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<ul><li><p> Sure Success Series- CAIIB- Bank Financial Management -Vaibhav Awasthi Page 1 </p><p> Sure Success Series </p><p>Bank </p><p>Financial Management </p><p>( For CAIIB Examination) </p><p> 3</p><p>rd Edition By: Vaibhav Awasthi </p></li><li><p> Sure Success Series- CAIIB- Bank Financial Management -Vaibhav Awasthi Page 2 </p><p>The content of this book has been developed keeping in view courseware for </p><p>the Second paper of Bank Financial Management of CAIIB. </p><p>An attempt has been made to cover fully the syllabus prescribed for each </p><p>module/subject and the presentation of topics may not always be in the same </p><p>sequence as given in the syllabus. Candidates are also expected to take note of </p><p>all the latest developments relating to the subjects covered in the syllabus by </p><p>referring to RBI circulars, financial papers, economic journals, latest books and </p><p>publications in the subjects concerned. </p><p>Although due care has been taken in publishing this study material, yet the </p><p>possibility of errors, omissions and/or discrepancies cannot be ruled out. </p><p>We welcome suggestion for improving the book and its contents. You may write </p><p>back to us at </p><p>About the Author: </p><p>Vaibhav Awasthi,is a professional banker and has experience of 11 years </p><p>in Banking. He has done his graduation from Kanpur University and MBA </p><p>(Finance) from Delhi. He also holds the distinction of being part of maiden </p><p>batch of Certified Banking Compliance Professional conducted by IIBF </p><p>&amp; ICSI. </p><p>He has been mentoring students for JAIIB/CAIIB since last 8 years and </p><p>presently works as Senior Manager with a leading Public Sector Bank. He </p><p>can be reached at </p><p>All rights reserved. No part of this publication may be reproduced or transmitted, in any form or by </p><p>any means, without permission. Any person who does any unauthorized act in relation to this </p><p>publication may be liable to criminal proceedings and civil claim for damages. </p><p>This book is meant for educational and learning purpose. The author of this book has taken all reasonable care to ensure that the </p><p>contents of the book do not violate any existing copyright or other intellectual property rights of any person in any manner </p><p>whatsoever. </p></li><li><p> Sure Success Series- CAIIB- Bank Financial Management -Vaibhav Awasthi Page 3 </p><p> To the thought </p><p>We all live under the same sky, but we all don't have the same horizon </p></li><li><p> Sure Success Series- CAIIB- Bank Financial Management -Vaibhav Awasthi Page 4 </p><p> Preface Dear Students, </p><p>Bank Financial Management is the second paper of CAIIB exam. Typically this is considered </p><p>as the toughest paper amongst all the three paper of CAIIB because of the numerical portion </p><p>which often occupy as much as 60% of the question paper. </p><p>The subject is divided into four module and questions are evenly asked from all the modules. </p><p>Thus while preparing students must not ignore any module. </p><p>Having said that, Module B, C &amp; D are inter related and having understanding of one module </p><p>is necessary for progressing to another. </p><p>Aim of BFM subject is to enable student to have high level of understanding of how banks </p><p>operate on Macro level, how funds are managed, how capital is arranged and managed and </p><p>how treasury operates and helps the bank in making profits. </p><p>When students take up this subject, they are worried about the numerical and how they will </p><p>solve it. We assure you that numerical asked in BFM are of very basic nature and little </p><p>understanding will make sure that you not only crack but enjoy the numerical part. </p><p>The book has been written based on our experience about prior year question papers. We </p><p>have tried to keep the book concise and most relevant by explaining all the important points </p><p>chapter wise along with case studies and numerical. </p><p>The aim of our Sure Success Series- is to make sure that students are able to finish the </p><p>course in minimum possible time. </p><p>To boost their preparation students may stay in touch with us by visiting our website </p><p> They can also join us on facebook for regular updates and questions </p><p>We wish you all the best for your exams. </p></li><li><p> Sure Success Series- CAIIB- Bank Financial Management -Vaibhav Awasthi Page 5 </p><p>Module A </p><p>International Banking </p><p> What to Focus in this module Module A is based on Foreign exchange. Students are expected to know </p><p>various facilities available to NRIs, various kinds of deposits like NRE, NRO, </p><p>FCNR along with details of foreign exchange which can be remitted. </p><p>Another important area to be focussed is foreign trade and role of LC in it. </p><p>Students should understand in deep, concept of LC and various articles </p><p>governing it </p><p>Foreign trade means export and import. Export requires funds which are </p><p>granted in the form of pre shipment and post shipment finance. Students should </p><p>understand various financial facilities like PCFC, PSFC, etc. which can be </p><p>given. Import involves giving away of valuable foreign exchange. There are </p><p>various