Exchange Rates Arithmetic ( With Introduction to Derivatives) | Gaurav Khullar | Skillshare

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Exchange Rates Arithmetic ( With Introduction to Derivatives)

teacher avatar Gaurav Khullar, Professional Banker(10 Years Experience)

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Taught by industry leaders & working professionals
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Lessons in This Class

33 Lessons (1h 27m)
    • 1. Exchange Rate Arithmetic Introduction

      2:43
    • 2. Why Foreign Exchange?

      1:31
    • 3. What is Foreign Exchange?

      1:20
    • 4. FOREX Participants

      1:13
    • 5. Features of FOREX Market

      1:07
    • 6. Currency Pairs

      2:47
    • 7. Appreciation And Depreciation Of Currency

      1:28
    • 8. Types of FOREX Transactions

      4:12
    • 9. Direct Vs Indirect Quote

      3:22
    • 10. Bid And Ask Rate

      1:19
    • 11. Two Way Quotation Method

      1:40
    • 12. Cross Currency Rates

      3:08
    • 13. Discount And Premium

      4:41
    • 14. Factors determining Exchange Rates

      3:42
    • 15. Various Foreign Currency Accounts

      2:29
    • 16. Major FOREX Crisis

      2:35
    • 17. Exchange Rates : Case Study 1

      6:22
    • 18. Exchange Rates : Case Study 2

      4:39
    • 19. What is Risk?

      1:25
    • 20. What are Derivatives?

      1:37
    • 21. Types of Derivatives

      2:29
    • 22. Forward Contracts

      1:12
    • 23. How to calculate Forward Rate?

      3:47
    • 24. Futures

      1:31
    • 25. Difference : Forward Contracts and Futures

      1:10
    • 26. Futures : Case Study 1

      4:48
    • 27. Options

      1:57
    • 28. Call-Put Options

      4:11
    • 29. Types of Money Options

      3:07
    • 30. Options : Case Study 1

      4:08
    • 31. Options : Case Study 2

      2:02
    • 32. Swap Contracts

      1:22
    • 33. Currency Swaps

      2:24
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About This Class

This course is primarily intended as an introduction to the theoretical and practical aspects of Exchange Rate Arithmetic for anyone interested in how the exchange rates work and other intricacies involved with Exchange Rates.

This course is ideal for the students taking various examinations of the Institute of Bankers.
With many case studies included in this course which will prove useful to many who are actually engaged in this interesting branch of International Banking.

If you are new to this field then this course is a perfect starting point.

The course is taught in the simplest language with examples given at each and every point.

Topics Covered in this course-

  • What is Foreign Exchange?

  • Different FOREX participants.

  • Currency Pairs.

  • Appreciation and Depreciation of currency.

  • Types of FOREX transactions.

  • Direct/ Indirect Quote.

  • Bid/ Ask Rate.

  • Two Way Quotation Method.

  • Cross Currency rate mechanism.

  • Discounts and Premiums.

  • Factors determining Exchange rates.

  • Various Foreign Currency accounts.

  • What are Derivatives?

  • Types of Derivatives- Forward Contracts, Futures, Options, Currency Swaps.

  • Case Studies on Exchange Rate Arithmetic, Futures, Options.

Meet Your Teacher

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Gaurav Khullar

Professional Banker(10 Years Experience)

