial Letters of Credit
 Trade Finance

3.8. Current Position of Bank of India:

Bank of India key Products/Revenue Segments include Interest & Discount on Advances & Bills which
contributed Rs 27187.86 Crore to Sales Value (69.19 % of Total Sales), Income From Investment which
contributed Rs 9059.92 Crore to Sales Value (23.05 % of Total Sales), Interest On Balances with RBI and
Other Inter-Bank Funds which contributed Rs 2012.21 Crore to Sales Value (5.12 % of Total Sales) and
Interest which contributed Rs 1030.86 Crore to Sales Value (2.62 % of Total Sales)for the year ending 31-
Mar-2017.
The Bank has reported a Gross NPAs of Rs 62328.46 Crore (16.58 % of total assets) and Net NPAs of Rs
28207.27 Crore (8.26% of total assets).
For the quarter ended 31-03-2018, the company has reported a Standalone Interest Income of Rs 5919.94
Crore, down -6.49 % from last quarter Interest Income of Rs 6331.06 Crore and down -12.48 % from last
year same quarter Interest Income of Rs 6764.29 Crore. The bank has reported net profit after tax of Rs -
3969.27 Crore in latest quarter.
Overseas business has de-grown by 9.70% during FY 2016-17 compared to last year de-growth of 2.87%.
Global business has grown by 4.38% during FY 2016-17 compared to last year de-growth of 5.19%. Total
14
Business mix (Deposits Advances) reached at Rs. 9,33,820 crore, a growth of Rs. 39,153 crore. Total
deposits increased by 5.27% to Rs. 5,40,032 crore. Advances increased by 3.18% to Rs. 3,93,788 crore.
Bank of India has been ranked as the 2nd Most Trusted Bank in the PSU Bank category by Economic Times.
Bank of India has been awarded as Best Bank for Managing IT Ecosystem among Large Banks in IDRBT
Banking Technology Excellence Awards for FY 2015-16. Bank also received the Best Bank Award for
Electronic Payments among Large Banks from IDRBT Banking Technology Excellence Awards for FY
2015-16,
During the year Bank has raised Rs.1338 crore by issue of 12,06,60,113 fresh equity shares to Government
of India at the price Rs.110.89 per share. As per Basel III framework, the Bank’s Capital Adequacy Ratio
was 12.14% which is higher than the regulatory requirement of 10.25%.
3.9. Chapter Summary:
Bank of India being one of the leading nationalized bank, issues letters of credit for their importer clients
and handles letters of credit received from overseas correspondents in favour of exporters from India, handle
foreign inward remittances as well as outward remittances; buying and selling of foreign currencies,
handling and forwarding of import and export documents and giving the consultancy services to the
exporters and importers. Its branches all over the country are performing this responsibility. Bank of India
being the largest public sector banking entity in the country has created many milestones.

15
4.1. Documentary Letter of Credit:
A Documentary Credit is an instrument, which can be used for settling the trade payments. It may be defined
as follows:

“Credit means any arrangement, however, named or described, that is irrevocable and thereby constitutes a
definite undertaking of the issuing bank to honour* a complying presentation.”

* Honour means:

(a) To pay at sight if the credit is available by Sight payment.

(b) To incur a deferred payment undertaking and pay at maturity if the credit is available by deferred
payment.
(c) To accept a bill of exchange (‘draft’) drawn by the beneficiary and pay at maturity if the credit is
available by acceptance.
In common parlance, documentary credit is like a bank guarantee except that the bank guarantee covers a
situation of non-performance of the contract (payment is made when our customer does not perform as per
the contract). Whereas a documentary credit covers a situation where payment is made on performance of
contract. From the definition, we can derive five important features of documentary credits, viz.:

 It is an irrevocable undertaking in writing

 given by a Bank called the Opening Bank
 on behalf of its customer who is the importer or buyer
 to honour bills drawn by a third party who may be the beneficiary or the transferee under the credit
 subject to compliance with terms and conditions of the credit

4.1.1. Need for Documentary Letter of Credit:

Normally, in international trade, the exporter may not be ready to take risk of selling his goods abroad unless
he is sure of getting his payment. Likewise, the buyer may not buy goods in international market from an
unknown party due to risk of not meeting his requirements. Both these risks are quiet high, which may
sometime result into major loss. This perception is not congenial to development of international trade.

The seller, therefore, needs an assurance of payment on behalf of the buyer; similarly, a buyer would want
somebody to ensure due performance by the seller as per the contract.

Both the parties can feel satisfied, if a professional intermediate like bank lends his support by issuing
Documentary Credit on behalf of the buyer (importer) in favor of the seller (exporter).

16
4.1.2. Parties involved in Letter of Credit:

1. Opener (Importer/Buyer): means the party on whose request the credit is issued.
2. Issuing Bank: means the bank that issued a credit at the request of an applicant or on its own behalf.
3. Advising Bank: means a bank that advises the credit at the request of the issuing bank.
4. Beneficiary (seller/ exporter): means the party in whose favor the credit is issued.
5. Nominated Bank: means the bank, with which the credit is available or any bank in the case of a credit
available with any bank.
6. Confirming Bank: means the bank which guarantees honouring of bills by the Opening Bank under the
credit i.e. if the Opening Bank fails for any reason to honour the Confirming Bank honours, wherever
available.
7. Reimbursing Bank: the bank which pays claims made by the nominated bank after negotiating bills
drawn by the exporter under the credit.
4.1.3. Types of Letter of Credit:

1. Irrevocable Letter of Credit: It carries a definite undertaking of the issuing bank to honour the
documents drawn strictly in conformity with the terms and conditions of the credit. It cannot be
amended nor cancelled without the consent of all parties concerned. Any Credit issued will be an
irrevocable credit.
2. Revocable Letter of Credit: This credit can be amended/modified/cancelled any time by the opening
bank without the consent of the beneficiary. Hence, this credit is not a safe credit from the point of
view of the beneficiary. However, in practice, this type of credit is seldom issued. Even though the
credit can be cancelled any time, but the opening bank would be liable to the beneficiary for the
shipments made by him prior to receipt of notice by him about the cancellation of credit by the issuing
bank.
3. Confirmed Letter of Credit: This means the bank that adds its confirmation* to a credit upon the
issuing bank’s authorisation or request.
*Confirmation means a definite undertaking of the confirming bank, in addition to that of the issuing
bank, to honour or negotiate a complying presentation.
4. Anticipatory Letter of Credit
(a) Red Clause Letter of Credit: In this credit, the issuing bank authorizes nominated bank,
which is in beneficiary’s country, to give pre-shipment credit to the beneficiary. This advance
is given to the beneficiary for purchase of raw-material/processing/packing of the goods to be
exported. It is given at the risk and responsibility of the issuing bank and is unsecured.. The
pre-shipment advance given in this way would be adjusted against the documents tendered by
the exporter for negotiation. This type of LC is known as `Red Clause Letter of Credit’.

17
 (b) Green Clause Letter of Credit: This credit is an extended version of red clause credit. In
addition to whatever has been given in red clause credit, it covers charges for warehousing
of goods at the port of shipment, when waiting for ship or space and insurance therefore.
Generally, the advance under this credit is given to the exporter after the goods are lodged in
bonded warehouse and would be adjusted once they are shipped on board. Under this credit,
warehouse warrants are given as a security for the advance.
5. Transferable Letter of Credit: means a credit that specifically states it is “transferable”. A
transferable credit may be made available in whole or in part to another beneficiary (“second
beneficiary”) at the request of the beneficiary (“first beneficiary”).
 Transferring bank means a nominated bank that transfers the credit or, in a credit available
with any bank, a bank that is specifically authorised by the issuing bank to transfer and that
transfers the credit.
 A credit may be transferred in part to more than one second beneficiary provided partial
shipments are allowed.
6. Back-to back Letter of Credit: The beneficiary of the export credit, who is not the manufacturer of
the goods, may approach a bank to open a letter of credit in favour of the manufacturer who is ready
to supply the goods. Such a letter of credit is opened on the strength of the export letter of credit
and hence called back-to-back letter of credit. Such a documentary credit should be opened only on
behalf of the good exporters and suppliers.
7. Revolving Letter of Credit:
 When a buyer wants a regular supply of goods from the foreign/ domestic supplier, he may
approach his banker to open a revolving letter of credit in supplier’s favour.
 When the shipment is made and the documents are drawn on the opener as per the terms of credit,
the documents are negotiated and forwarded to the drawee for payment.
 When the payment is made, the credit is reinstated and made available to the beneficiary on receipt
of the advice from the issuing bank.
 Further negotiations will take place after the advice of reinstatement is received.
 Revolving letter of credit should stipulate maximum drawings under the credit and should have
reinstatement clause.
8. Stand-by Letter of Credit: The very name of this credit suggests that it is not a regular letter of
credit, but a sort of stand-by or back-up credit. These types of credits can be issued in India, but are
very much in vogue in Western Countries, especially in U.S.A in place of guarantee. These credits
are generally used as substitutes for performance guarantee or for securing loans. As per FEMA,
now they can be issued in India for imports of certain category as per FEDAI guidelines. Our
exporters can freely receive standby letter of credit to cover their exports of goods.

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4.1.4. How to open letter of credit?

A business called the Ocean World Ventures from time to time imports goods from a business called Ram’s
Assorted Cold Storage Ltd, which banks with the bank of India. Ocean World Ventures wants to buy
$500,000 worth of merchandise from Ram’s Assorted Cold Storage Ltd, who agrees to sell the goods and
give Ocean World Ventures 60 days to pay for them, on the condition that they are provided with a 90-day
letter of credit for the full amount. The steps to get the letter of credit would be as follows:

9. Ocean World Ventures goes to the commonwealth bank and request a $500,000 letter of credit, with
ACME as the beneficiary.
10. The commonwealth bank can issue an LC either on approval of a standard loan underwriting process or
by Ocean World Ventures funding it directly with a deposit of $500,000 plus fees which are typically
between 1% and 8% of the face value of the LC.
11. The commonwealth bank sends a copy of the LC to the Bank of India which notifies Ram’s Assorted
Cold Storage Ltd that payment is available and they can ship the merchandise Ocean World Ventures
has ordered with the full assurance of payment to them.
12. On presentation of the stipulated documents in the letter of credit and compliance with the terms and
conditions of the letter of credit, the commonwealth bank transfers the $500,000 to the bank of India,
which then credits the account of Ram’s Assorted Cold Storage Ltd for the amount.
13. That banks deal only with documents required in the letter of credit and not the underlying transaction.
14. Many exporters have mistakenly assumed that the payment is guaranteed after receiving the LC. The
issuing bank is obligated to pay under the letter of credit only when the stipulated documents are
presented and the terms and conditions of the letter of credit have been met.

4.1.5. Documents called for under Letter of Credit:

To receive payment, an exporter or shipper must present the documents required by the LC. Typically the
letter of credit will request an original Bill of lading as the use of a title document such as this is critical to
the functioning of the Letter of Credit. However, the list and form of documents is open to negotiation and
might contain requirements to present documents issued by a neutral third-party evidencing the quality of
the goods shipped, or their place of origin or place. Different types of documents in such contracts might
include:

 Financial documents — bill of exchange, schedule of negotiated bill

 Commercial documents — commercial invoice, packing list
 Shipping documents — bill of lading (ocean or multi-modal or charter party), airway bill, lorry/truck
receipt, railway receipt, forwarder cargo receipt

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 Official documents — license, certificate of origin, inspection certificate, quality certificate, health
certificate, beneficiary’s certificate, declaration, beneficiary’s confirmation
 Insurance documents — insurance policy or certificate, but not a cover note.