guidelines on release of funds and how to monitor it. Students should </p><p>be aware of it. </p><p>Finally Forex numerical. They essentially require calculation of correct rate to </p><p>be quoted to export and import customer for various kind of transactions- </p><p>spot/forward. We have covered various types of numerical calculation to give </p><p>student a clear picture of how to calculate the various rates. </p></li><li><p> Sure Success Series- CAIIB- Bank Financial Management -Vaibhav Awasthi Page 6 </p><p>Foreign Exchange Management Act (FEMA), 1999, (Section 2) defines foreign exchange as: </p><p>"Foreign Exchange means foreign currency, and includes: </p><p>(i) All deposits, credits and balances payable in foreign currency, and any drafts, traveler's </p><p>cheques, letters of credit and bills of exchange, expressed or drawn in Indian currency and </p><p>payable in any foreign currency, </p><p>(ii) Any instrument payable at the option of the drawee or holder, thereof or any other party </p><p>thereto, either in Indian currency or in foreign currency, or partly in one and partly in the other." </p><p>Thus, broadly speaking, foreign exchange is all claims payable abroad, whether consisting </p><p>funds held in foreign currency with banks abroad or bills, checks payable abroad. </p><p>Major participants of forex markets are: </p><p>(i) Central Banks </p><p>(ii) Commercial Banks </p><p>(iii) Investment Funds/Banks </p><p>(iv) Forex Brokers </p><p>(v) Corporations </p><p>(vi) Individuals </p><p>Major Factors which affect exchange rates are: </p><p>(1) Fundamental reasons- relate to general economic condition and include balance of </p><p>payment, interest rates, economic growth, political conditions etc. </p><p>(2) Technical reasons: Capital moves from low yielding currency to high yielding currency </p><p>(3) Speculation </p><p>Exchange rate mechanism: The delivery of FX deals can be settled in one or more of the </p><p>following ways: </p><p>Ready or Cash: Settlement of funds takes place on the same day (date of deal), </p><p>Tom: Settlement of funds takes place on the next working day of the date of deal </p><p>Spot: Settlement of funds takes place on the second working day after/following the date of </p><p>Contract/deal. </p><p>Forward Delivery of funds takes place on any day after Spot date. </p><p>Forward rate = Spot rate + Premium (or - Discount). </p><p>If the value of the currency is more than that being quoted for Spot, then it is said to be at a </p><p>Premium, while if the currency is cheaper at a later date than spot, than it is called at a </p><p>Discount </p><p>The forward price of a currency against another can be worked out with the following factors: </p><p>(i) Spot price of the currencies involved. </p><p>(ii) The interest rate differentials for the currencies. </p><p>(iii) The term, i.e., the future period for which the price is worked out </p><p>Unit-1 Exchange Rates and Forex Business </p></li><li><p> Sure Success Series- CAIIB- Bank Financial Management -Vaibhav Awasthi Page 7 </p><p>Direct and Indirect Quotes </p><p>In direct quotes, the local currency is variable, say as in India, 1 USD = Rs 48.10. The rates </p><p>are called direct, as the rupee cost of foreign currency is known directly. These quotes are also </p><p>called Home Currency or Price Quotations. On the other hand, under indirect method, the local </p><p>currency remains fixed, while the number of units of foreign currency varies. For example, Rs </p><p>100 = 2.05 USD </p><p>Cross Rates When we deal in a market where rates for a particular currency pair are not </p><p>directly available, the price for the said currency pair is then obtained indirectly with the help of </p><p>cross rate mechanism </p><p>Fixed vs. Floating Rates </p><p>The fixed exchange rate is the official rate set by the monetary authorities for one or more </p><p>currencies. It is usually pegged to one or more currencies. Under floating exchange rate, the </p><p>value of the currency is decided by supply and demand factors for a particular currency </p><p>Bid and Offered Rates </p><p>The buying rates and selling rates are also referred to as bid and offered rates </p><p> RBI/FEDAI GUIDELINES </p><p>Authorised Person - Category I: Authorised Dealer Banks, Financial Institutions, and other </p><p>entities allowed to handle all types of foreign exchange transactions. (Earlier known as </p><p>Authorised dealers). </p><p>Authorised Person - Category II: Money changers, allowed to undertake sale/purchase of </p><p>foreign currency notes, travellers cheques, as also handle foreign exchange transactions </p><p>relating to remittance facilities allowed to residents, like Travel abroad, studies abroad, medical </p><p>needs, gifts, donations, etc. (Earlier known as Full fledged Money Changers-FFMCs). </p><p>Authorised Person - Category III: Entities allowed to undertake only purchase of foreign </p><p>currency notes and traveller's cheques, (Earlier these entities known as Restricted Money </p><p>Changers-RMCs) </p><p>Foreign Exchange Dealers Association of India. FEDAl, is a non-profit making body, </p><p>formed in 1958 with the approval of Reserve Bank of India, consisting of Authorised dealers as </p><p>members. </p><p>FEDAI Guidelines relating to Forex business: </p><p> 1. All export bills to be