Teacher

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Transcripts

1. Exchange Rate Arithmetic Introduction: Hello, friends. Welcome to this course on exchange rate automatic. My name is Goro Color and I will be your instructor for this course. I am a professional banker and traded with years of experience. Let me show you what you will learn in this course. We will start off with why we need to learn about foreign exchange and its importance. Next, we will understand what a foreign exchanges. After this, we will look at various for export Dispense. Next we will look at features off forex market. After this, we will learn more currency pairs. Next we will understand about appreciation and depreciation off currency. Then we will look at types of forex transactions. After this, we will learn an important topic on direct or indirect court. Next we look at bed and ask red. Then we will learn about two recordation matter. After this, we will learn about cross currency. It's and here we will look at finding exchanger when a direct quote is not available. Next we'll learn about discounts and premiums. Then we will look at various factors that reminding exchange rates. Then we will learn our types of various foreign currency accounts. Then we look at major for inaction crisis, which happened in recent past. After this, we will move on to deliver this part, and first of all, we will learn what is risk. Then we will know what our derivatives. After this, we will learn types of derivatives. Then we move on to learning East type of derivatives in detail. First, we will study forward's contract. Then we will learn futures after this with Dylan options and then about currencies wraps along with discourse. We will see many case studies on exchange rates, sort of the concept which you learn. In theory. Classes are crystal clear, and you can implement the course practically your data. They're working. So friends, if you are new to foreign exchange or a banker greater student preparing for various example like CFE, MB frm international banking or any person interested in exchange rates and it's working, then I welcome you all to discourse and rule Now and take your first step towards learning currency action rates. Hope to see you in the opening lecture 2. Why Foreign Exchange?: Hello, friends. Welcome to this lecture. French cross water movement off commodities services, manpower and capital is one of the biggest drivers off economic activity. In this lecture, we will understand what's the importance off currency exchange rates? So for an exporter of goods manufactured in India exported to USC, if payment is received in Jewish dollars, then exporter needs to convert the U. S. Dollar proceeds off the world into Indian rupees. So friends, if this important, receive the proceeds in Jewish dollar, then these dollars are off. No use to him until and unless he converts those dollars in ₹2. Similarly, for import off capital goods from France to India building Juro, then important needs to pay the company and euro by first converting Indian rupees into euro. Does the conversion off currencies from the currency off invoice to home currency off exporter will be generally required for all cross border trades? French. This is nothing but foreign exchange for the Indian exporter or importer. The U. S. Dollars or you is a foreign exchange, while for American buyer off Indian goods or the French seller off capital goods, the Indian rupees is foreign exchange also known that exchange rates and business off dealing in forex are two important aspects off international banking 3. What is Foreign Exchange?: welcome to this lecture. So what is foreign exchange? Ah, foreign exchange transaction is primarily defined US. Exchange of what currency from another currency by two parties at an agreed price on the issue at which the currencies are exchanged is called exchange Rid. You just saw in previous example where the Indian exporter needs to convert the U. S dollar receive into rupees on in second example where the important needed to convert rupees into euros so that he can make payment to the French company. All this exchange of currency is nothing but foreign. Exchange on the related with this exchange takes place is called Exchange it. Let's understand in detail with the help often example. If $1 can be exchanged for approximately 60 sound I in our that is Indian rupees none. The exchange rate is generally denoted as $1 equals 67 I in our similarly if 10 equals 1.46 for us dollars than this music that 10 can be exchanged for 1.436 $41 4. FOREX Participants: Hello, friends. Welcome to this new lecture. Next. Move ahead and knowledge. The videos for export is burns. There are various participants that trade foreign currencies and some of them are the first exporting companies. They basically convert foreign revenues into domestic revenues. Then we have important companies. They convert foreign cause in tow, domestic cost. Then we have commercial banks, their customers in need of forex, then investment funds or banks. They transfer funds for investments in or out of foreign countries. Then we have central banks, demon, it results and for experience. At last, we have individuals, Dimmick investments and participate in training. Please know that family that is foreign. A Change Management Act is the primary at controlling deck of these related to forex, and this is controlled by a central banks in most countries. 5. Features of FOREX Market: Let's now see features off forex markets. French. These markets exist around the globe. The main feature off this market is there. It is continuous that is open 24,000. The markets open from Monday through Friday. Secretaries and they're being closed is in any other interbank market. Opens at 9 a.m. And close at 5 p.m. These markets, in fact, operates around the clock in one or the other part of the globe. Due to different angles. These markets operate not at a particular place, but geographically. The markets extend from Tokyo answered in these to London and New York, and the rest when the European markets open. There is already lunch time for Indian markets. When Indian markets closed, the U. S markets are about to open just before the close off US. Markets that talk you or Singapore markets are about to open. This is how these markets are able to work 24 or 30 6. Currency Pairs: welcome to this lecture. Let's no focus our attention towards currency pairs friends off for inaction deles Always done in currency piers just recall. Look to examples which we saw the start the Indian exporter who converted US dollars to India national rupees and then water converted I in our two euro. So you can see in forex the action really is always done in currency pairs. But first, I would like to show you some basic currency terms. If you're not familiar with the currencies off the world, U S. D short for us dollars and the symbol used is this. Joe is short for the European Union currency, euro and symbol is this J B Y U. Short for Japanese yen and symbol is this. GDP is short for British pound and somebody's this. I am not the shot for Indian rupees and symbol is this. CHF is short for Swiss friend, which is currency or Susan Linn now coming back to our topic off currency pairs. You can see the currency peers like these US dollars in your a p but a fishbone I enough Japanese yen US dollar US dollars with frank Euro U S dollar and many of their peers like these. But in any currency pair, there will always be two currencies and work in a currency peer. The first currency is referred to US based currency, and the second currency is referred to as counter or terms or court currency. The action retells the words of the base currency in terms of the court currency, that is, for a buyer. How much off the terms can see must be paid to obtain one unit off the base currency. Let's see an example off U. S. Dollar I n r a as U. S. Dollar I in a rate of rupees 67 implies that rupees 60 someone must be paid to obtain $1. Friends and foreign exchange prices are highly volatile and fluctuate on a real time basis . Inform action contracts. The price fluctuation is expressed as appreciation or depreciation order strengthening or weakening office currency related to another. For example, a change off U. S. Dollar I n r. Eight off 67 do be 67.50 implies their U. S. Dollar has friend or appreciated, and the Anna has weaken or depreciated since a buyer of U. S dollar will now have to pay more. I in our Taub. I want U S dollar done before. 