The range of documents that may be requested by the applicant is vast, and varies considerably by country
and commodity. Several methods of verifying the documents exist, each provides different variations of risk
to the fact that the documents are legitimate. A Documentary Credit provides security for both buyer and
seller. The bank will give an undertaking or promise, on behalf of buyer (who is often the applicant) to pay
the beneficiary the value of the goods shipped if acceptable documents are submitted and if the stipulated
terms and conditions are strictly complied with. The buyer can be confident that the goods he is expecting
only will be received since it will be evidenced in the form of certain documents, meeting the specified
terms and conditions. The supplier finds his confidence in the fact that if such stipulations are met, he will
receive payment from the issuing bank, which is independent of the parties to the contract. In some cases, a
letter of credit will require the documents to be collected. Subject to ICC's URC 525, sight and usage, for
delivery of shipping documents against payment or acceptances of draft, where shipment happens first, then
the title documents are sent to the buyer's bank by seller's bank, for delivering documents against collection
of payment. Other form of effected payment is the direct payment where the supplier ships the goods and
waits for the buyer to remit the bill, on open account terms.

4.2. Foreign Remittances:

A foreign remittance is a transfer of money from a foreign worker to their family or other individuals in their
home countries.

Foreign Remittance are of two types-

(I) Inward Remittance: It is money from overseas which is getting credited to INR Account.

(2) Outward Remittance: It is money that is sent out of India.

4.2.1. Modes of Foreign Exchange Remittances:
Foreign exchange transactions involve inflow and outflow of foreign currency depending upon the nature of
transactions. A purchase transaction means inflow of foreign exchange while a sale transaction results in
outflow of foreign exchange. The former is called as inward remittance and the latter is called as outward
remittance. Remittance can takes place through a number of modes. Some of them are:
 Demand draft
 Mail transfer
 Telegraphic transfer
 Personal cheques
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4.2.2. Types of buying rates:
 TT buying rate
 Bill buying rate
TT buying rate: It is the rate applied when the transaction does not involve any delay in the conversion of
the foreign exchange by the bank. In other words, the Nostro account of the bank would already have been
credited. The rate is calculated by deducting the exchange margin from the interbank buying rate as
determined by the bank.
Bill buying rate: It is the rate to be applied when foreign bill is bought. When a bill is bought, the rupee
equal of the bill values is paid to the exporter instantly. However, the bank will realize the proceeds after the
bill is presented at the overseas centre.
4.2.3. Types of selling rates:
 TT selling rates
 Bill selling rates
TT Selling rate: The sale transactions which don’t handle documents are put through at TT selling rates.
Bill Selling rates: It is the rate applied for all sale transactions with public which involve handling of
documents by the bank.
4.2.4. Inter Bank transactions: The exchange rates quoted by banks to the customer are based on the rates
prevalent in the Inter Bank market. The big banks in the market are called as market makers because they
are willing to sell or pay foreign currencies at the rates quoted by them up to any extent. Depending upon its
resources, a bank may be a market in one or few major currencies. When a banker approaches the market
maker, it would not reveal its intention to buy or sell the currency. This is done in order to get a fair price
from the market maker.

In the present scenario, when liberalization is taking place at a rapid pace, the importance of foreign
remittance cannot be underestimated. The phenomenal rise in forex reserves may be attributed to large
influx of forex remittances in the country. In the days to come, the foreign remittances are bound to come in
a big way.

4.3. Chapter Summary:

This chapter gives us a clear idea about Documentary credit and Remittances. A documentary credit is
a payment mechanism used in international trade to provide an economic guarantee from a
creditworthy bank to an exporter of goods. A letter of credit is extremely common within international trade
and goods delivery, where the reliability of contracting parties cannot be readily and easily determined.
Remittance is a transfer of money by a foreign worker to an individual in their home country. Remittance
plays an increasingly large role in the economies of many countries. They contribute to economic growth
and to the livelihoods of the countries.

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5.1. What is Foreign Exchange Rate?
A foreign exchange rate is the rate at which one currency is exchanged for another. Thus, an exchange rate
can be regarded as the value of one country’s currency in relation to another currency. An exchange rate is a
ratio between two monies. If 5 UK pounds or 5 US dollars buy Indian goods worth Rs. 400 and Rs. 250 then
pound- rupee or dollar-rupee exchange rate becomes Rs. 80 = £1 or Rs. 50 = $1, respectively. Exchange rate
is usually quoted in terms of rupees per unit of foreign currencies. Thus, an exchange rate indicates external
purchasing power of money.

An exchange rate is the price of a nation’s currency in terms of another currency. Thus, an exchange rate has
two components, the domestic currency and a foreign currency, and can be quoted either directly or
indirectly. In a direct quotation, the price of a unit of foreign currency is expressed in terms of the domestic
currency. In an indirect quotation, the price of a unit of domestic currency is expressed in terms of the
foreign currency.

A fall in the external purchasing power or external value of rupee (i.e., a fall in exchange rate, say from Rs.
80 = £1 to Rs. 90 = £1) amounts to depreciation of the Indian rupee. Consequently, an appreciation of the
Indian rupee occurs when there occurs an increase in the exchange rate from the existing level to Rs. 78 =
£1.

In other words, external value of the rupee rises. This indicates strengthening of the Indian rupee.
Conversely, the weakening of the Indian rupee occurs if external value of rupee in terms of pound falls.
Remember that each currency has a rate of exchange with every other currency.

5.2. Types of Foreign Exchange Rate System:

a) Flexible Exchange Rate or Free Float Exchange Rate System:

Flexible exchange rate system refers to a system in which exchange rate is determined by forces of demand
and supply of different currencies in the foreign exchange market.

 The value of currency is allowed to fluctuate freely according to changes in demand and supply of
foreign exchange.

 There is no official (Government) intervention in the foreign exchange market.

 Flexible exchange rate is also known as ‘Floating Exchange Rate’.

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  The exchange rate is determined by the market, i.e. through interactions of thousands of banks, firms
and other institutions seeking to buy and sell currency for purposes of making transactions in foreign
exchange.

b) Fixed Exchange Rate System:

Fixed exchange rate system refers to a system in which exchange rate for a currency is fixed by the
government.

 The basic purpose of adopting this system is to ensure stability in foreign trade and capital
movements.

 To achieve stability, government undertakes to buy foreign currency when the exchange rate
becomes weaker and sell foreign currency when the rate of exchange gets stronger.

 For this, government has to maintain large reserves of foreign currencies to maintain the exchange
rate at the level fixed by it.

 Under this system, each country keeps value of its currency fixed in terms of some ‘External
Standard’.

 This external standard can be gold, silver, other precious metal, another country’s currency or even
some internationally agreed unit of account.

 When value of domestic currency is tied to the value of another currency, it is known as ‘Pegging’.

 When value of a currency is fixed in terms of some other currency or in terms of gold, it is known as
‘Parity value’ of currency.

c) Pegged Float Exchange Rate System:

Pegged floating currencies are pegged to some band or value, which is either fixed or periodically adjusted.
These are a hybrid of fixed and floating regimes. There are three types of pegged float regimes:

 Crawling bands: The market value of a national currency is permitted to fluctuate within a range
specified by a band of fluctuation. This band is determined by international agreements or by
unilateral decision by a central bank. The bands are adjusted periodically by the country’s central
bank. Generally the bands are adjusted in response to economic circumstances and indicators.

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  Crawling pegs: A crawling peg is an exchange rate regime, usually seen as a part of fixed exchange
rate regimes that allows gradual depreciation or appreciation in an exchange rate. The system is a
method to fully utilize the peg under the fixed exchange regimes, as well as the flexibility under the
floating exchange rate regime. The system is designed to peg at a certain value but, at the same time,
to “glide” in response to external market uncertainties. In dealing with external pressure to appreciate
or depreciate the exchange rate (such as interest rate differentials or changes in foreign exchange
reserves), the system can meet frequent but moderate exchange rate changes to ensure that the
economic dislocation is minimized.

 Pegged with horizontal bands: This system is similar to crawling bands, but the currency is allowed to
fluctuate within a larger band of greater than one percent of the currency’s value.

d) Managed Floating Exchange Rate System:

Traditionally, International monetary economists focused their attention on the framework of either Fixed or
a Flexible exchange rate system. With the end of Bretton Woods’s system, many countries have adopted the
method of Managed Floating Exchange Rates.

 It refers to a system in which foreign exchange rate is determined by market forces and central bank
influences the exchange rate through intervention in the foreign exchange market.

 It is a hybrid of a fixed exchange rate and a flexible exchange rate system.

 In this system, central bank intervenes in the foreign exchange market to restrict the fluctuations in
the exchange rate within certain limits. The aim is to keep exchange rate close to desired target
values.

 For this, central bank maintains reserves of foreign exchange to ensure that the exchange rate stays
within the targeted value.

 It is also known as ‘Dirty Floating’.

e) Parallel Exchange Rate System:

In many countries there is a distinction between the official exchange rate for permitted transactions and
a parallel exchange rate that responds to excess demand for foreign currency at the official exchange rate.
The degree by which the parallel exchange rate exceeds the official exchange rate is known as the parallel
premium.

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5.3. Factors affecting Foreign Exchange Rates:
Foreign Exchange Rate (ForEx Rate) is one of the most important means which determines the relative level
of economic health of a country. A country’s foreign exchange rates provides a window to its economic
firmness, which is why it is constantly scrutinized and examined.
The exchange rate is defined as “the rate at which one country’s currency may be converted into another.” It
may vary daily due to changing market forces of supply and demand of currencies from one country to
another. For these reasons, when sending or receiving money internationally, it is important to interpret
what regulates and affects exchange rates. Some of the leading factors that influence the variations and
fluctuations in exchange rates are mentioned below:
 Inflation Rates: Changes in market inflation leads to changes in currency exchange rates. A country
with a consistently lower inflation rate exhibits a rising currency value while a country with higher
inflation typically sees decline in its currency value, usually followed by higher interest rates.
 Interest Rates: Change in interest rate affects currency value and exchange rate. Forex rates, interest
rates, and inflation are all correlated. Increase in interest rates leads to appreciation in the value of a
country’s currency because higher interest rates provide higher rates to lenders, thereby attracting
more foreign capital, which results a rise in exchange rates.
o Higher interest rates cause an appreciation.
o Cutting interest rates tends to cause a depreciation.
 Country’s Current Account / Balance of Payments: A country’s current account reflects balance of
trade and earnings on foreign investment. It consists of total number of transactions including its
exports, imports, debt, etc. A deficit in current account due to spending more of its currency on
importing products than it is earning through sale of exports causes depreciation. Balance of
payments fluctuates exchange rate of its domestic currency.
 Government Debt: Government debt is public debt or national debt owned by the central
government. A country with government debt is less likely to acquire foreign capital, leading to
inflation. Foreign investors will sell their bonds in the open market if the market predicts
government debt within a certain country. As a result, there will be a decrease in the value of its
exchange rate.
 Terms of Trade: Related to current accounts and balance of payments, the terms of trade is the ratio
of export prices to import prices. A country's terms of trade improves if its exports prices rise at a
greater rate than its imports prices. This results in higher revenue, which causes a higher demand for
the country's currency and an increase in its currency's value. This results in an appreciation of
exchange rate.
 Political Stability & Performance: A country's political state and economic performance can affect
its currency strength. A country with less risk for political turmoil is more attractive to foreign

25
 investors, as a result, drawing investment away from other countries with more political and
economic stability. Increase in foreign capital, in turn, leads to an appreciation in the value of its
domestic currency. A country with sound financial and trade policy does not give any room for
uncertainty in value of its currency. But, a country prone to political confusions may see
depreciation in exchange rates.
 Recession: When a country experiences a recession, its interest rates are likely to fall, decreasing its
chances to acquire foreign capital. As a result, its currency weakens in comparison to that of other
countries, therefore lowering the exchange rate.
 Speculation: If a country's currency value is expected to rise, investors will demand more of that
currency in order to make a profit in the near future. As a result, the value of the currency will rise
due to the increase in demand. With this increase in currency value comes a rise in the exchange rate
as well.

