SUBJECT :FOREIGN EXCHANGE MANAGEMENT

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Case Study Project

Total Marks: 80

SUBJECT :FOREIGN EXCHANGE MANAGEMENT

N. B.: 1)Attempt any Four Questions

2)All questions carries equal marks.

Case 1

(10 Marks)

Mr Oak pays US $ 2000 to buy a December 103 Call option on a US $ 1,00,000. US Treasury Bond at anexercise price of US $ 103. If the price rises above US $ 103, Mr Oak will gain from the difference and ifthe price falls below US $ 103, the maximum amount that Mr Oak may lose is the amount of Premium paid.

Question. 1. Explain the term ‘Speculation’?

Answer:Speculation is the practice of engaging in risky financial transactions in an attempt to profit from fluctuations in the market value of a tradable good such as a financial instrument, rather than attempting to profit from the underlying financial attributes embodied in the instrument such as capital gains, interest, or dividends. Many speculators pay little attention to the fundamental value of a security and instead focus purely on price movements. Speculation can in principle involve any tradable good or financial instrument. Speculators are particularly common in the markets for stocks, bonds, commodity futures, currencies, fine art, collectibles, real estate, and derivatives.

Speculators play one of four primary roles in financial markets, along with hedgers who engage in transactions to offset some other pre-existing risk, arbitrageurs who seek to profit from situations where fungible instruments trade at different prices in different market segments, and investors who seek profit through long-term ownership of an

Question.2. Define Risk Management in detail?

Answer:Risk management is the identification, assessment, and prioritization of risks (defined in ISO 31000 as the effect of uncertainty on objectives) followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate eventsor to maximize the realization of opportunities. Risk management’s objective is to assure uncertainty does not deflect the endeavor from the business goals.

Risks can come from various sources including uncertainty in financial markets, threats from project failures (at any phase in design, development, production, or sustainment life-cycles), legal liabilities, credit risk, accidents, natural causes and disasters, deliberate attack from an adversary, or events of uncertain or unpredictable root-cause. There are two types of events i.e. negative events can be classified as risks while positive events are classified

Question. 3. Define derivatives in detail?

Answer:A derivative is a security with a price that is dependent upon or derived from one or more underlying assets. The derivative itself is a contract between two or more parties based upon the asset or assets. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes.

Derivatives either be traded over-the-counter (OTC) or on an exchange. OTC derivatives constitute the greater proportion of derivatives in existence and are unregulated, whereas derivatives traded on exchanges are standardized. OTC derivatives generally have greater risk for the counterparty than do standardized derivatives.

Question.4. Suggest Mr Oak to hedge the above transaction position?

Answer:Mr Oak pays US $ 2000 to buy a December 103 Call option on a US $ 1,00,000. US Treasury Bond at an exercise price of US $ 103. If the price rises above US $ 103, Mr Oak will gain from the difference and if the price falls below US $ 103, the maximum amount that Mr Oak may lose is the amount of Premium paid. They should prefer hedge.

A hedge is an investment position intended to offset

Case 2

(10 Marks)

Suppose United States dollar is relatively stable while the Indian rupee is suffering from sudden inflationarypressures. As the Indian Rupee buys less in the domestic economy. Indian and their banking institutionsseek the safe haven of the United States Dollars to maintain the purchasing power of their liquid resources.The demand for US dollars created by Indian‘s buying them with Indian Rupees makes the US dollars morevaluable in terms of the rupees and drives up the exchange rate. The United States Dollars commands moreRupees in an exchange of currency.

Question. 1.Define the meaning of Foreign Exchange?

Answer: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 largest trading centers are London, New York, Singapore and Tokyo. The term foreign exchange is usually abbreviated as "forex" and occasionally as "FX."

Foreign exchange transactions encompass everything

Question. 2. What are the Exchange rate risks?

Answer:In the present era of increasing globalization and heightened currency volatility, changes in exchange rates have a substantial influence on companies’ operations and profitability. Exchange rate volatility affects not just multinationals and large corporations, but small and medium-sized enterprises as well, even those who only operate in their home country. While understanding and managing exchange rate risk is a subject of

Question. 3. What are the factors influencing exchange rate risks?

Answer:Foreign Exchange rate (ForEx rate) is one of the most important means through which a country’s relative level of economic health is determined. A country's foreign exchange rate provides a window to its economic stability, which is why it is constantly watched and analyzed. If you are thinking of sending or receiving money from overseas, you need to keep a keen eye on the currency exchange rates.

Question. 4. Comment ‘The relationship between currencies is not always stable and therefore creates exchange raterisk’.