7. Appreciation And Depreciation Of Currency: Hello friends. Welcome to this lecture friends, most of whom you must have heard that so and so currency is appreciated or did appreciated . Let's not see what that means in contacts to exchanges. Next foresee what an appreciation is and simple terms. If one currency is able to purchase more off the other currency, then the first currency is said to have appreciated in comparison to a second currency. Example. If rupees per dollar is $1 equals rupee 72 and it changes toe. $1 equals review 73 Done That dollar is said to have appreciated in comparison topi. Now let's see what the depreciation off currency means in simple terms. If one can see is able to produce less off the other currency, then the first currency is said to have depreciated in comparison to a second currency. Example. If $1 equals rupee 72 energon usedto $1 equals rupees 71. Then dollar is said to have appreciated and will be appreciated. Hope you're no clear with appreciation and deposition off the currency 8. Types of FOREX Transactions: Hello, friends. Welcome, please. New lecture. Let us know. See types off foreign exchange transactions. This is an important topic. Friends as foreign a change is generally conducted across different time zones. Those settlement is any important factor in determining a contra in a contract, the actual payment and rupees and reception foreign currency say U S dollar may take place on same day next day. Dude is later or a month later or move so various ways in which delivery can be subtle are the very your cash basis, Tom Basis sport with his and forward. This is the first is very your cash business. When the payment in home currency and recep tion foreign currency takes place on same day, it is called cash transaction or value Today. Next, we have Dominic where the deal is settled on immediately securing walking there. If the settlement days holiday in any of our two countries, the settlement date will be next working day in both the countries. Next it spot Mrs. This is when the currencies are delivered on the second day following the day off dealer contract. The exchange rate used for this purpose is called the sport exchanges also not here that if the settlement is a holiday in any of the two countries, the settlement date will be next working day in Boulder countries At last, we have forward production in forward transaction. Those settlement off deal takes place on some predetermined future date. After next two days, a forward contract with delivery off two months means the exchange of currency shall be completed after two months from the date off contract Friends. If you're feeling confused with all these tomes, then lets you practical example, and this will make things more clear. In this example, you can see three columns. The first column has Ditto Contra, that is day on with the deal took place. Then, in the second column, we have date off delivery that is date on which deal is settled, and last we will see what red we will Jews. Although the four transaction, which we saw in the previously So let's say a deal took place on 4th November 2018 and the settlement took place on the same day that is 4th November 2018. Then, as you can see, the deal is settled on the same day has This is a cash or ready tradition. Has the re Jews will be Cash already did it. The second deal happened on 4th November 2018 and settle on 5th November 2018. As you can see, the settlement took place on Second Day. Does this is a tone production? Handsome radios will be Tom did. The third bill happened on 4th November 2018 and settled on 6 November 2018. Does you can see the settlement took place on the second day front or date off the does this is sport transaction and radios will be spotted. This is also Quartey did fourth we have that deal took place on 4th November 2018 but the settlement took place on 28 December 2. Commentating does. This is a forward transition As the date off settlement is beyond second day. From the date of the does, the rituals will be forwarded. Who opened this? You are clear with types of productions, most often in various exams. You will be given date off deal and date of settlement and you will be asked vigilant. We used 9. Direct Vs Indirect Quote: Welcome to this lecture. Let us know. Understand what? Our direct or indirect quarters in a direct court, there is one unit off foreign currency and corresponding units off home currency. So in our example home currencies, I in a So for us, the direct court will be one unit of foreign currency and corresponding units off rupees. So let us see some examples off direct courts and you, Nia. $1 equals rupee. 67. £1 equals rupees. 60 year one your week Once rupees 54 are all examples off directly in an indirect court. There is one unit off home currency and corresponding units of foreign currency. Let's see examples off Internet courts in India. To be one equals 0.0 to $50. Our rupee one equals £0.12. Our ruby one equals 0.185 euros. In all these examples, you can see there is one unit off home currency I anna and corresponding units off foreign currency. Another relation to remember is there Direct court equals one upon indirect court, that is, you can find direct quote by calculating the in worse off indirect court or vice versa. Friends and most exams are small. Caution often comes from direct or indirect. Let us solve a similar problem. The problem goes like this. Convert the following direct courts in India in tow. Indirect course were given. $1 equals rupees 67 and £1 equals rupees. 90. So that's all we already learned. The relationship between direct or indirect court daughters. Indirect code equals one upon direct court. Does indirect court for $1 equals roughly 60 someone will be will be one equals one upon $67 doctors $0.149. An indirect court for £1 equals rupees. 90 will be it will be one equals one upon £90. That is 0.111 bone. Let's off another problem. The problem goes like this can work the following indirect courts in India and do direct quotes. It's given rupee one equals $0.143. Andrew P. One equals £0.109. We already learned the relation between direct and indirect court, so the one equals $0.143 can be converted into direct quotas. $1 equals rupees. One of 10.143 Rich gives rupees 69.93 Similarly, Ruby one equals £0.109 can be converted into direct Cota's £1 equals rupees one upon 0.109 which gives rupees 91.74 Does These are very easy questions to solve and exams. 10. Bid And Ask Rate: French still know the sort of forex courts like this $1 equals rupees 67. Which one that bank is buying and selling at similar it that is $1 for rupees 67. But it won't do this ax Everett. Then how the banks will make profits. And what about other technical cost, which happened during the exchange so impractical? This is really the case that is bank buying and selling. It seems, in fact, banks by and seller different rates, so the matter they're often in actual forex market. Is that off bidden Oscar off for it better. It is the created which bank will buy foreign currency and ask or offer It is dory. Average bank will sell foreign currency. Also know the difference between the burden ask rate or offer. It is called bird. Ask red on a tree *** the liquidity in the market. Their difference in these rates. He presents the cost of banking cause in these transactions, a small return on capital employed and compensation for the risk. Critics 11. Two Way Quotation Method: welcome to this lecture. So Friendster Bank used to be a quotation matter to show the buying and selling action it as we learned the for inaction quotation. But the bank has Tourette's one. It was the quoting bank is willing to buy and other at which it is willing to sell the pool . Recordation is return as $1 equals rupees. 67. Hi fund. 67 point a digital. The first rate denotes that bank will enter into purchase transaction. I had to be 67 and second, it shows that the bank is willing to do sell transaction. Attribute 67.80 has a principal buy low and sell eyes followed in order to maintain profitability and recover journal transactional expenses. There are other forms like $1 equals 67. Hi, phone 80. This also means the same. Not is Bank will purchase that will be 67 and sell actually 67 point eggs. It'll so don't have confused. Another way to remember is down. Those selling rate is just higher than the buying read showing off of example. Please don't read buying greater 60 someone and sell date as Rupee city. There can't be this use difference intrigues. This is a smart trick you can use in your examinations 12. Cross Currency Rates: Hello, friends. Welcome to this lecture and thats no discuss an important topic which is cross currency idiots. Many questions come from this part. So please learn carefully Principle You want the court for I n r g b y But this court is not directly given by the bank. So is it very to get I in RGB white coat? Yes, there is And that weighs crosscurrent cedars when dealing in a market where rage for the particular currency Pierre are not directly available The price for Dad currency pair is then open indirectly with the help off Carrasco on Syria it mechanism The match uses simple algebra. It won't be multiplied by BIA Ponsi no beacons iso and you get a Ponzi. So in the above example very need to get a hold for high energy. P y. We can find this with help off Carrasco on Syrian mechanism like this. Find iron Rusdi and