All of these factors determine the foreign exchange rate fluctuations. If you send or receive money
frequently, being up-to-date on these factors will help you better evaluate the optimal time for international
money transfer. To avoid any potential falls in currency exchange rates, opt for a locked-in exchange rate
service, which will guarantee that your currency is exchanged at the same rate despite any factors that
influence an unfavourable fluctuation.

5.4. Chapter Summary:

In the long run the foreign exchange rate between the two currencies is determined by the purchasing
powers of the two currencies in the domestic economies. In the short run, the demand for imports and
exports of goods and services, magnitude of capital flows between the countries affects the demand for and
supply of foreign exchange and thereby determine the exchange rate between the currencies.

26
6.1. Foreign Exchange Risks:

A common definition of exchange rate risk relates to the effect of unexpected exchange rate changes on the
value of the firm. In particular, it is defined as the possible direct loss (as a result of an unhedged exposure)
or indirect loss in the firm’s cash flows, assets and liabilities, net profit and, in turn, its stock market value
from an exchange rate move.

The assets and liabilities or cashflows of an enterprise, that are denominated in foreign currencies undergo a
change in their value, as measured in domestic currency, over a period of time, because of variation in
exchange rate. This variability in the value of assets and liabilities or cashflows is referred to as exchange
rate risk. When the value and the maturity dates of assets and liabilities as well as claims and counterclaims
in a foreign currency are matched against each other, then there is no net exposure. In such a situation, there
is no foreign exchange risk. But foreign exchange risk results from an open position - the position can be
either long or short. When an enterprise owns a net claim or an asset in foreign currency, it is said to be
long; and when it has a liability in foreign currency, it is said to be short.
6.2. Different Exchange Risks for Banks:
Exchange risk for banks emanates from their activities relating to currency trading, management of risks for
their clients as also the risks of their own balance sheet and operations. Banks are exposed to a number of
different risks in the conduct of foreign exchange and general business, and these may be categorised as
follows:

(1) Exchange rate risk,

(2) Credit risk,
(3) Market risk,
(4) Liquidity risk,
(5) Operational risk.
(6) Interest rate risk,
(7) Settlement risk, and
(8) Country risk
They are explained below.
6.2.1. Exchange Rate Risk:
Exchange rate risk relates to appreciation or depreciation of currencies. Every bank that has a long position
in a currency runs a risk of loss if that currency depreciates. Likewise, any bank that has short position in a
currency runs the risk of loss if that currency appreciates. The risk can result from the mismatch of amounts
of assets and liabilities as well as from the mismatch of maturity dates of the assets and liabilities. When an
exchange dealer of a bank takes a position in a currency, he does so, on the assumption that the currency is
going to evolve in his favor. The currency, however, may move in the opposite direction resulting in a loss.
In addition, the dealer also runs the risk of interest rate changes. If, for- example, the position taken by the
27
dealer is financed by a loan which needs to be renegotiated during the period of the position, the dealer is
exposed to a risk, as the interest rate of the borrowed currency may increase. That is why limits are
prescribed by the banks on the total position as well as on the position per currency. These limits depend on
the financial situation of the bank and on its reading of the ensuing risk. Likewise, the position of a dealer
should be closed if he has already suffered a certain amount of loss.
6.2.2. Credit Risk:
The second category of risks that banks are exposed to is credit risk. This risk arises from the possibility of a
counterparty making a default. This risk may appear either during the period of contract or at the maturity
date. It can be reduced by fixing the limits of operations per client, based on the creditworthiness of the
client, by incorporating the clauses for rescinding the contract if the rating of counterparty goes down. The
Basle Committee, consisting of the governors of Central banks of G10 observed that the increasing
complexity, diversity and growth in volume of derivative products present increasing challenges for the
management of risk. It makes the following recommendations for containment of risk: (i) constant follow up
on risks, their measurement (quantification), supervision and control, (ii) effective information system, and
(iii) procedures of audit and control.
6.2.3. Market Risk:
Market risk for a multi-currency portfolio represents the potential change in valuations that results from
movements in financial market prices, for examples, changes in interest rates, foreign exchange rates, equity
prices and commodity prices. The major sources of market risk for central bank are currency risk, interest
rate risk and movement in gold prices. Gain/losses on valuation of FCA and gold due to movements in the
exchange rates or price of gold are booked under a balance sheet head named the Currency and Gold
Revaluation Account. The balances in CGRA provide a buffer against exchange rate and gold price
fluctuations which in recent times have shown sharp volatility. Foreign dated securities are valued at market
prices prevailing on the last business day of each month and the appreciation/depreciation arising therefore
is transferred to the Investment Revaluation Account. The balance in IRA is meant to provide cushion
against changes in the security prices over the holding period.
6.2.4. Liquidity Risk:
This is the risk of refinancing. It may happen when a dealer has placed funds for a period longer than that of
the deposits that finance this placement. At the time of refinancing, the interest rate may go up, resulting in a
loss for the dealer. Similarly, in a reverse situation, the dealer may increase his profits.
6.2.5. Operational Risk:
This risk is related to the operations of the bank. The bank may be able to limit this type of risk by precisely
identifying the problems: definition of responsibilities, reporting, accountability for operations and so on.
6.2.6. Interest rate risk:

This risk arises from unmatched forward foreign exchange transactions.

28
6.2.7. Settlement risk:

Also known as time zone risk, this is a form of credit risk that arises from transactions where the currencies
settle in different time zones. For example, where a bank enters into a transaction to sell Australian Dollars
and buy US Dollars, they are obliged to pay AUD to the counterparty some 15 hours before they are able to
receive their USD in settlement.

6.2.8. Country risk:

This is essentially a form of credit risk arising from either the currency of the trade or the centre in which
the counterparty is situated rather than the counterparty itself. However, there are implications for foreign
exchange transactions. In particular, many investment managers buy stocks in emerging markets where there
may be some political risk, and will instruct the treasury department to buy or sell the currency according to
the trade. In the event of sanctions being imposed by the government of that country, or an international
agency such as the United Nations, banks may not be able to sell balances or deliver currency in settlement
of trades already completed.

Some of other risks associated with forex trading in banks are:

 Delay in bank payment (Issuing bank)

 Party (Buyer) defaulter
 Cancel of shipment
 Return of ordered consignment due to quality issues or other
 Country Customs clearance
 Goods may not be as per standard

Fluctuations in exchange rates leads to variations in the value of assets and liabilities warrant management
or hedging of risk. The word 'hedging' means taking steps to reduce risk. To manage the exchange rate risk
inherent in firms operations, a firm needs to determine the specific type of current risk exposure, the hedging
strategy and the available instruments to deal with these currency risks.
6.3. Chapter Summary:
This chapter explains about the foreign exchange risks and the different types of foreign exchange risks
faced by banks in international trade. Foreign currency risk occurs when there are cross-border operations
involving more than one currency. Negative exchange rate fluctuations between the currency in the country
where a company or individual is based and the currencies of the countries in which they operate can
severely reduce and even wipe out profit margins.

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7.1. Foreign Exchange Exposure:
Foreign Exchange Exposure refers to the risk associated with the foreign exchange rates that change
frequently and can have an adverse effect on the financial transactions denominated in some
foreign currency rather than the domestic currency of the company.

In other words, the firm’s risk that its future cash flows get affected by the change in the value of the foreign
currency, in which it has maintained its balance sheet, due to the volatility of the foreign exchange rates, is
termed as foreign exchange exposure.

Foreign Exchange Exposure is a measure of the potential change in a firm's profitability; net cash flow or
market value of net assets due to a change in exchange rates.

It is not only those firms who directly make the financial transactions in the foreign currency denominations
faces the risk of foreign exposure, but also, the other firms who are indirectly related to the foreign currency
is exposed to foreign currency risk.

For example, if Indian company is competing against the products imported from China and if the Chinese
Yuan per Indian rupee falls, then the importers enjoy decreased cost advantage over the Indian company.
This shows, that the companies not having any direct link to the forex do get affected by the change in the
foreign currency.

7.2. Types of foreign currency exposures:

Foreign currency exposures are generally categorized into the following three distinct types: transaction
(short-run) exposure, economic (long-run) exposure, and translation exposure.

7.2.1. Transaction Exposure:

It denotes to the risk associated with the change in the exchange rate between the time an enterprise initiates
a transaction and settles it, i.e. it is the gain or loss arising on conversion. It measures the effect of an
exchange rate change on outstanding obligations that existed before exchange rates changed but were settled
after the exchange rate changes. Thus, it deals with cash flows that result from existing contractual
obligations.

This type of risk is primarily associated with imports and exports. If a company exports goods on credit then
it has a figure for debtors in its accounts. The amount it will finally receive depends on the foreign exchange
movement from the transaction date to the settlement date. Transaction exposure can be reduced either with
the use of the money markets, foreign exchange derivatives such as forward contracts, futures contracts,

30
options, and swaps, or with operational techniques such as currency invoicing, leading and lagging of
receipts and payments, and exposure netting .

The degree of exposure is dependent on:

(a) The size of the transaction.
(b) The hedge period, the time period before the expected cash flows occurs.
(c) The anticipated volatility of the exchange rates during the hedge period.

Example: If an Indian exporter has a receivable of $100,000 due in six months hence and if the dollar
depreciates relative to the rupee, a cash loss occurs. Conversely, if the dollar appreciates relative to the
rupee, a cash gain occurs.

The example illustrates that whenever a firm has foreign currency denominated receivables or payables, it is
subject to transaction exposure and their settlements will affect the firm’s cash flow position.

7.2.2. Economic Exposure:

It refers to the extent to which the economic value of a company can decline due to changes in exchange
rate. It is the overall impact of the exchange rate changes on the value of the firm. The essence of economic
exposure is that exchange rate changes significantly alter the cost of a firm’s inputs and the prices of its
outputs and thereby influence its competitive position substantially.