Answer:An exchange rate is the rate at which one currency can be exchanged for another. In other words, it is the value of another country's currency compared to that of your own. If you are traveling to another country, you need to "buy" the local currency. Just like the price of any asset, the exchange rate is the price at which you can buy that currency. If you are traveling to Egypt, for example, and the exchange rate for U.S. dollars is 1:5.5 Egyptian pounds, this means that for every U.S. dollar, you can buy five and a half Egyptian pounds. Theoretically, identical assets should sell at the same price in different countries, because the exchange rate must maintain the inherent value of one currency against the other.

Case 3

(10 Marks)

In order to operate successfully, business communities need computer systems that can accurately record andsummarize their business transactions. This type of information technology is called a Business InformativeSystem. Business Information Technology or Systems have become an essential component of everybusiness organization. It would be very difficult to successfully run a business without some type ofinformation system.

Question. 1. How Business Information System support any business?

Answer:An information system (IS) is any organized system for the collection, organization, storage and communication of information. More specifically, it is the study of complementary networks that people and organizations use to collect, filter, process, create and distribute data.

A computer information system is a system composed of people and computers that processes or interprets information. The term is also sometimes used in more restricted senses to refer to only the software used to run a computerized database or to refer to only a computer system.

Information system is an academic study of systems with

Question. 2. Explain the components of Business Information System?

Answer:There are various types of information systems, for example: transaction processing systems, decision support systems, knowledge management systems, learning management systems, database management systems, and office information systems. Critical to most information systems are information technologies, which are typically designed to enable humans to perform tasks for which the human brain is not

Question. 3. Distinguish between computer hardware and software?

Answer:Computer hardware is any physical device used in or with your machine, whereas software is a collection of code installed onto your computer's hard drive. For example, the computer monitor you are using to read this text and the mouse you are using to navigate this web page is computer hardware. The Internet browser that allowed you to visit this page and the operating system that the browser is running on is considered software.

All software utilizes at least one hardware device to operate. For example, a video game, which is software, uses the computer processor (CPU), memory (RAM), hard drive, and video card to run. Word processing software uses the computer processor, memory, and hard drive to create and save documents.

In a computer, hardware is what makes a

Question. 4. Explain the role and responsibilities of Information Technology Professionals.

Answer:The IT security world has witnessed huge demand in the recent years and this transition is majorly due to the global acknowledgment for the need for IT security. As the world has adopted the IT world as a necessary belonging, the threats surrounding the IT world too are increasing. This led to IT security strategies that can resolve IT problems and control threats occurring in the technology field. The IT security professionals are handed with responsibility of protecting the IT world from rising threats and issues. Let’s have a look at the job of IT

Case 4

(10 Marks)

Question. 1. The primary goal of any national payment system is to enable the circulation of money in its economy. It isrecognized world wide that an efficient and secure payment system is an enabler of economic activity. Morerecently, the proliferation of electronic payment mechanisms, the increase in the number of players in thefinancial arena and the payment crises in quite a few countries and regions in the 1990’s have focusedattention on public policy issues related to the organization and operation of payment systems.

Answer:

Question. 1. What is payment system?

Answer:A payment system is any system used to settle financial transactions through the transfer of monetary value, and includes the institutions, instruments, people, rules, procedures, standards, and technologies that make such an exchange possible. A common type of payment system is the operational network that links bank accounts and provides for monetary exchange using bank deposits.

What makes a payment system a system is the use of cash-substitutes; traditional payment systems are negotiable instruments such as drafts (e.g., checks) and documentary credits such as letters of credit. With the advent of computers and

Question. 2. Explain components of a payment system?

Answer:The payment and settlement system consists of the following components:

·         Banks providing financial intermediation

·         A legal and statutory framework

·         Rules, regulations and agreements

·         Various payments instruments and payment streams.

·         Payment and settlement transactions.

Question. 3. Explain the importance of payment system?

Answer:Payment systems are a vital part of the financial infrastructure of a country. In Malaysia, the large value payment system, RENTAS, which is operated by the Malaysian Electronic Clearing Corporation Sdn. Bhd. (MyClear), a payment subsidiary owned by Bank Negara Malaysia, enables the transfer and settlement of high-value interbank payments and securities. Its failure could contribute to systemic crisis and transmit financial shocks to the financial system. The efficient functioning of RENTAS allows transactions to be completed safely and in a timely manner contributing to overall economic performance.

Question. 4. Explain the evolution of payment systems in various stages?

Answer:Payment systems refer to the set of rules, procedures, and mechanisms for transferring money between two or more financial institutions and their customers. Efficient, secure and reliable payments and settlements systems reduce the transactions costs and are essential for the effective implementation of monetary policy and smooth functioning of money and capital markets.

The principal components of a payment system

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