you'll djp my court and simply multiply boat J ust cancels out and you finally get your desired court That is I in our GP way. So this logic can be extended toe any currency pair together action yet for which there is no outright market. Let us know. See another example if you're a USD equals 1.4 and g BP used equals 1.6. Then find GBP Euro court. So here you need to find GBP Euro court from the given data. Well, the triggers to see the third currency in the data given and make an arrangement says Dad, You finally got GDP euro after cancelling up, so start from rivers that is GDP. Euro equals gbp USD multiplied by used the euro So here USD cancels out and you ultimately left with GDP euro. Now our task is to find G b B USD, and you will be zero, which can easily be often from the data given g b people he was d is given as one born six USD part hero can be can who little as one upon $0 which is nothing. What USDA Euro does us The euro equals one upon 1.4. So now just multiply both these values to get the required currency court off Jimmy PGP way , which is 1.1 fold. So now just multiply both these values together required court currency off G B P euro, which is 1.14 13. Discount And Premium: welcome to this new lecture. Let us see another concept off this content premium. Our currency is said to wear a premium against another currency. If it is more expensive in the forward market done in the spot market. In this case, it's forward. It will be higher than its portrait. This happens when the future spot rate is expected to be hired them then the currents portrait, on the other hand, are currency, said we after this call. If it is cheaper in the forward market, then in the spot market in this case it's forward rate will be lower than its sported. This happens when the future sport it is expected to be Lord and the Currents portrait. Let's see an example. It's given that who people? Dollar equals 67.45 the last 60 years and Freeman forward will be per dollar quarters 67.45 slash 68 and treatment forward rupee per dollar quarters 69.52 slash eight Fight As you can see in this case, the bank is ready to give rupees 67.45 Currently in exchange for a doll, Violet is ready to give rupees 69.52 after three months Does Bank is charging only rupees 67.68 for selling a dollar now while you discharging rupees 67.85 for delivery in three months? So the dollar is expected? Do we more expensive in the future and hands is at a premium against the rupee. On the other hand, the ruby is expected to be cheaper in future and has it is after discount against the dollar. Let's see another example. The following courts are given for dollars on currency Pierre and two months and 31 forward rates are also given. Here you can see the exchange rate for the pound is more for Tuman forward rate and less for Freeman forwarded. Does we can see that the pound is at a premium against the dollar for the Tomb of Maturity ? Why added this calm for three months majority Now we will see margins used by banks in foreign. A change friends exchange margin is the extra moan or person d Charge five Bang over and above the re it quoted by the back when were given the sport rate or forward rate with a margin for buying red and margin for selling late. Then the effective rate will be calculated as you have to deduct margin from buying great together. Desired extended. Does buying bread will be bed rip minus action margin? Let's see an example, given that dollar equals W 68.40 slash 0.9, double zero and Martinus 0.8%. And you have to find bid rate after the margin. So the New Madrid will we old? Will great miners exchange modern? That is 68.4 digital miners 0.8% off 68.4 digital, which gives 68.4 year zero minus 0.54 So the new better it will be rupees 68.46 friendly. So bored the bigger it. But what about the ask or offering? So you have to add margin toe the selling it together desired our score off for it does new selling bread will be Oscar. No section margin. Let's understand. With the help of an example given dollar equals Ruby 68.40 slash 0.9, double zero and margin is 0.8% Find Oscar it after the margin. So as we learn, new ask Red will be old ass create plus exchange margin has we have 68.9 double zero plus 0.8% off 68.9 Double zero, which gives 68.9. Double zero plus 0.0 Double fire does new Oscar. It after action margin will be rupees 68.9, Double five. 14. Factors determining Exchange Rates: Hello, friends. Welcome to this lecture. In this lecture, we will see what are some factors which impact exchange it do Dinner manufactures impacting the fluctuation off exchanges. But we will focus broadly on five major factors. So Friendster main factors affecting the exchange rates are the first years balance of payments. Then we have inflation, industrious, then money supply and lastly political factors. Let us see each of these factors in detail and how they impact extended off any currents off a country. Let us foresee the impact off balance of payments. French balance or payment is nothing but the transaction in goods, services and income between a country on the rest of the world. So when we say balance of payment deficit, this means the country imports more goods, services and capital than it exports. With this dirt demand for the currency off the country's less of Janet supply, hence value of currency, the market declines similarly of NBC balance of payments surplus. This means the country exports more than it imports, and US demand for the currency in exchange market is higher than a supply. Does the currency gains in value? Let us see how inflation backs direction. Jerks France. High inflation causes prices off commodities to increase, and this results in decrease in exports because high prices resulting and decreasing sales in international markets. With the decrease in exports, the demand for the currency is also decreased and this results in a decrease in external value of the currency. No. Let's see how in frustrated impacts the exchange. It's friends. Vendor interest rates in the country rises. It attracts short on funds from other countries. This increases the demand for the currency in the country and and it's really also rises. Rising interest rate is generally adopted by a country which wants to attract foreign investments. High interest rates results in strengthening the currency of the country through the larger inflow of investment and a decrease in the outflow of investment. But of residents off the country, No, let's, you know, effect off money supply on action drinks France increasing money supply results in an increase off inflation due to larger scale off spending. This in turn, increases the supply off currency in the forex market and this results indoor degrees in the value of a currency. Let's see the effect off political factors friends this is an important factor affecting exchangers in the government are the center of this table then the confidence of investors also right is did isn't in floor fronts and this results in increasing value of the currency. There are numerous examples around the world with respect to this. Just see any country with military government. Generally you will find exchange rates pretty high as investors are less confident hand US influence very less which results in decrease in value of the currency. Friends will. But this I finished this lecture friends There are many factors affecting exchanges and in this lecture I just out like some of the media factors. 15. Various Foreign Currency Accounts: Hello, friends. Welcome to this lecture. In this lecture we will look at various foreign currency accounts which are maintained by banks. Many data to you types of foreign currency accounts which are maintained by banks. The first is no stroke on. Then we have lost broken. And lastly, we have Lorcan. Let's see each of these accounts in detail. Let's first see no stroke on a north for account is basically account of a domestic ban are frayed the country. It is generally known by the tagline our account with you. Example. An account off S B A, which is an Indian bank with Citibank, which is a U. S bank in the United States In dollars is in North stroke. Let's understand what have watt stroke counters friends watch straw ground is basically account off a foreign bank in a domestic area. Watch stroke round is therefore by the tagline your account of the does. Let's understand this with the help of an example. So both Citibank, which is a U. S bank, is maintaining an accord would S B A, which is an immune bank in New Delhi and that win rupees is basically of war struggling Let's see what our Laura Countess. A lot of ground is basically a combination of Botin Australian Watts programs. Aloro Account isn't account maintained by a domestic bank on behalf off another domestic bank in a foreign bank in foreign currency, Laura account is referred by the tagline dare gone with you. Let us see an example. Suppose as we I, an Indian man is maintaining a current account off PNB, which is also an Indian man in Citibank, which is a U. S bank and the account is maintained in dollars and that too in the united stairs, then that is referred to as Lord France. Would this have finished this lecture? Hope the concept or different accounts is clear to you. See you in the next lecture. 