A firm has economic exposure also called forecast risk to the degree that its market value is influenced by
unexpected exchange rate fluctuations. Such exchange rate adjustments can rigorously affect the firm's
market share position with regards to its competitors, the firm's future cash flows, and finally the firm's
value. Economic exposure can affect the present value of future cash flows. Any transaction that exposes the
firm to foreign exchange risk also exposes the firm economically. A swing in exchange rates that influence
the demand for goods in some country would also be an economic exposure for a firm that sells goods.
Economic Exposures cannot be fudged as well due to limited data, and it is expensive and time consuming.
Economic Exposures can be managed by product variation, pricing, branding, and outsourcing. For example,
a beer manufacturer in Argentina that has its market concentration in the United States is continuously
exposed to the movements in the dollar rate and is said to have an economic foreign exchange exposure.

7.2.3. Translation Exposure:

Also known as Accounting exposure or Balance sheet exposure, it refers to gains or losses caused by the
translation of foreign currency assets and liabilities into the currency of the parent company for
consolidation purposes. A firm's translation exposure is the extent to which its financial reporting is affected
by exchange rate movements. While translation exposure may not affect a firm's cash flows, it could have a
31
noteworthy impact on a firm's reported earnings and therefore its stock price. Translation exposure is
distinguished from transaction risk as a result of income and losses from various types of risk having
different accounting treatments. A company such as General Motors may sell cars in about 200 countries
and manufacture those cars in as many as 50 different countries. Such a company owns subsidiaries or
operations in foreign countries and is exposed to translation risk. At the end of the financial year the
company is required to report all its combined operations in the domestic currency terms leading to a loss or
gain resulting from the movement in various foreign currencies.

It is not only those firms who directly make the financial transactions in the foreign currency denominations
faces the risk of foreign exposure, but also, the other firms who are indirectly related to the foreign currency
is exposed to foreign currency risk. Firms with exposure to foreign exchange risk may use a number of
foreign exchange hedging strategies to reduce the exchange rate risk.

7.3. Pre transaction, transaction and accounting exposure:

Order
received Receipt of
Price Production Ship Invoice
from foreign
list/tender
foreign currency

Pre Transaction Transaction

Exposure Exposure

Accounting Exposure
sale record in the
book

32
7.4. Format of request for exposure of Bank of India:

Ref. No.: 2017/18/55 Date:

ZONE: BHUBANESWAR BRANCH:BHUBANESWAR
Beneficiary : RAM’S ASSORTED COLD STORAGE CR:
Applicant: OKAYA AND CO LTD
REQUEST FOR EXPOSURE LIMIT OF USD 186,300.00 RATE 72.00
ON Mitsubishu UFJ Financial Group JAPAN APPRX 1.34 Cr.
BANK OF TOKYO is subsidiary to the extent of 100%
UPTO 19-Aug-18
ZONE REF.:
The zone seeks exposure limit of USD 186300 APPRX. Rs. 1.34 Cr.
We propose to meet the requirement out of limits available with us.
We hereby the position of exposure on the bank is as under:
(Rs in Crore)
A Exposure limit held with us under A 1400.00
category
B Exposure sanctioned so far 3.78
C Exposure expired 2.78
D Balance available with us 1399.00
E Present request 1.34
F Net Balance available after allocation 1397.66

Approval from credit angle has to be obtained by Zone/Branch at the appropriate level.
As per the Bank Exposure Policy on Foreign Banks approved by the Board of ………………….
General Manager is empowered to approve the exposure.
Please be guided by the instructions contained in Branch Circular
& Branch Circular No…………………. as per which branches are advised NOT to discount/ negotiate bills
under I/Cs (eve in case where IC is restricted to our Bank) to a non-constituent borrower of non constituent
member of consortium/multiple banking arrangement.
Designated Branches are instructed to strictly adhere to instructions issued in Br……………….. for due
diligence, verification of genuineness of IC etc. for non-constituent borrowers.
In the case of DA bills, purchasing/discounting/negotiating should be undertaken only after receipt of
acceptance from the IC opening bank.
Please ensure availability of matching country exposure limit with the branch.

33
 Re: Exposure of Indian Banks – Public & Private Sector
And international Banks – Negotiation of bills
Format for LC transaction ANNEXURE I

1 Name of the Country Japan

BANK OF TOKYO-MISTIBUSHI UFJ
(A) Name of the Bank on whom exposure is sought
2 LTD.
(B) SWIFT code of the bank BOTKJPJXXX
(A) Amount of exposure in foreign currency $ 1,86,300.00
3
(B) Amount of exposure in INR Rs. 1,27,00,000/- (Approx)
Details of LC
(i) L/C No. S-321-2018087
(ii) LC issuance date / LC amendment date 22.06.2018
(iii) If amended: Mention the amended details N/A
4 (iv) Tenor (Also mention whether DA/DP) AT SIGHT
(v) L/C expiry date 05.08.2018
IN case LC has expired and acceptance has been
(vi) received from LC issuing bank (PI mention the due N/A
date of payment)
(vii) Reimbursing bank BOTKU33XXX
5 Date up to which exposure is required 19.08.2018
OKAYA AND CO LTD.
(i) Name of the Applicant of LC
SHINJUKU TOKYO JAPAN
M/s RAM’S ASSORTED COLD
(ii) Name of Beneficiary STORAGE LTD. BHUBANESWAR,
ODISHA
6 In case of borrowers – Credit Rating Asset Code,
(iii)
Borrower Risk Grade & conduct of the A/c
In case of beneficiary being a Non-Constituent
Borrower or Non-Constituent Member of a
(iv) N/A
consortium/multiple banking arrangement:- Refer Br.
Cr. 105/169 dt. 27.01.2012
(i) Present outstanding exposure on the bank NIL
Total outstanding exposure taken on the beneficiary for
7 (ii) INR 20.40 Cr.
all transactions of FBN and IBN
(iii) Past experience with the bank SATISFACTORY
Name & contact No. of officer concerned who may
8
contacted in case of query.
All previous bills negotiated for this customer/beneficiary are realized on /before due date
1. We seek approval” A) For exposure as sought by us for the concerned Overseas Bank.
B) To permit us to negotiate the export bill.

BANK OF TOKYO-
Name of the Bank Proposed Exposure Rs 1.27 Crore
MITSUBISHI UFJ:LTD.
Exposure Allotted to ZO by Total outstanding after
NIL Rs 1.27 Crore
HO RMD: proposed Exposures
Preset O/s of Exposure NIL Delegation for approval HO, RMD

34
7.5. Chapter Summary:

Foreign exchange exposure is a Bank of India prospective where in the bank undertakes risks while making
financial transactions in foreign countries. It is not only those firms who directly make the financial
transactions in the foreign currency denominations faces the risk of foreign exposure, but also, the other
firms who are indirectly related to the foreign currency is exposed to foreign currency risk.

35
8.1. Export:

An export is a function of international trade whereby goods produced in one country are shipped to another
country for future sale or trade. The sale of such goods adds to the producing nation’s gross output. Export
finance refers to the financial assistance extended by banks and other financial institutions to businesses for
the shipping of products to foreign countries. The below tables represents the export documents negotiated
and the export documents sent on collection basis of Bank of India for the last 3 years i.e., from 2015-2018.

TABLE1 & 2: EXPORT BILLS

Export Documents Export Documents

Year Purchased/Negotiated/Discounted Amount(₹) Sent On Collection Amount(₹)
(No. of Items) Basis (No. of Items)
2015-2016 307 2618091609 176 1515164656
2016-2017 151 1408336281 193 1761155079
2017-2018 169 1612523155 195 1678530251

Total No of Items
Year Total Amount (₹) Trend %
exported
2015-2016 483 4133256265 100%
2016-2017 344 3169491360 76.68%
2017-2018 364 3291053406 79.62%
Source: Forex Turnover Report of Bank of India (01/04/2015 – 31/03/2018)

 The process whereby the bank examines the documents and claims proceeds and the willingness to
give value, i.e. advance or discount the transaction to and on behalf of the seller, is known as Export
Documents Negotiation.
 A documentary collection is a process in which a seller instructs their bank to
forward documents related to the export of goods to a buyer's bank with a request to present
these documents to the buyer for payment, indicating when and on what conditions
these documents can be released to the buyer.

450
x 10000000

400
350
300
250
200 Export Amount
150
100
50
0
2015-2016 2016-2017 2017-2018 36
 Graphical representation of Export Amount of Bank of India for the period 2015-18

Interpretation:

 According to the data collected and reports prepared, it can be concluded that there is a decreasing
trend in the amount of exports from 2015 to 2018.
 Bank of India acts as an intermediate for exporters trading mainly in seafood processing/exports
division which includes shrimp exports, crustaceans, frozen fish and fish products and aquaculture;
and also coal and briquette.
 The reasons behind the decrease are Global slowdown that is lower demands for goods and services
(economic decline), lower prices of exported goods and services, rise in the labour prices, currency
factors etc.

8.2. Import:

An import is a function of international trade whereby goods and services brought into one country from
another country for future sale or trade. Import finance refers to the financial assistance extended by banks
and other financial institutions to businesses for the shipping of products from foreign countries. The below
tables represents the Import DCs opened and the Import documents received on collection basis of Bank of
India for the last 3 years i.e., from 2015-2018.

TABLE 3 & 4: IMPORT BILLS/ DOCUMENTARY CREDITS

Import DCs Opened (No. Of Import Bills

Year Amount(₹) Amount(₹)
Items) (Not Under Dc)
2015-2016 6 79209666 0 0
2016-2017 9 55149886 44 120514155
2017-2018 18 78196545 74 88559616

Total No of items Trend %

Year imported Total Amount(₹)
2015-2016 6 79209666 100%
2016-2017 53 175664041 221.77%
2017-2018 92 166756161 210.53%
Source: Forex Turnover Report of Bank of India (01/04/2015 – 31/03/2018)

 Import documentary credit is issued by the importer's bank on behalf of the importer with the
exporter being the beneficiary. It is a guaranteed by the importer's or buyer's bank that the payment
will be given to the exporter or seller.
 Import Bill Collection is a mode of payment for international trade where the seller forwards
financial and/or commercial documents to the buyer, against which the payment is made.

37
 20

x 10000000
18
16
14
12
10
Import Amount
8
6
4
2
0
2015-2016 2016-2017 2017-2018

Graphical representation of Import Amount of Bank of India for the period 2015-18

Interpretation:

 Similarly, from the import data collected it can be concluded that there is a rise in the amount of
import from the year 2015-16 to 2016-17 and then eventually there is a little fall in the year 2017-
2018.
 Bank of India acts as an intermediate for importers mainly importing heavy machinery, electronics,
iron and steel, organic chemicals from foreign countries.
 The reasons behind the high growth of imports are expensive local production of a commodity such
as machinery and electronic items, lack of natural resources, downfall in the production of high-tech
goods, devaluation of currency that immediately stimulates the export volume, if the national
currency is very strong that motivates the countries with weak currencies to export to the country
with strong currency and thus increasing the latter import volume.

8.3. Remittances:

A. Inward Remittances:

Inward remittance is money from overseas which is getting credited to the INR Account. The below table
represent the TTs drawn and the DDs drawn on collection basis by Bank of India for the last three years
(2015-2018).