allowed standard transit period. </p><p> 2. Export bills drawn in foreign currency, purchased/discounted/negotiated, must be </p><p>crystallized into rupee liability, in case of delay in realization of export bills. The same would be </p><p>done at TT selling rate. The prescription of crystallisation of export bills on the 30 th day from </p><p>the due date /notional due date, has since been relaxed for bank's to decide on the days for </p><p>crystallisation on their own , based on nature of commodity, country of export etc. The </p><p>crystallisation period can vary from bank to bank, customers to customers, etc, but cannot </p><p>exceed 60 days. </p></li><li><p> Sure Success Series- CAIIB- Bank Financial Management -Vaibhav Awasthi Page 8 </p><p>Types of Risks in foreign business are given as under: </p><p>(1) Exchange Risk: Exchange risk means risk on account of adverse movement in prices </p><p>which affects your position. There can be two position overbought and oversold. Understand </p><p>through an example. A merchant buys 100 dollars @ Rs 50 but is able to sell only 60 at the </p><p>end of the day. He has 40 dollars which he has not been able to sell. This is overbought </p><p>position. Now lets say price of dollar next day is Rs 49 only. This means he faces loss of Rs 1 </p><p>on each 40 dollar. This is exchange risk </p><p>Another case can be a deal buys 100 dollars but enters into a contract to sell 120 dollars. Here </p><p>his position is oversold. </p><p>Foreign exchange exposure has been classified into: </p><p>(i) Transaction Exposure: Arising due to normal business operations consequent to which the </p><p>value of transactions will be affected. This is affected by the transactions undertaken which </p><p>may expose the company/firm to currency risk, when compared to the value in home currency. </p><p>(ii) Translation Exposure: This arises when firms have to revalue their assets and liabilities or </p><p>receivables and payables in home currency, at the end of each accounting period. Also arises </p><p>due to consolidating the accounts of all foreign operations. These are not actual costs or gains, </p><p>but notional, as the actual loss or gain is booked at the time of actual translation of the </p><p>exposure. </p><p>(iii) Operating Exposure: This affects the bottom-line of the firm /company, not directly due to </p><p>any foreign exchange exposure of the firm /company, but due to other external factors in the </p><p>market/ economy, like changes in competition, reduction in import duty increasing competition </p><p>from imported goods, reduction in prices by other country exporters- effecting exports, </p><p>increase in import duty by other country -trade tariff, etc.- causing reduction in exports, etc. </p><p>(2) Settlement Risk: When one party of trade fails to performs its part due to difference in time is </p><p>called settlement risk </p><p>(3) Liquidity Risk: when one party is unable to meet its funding requirement </p><p>(4)Country Risk /Sovereign Risk: </p><p>(5) Interest Rate Risk </p><p>(6) Operational Risk </p><p>(7) Legal Risk </p><p>RBI has issued Internal Control Guidelines (ICG) for foreign exchange business, Under ICG, </p><p>banks are required to put in place various dealing limits for their forex operations, which can be </p><p>briefly summarized as under: </p><p>(i) Ovenight limit: Maximum amount of open position or exposure, a bank can keep ovenight, </p><p>when markets in its time zone are closed. Open position means overbought or oversold </p><p>position </p><p>(ii) Daylight limit: Maximum amount of open position or exposure, the bank can expose itself </p><p>at any time during the day, to meet customers' needs or for its trading operations. </p><p>(iii)Gap limits: Maximum interperiod/month exposures which a bank can keep, are called gap </p><p>limits. </p><p>Unit 2 Basics of Forex Derivatives </p></li><li><p> Sure Success Series- CAIIB- Bank Financial Management -Vaibhav Awasthi Page 9 </p><p>(iv) Counter party limit: Maximum amount that a bank can expose itself to a particular counter </p><p>party. </p><p>(v) Country risk: Maximum exposure on a single country. </p><p>(vi) Dealer limits: Maximum amount a dealer can keep exposure during the operating hours. </p><p>(vii) Stop loss limit: Maximum movement of rates against the position held, so as to trigger </p><p>the limit - or say maximum loss limit for adverse movement of rates. </p><p>(viii) Settlement risk: Maximum amount of exposure to any entity, maturing on a single day. </p><p>(ix) Deal size limit: Highest amount for which a deal can be entered. The limits is fixed to </p><p>restrict the operational risk on large deals. </p><p>This is a sample Preview. All pages of the book not displayed. </p><p>This is a sample preview. To purchase the complete Sure Success Series log on to our website You can also call us on 07600273309 for any assistance. </p><p> It is an instrument by which a bank undertakes to make payment to a seller on production of </p><p>documents stipulated in the credit (Refer to article 2 of UCPDC).. </p><p>Parties to LCs </p><p>a: Applicant: - The Buyer or importer of the goods. </p><p>b: Issuing bank: - Importers or buyers bank who lends its name or credit. </p><p>c: Advising bank: - Issuing banks branch (or correspondent in exporters co...</p></li></ul>