16. Major FOREX Crisis : Hello, friends. Welcome to this lecture. In this lecture, we will look at some of the major for inaction crisis which robbed the world. We will look at the corners and results off these crisis. Let's further discuss salty station crisis. This crisis was originated in Thailand in 1997 and later spread to other Southeast Asian countries like Taiwan, Philippines, Malaysia and other countries. French. Most of the salty station countries witnessed high growth rates around this time. Moreover, the exchange rate was fixed by the government and was not a floating that this game ah, false sense of security to the investors. No, this high GDP, along with currency area differentials, resulted in a huge and floor funds from western countries, especially the U. S. Now this huge inflow of money gives a false sense of security in the nationals off these countries, and nor attention was given to future growth prospects. In the mid nineties, the U. S. Government increased interest rates and this made investors going back to their own countries, not issues or cruel money resulted in a collapse of banking system as they were not ready to handle such conditions. Next we will see Argentinean crisis This crisis revolved around 1989 due to gross negligence in fiscal discipline, the currency war. The country provided an immediate solution by saying that each Argentine p so would be back by U. S. Dollars now that put a stop to printing off local currency. Do do this. Inflation dropped and Argentina prospered overnight. But French this prosperity was in fact, shortly as there were increased government spending and corruption again, government raise the tax rates which in fact discourage investment and carries taxi vision . This increased tax burden which resulted in high interest cost there were triggering a vicious dog crap. So, friends, this I finish this lecture. These were few foreign exchange prices which robbed the financial world in recent past. 17. Exchange Rates : Case Study 1: Hello, friends, Welcome to the first case study. The first kissed really goes like this and in the in form is interested in purchasing five million Chinese yuan. The following conditions have been given by two banks, so bank egg, disco addition and bang B gives this condition. Now you have to advise the in form which Cordish would accept. So, as you can see in this case study, there's an Indian for who wants to purchase five million Chinese yuan. So do porches them. The form goes toe to banks bank and when we and those two backs gave the condition to the form. Since the farm is Indian, it can do amount in rupees to bank and bank will give Chinese you want to the form. So the transaction basically is for news to watch an easy one. So the bank is actually selling the Chinese yuan, so the bank will use offer rate that is selling it also nor dot No bank is exchanging rupees for Chinese. One bank is using the pound as intermediate currency on my bees using dollar and intermediate currency, so you have to use a cross currency mechanism to finally arrive at I in our Chinese yuan exchange it. So this is the overview of the case study. Let's start solving now. Please know down the case study on a piece of paper so that you don't need to come back to this light again and again. As you can see in this case study, our ultimate goal is to advise the form from which bank should it by the Chinese one. So the concept is simple. Former white Chinese you want from Dad by where it has to give less of rupees. That's a common business psychology. You will buy something from a seller, which will cost you less so if you find rupees per Chinese, you want somehow. Then you can simply multiply five million with dad rate, and ultimately you will get rupees. That form has to pay. Let's see. For Bank bank, it's given that £1 equals. Who will be 79.89 and 80. It is basically rupees for ponder It also given £1 equal Chinese. You want 1.50 and 12.6 ill which is our Chinese. You want full 100? No, this can weaken what it as one Chinese yuan equals one of 1 12.60 on one of 1 12.50 which is our phone for Chinese yuan. Read notice that her bid rate is one upon 12.60 and ask rate is 1.12 point 50 because off by no sell high concept and you know our target is to find rupees per Chinese yuan, which can be found using crosscurrent. Humankind is on Mars, rupees upon pound multiplied by a bomb upon Chinese yuan, the pound will cancel out and we will be left out with rupees per Chinese yuan. As you can see, the offer rate for rupees per pound is 80 which we took from this aggression and offer rate for a bomb. Part Chinese Yuan is one upon 12.50 which we took from desecration. I hope you now understood why we calculated bomb for Chinese yuan from its above equation off Chinese you want per phone. Now we confined our desire to Ripley's poor Chinese one by simply multiplying both the figures we finally get 6.4 does. This is offer rate for ₹2 per Chinese yuan, that is bank will sell one Chinese want at rupees 6.4, which implies for five million Chinese yuan the customer has to pay 6.4 multiplied by five million, which is rupees 32 million. Similarly, we have to find for Bank B. Let's do the calculation quickly bank be given that one Chinese yuan equals $0.1598 and you know $0.1600 which is our dollar per Chinese. You want Rick and $1 equals rupees 40 and 40.5 which is our rupees per dollar. It our target is to find rupees per Chinese yuan, which can be calculated as rupees. $1 multiplied by dollar. Ah born Chinese yuan now put the offer figures from the equations Given that is a piece per dollar is 40.5 which we got from this equation and dollar per Chinese. You wanna 0.16 double zero which we got from this equation now multiplying both we get 6.4 dilate. This means bank will sell one Chinese yuan and rupees 6.40 it which imply for five million Chinese yuan the customer has to pay 6.4, the weight multiplied by five million, which gives approximately rupees 32,040,000. Let's see what the form has to pay to buy five million Chinese one if the form by from Bank A the form needs to pay the bank rupees 32 million to purchase five million Chinese yuan. On the other hand, if the phone buys from Bank B, the phone used to pay the bank Rubies 32 million. 40,000. So what are you recommending? The phone bank or Bank B? If your answer is a, then you are correct. Does very commander form to purchase five million Chinese yuan from Bank A. 18. Exchange Rates : Case Study 2: that's all. Another case study which calls like this an exporter customer request a bank to sell 2.5 million Singapore dollars. The interbank market rigs are as follows the moment it is this on London Bridge is this. The bank wishes to retain an action margin off 0.125%. How many rupees the exporter will receive Friends in this case study a custom has 2.5 million Singapore dollars and he wants to sell those and often rupees in a change interment market rates are also given, but you can see no red converts. Singapore dollar, ₹2 directly. So first we have to convert Singapore dollar to US dollar and then US dollar Dooby's Can you tell What's your target? In this case where he is friends, our target is to find released, forcing a $4. If you can find exchange rate off one single for dollar, then you can easily calculate rupees. The customer asi for 2.5 million Singapore dollars by simply multiplying 2.5 million with exchange rate off rupees per Singapore dollars. So let's start again. Please, no down this case study on a piece of paper so that you don't need toe. Come back to this light again. Let's solve this case study in a step by step manner. So step one is the customer is selling. Hence bank is binding upon dollar so we will use bid Rick, that is bite it. So one thing is clear from distance that we have to use big rate out of the tool. It's Step two is in Steptoe. We will see what's our target is. If we just find that re eight off one Singapore dollar and rupee, then we can calculate for 2.5 million Singapore dollars. Does our target is to calculate rupees, pursing a $4 rate and step two d. Let's are integrated given in such a way that we finally arrive where ₹2 per Singapore dollar does. Let's use cross currency mechanism to finally arrive at our target. Let's start from the reward Rupees pursing up or dollar can be returned as rupees $4 multiplied by dollar per pound multiplied by pound per Singapore dollars does. If I find these exchange rates, then I can simply substitute these ears and find out required it. Let me write all these equations again, so rupees per dollar can be found from this equation. Dollar Barbone can be found from dis equation but bound for Singapore dollar. Can't we've elevated from this toddy question? We need to find the inverse so that in worse off desecration is this. So from here we can put the value your bound for Singapore dollar. So we finally got all the values and let's substitute these values into this cross currency . A question since we have to use the bigger it. So we get 45.85 multiplied by one point. Someone at 40 multiplied by one upon 3.1590 So we finally get 25.89313 Does it get our desired exchange it off rupees per Singapore dollars? 