TABLE 5: INWARD REMITTANCES

Cheques/ Inward Trend %

TTs DDs on Remittances
Year Amount(₹) Amount(₹) Amount(₹)
Drawn collection Total No of
basis items
2015-2016 298 23592109 44 2437733 342 26029842 100%
2016-2017 365 28675405 92 7566958 457 36242363 139.23%
38
 2017-2018 520 5350875 35 5315653 555 10666528 40.98%
Source: Forex Turnover Report of Bank of India (01/04/2015 – 31/03/2018)

B. Outward Remittances:

Outward remittance is the money that is sent out of India. The below table represents the TTs issued by
Bank of India for the last three years (2015-2018).

TABLE 6: OUTWARD REMITTANCES

Outward
Year TTs Issued Amount(₹) Remittances Amount(₹) Trend %
Total No of items
2015-2016 249 279018494 249 279018494 100%
2016-2017 188 61353050 188 61353050 21.98%
2017-2018 225 68019779 225 68019779 24.38%
Source: Forex Turnover Report of Bank of India (01/04/2015 – 31/03/2018)

 A telegraphic transfer (TT) is an electronic method of transferring funds utilized primarily for overseas
wire transactions. These transfers are used most commonly in reference to Clearing House Automated
Payment System (CHAPS) transfers in the U.K. banking system. Telegraphic Transfers are also known
as Telex Transfers.
 A demand draft is a negotiable instrument similar to a bill of exchange. A bank issues a demand
draft to a client (drawer), directing another bank (drawee) or one of its own branches to pay a certain
sum to the specified party (payee). A demand draft can also be compared to a cheque.
 A foreign draft is an alternative to foreign currency. A foreign draft is a bank draft which is drawn on
a financial institution in the country of currency. They can be purchased at commercial banks and
usually have a fee depending on the institution and the type of account you hold.

39
 300000000

250000000

200000000

150000000 Inward Remittances

100000000
Outward
50000000 Remittances
0
2015-2016 2016-2017 2017-2018

Graphical representation of Inward and Outward Remittances of Bank of India for the period 2015-18

Interpretation:

From the remittances data collected, it can be concluded that the amount of outward remittances is more as
compared to the inward remittances for the given three years of Bank of India whereas, for each subsequent
year there is a decrease in the amount of outward remittances as compared to the base year. The reason
behind this is that every year thousands of workers move overseas to seek better employment for an
improved quality of life for themselves and their family. The salaries earned by migrants and the resulting
surplus funds sent home are known as remittances.

8.4. Supplementary Statistics:

A. Export LC's Advised:

 Advising bank, located in beneficiary country known as a notifying bank advises a beneficiary
(exporter) that a letter of credit (L/C) opened by an issuing bank for an applicant (importer) is
available. An advising bank's responsibility is to authenticate the letter of credit issued by the issuer
to avoid fraud. The following table represents the Export LCs advised by Bank of India for the last
three years (2015-2018).
TABLE 7: EXPORT LCs ADVISED

Year No of items Amount(₹) Trend %

2015-2016 100%
275 2507276793
2016-2017 158 1455446406 57.45%
2017-2018 149 684423707902 54.18%
Source: Forex Turnover Report of Bank of India (01/04/2015 – 31/03/2018)

40
  From the above data collected, it can be concluded that the number of export LCs advised by Bank
of India have decreased from 2016 to 2018 as compared to the base year i.e., 2015.

B. Import Bills under DC:

 Under letter of credit trade settlement, when exporter presents import documents complying with
the terms and conditions of letter of credit, then honour payment and effect reimbursement is done
to the exporter accordingly. The below table represents Import Bills under DC of Bank of India for
last 3 years (2015 – 2018).
TABLE 8: IMPORT BILLS UNDER DC

Year No of items Amount(₹) Trend %

2015-2016 7 57659103 100%
2016-2017 6 29621278 85.71%
2017-2018 11 52005191 157.14%
Source: Forex Turnover Report of Bank of India (01/04/2015 – 31/03/2018)

 From the above gathered data, it can be said that there has been a little decrease in the number of
Import bills under DC for the year 2016-17 and a subsequent increase in the following year i.e.,
2017-18.
8.5. Chapter Summary:
This chapter analyses and interprets the export, import and remittances data of Bank of India for three
years that is from 2015 to 2018. Exports and imports are important for the development and growth of
national economies. Remittances constitute the second largest flow of capital to developing countries,
behind only governmental development aid.

41
9.1. Foreign Exchange Risk Management:
Exchange rate volatility is unpredictable since there are so many factors that affect the movement of the
exchange rates i.e. economic fundamental, monetary policy, fiscal policy, global economy, speculation,
domestic and foreign political issues, market psychology, rumors, and technical factors. The exchange rate
volatility poses a risk, called foreign exchange risk or currency risk, to business sector in particular, the
importers and exporters or those ones who associate with international businesses. Depositors and businesses
exporting or importing goods and services or making foreign investments have an exchange rate risk which
can have severe financial consequences; but steps can be taken to lessen the risk. This risk frequently affects
businesses that export or import. It also affects investors making international investments. Many financial
reports signified that financial risk management is the practice of creating economic value in a firm by using
financial instruments to manage exposure to risk FOREX-Management of exposure risks.
Although businesses could not control the fluctuation of the exchange rates but they can manage the risk by
using proper hedging tools like Forward, Futures, and Options, in order to manage their revenues and costs
more efficiently.
Exposure management is critical for multinational corporations or businesses involved with exporting or
importing goods. Techniques for exposure management minimize the risks associated with currency
fluctuations when converting currencies. Businesses should carefully consider each available option when
encountering a situation requiring exposure management, as there is not one best technique for minimizing
exposure risk.

9.1.1. Why foreign exchange risk is managed?

 Changes in exchange rates induce changes in the value of a firm’s assets, liabilities and cash flows,
especially when these are denominated in a foreign currency.
 Therefore, fluctuations in the currency markets have an impact on your outgoing import payments and
incoming export funds.
 Your foreign exchange risk is influenced by many factors such as length of exposure and currency
volatility.
 By managing the risk, profits are maximised or the risk is minimise.

9.1.2. Where do these foreign exchange exposures come from?

 Trade – Drawdown and Repayment of Import/Export Foreign Currency Loans and payments of
Import/Export Bills denominated in foreign currencies.
 Inward and Outward Remittances denominated in foreign currencies.
 Overseas Dividends, e.g. repatriating overseas profit home and Overseas Operating Expenses, e.g.
paying overseas employees’ salary expenses.

42
  Overseas Assets, e.g. surplus cash balances of overseas subsidiaries and Overseas Liabilities, e.g.
foreign currency borrowing.

9.1.3. Who are concerned?

 Companies repatriating Overseas Dividends and/or paying Overseas Operating Expenses

 Importers/Exporters
 Companies liquidating Overseas Assets and/or repaying Overseas Liabilities

9.2. Methods of managing Foreign Exchange Risk:

Foreign exchange risk is mitigated by using different hedging techniques. Hedging is a way by using which
a bank eliminates or minimizes its risk exposure. Hedging can be done using different ways:

9.2.1. Foreign Currency Assets & Liabilities Matches:

A commercial bank matches its assets and liabilities in foreign currencies to ensure a profitable spread by
dealing in FX. By using this technique the positive profit spread is ensured regardless of the movements in
exchange rate at the respective maturities of these assets and liabilities, in the investment period. For
example, if a bank has a liability in shape of a deposit for one year in US$ at rate of 3% p.a. and it has
another liability of same type but in PKR @ 10% p.a., it can match its assets with these liabilities by
advancing US$ at rate of 4.5% p.a. and PKR @ 15% p.a. Using this the bank has locked into the profit of
spread. Bank will get US$ & PKR to repay the principal and exchange rate will not affect the
cost of exchanging the currencies.

9.2.2. Hedging using Derivatives:

A commercial bank uses foreign currency derivatives to hedge foreign exchange risk. Foreign currency
derivatives are:

a. Foreign Currency Future contracts

b. Foreign Currency Swap

c. Foreign Currency Options

d. Foreign Currency Forward Contracts

The most popular amongst all others as mentioned above are FX forward Contracts. Instead of matching FX
asset-liability bank enters into a forward contract having the same maturity. For example in above examples
bank does not need to advance loans in the same currency rather it uses forward contracts to insulate FX

43
risk. An important feature of such contracts is that they do not appear on the balance sheet of the bank
instead it appears under the head of Contingencies & Commitments and hence are off-balance sheet items.

9.2.3. Hedging through Diversification of Foreign Asset-Liability Portfolio:

Commercial Banks try to mitigate the foreign currency risk on its individual currency by
holding Multicurrency Asset-Liability Positions. Holding assets and liabilities in various foreign currencies
does not reduce the risk of the portfolio of assets and liabilities of a bank alone but also significantly lower
the cost of capital. The risk of holding any net open position in a currency is diversified by holding a
position in foreign currency. The main reason for this is the differential inflation and interest rates in
different countries. Almost all commercial banks hold such type of multicurrency asset-liability portfolios.

Foreign currency derivatives are explained bellow:

a) Foreign Currency Future contracts:

Futures contract is a special type of contract with standardized delivery dates and sizes that allows trading
on an exchange, making it easier to find suitable counterparties increasing the liquidity of the market. A
deposit (margin requirement) is used to protect both parties against default and the contract is marked to
market, with amounts deducted from the notional amount accordingly. Mark to market performance
measurement is an effective method of safeguarding against unnecessary loss. Instead of the parties realizing
the profit or loss at the expiry date, futures are evaluated every day and margin payments are made across
the lifetime of the contract, at the end of every day, the change in value of the contract or “settlement price”,
is added or subtracted from the margin (deposit) account.

Commonly used by MNEs as hedging instruments, future contracts are standardized contracts that are trade
in organized futures markets for a specific delivery date only.

b) Foreign Currency Swap:

In order to hedge long-term transactions to currency rate fluctuations, currency swaps are used. Agreement
to exchange one currency for another at a specified exchange rate and date is termed as currency swap.
Currency swaps between two parties are often intermediated by banks or large investment firms.

Currency swap is a financial contract where a borrower swaps their debt obligations in one currency for the
obligations of another borrower in a different currency. Currency swaps immediately remove currency risk
since the institution’s assets and liabilities are as a result denominated in the same currency. Swaps can also
be used to exchange variable-rate loans into fixed rates to match the firm’s cash flow profile.

Buying a currency at a lower rate in one market for immediate resale at higher rate in another with an
objective to make profit from divergence in exchange rates in different money markets is known as
44
‘currency arbitrage’. To capitalize on discrepancy in quoted prices, arbitrage is often used to make riskless
profits.

c) Foreign Currency Options:

If there is serious doubt about whether a foreign currency sale will actually be completed and collected by
any particular date, an FX option may be worth considering. Under an FX option, the exporter or the option
holder acquires the right, but not the obligation, to deliver an agreed amount of foreign currency to the
lender in exchange for dollars at a specified rate on or before the expiration date of the option. As opposed
to a forward contract, an FX option has an explicit fee, which is similar to a premium paid for an insurance
policy. If the value of the foreign currency goes down, the exporter is protected from loss. On the other
hand, if the value of the foreign currency goes up significantly, the exporter can sell the option back to the
lender or simply let it expire by selling the foreign currency on the spot market for more dollars than
originally expected, but the fee would be forfeited.

