terms used in forex

1. Terms used in Foreign Exchange

2. Repo/ready forward: [opp – reverse repo] Means of funding by selling a security sold on SPOT basis and repurchasing on forward basis. Currency risk: Risk of value of an investment in some other country’s currency coming down in terms of domestic currency

3. Country risk: Risk of not being able to invest at will due to countries changing attitudes on foreign investment/ war revolution,… Tariff: Tax levied on goods traded internationally ->Import duty -on import (to support domestic production) -> Export duty – to discourage exports. (less frequently imposed) -> Transit duty – on goods passing through the country

4. Ad valorem duty: % of value of goods Specific valorem duty: flat duty based on number of units, not value of goods. BOP: “ A systematic record of all economic transactions between residents of a given country and the rest of the world, carried out over a particular period.(usually a year) ->eco, transactions include ‘invisible transactions’ like- banking, insurance, transport services

5. BOT: Merchandise imports and exports (visible trade - follows Double entry system) Transaction↑ purchasing power – exports – credit (capital inflow) Transaction↓ purchasing power – imports - debit (capital outflow/lending)

6. Exchange rate: rate at which conversion takes place. Value of one currency in terms of another. International monetary system: movement in which each exchange rate over a period of time involves, 1. conversion of currencies to one another 2. transfer of funds across nations for - i. International trade in goods and services. ii. Liquidation/ acquiring of financial assets. iii. Creation and repayment of individual credit.

8. Forwards : a contract (obligation) between two parties, to exchange currency or goods,at some specific date in the future

9. Options : contracts that give option to buy or sell underlying asset at a particular price on or before a specified period

10. The holder has a right and not obligation

12. Put option : Right to sell an underlying asset at a specified price, on or before a particular time by paying a premiumOption writer Bearish : seller (usually writes) Bullish : buyer

13. Types of option European style option :exercised only on expiry date/ maturity date American style option :at any time before or on due date

14. Swaps :simultaneous purchase and sale of foreign exchange for two different value dates. Happens between banks, govts, and business Arbitrate : buying currency low and selling high at the same time LIBOR : London Interbank Operating Rate of Interest

16. Reason for integration? Technology :speed, reduced cost, co- production of activities Inflation & interest rates : changes in different instruments Development of new financial instruments like euro dollar market, interest rate swaps, currency swap, future and forward contract,.. Liberalisation of regulations in financial markets Increased foreign ownership

17. LERMS : (Liberalised Exchange Rate Management System) After the liberalisation in 1992, dual exchange system was followed in India. One fixed by RBI and other by market. It was the beginning of moving towards market oriented rate 40/% of the amount was to be converted at RBI rate and the rest by market rate