25.89313 But there's one thing more in the caution that is exchange Martin. Since we are doing better it, you have to lessen the mountain. So let's less The margin as 25.89313 minus 0.125% off 25.89313 which is 25.860 summer Does Bank will buy one Singapore dollar for rupees 25.8607 which implies 2.5 million Singapore dollars multiplied by 25.80 someone which is 64 million ₹652,000 Does the customer will get 64 million ₹652,000. I hope you are clear this case study. If you face any doubt, he's asked it out in Q and A. 19. What is Risk?: friends of Financial and Woman today has more risks done earlier. Successful business forms of those that are able to manage these risks effectively forms that monitor Davis carefully and manage their risk with judicious policies enjoy most able business than those who are unable to identify and manage the risks. Let's start with learning what the risk is. The risk and simple terms may be defined out. The uncertainty off the returns risk arises because off a number of factors, but you can broadly classify it into who categories. The first is businesses, and second is the financial list. French business risk include strategy, Chris Macroeconomic risks, the competitive risk and technological innovation. Risk managers off every organization should be capable of identifying such risk. Also, they must adapt themselves to the new environment and maintain their competitive advantage . On the other hand of financial risk is caused you do financial market activities and includes liquidity risk and credit risk 20. What are Derivatives?: friends. In spite off all these risks, financial institutions are equipped with tools and techniques that can be used to measure and manage such financial risk. The most powerful instruments among them are derivatives. Very videos are financial instruments that are used as risk management tools. They help in transferring risk from risk averse to risk taker. Derivatives are, in fact, financial contracts whose values deter mined from one or more underlying variables, which can be a stop alone and index on an interest rate or an extended. If underlying assert is equity, then it is called the equity derivative. And if the underlying a service currency, then it is called a currency that ever do Prince. Another important point is that very witty is do not have any independent existence. They are based on underlying assets that could be a stalking next. No foreign gonna see how commodity order individual stocks. This means that very where this RealAge toe future value one major purple goddess sober derivatives is toe has the risk futures forwards options Straps at secure are some of the common derivative instruments, which are used to hedge or mitigate risk 21. Types of Derivatives: friends. The reading off derivatives can be done either on the market or directly over the counter that is, or dizzy and depending on the platform for printing the day where lives are classified US. The first is Forward's contract. Second is futures contract, thirties options contract and 40 straps. Contract France Vineland. Each of these derivative in detail, as lots of questions are asked from derivatives in Exam. Lex Land Another concept which forms the basis off classification that is, or D C derivatives on exchange traded derivatives. What is he that is over the counter derivatives are the contracts that are traded directly between two parties without going to an exchange or intermediary, very body products like forward. So APs and options are mostly traded in the OTC. Another point. News or disease? The largest market or very widows What it's mostly unregulated and thus they are subjective . Come for party risk. Ask Congress Party relies on each other to perform Contra body risk means that one party in the contract, maybe for on fulfilling its obligations there were quoting lost to other party example of what is he can be. Bank offering off our contract to its customers for the sale off US dollar on a future date . Now let's see exchange traded Derivatives Action Treaty devotees are the contracts ladder treated to specialized derivative exchanges or other exchanges or derivative. Exchange is a market where an individual trades contract, which are defined by the exchange and just like stock market derivatives exchange accident in community to all transactions and takes an initial margin from both side. Ogletree to act as a guarantee for clearing and settlement off contracts. In action traded derivatives. There is no comparable editors. As action provides. Got 94 does him. 22. Forward Contracts: yet started first type of derivatives that is forward contract Oh forward contract is a customize contract between two parties for buying or selling an answer at a certain future time and at a certain price known as strike price. The actual settlement It is more than two working days after the deal it here The agreed rate is called the forward rate, and the difference between the spot rate and forward rate is called US forward margin. Prince forward contracts suffer form congres parties and also from liquidity is that is there exists potential for one party to divorce. It could be either the buyer or the seller. This is Earth in the other party suffering a loss. And as we learned earlier, the risk off making lost you do any of these two parties deporting is known as a counterpart. It is 23. How to calculate Forward Rate?: friends in exam, you are offered us to calculate the forward rate. So let's see how to calculate a forward read with the help of an example. Four differentials are calculated on the basis off difference in interest rates off countries off currency. So if the sport price for Europe or U. S dollar equals 0.7395 then this means that $1 equals to 0.7395 year old. The interest rate in Europe is currently 3.75% and the current interest rate in United States is 5.25%. Calculate one year forward, right? So to calculate forward rate, we use simple formula that is forward action. Genetic was toe s into one plus R Q to the power and and hold off. This divided by one plus R B to the power we're s equals sport price. RQ is the industry it off gold currency hard to be the interest rate of base currency and and is a number of compounding Peters. So when we put all these values in the formula, we get forward. Extender t equals 0.7395 and do one plus 0.375 and to the power one divided by one plus 0.5 to 5 divided by. And this also to the power one, which gives zero born Sam until nine. Deal. So forward exchange rates are simply forward. Rate is $1 equals 20 born 7 to 90 euro. I also know that Europe or U. S dollars portrait was given us 01 79 5 and Euro per U S dollar forward rate comes out Toby zero born 7 to 90 Ask for our calculation dishes that forward Raiders lessons. Quarter it. This implies that dollar is weak related to zero and forwards market friends, sometimes an exam. You are also asked to calculate the annualized rate. And Leslie, it can be calculated using this simple formula forward. Price minus squad prize divided by sport. Price into 12. Divided by number off months forward in 200. Yeah, let's understand this. With the help of an example, suppose you are the one. If the 90 days Jen per dollar forward exchange it is 109.50 and the former it is Gen $4 equals 109 point tree and then find the analyzed forward putting him. So if you put these values in the formula off forward price minus sport prize divided by sport prize into trouble divided by the motor forward months in 200 person does 109.50 minus 109.3 years. Do I did by 109.3 years into 12 divided by three in 200 which gives 0.44%. I know that we have used number of months forward as three as were given 90 days. So the unless forward premium will be 0.44% in this example. 