(i) Forex Business : Banks buy Currencies and Sell.
Principle is BUY LOW AND SELL HIGH .
Difference between buy rate and sell rate is known as spread and is also known as profit ( provided buy > sell ) .
For example - Bank can buy US dollar at Rs 65 from an exporter and sell the same at Rs 66 to an importer.
Rs 1 will be the profit of the bank. Now Suppose Bank has bought 10 USD and could sell only 8 dollars, the 2 dollar which will be left with the Bank is known as open position.
In this case Bank will be in the position known as overbought, similarly if Bank had bought only 10 USD and entered into a contract to sell 12 USD bank would be in a position called oversold.
Banks generally try to square off their position by buying equal and selling equal amount of currency so that at the end of the day it is not left with any open position so as to avoid exchange risk.
TREASURY PRODUCTS : Treasuries operate in various markets, namely foreign exchange market, money market, securities market and also deal in various derivatives and structured products. In this we will learn about all those products: (1) Products of Foreign exchange market: It is a virtual market with no physical boundaries and operates 24 hours. Principle of this market is buy currency at low rate and sells at high rates. (a) Spot Trades: Spot means settlement takes place two working days from the trade date i.e. on the third day.
Currency can also be bought and sold, with settlement on the same day i.e. today (TOD) or, on the next day i.e. tomorrow (TOM).
All the rates printed are for spot trade unless otherwise mentioned.
(b) Forward rates: While spot refers to current transaction, forwards refer to purchase and sale of currency on future date.
Forward exchange rates are arrived at on the basis of interest rate differentials of two currencies, added or deducted from spot exchange rate.
The interest rate differential is added to the spot rate for low interest yielding currency (representing forward premium) and deducted from the spot rate for high interest yielding currency (representing forward discount).
(c) Investment of foreign exchange surpluses: Forex surplus arise out (i) profits from treasury operations (ii) profits from overseas branches (iii) FOREX borrowings from domestic/overseas markets (iv) Foreign currency and deposits from customers (v) Balances in Nostro A/c, EEFC etc. These surpluses can be lent to domestic and global banks for a period not exceeding 1 year or can be invested in overseas market in short term instrument or can be deposited in Nostro Accounts.
(d) Loans and advances: Banks can give loans in foreign currency in form of FCNR loans, PCFC and discount of foreign currency bills.
(e) Re-discounting of foreign currency bills: It is an inter-bank advance where one bank re discounts the foreign currency bill discounted by another bank.
(2) Money Market Products:
(a) Call money, notice money and term money: The market is for raising and deploying short term resources not exceeding one year. Call money is for placement of funds for 1 day. Rate used for this is Overnight Mumbai Inter-bank offered rate (O/N MIBOR). Notice money is for period not exceeding 14 days and term money is for period more than 14 days but not exceeding one year. (b) Treasury bills: They are short term money market instruments issued by GOI through RBI for maturity of 91-day, 182 day and 364-day. There are no treasury bills issued by state governments. Minimum amount is Rs 25,00 and in multiples of Rs 25,000. T-Bills are issued at discount and redeemed at par. For example , T Bill of 91 day will be available for purchase at 99.26 yielding interest at 5.16% p.a. and after 91 days it can be redeemed for Rs 100. They are held in SGL account which is maintained with RBI by each banks. Secondary market of T- bills takes place through Clearing Corporation of India Ltd (CCIL).