The buyer of an option contract has the right but not the obligation to buy or sell a currency at a specified
exchange rate on a given future date in exchange for the payment of a premium. Options are sold either on
the trading markets at set prices and standard sizes, with definite dates of purchase and sale or over the
counter where dates, sizes and prices are determined by negotiation between the parties. Options are
considered an appropriate hedging instrument owing to the flexibility of their terms and the avoidance of
loss, should the exchange rate fluctuate to the disadvantage of the buyer. Unlike futures, where there is
exposure to upside and downside movement as the value is off-set by the loss on the contract, options need
only be a one-sided bet and offer limited risk. They are available from financial institutions in return for
payment of a risk premium to reflect the level of risk involved.

There are two types of foreign currency options:

 Call option gives the holder the right to buy foreign currency at a pre-determined price. It is used to
hedge future payables and contingent exposure.

 Put option gives the holder the right to sell foreign currency at a pre-determined price. It is used to
hedge future receivables.

Several alternative currency options are normally available with different exercise prices. Foreign currency
options are used as effective hedging instruments against exchange- rate risks as they offer more flexibility
than forward or future contracts because no obligation is required on the part of the buyer under the currency
options.

45
d) Foreign Currency Forward Contracts:

A forward contract is a commitment to buy or sell a specific amount of foreign currency at a later date or
within a specific time period and at an exchange rate stipulated when the transaction is struck. The delivery
or receipt of the currency takes place on the agreed forward value date.

Abor, (2005) defines a forward contract as a contract made today for delivery of an asset at a pre-specified
time in the future at a price agreed upon today. No money changes hands until the expiry time.

The most direct method of hedging FX risk is a forward contract, which enables the exporter to sell a set
amount of foreign currency at a pre-agreed exchange rate with a delivery date from three days to one year
into the future.

A forward transaction cannot be cancelled but can be closed out at any time by the repurchase or sale of the
foreign currency amount on the value date originally agreed upon. Any resultant gains or losses are realized
on this date.

Generally, there is variation in the forward price and spot price of a currency. In case the forward price is
higher than the spot price, a forward premium is used whereas if the forward price is lower, a forward
discount is used.

Computation of annual percentage premium or discount:

Forward premium or discount = (Forward rate – Spot rate)/Spot rate x 360/Number of days under the
forward contract

If a currency with higher interest rates is sold forward, sellers enjoy the advantage of holding on to the
higher earning currency during the period between agreeing upon the transaction and its maturity.

Buyers are at a disadvantage since they must wait until they can obtain the higher earning currency. The
interest rate disadvantage is offset by the forward discount. In the forward market, currencies are bought and
sold for future delivery, usually a month, three months, six months, or even more from the date of
transaction.

9.3. Steps to manage foreign exchange risk:

Hedge
Identity and Develop Exposure Evaluate and
Measure FX bank’s policy using Trades adjust
1 exposure 2 3 and/or other 4 periodically
Techniques

46
9.4. Format of Forward Contract of Bank of India:
Issue/cancellation of Forward Purchase/Sale Contract/
A/c. Ram’s Assorted Cold Storage Ltd.
Kindly issue/cancel a Forward Purchase/Sale contract in the name of captioned customer as per details given
below.
Please Tick
To be booked
On-past performance basis [×] or on basis of underlying contract [√]
For
a) Exporter – SME / Other (tick any one)
b) Importer - SME / Other (tick any one)
c) Resident Individuals
d) Foreign Institutional Investor
e) Non Resident Individuals
f) Foreign Direct Investment into India
Details of the Contract
1 Foreign Currency and Amount US $ 108736.88 US $ 100600.00 US $ 89100.00
2 Period of document delivery 01.1.2018 to 25.07.2018 to 10.08.2018 to
31.10.2018 24.08.2018 07.09.2018
3 Usance Period LC LC LC
4 Period of currency delivery 11.08.2018 to 11.07.2018 to 21.07.2018 to
10.09.2018 10.08.2018 20.08.2018
5 Rate 69.16 68.64 68.76
5a Booking No. 20-5001544 20-5001551 20-5001555

1. Credit Exposure Limit Rs. 2.23 Crore, Asst. Gen. Manager

2. Available Limit Rs. 1.26 Crore
3. Sanction Date

6) If for exporter/Importer on past performance basis (All answers from point 3 to 7 should be YES)
Undertaking is taken from the customer that documentary evidence would be
produced before maturity of the contract that the maturity of the contract would not
3. YES
exceed the maturity of the underlying transaction. Declaration regarding amounts
of contracts booked with other banks/branches has been obtained.
Where outstanding forward contracts are higher than 50% of the limits. CA
4. YES
certificate as required by RBI/Bank’s policy has been obtained.
Exposure calculated is based on performance up-to the average of previous three
5. YES
years turnover or previous year’s turnover, whichever is higher.
Where contracts are booked in excess of 75% of eligible limit, the same is on
6. YES
deliverable basis and informed to the customer.
7. The amount of overdue bills, if any, is not in excess of 10% of turnover. YES
The value of the underlying is ascertainable /contract booked on the basis of
8. YES
reasonable estimate (cross out whichever is not applicable).

47
For exporter/ importer on basis of Underlying Contract (All Answer from point 8 to 10 should be YES).
1. Commodity Frozen shrimps
2. Quantity 1400 M/Cs each
1. OCEAN WORLD VENTURE,
HOUSTON, USA
2. LIMSON TRADING INC, NJ,
3. Name of the Buyer/Seller
USA.
3. SUNGWON DISTRIBUTOR,
LLC, USA.
18235(017), 42732 and 6385
5. Firm Order No.
respectively
6. L/C No. ---
7. FIBC/FBC NO. ---
We have scrutinized the documentary evidence as
stated above and satisfied with the genuineness of the
8. YES
transaction for which forward cover is applied for and
the above details are duly recorded in our books.
The details of the forward contract will be endorsed on
9. YES
the underlying, original of which is in our possession.
The maturity of the contract does not exceed the
10. YES
maturity of the underlying transaction

3. We certify that the transaction is in conformity with FEMA2000/RBI guidelines issued from time to
time.
4. We have noted that contract will be automatically cancelled on 3rd working day from the date of
maturity and that you will send us a debit note for overdue interest/exchange difference/swap cost.
5. We confirm that we will send intimation in writing to our customer calling for cancellation
instructions well in advance of the due date.
6. We also confirm that if no instruction for cancellation is received within 3days from the date of
maturity, we will send an intimation informing our customer that the contract will be cancelled on 3 rd
day from the date of maturity.
7. Where contracts are booked for resident individuals, FIIs, NRIs, etc. the relevant RBI guidelines have
been followed.
8. We certify and confirm having obtained a certificate from concurrent auditors every month regarding
100% verification/ compliance of RBI guidelines on booking of forward contracts and the copy of
such certificate is held in our record.

*
48
9.5. Chapter Summary:

Exposure management is critical for multinational corporations or businesses involved with exporting or
importing goods. Techniques for exposure management minimize the risks associated with currency
fluctuations when converting currencies. A commercial bank uses foreign currency derivatives to hedge
foreign exchange risk. In Bank of India, Forward contracts are the most widely and most frequently used
external technique of managing currency exposure among all categories of derivatives.

49
10.1. Findings:

 According to the data collected and reports prepared, there is a decreasing trend in the amount of
exports from 2015 to 2018.
 There is a rise in the amount of import from the year 2015-16 to 2016-17 and then eventually there is
a little fall in the year 2017-2018.
 The amount of outward remittances is more as compared to the inward remittances for the given
three years of Bank of India whereas, for each subsequent year there is a decrease in the amount of
outward remittances as compared to the base year.
 Of the various types of foreign exchange risks exchange rate risk, interest rate risk, settlement risks
are the major risks to the bankers.
 In Bank of India, Forward contracts are the most widely and most frequently used external technique
of managing currency exposure among all categories of derivatives.
 Usage of Options and Swaps is less as compared to forward contracts.
 Money market hedge and recently introduced currency futures is the least preferred external
exposure management instrument among the organization.

10.2. Conclusion:

The foreign trading variables currency options, forward contracts and options are very crucial in determining
financial performance of commercial banks. Although forex may be confusing in today’s global market
place, there is a critical need for almost everyone to understand foreign exchange. As the world shrinks,
there is an ever increasing likelihood that we will be required to address the risks associated with the fact
that there are different currencies used all around the world and that these currencies will have an immediate
impact on our world. We must be able to evaluate the effects and actively respond to changes in foreign
exchanges rates with respect to our consumption decisions, investments portfolios, business plans,
government policies and other decisions. In fact forex may cost you everything that you own. The only way
to win the forex trading is the old fashioned way i.e. the hard work and solid understanding in the market for
which one has to be clue about global marketing, developments, trends in worldwide as well as economic
indicators of different countries. These include GDP growth, fiscal and monetary policies, inflows and
outflows of the currency, local stock market performances and interest rates. Volatility of the Indian foreign
exchange market is on rise due to increase in the cross-border trade, huge capital flow in and out and
integration of the international financial market.

>> SOME PEOPLE SAY FOREX TRADING IS DANGEROUS,

I SAY INVESTING WITH LACK OF KNOWLEDGE IS DANGEROUS <<

50
10.3. Suggestions:
 Hedging should be considered as a corporate strategy. The wide choice for the hedging techniques in
the market and analytical basis for the use of hedging tool will definitely improve the market
efficiency.
 The recent introduction of ‘currency futures’ in Indian foreign exchange market is a step towards the
market diversification as regards the use of hedging tools.
 The bank can use Options and Swaps as risk management techniques to minimize the risks
associated with foreign exchange.

51
BIBLIOGRAPHY:

1. https://www.bankofindia.co.in/
2. https://www.investopedia.com/terms/f/foreign-remittance.asp
3. http://shodhganga.inflibnet.ac.in/bitstream/10603/15887/13/13_chapter%206.pdf
4. http://www.yourarticlelibrary.com/macro-economics/balance-of-payment/main-types-of-foreign
exchange-rates/30435
5. www.thebalance.com
6. www.investopedia.com
7. www.globalprime.com
8. www.yourarticlelibrary.com
9. www.businessmanagementideas.com
10. https://www.investopedia.com/terms/f/foreignexchangerisk.asp
11. www.risk.ne
12. https://www.bankofindia.co.in/english/ListCardRate.aspx
Magazines:
1. Business Today
2. Money Life
3. Money Today
Articles Used:
1.http://erepository.uonbi.ac.ke/bitstream/handle/11295/74933/Limo_The%20Effect%20Of%20Foreign%20Exchang
e%20Risk%20Management%20On%20The%20Financial%20Performance%20Of%20Commercial%20Banks%20In%20
Kenya.pdf?sequence=3

2. https://core.ac.uk/download/pdf/61800493.pdf

3. https://www.cpaaustralia.com.au/~/media/corporate/allfiles/document/professional-
resources/business/managing-foreign-exchange-risk.pdf?la=en

4. https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Exchange-Rate-Risk-Measurement-and-
Management-Issues-and-Approaches-for-Firms-20120

5. https://www.imf.org/external/pubs/ft/wp/2006/wp06255.pdf

6.http://erepository.uonbi.ac.ke/bitstream/handle/11295/21815/Ubindi_A%20Survey%20of%20Foreign%20Exchang
e%20Risk%20Management%20Practices%20by%20Forex%20Bureaus%20in%20Kenya..pdf?sequence=3&isAllowed=
y