24. Futures: Let's not discuss secondary ready product that is futures. It is a derivative product that is, this don't agreement by or selling? Is it at certain price in future? The price agreed today to be paid in future is called a future price or strike price on the specified A T. Score the delivery date down the line. Yes, sir can be commodity born equity or currency in C A. B regionally focused on currency futures only. Also no back future that standard contracts with regard to quantity and delivery date only the delivery is not must and futures. These futures are in fact treated in exchanges. Since futures contracts are traded through exchanges, the settlement off contractors guaranteed by exchange or clearing corporation and ends there is no contra, but it is. Exchanges guarantee the execution by holding an among Asako different both parties. This amount is called a margin. Money futures contracts provide the flexibility off closing or the contract prior to maturity by squaring off the transaction in the market 25. Difference : Forward Contracts and Futures: by now, you must be thinking that bottle these that is futures as well as forwards contracts sound similar. So what's the difference between forward contract and futures? Now? Let's see the difference between both of these. The first is forward contractors OTC, that is over the counter product, while few justices exchanger headquarters. Second is forward contract can before any order one. While futures is for standard among car forward contracts can before any or period while futures is for standard. Peter Florida is and forward contract the deliveries essential while in futures the delivery is not essential. Lastly, in forward contract margin is not essential. Violent futures margin is required. 26. Futures : Case Study 1: Now let's do a kiss. Sturdy Discuss. Sturdy goes like this. Please read it carefully. An exporter of garments from India has contracted to export 10,000 eases off shirt Quinn large of you telling us the agreed price Waas US Dollars 100 or shirt and the payment would be made three months after the Shipman the exporter would take one month to manufacture the shirt. The exporter has used a privilege export price off 45 at the budget price while signing the export contract. The Lord of Forest Trees, the exporter sells four month futures and the price of 46. The exporter deceives US dollar Valentine and he can words us dollar toe in our an OTC market and then prevailing price off 47 and also cancels the future contract at the same time at the price of 47.20 So how much was the effective currency price for the exporter French? Please write down this case study on a piece of paper so that you don't need to come back to this light again and again Hope you have read the history Well, let's start discussing, discussed, ready as you can see In this case study there is an Indian exporter of garments who exported a T shirt consigned, went to United States. Now he made a deal at the prevailing rate that is, $1 equals two rookies 45. But as you know there, deal will take time to complete. And he made a payment after 23 months. So what if the rate of US dollar goes to $1? It was to 44 or 43. So in this case the exporter will lose on some profits. So when the exporter received a payment of consignment in Jewish dollar, hey will sell the dollars in the forex market. But to mitigate the risk of dollar appreciation, the exporter sells four month futures in exchange at the rate of ₹46 per U. S. Dollar. You must caution Why sell? In fact, he enters into a cell contract that is, he will sell the dollars after four months and the rate of 46 this was done to mitigate the forest risk in case the raid drops below 45. Now the effective prize that exporter will get would be summation off effect off Cheney in I in our for US dollar price, there are basically two points on wisdom. Effective price depends. First is the Langtry transaction and second is the effect off Cheney in future price on the currency futures contract. So let's solve the case study first, Let's see the effect off underlying pre transition. Yeah, against the budget of 45 at which he signed the deal, the exporter realizes the price of 47 at Odyssey and therefore there is not positive change of rookies to has were selling at OTC Exporter is gaining rupees two for US dollar profit in currency exchange. Now let's see the effect off genuine future price on the currency futures contract. It is the contracted phrase off. What is It's The exporter had to settle the contract at 47.2 as he did and you the futures to exchange the U. S. Dollar Since he is getting better, it at selling at all dizzy and therefore the result is a net negative rate off rupees 1.2. So the combined effect of both these transactions will be that is the combined effect of change in U. S. Dollar I in our sport price and January futures prices rupees two plus negative or rupees one point toe which gives lost ₹2.0 point it. Therefore the effective price loss. 45 Which one? But it did prize less 0.8 which waas a fact off hedging and underlying pre transition that is net effect is 45 point it hope you're care of this case study. 27. Options: Let's look at third derivative type. That is options. Friends option means a choice or an alternative. Let's understand this. With the help of an example, take a case where you want to buy house and you finalize the house. Toby Bark. On September 1st 2017 you pair token amount or a security deposit off rupees 50,000 to the house cellar, the book, the house and the price and rupees 35 legs and agree to quit a full amount in three months . That is on november 30th 2017 Doing these three months. If you decide not to buy the house because off any reason your initial token Ammon here to the seller will be retained by him in this example. At the expiry of three months, you have the option of buying or not buying the house and how seller is under obligation to sell it to you. In case during these three months, the house price drops. You may decide not to buy the house and lose the initial Okano. Similarly, if the price off house rises, you would certainly by the home, therefore, by being the initial talk in a moment, you are getting a choice or option to buy or not buy the house after pre months. The above arrangement between house wire and how seller is called an option contract. So let us now see the basic definition off option. It is a contract between two parties to buy or sell a given amount off, assert at a pre specified price on or before a given did. 28. Call-Put Options: before moving forward. Let's understand some basic terms in contracts which you'll encounter first is the call option. The right to buy. The assert is called call option Does a call option is an option, granting the right to buyer off the option to buy down the lying as it on a specified day at an agreed upon price but not the obligation Caboose. Oh second, is the production the right to sell? Desert is called a production. A put option is basically a contract granting the right to the buyer off the option to sell down the line. Is it on or before the specifically at an agreed upon price, but nor the obligation to do so? Did you notice the difference Police again, as you will face many cautions in the exam, which contained these two comes, so be clear with these two comes next Anyways, again, In short, the currency options are off. Who pipes one is call option and second escort option. Corn often is right to buy, but no obligation to buy and put option is right to sell but no obligation to sell. Let's see some more definition associated with options. The first is strike price, the priest was fit. Price is called a strike price. In simple terms, it is the price at which deal is made. Next is exploration the day at which strike price is applicable. Score exploration did. In simple terms, it is the date of maturity off contract. Another important terms is auction buyer. It is a party which, by the right but not obligation and pays premium for buying the right. Next is often seller or writer. It is a body which sells the right and receive premium for assuming such obligation, option price or off sentry meal. The price. Which option by is to obtain seller to acquire the rights is called as option tries or offended women. So friends in simple terms in an option, you are it flexibility off either committing to the trade or more, and you pay some premium In case you're not coming to the trade. It's that simple. Now you must raise a question. Why should we use caller port? So in this light, let's discuss words. The use off caller court. We will understand this with the help. Often example. Suppose there are new forms us from here and a French phone Be now US form needs to pay the French form 100 euros and future, that is, the U. S. Form has liability in journals, but this form from some source order tends that Europe or U. S dollar rate will be higher on maturity and us they may be losing on some money due to exchangers. So the mitigator for estrous doe from a enters into a euro call that is, they will buy a euro call. This means that on mature did a Jewess form has the option to buy the euro at the strike price or buy it from the market in case it is cheaper. If the U. S farm buys a call option with a strike price off 0.9000 and on maturity either ready zero point if someone w dan form, he has a right to exercise the option, since in the example, it would be cheaper for the firm here to buy the euro from market. Does the fungal not exercise the option? Hope you're clear with a call and put 29. Types of Money Options: let's move forward and see another concept