Foreign Exchange

Type of transactions:
a) Inter-bank Transactions : Forex transactions between two banks/institutions

b) Merchant Transactions: Sale or Purchase transactions with the customers.

Types of accounts:

a) Nostro Accounts: “OUR ACCOUNT WITH YOU” It is foreign currency account

maintained by a bank in domestic country with the bank in foreign country.

b) Vostro Accounts: “YOUR ACCOUNT WITH US” Rupee account of a foreign

bank in India.

c) Loro Accounts: “Their account with you” Account of third bank in foreign
country.

d) Mirror accounts: Dummy account maintained by the banks to know actual

position of Nostro accounts for reconciliation purposes with the foreign
correspondent banks. We may call it a pass-book for our accounts
maintained with foreign banks.

Foreign Exchange Management Act [FEMA]

FEMA was implemented in India with effect from 1 st June 2000. It defines certain
terms as…..

a) Capital Account Transactions: The Transaction which alters the assets and
liabilities outside India of a person resident in India or assets or liability in India
of a person resident outside of India.

b) Current Account Transactions: Other than a capital account transaction

and include payments due in connection with foreign trade, other current
business services and short term banking and credit facilities in ordinary
course of business.

c) Resident as per FEMA: Any person residing in India for more than 182 days
during the course of preceding financial year will be taken as resident in
India.

Method of delivery of forex:

Ready/cash The transaction settled on same day. Also known as ‘value today’
TOM The delivery of foreign exchange/ currency to be made on the
day next to the date of transaction.
SPOT Exchange of currencies takes place two days after the date of
contract –SPOT RATE.
FORWARD When the delivery has to take place at a date farther than the
spot date, then it is a forward transaction –FORWARD RATE.