52
TABLE 9:

LIST OF BANKS WITH THEIR NOSTRO ACCOUNTS WITH MUMBAI OVERSEAS BRANCH

NOSTRO
SL BANK'S
ACCOUNT BANK NAME CURRENCY CURRENCY DETAILS
NO. SHORT FORM
NO

1 5 ANZ BANKING GROUP MELBOURNE AUD AUSTRALIAN DOLLAR ANZBAN MEL

2 16 COMMONWEALTH BKOF AUSTRALIA AUD AUSTRALIAN DOLLAR CWEALT SYD

3 6 TORONTO DOMINION BANK TORONTO CAD CANADIAN DOLLAR TORONT TOR

4 7 UNION BANK OF SWITZERLAND ZURICH CHF SWISS FRANC UBSZU ZUR

5 8 DN DANSKE BANK COPENHAGEN DKK DANISH KRONE DENSK COP

6 9 COMMERZ BANK DUSSELDORF EUR EURO COMRZ DUS

7 36 UNICREDITO ITALIANO MILANO EUR EURO UNICRE MIL

STANDARD CHARTERED BANK

8 35 FRANKFURT EUR EURO STCHB FRA

9 27 BANK OF INDIA PARIS EURO ACCOUNT EUR EURO BOI PAR

GREAT BRITAIN
10 15 NATIONAL WESTMINISTER BANK PLC GBP POUND NATWES LON

GREAT BRITAIN
11 10 BANK OF INDIA LONDON GBP GBP POUND BOI LON

12 11 BANK OF INDIA HONG KONG HKD HONG KONG DOLLAR BOI HOK

13 12 BANK OF INDIA TOKYO JPY JAPANESE YEN BOI TOK

14 37 HSBC BERHAD MALAYSIA MYR MALAYSIAN RINGGIT HSBCMY KUA

15 30 DEN NORSKE BANK OSLO NOK NORWEGIAN KRONE DNORSK OSL

NEWZEALAND
16 24 BANK OF NEWZEALAND WELLINGTON NZD DOLLAR BONZLD WELL

17 13 SKANDINAVISKA ENSKILDA BANKEN SEK SWEDISH KRONA SKANDI STKM

18 31 BANK OF INDIA SINGAPORE SGD SINGAPORE DOLLAR BOI SIN

19 4 CITI BANK NA NEW YORK USD US DOLLAR CITI NY

ASIAN CURRENCY
20 45 BANK OF CEYLON (SRI LANKA) ACU UNIT BCEYLK

21 34 J P MORGAN CHASE NY USD US DOLLAR JPCHASE NY

22 26 BANK OF INDIA NEW YORK ACCOUNT USD US DOLLAR BOI NY

23 50 BANK OF INDIA NAIROBI KES KENYAN SHILLING BOI NAR

24 14 DEUSTCHE BANK TRUST CO NEW YORK USD US DOLLAR DBT NY

25 74 BANK OF NEW YORK, NEW YORK USD US DOLLAR BONY NY

26 75 WELLS FARGO BANK, N.A. USD US DOLLAR WELLS NY

STANDARD CHARTERED BANK, NEW

27 83 YORK USD US DOLLAR STCHB NY

NEWZEALAND
28 89 BANK OF INDIA, NEW ZEALAND NZD DOLLAR BOI NZ

29 90 DEUSTCHE BANK, FRANFURT EUR EURO DEUT FF

53
TABLE 10:
SWIFT OUTWARD MESSAGE TYPES

SWIFT CODES MESSAGE

MT 102- Multiple Customer Credit Transfer
MT 103- Single Customer Credit Transfer
MT 110- Advice of Cheque/Cheques
MT 111- Request for Stop Payment of A Cheque
MT 191- Request for Payment of Charges, Interest and Other Expenses
MT 202- General Financial Institution Transfer
MT 400- Advice of Payment
MT 410- Acknowledgement
MT 412- Advice of Acceptance
MT 416- Advice of Non-Payment & Sol; Non-Acceptance
MT 420- Tracer
MT 422- Advice of Fate and Request for Instructions
MT 430- Amendment of Instructions
MT 491- Request for Payment of Charges, Interest and Other Expenses
MT 700- Issue of a Documentary Credit
MT 705- Pre-Advice of a Documentary Credit
MT 707- Amendment to a Documentary Credit
MT 710/711- Advice of a Third Bank’s Documentary Credit
MT 720/722- Transfer of a Documentary Credit
MT 730- Acknowledgement
MT 732- Advice of Discharge
MT 734- Advice of Refusal
MT 740- Authorisation to Reimburse
MT 742- Reimbursement Claim
MT 747- Amendment to an Authorisation to Reimburse
MT 750- Advice of Discrepancy
MT 752- Authorisation to Pay, Accept or Negotiate
MT 754- Advice of Payment & Sol; Acceptance & Sol; Negotiation
MT 756- Advice of Reimbursement or Payment
MT 760- Guarantee
MT 767- Guarantee Amendment
MT 791- Request for Payment of Charges, Interest and Other Expenses
MT 900- Confirmation of Debit
MT 910- Confirmation of Credit
MT 950- Statement Message
MT 999- Free Format Message

54
TABLE 11:
NEW PURPOSE CODES FOR REPORTING FOREX TRANSACTIONS
A. PAYMENT PURPOSES

Gr. Purpose Group Name Purpose Description

No. Code
00 Capital Account S0001 Indian investment abroad -in equity capital (shares)
S0002 Indian investment abroad -in debt securities
S0003 Indian investment abroad -in branches & wholly owned
subsidiaries
S0004 Indian investment abroad -in subsidiaries and associates
S0005 Indian investment abroad -in real estate
S0006 Repatriation of Foreign Direct Investment in India- in equity
shares
S0007 Repatriation of Foreign Direct Investment in India- in debt
securities
S0008 Repatriation of Foreign Direct Investment in India- in real
estate
S0009 Repatriation of Foreign Portfolio Investment in India- in equity
shares
S0010 Repatriation of Foreign Portfolio Investment in India- in debt
securities
S0011 Loans extended to Non-Residents
S0012 Repayment of long & medium term loans with original
maturity above one year received from Non-Residents
S0013 Repayment of short term loans with original maturity upto one
year received from Non-Residents
S0014 Repatriation of Non-Resident Deposits (FCNRB/NRERA etc)
S0015 Repayment of loans & overdrafts taken by ADs on their own
account.
S0016 Sale of a foreign currency against another foreign currency
S0017 Purchase of intangible assets like patents, copyrights, trade
marks etc.
S0018 Other capital payments not included elsewhere
01 Imports S0101 Advance payment against imports
S0102 Payment towards imports- settlement of invoice
S0103 Imports by diplomatic missions
S0104 Intermediary trade
02 Transportation S0201 Payments for surplus freight/passenger fare by foreign shipping
companies operating in India.
S0202 Payment for operating expenses of Indian shipping companies
operating abroad.
S0203 Freight on imports – Shipping companies
S0204 Freight on exports – Shipping companies
S0205 Operational leasing (with crew) – Shipping companies
S0206 Booking of passages abroad – Shipping companies
S0207 Payments for surplus freight/passenger fare by foreign Airlines
companies operating in India.
S0208 Operating expenses of Indian Airlines companies operating
abroad
S0209 Freight on imports – Airlines companies
S0210 Freight on exports – Airlines companies
S0211 Operational leasing (with crew) – Airlines companies
S0212 Booking of passages abroad – Airlines companies
S0213 Payments on account of stevedoring, demurrage, port handling
charges etc.
55
Gr. Purpose Group Name Purpose Description
No. Code
03 Travel S0301 Remittance towards Business travel.
S0302 Travel under basic travel quota (BTQ)
S0303 Travel for pilgrimage
S0304 Travel for medical treatment
S0305 Travel for education (including fees, hostel expenses etc.)
S0306 Other travel (international credit cards)
04 Communication S0401 Postal services
Services
S0402 Courier services
S0403 Telecommunication services
S0404 Satellite services
05 Construction Services S0501 Construction of projects abroad by Indian companies
including import of goods at project site
S0502 Payments for cost of construction etc. of projects executed by
foreign companies in India.
06 Insurance Services S0601 Payments for Life insurance premium
S0602 Freight insurance – relating to import & export of goods
S0603 Other general insurance premium
S0604 Reinsurance premium
S0605 Auxiliary services (commission on insurance)
S0606 Settlement of claims
07 Financial Services S0701 Financial intermediation except investment banking – Bank
charges, collection charges, LC charges, cancellation of
forward contracts, commission on financial leasing etc.
S0702 Investment banking – brokerage, under writing commission
etc.
S0703 Auxiliary services – charges on operation & regulatory fees,
custodial services, depository services etc.
08 Computer & S0801 Hardware consultancy/implementation
Information Services
S0802 Software consultancy / implementation
S0803 Data base, data processing charges
S0804 Repair and maintenance of computer and software
S0805 News agency services
S0806 Other information services- Subscription to newspapers,
periodicals
09 Royalties & License S0901 Franchises services – patents, copyrights, trade marks,
Fees industrial processes, franchises etc.
S0902 Payment for use, through licensing arrangements, of produced
originals or prototypes (such as manuscripts and films)
10 Other Business S1001 Merchanting services –net payments (from Sale & purchase of
Services goods without crossing the border)
S1002 Trade related services – commission on exports / imports
S1003 Operational leasing services (other than financial leasing)
without operating crew, including charter hire
S1004 Legal services
S1005 Accounting, auditing, book keeping and tax consulting
services
S1006 Business and management consultancy and public relations
services
S1007 Advertising, trade fair, market research and public opinion
polling service
S1008 Research & Development services
S1009 Architectural, engineering and other technical services
56
Gr. Purpose Group Name Purpose Description
No. Code
S1010 Agricultural, mining and on–site processing services – protection
against insects & disease, increasing of harvest yields, forestry
services, mining services like analysis of ores etc.
S1011 Payments for maintenance of offices abroad
S1012 Distribution Services
S1013 Environmental Services
S1019 Other services not included elsewhere
11 Personal, Cultural & S1101 Audio-visual and related services – services and associated fees
Recreational services related to production of motion pictures, rentals, fees received
by actors, directors, producers and fees for distribution
rights.
S1102 Personal, cultural services such as those related to museums,
libraries, archives and sporting activities; fees for
correspondence courses abroad.
12 Govt. not included S1201 Maintenance of Indian embassies abroad
elsewhere (G.n.i.e.)
S1202 Remittances by foreign embassies in India
13 Transfers S1301 Remittance by non-residents towards family maintenance and
savings
S1302 Remittance towards personal gifts and donations
S1303 Remittance towards donations to religious and charitable
institutions abroad
S1304 Remittance towards grants and donations to other
governments and charitable institutions established by the
governments.
S1305 Contributions/donations by the Government to international
institutions
S1306 Remittance towards payment / refund of taxes.
14 Income S1401 Compensation of employees
S1402 Remittance towards interest on Non-Resident deposits
(FCNRB/NRERA/ NRNRD /NRSR etc.)
S1403 Remittance towards interest on loans from Non-Residents
(ST/MT/LT loans)
S1404 Remittance of interest on debt securities –debentures / bonds
/FRNs etc.
S1405 Remittance towards interest payment by ADs on their own
account (to VOSTRO a/c holders or the OD on NOSTRO
a/c.)
S1406 Repatriation of profits
S1407 Payment / repatriation of dividends
15 Others S1501 Refunds / rebates / reduction in invoice value on account of
exports
S1502 Reversal of wrong entries, refunds of amount remitted for
non-exports
S1503 Payments by residents for international bidding
S1504 Notional sales when export bills negotiated/ purchased/
discounted are dishonored/ crystallized/ cancelled and reversed
from suspense account