in options. That is the concept of money options. No, that in past many questions have been asked from this topic. So please watch carefully. They're diffident regarding buying, and selling of options is done by considering the falling money options. The first is in the money option. Second is out off money option and third is had the money option. Let's discuss each in detail cause let us discuss in the money option. It is an option that would lead to positive cast photo the buyer and that if exercise immediately French, please, no Dad. In this option, the buyer of the option will be again. That is, he will be profiting. So a call option is said to be in the money when the score price that is market price at that time is higher than the strike price Prince scandal. When you will hear the profit when you buy option, obviously, if the current price goddess squat right is more than the strike price, that is pretty specified. Price swing simple down if you're getting lower prices on the day or strike, but currently the prices running higher than that means you have postive Castro. Are you are not profit. Similarly, ah, put option is said to be in the money if strike prices more than the sport price. As we learned, a poker often is simply option to sell, and in selling you will be a prophet or have positive cash flow when we can sell it higher . Veer on these festive every that is tricolored. Let's move forward and now see out off money option. It is an option that will lead to a negative cash flow through the bar if exercising majority. So I call option is said to be out of money when the sport prices lord and the strike price on a put option is said to be out off money when the strike price is less than spot price. Lastly, let's see have the money option. It is an option that would lead to a zero cash flow through the wire if exercise immediately Example. A call option is certainly add the money. When the sport price is equal to strike. Price hop adoption is said to be at the money when the strike price equals toe the sport price. So friends many questions can be asked from this concept, but easier than understand this concept. No need to learn blindly. Just understand the underlying concept off venue in Viet profit or laws. Then you can answer the questions really well. 30. Options : Case Study 1: That's all the guests or the on options. An American manufacturer, ABC LTD. Coaches Japanese goods worth 90 million yens. The career Tom is one month. That is, manufacturer has to pay after one month the Japanese company 90 million yens. No matter what happens to the general rate, that means the American company is at risk. Another raid is not favorable here. ABC LTD. Can hajis by and drinking doing option contract the company can by a foreign currency option, which gives him the right to buy but nor the obligation to buy 90 million Jens at 110 years for dollars. The option carries a premium or cost of US dollar 0.2 million. Please read the history again and better write on a piece of paper so that you don't need to come back here again. So, friends in this case study there is a US manufacturer who buys raw material from Japanese form and needs to pay 90 million Jen's in one month off time. So Friendster form is water. What if there she ended? It is not favourable after one month and does they may lose some extra bucks. Does the manufacturer decides to enter into a call option er the rate of 110 years for dollars. Now they have off shut off, exchange it Liberty 210 years per dollar and give the raid is not in their favor and proceed for market rate in case the exchange rate isn't their favor and they're profiting. So friends ask for discussion. There are three possibilities as regards to this call option. The first is if he and falls civilian falls toe 1 20 ends what u s dollar. So in this case, the phone will purchase Yin's from market instead of going for options. Why? Because now form needs to pay 90. Divided by 1 20 that is $0.75 million who spot market. But if the form goes for option than it has to be a 90 divided by 100 and 10 that is $0.81 million. So formal benefit. Even if the laws the premium off $0.2 million on the call option now, the second possibility is there if the yen is stable. So in this case, ABC LTD. Can purchase either from market or under his option, and it has to pay 90 divided by 100 10 that is 0.81 million U. S. Dollars. In either case, at last, if the GEN rises or will be a premium support, yen right is 200 jen's for US dollar. In this case, if the phone purchases jen from market, he has to pay 90 million divided by 100 That is 0.90 1,000,000 U. S. Dollars. And if manufacturer exercises the option, he has to get 90 million Indians at the rate of 110 years core dollar, or 90 million divided by 100. And that is 0.818 million U. S. Dollars. So manufacturer had savings off 0.9 million U. S. Dollars over sport market. Therefore, the form should exercise the option. No. Next savings is 0.9 minus 0.2 which WASP remember equals to 0.7 million U. S. Dollars. Hope we're clear with this case. Study 31. Options : Case Study 2: Let's do another case. Study on options. A London with form has supplied a heavy machine to New York based form for $10 million. The payment is doing four months. The current's portrait is £1 equals to $1.5. The London form has apprehensions that U. S dollar may decline against birdie phone, so the London form is considering the proposal of buying a put option or four months with four months maturity strike prices £1 equals to $1.60 on the option. Premium is 0.0 Carbone explain the position off London form on maturity at $1.5 million. So, Friends, this case study is similar to the last one, and here also, you have to help the London based form to decide whether to go for option or not. Let's see what's given in the case study. It's given their books. Strike is $1.60 Metro Bees $1.59. Thus, London company will lose 1.59 minus 1.60 That is $0.1 per phone. Donald, A matter of fact on company will be. If the company goes for strike, price will be $10 million in the 0.1 equals two equals $200,000. That is, the company will lose around $100,000 if they go with the foot has they will not exercise put option, and their maximum loss will be the premium that is only $2000 on $10 million Good contract . 32. Swap Contracts: Let's not discuss the last category of derivatives that is swept contracts. A swept contract is a contract that binds to contra parties, toe exchange, the different streams, off payments or the specified appeared at a specified rate. In the context of foreign exchange, it means simultaneous sale and purchase of one currency to another in the context of financial or derivatives does trap me the exchange off who streamed off cash flows or a definite petered off time, as we learn. So happened for a machine is simultaneous potato forward currency on sale off sport currency always were. So let us understand with the help often example. For example, an exporter has US dollars 20,000 available with them, but he does not require the foreign currency now. He actually knew to currency after three months, so what he can do is you can sell $20,000 in sport and simultaneously purchased 20,000 tree moves forward. So, friends, this is nothing but scrapping forex 33. Currency Swaps: Let's now see what a currency slappers When predetermined streams off, payments in different currencies are exchanged on a prefix tree. This is called currencies. Were the cash flow nearly two repayment off principal or interest under a loan obligation? There are three variations off currencies were the first day of spring she will scrap. Only this is done. If repayment of principal is in wall, the second is and just only so it is done. If three women off only interested in war. The third is principal plus interest. It is. Apply it if both are in war. The currencies rap is basically used when the loan is obtained in a different currency. Then from that, it is to be used. A classic example is when the loan is used in foreign currency, but the interest on the foreign currencies wrapped in tow. Rookie interest. So in this case, most forms use currencies, perhaps to save into access premiums. Let us understand. So after the help of an example, Ah, High Data Juca Company is a nude awful peformance and can raise funds in UK at very competitive rates. But it is not alone in India if it raises fund in India. It has to in God, high cost. On the other hand, Ah high rated Indian company also needs foreign currency, that is bones. And if raises funds and UK, it has to end got a high cost because off because it is unknown in UK. So what these companies can do is the boat can raise loans in their domestic currencies and can slap the longs to meet the requirements. An Indian company having higher international ratings may borrow funds and euro at a cheap cost and scrap the loans in tow therapies to reduce the effective cost. Hope you're not clear with currencies wraps.