57
 NEW PURPOSE CODES FOR REPORTING FOREX TRANSACTIONS
B. RECEIPT PURPOSES

Gr. Purpose Group Name Purpose Description

No. Code
00 Capital Account P0001 Repatriation of Indian investment abroad in equity capital
(shares)
P0002 Repatriation of Indian investment abroad in debt securities.
P0003 Repatriation of Indian investment abroad in branches &
wholly owned subsidiaries
P0004 Repatriation of Indian investment abroad in subsidiaries
and associates
P0005 Repatriation of Indian investment abroad in real estate
P0006 Foreign direct investment in India in equity
P0007 Foreign direct investment in India in debt securities
P0008 Foreign direct investment in India in real estate
P0009 Foreign portfolio investment in India in equity shares
P0010 Foreign portfolio investment in India in debt securities
including debt funds
P0011 Repayment of loans extended to Non-Residents
P0012 Long & medium term loans with original maturity above one
year from Non-Residents to India
P0013 Short term loans with original maturity upto one year from
Non-Residents to India
P0014 Receipts o/a Non-Resident deposits (FCNRB/NRERA etc.)
ADs should report these even if funds are not “swapped” into
Rupees.
P0015 Loans & overdrafts taken by ADs on their own account. (Any
amount of loan credited to the NOSTRO account which
may not be swapped into Rupees should also be reported)
P0016 Purchase of a foreign currency against another currency.
P0017 Sale of intangible assets like patents, copyrights, trade marks
etc. by Indian companies
P0018 Other capital receipts not included elsewhere

01 Exports (of Goods) P0101 Value of export bills negotiated / purchased/discounted etc.
(covered under GR/PP/SOFTEX/EC copy of shipping bills
etc.)
P0102 Realisation of export bills (in respect of goods) sent on
collection (full invoice value)

P0103 Advance receipts against export contracts, which will be

covered later by GR/PP/SOFTEX/SDF
P0104 Receipts against export of goods not covered by the
GR/PP/SOFTEX/EC copy of shipping bill etc.
P0105 Export bills (in respect of goods) sent on collection.
P0106 Conversion of overdue export bills from NPD to collection
mode
P0107 Realisation of NPD export bills (full value of bill to be
reported)
02 Transportation P0201 Receipts of surplus freight/passenger fare by Indian
shipping companies operating abroad
P0202 Purchases on account of operating expenses of Foreign
shipping companies operating in India
P0205 Purchases on account of operational leasing (with crew) –
Shipping companies

58
Gr. Purpose Group Name Purpose Description
No. Code
P0207 Receipts of surplus freight/passenger fare by Indian Airlines
companies operating abroad.
P0208 Receipt on account of operating expenses of Foreign Airlines
companies operating in India
P0211 Purchases on account of operational leasing (with crew) –
Airlines companies
P0213 Receipts on account of other transportation services
(stevedoring, demurrage, port handling charges etc).
03 Travel P0301 Purchases towards travel (Includes purchases of foreign TCs,
currency notes etc over the counter, by hotels, hospitals,
Emporiums, Educational institutions etc. as well as amount
received by TT/SWIFT transfers or debit to Non-Resident
account).

P0308 FC surrendered by returning Indian tourists.

04 Communication P0401 Postal services
Services
P0402 Courier services
P0403 Telecommunication services
P0404 Satellite services
05 Construction Services P0501 Receipts for cost of construction of services projects in India
06 Insurance Services P0601 Receipts of life insurance premium
P0602 Receipts of freight insurance – relating to import & export of
goods
P0603 Receipts on account of other general insurance premium
P0604 Receipts of Reinsurance premium
P0605 Receipts on account of Auxiliary services (commission on
insurance)
P0606 Receipts on account of settlement of claims
07 Financial Services P0701 Financial intermediation except investment banking – Bank
charges, collection charges, LC charges, cancellation of
forward contracts, commission on financial leasing etc.
P0702 Investment banking – brokerage, under writing commission
etc.
P0703 Auxiliary services – charges on operation & regulatory fees,
custodial services, depository services etc.
08 Computer & P0801 Hardware consultancy/implementation
Information Services
P0802 Software consultancy/implementation (other than those
covered in SOFTEX form)
P0803 Data base, data processing charges
P0804 Repair and maintenance of computer and software
P0805 News agency services
P0806 Other information services- Subscription to newspapers,
periodicals, etc.
P0807 Off site Software Exports
09 Royalties & License P0901 Franchises services – patents,copy rights, trade marks,
Fees industrial processes, franchises etc.

P0902 Receipts for use, through licensing arrangements, of

produced originals or prototypes (such as manuscripts and
films)
10 Other Business P1001 Merchanting Services – net receipt (from sale and purchase of
Services goods without crossing the border).

59
Gr. Purpose Group Name Purpose Description
No. Code
P1002 Trade related services – Commission on exports/imports.
P1003 Operational leasing services (other than financial leasing and
without operating crew) including charter hire
P1004 Legal services
P1005 Accounting, auditing, book keeping and tax consulting
services
P1006 Business and management consultancy and public relations
services
P1007 Advertising, trade fair, market research and public opinion
polling services
P1008 Research & Development services
P1009 Architectural, engineering and other technical services
P1010 Agricultural, mining and on –site processing services –
protection against insects & disease, increasing of harvest
yields, forestry services, mining services like analysis of ores
etc.
P1011 Inward remittance for maintenance of offices in India
P1012 Distribution Services
P1013 Environmental Services
P1019 Other services not included elsewhere
11 Personal, Cultural & P1101 Audio-visual and related services – services and associated
Recreational services fees related to production of motion pictures, rentals, fees
received by actors, directors, producers and fees for
distribution rights.
P1102 Personal, cultural services such as those related to
museums, libraries, archives and sporting activities and fees
for correspondence courses of Indian Universities/Institutes
12 Govt. not included P1201 Maintenance of foreign embassies in India
elsewhere (G.n.i.e.)
P1203 Maintenance of international institutions such as offices of
IMF mission, World Bank, UNICEF etc. in India.
13 Transfers P1301 Inward remittance from Indian non-residents towards family
maintenance and savings
P1302 Personal gifts and donations
P1303 Donations to religious and charitable institutions in India
P1304 Grants and donations to governments and charitable
institutions established by the governments
P1306 Receipts / Refund of taxes
14 Income P1401 Compensation of employees
P1403 Inward remittance towards interest on loans extended to non-
residents (ST/MT/LT loans)
P1404 Inward remittance of interest on debt securities –debentures /
bonds /FRNs etc.
P1405 Inward remittance towards interest receipts of ADs on their
own account (on investments.)
P1406 Repatriation of profits to India
P1407 Receipt of dividends by Indians
15 Others P1501 Refunds / rebates on account of imports
P1502 Reversal of wrong entries, refunds of amount remitted for
non-imports
P1503 Remittances (receipts) by residents under international
bidding process.

60
 NEW PURPOSE CODES FOR REPORTING FOR FOREX TRANSACTIONS
C. COVER PAGE PURPOSES

Gr. Purpose Group Name Purpose Description

No. Code
99 Cover Page Total P0091 Purchase from Reserve Bank of India (Currency-wise Totals)
P0092 Purchase from other ADs in India (Currency-wise Totals)
Purchase from Overseas banks & correspondents (Currency-
P0093 wise Totals)
debit from the vostro a/c of overseas bank or correspondents
P0094 (Country-wise Totals)
P0095 Aggregate Purchases at Branches (Currency-wise Totals)
Exports (Totals) {N/P/D + Collection bills Realised during
Fortnight + Advance received during Fortnight} (Purchases
P0100 from Public against exports (Currency-wise Totals)}
Purchases from Public against third country exports (Currency-
P0144 wise Totals)
P1590 receipts below Rs. 5,00,000 (Currency-wise Totals)
P1591 Non-Exports equivalent & above Rs. 5,00,000
S0091 Sales to Reserve Bank of India (Currency-wise Totals)
S0092 Sales to other ADs in India (Currency-wise Totals)
Sales to Overseas banks & correspondents (Currency-wise
S0093 Totals)
credit to the vostro a/c of overseas bank or correspondents
S0094 (Country-wise Totals)
S0095 Aggregate Sales at Branches (Currency-wise Totals)
Sales to Public against Imports into other countries (Currency-
S0144 wise Totals)
S0190 Imports below Rs. 500000 (Currency-wise Totals)
S0191 Imports equivalent & above Rs. 5 Lakhs (Currency-wise Totals)
S1590 Non-Imports payment below Rs 500000 (Currency-wise Totals)
Non-Imports equivalent & above Rs. 5 Lakhs (Currency-wise
S1591 Totals)
Opening Balance (Debit Balance in Mirror/Debit Balance in
Cover Page Balance P2088 Vostro)
Closing Balance (Debit Balance in Mirror/Debit Balance in
P2199 Vostro)
Opening Balance (Credit Balance in Mirror/Credit Balance in
S2088 Vostro)
Closing Balance (Credit Balance in Mirror/Credit Balance in
S2199 Vostro)

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ABBREVIATIONS AND SYMBOLS USED:
FX-Forex or Foreign Exchange
RBI-Reserve Bank of India
CBI-Central Bank of India
OTC-Over the Counter
BoI/BOI-Bank of India
ADs-Authorised Dealers
FFMC-Full Fledged Money Changer
RMC-Restricted Money Changer
SBI-State Bank of India
HSBC-Hongkong and Shanghai Banking Corporation
U.K.-United Kingdom
USA-United States of America
SWIFT-Society for Worldwide Inter Bank Financial Telecommunications
IPO-Initial Public Offerings
PSU-Public Sector Undertakings
LC-Letter of Credit
FEMA-Foreign Exchange Management Act
FEDAI-Foreign Exchange Dealers’ Association of India
ICC-International Chamber of Commerce
URC-Uniform Rules for Collections
NRIs-Non Resident Indians
NRE-Non-Resident External Accounts
HUF-Hindu Undivided Family
FCNR- Foreign Currency Non-resident Accounts
TT-Telegraphic Transfer
INCOTERMS-International Commercial Terms
MTOs-Multi-model Transport Operators
IDRBT-Institute for Development & Research in Banking Technology
G10-Group of 10: 10 wealthiest International Monetary Fund member countries agreed to participate in the
(GAB) General Agreements to Borrow.
USD-United States Dollar ($)
AUD-Australian Dollar ($)
EURO-European Currency (€)
PKR-Pakistani Rupee (₨)
GBP-Great British Pounds (£)
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NPA-Non-Performing Assets
FY-Financial Year or Fiscal Year
GDP-Gross Domestic Product
VAT-Value Added Tax
FCA- Foreign Currency Assets
IRA-Investment Revaluation Account
CGRA-Currency and Gold Revaluation Account
CD-Current Deposit
SB-Savings Bank
HO-Head Office

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