COMMERCIAL BANK

MANAGEMENT

Foreign Exchange Service

Concept: Foreign Exchange Service
• Why foreign currency is needed for a bank?
• Foreign exchange market is the decentralized market to trade currencies
globally, Larger after credit market, operated in big centers throughout
the world like New York, London, Tokyo, Mumbai etc.
• Foreign exchange market gives the structure for exchange of one
currency to others
• Foreign exchange transaction is an agreement between buyer and seller
to given amount of one currency is to be delivered at a specified rate for
some other currency.
• Larger international banks are the main players.
• Does not fix relative values of different currencies but sets market price of
each currency as demanded against other….
• Players are called dealers which are banks, a few insurance companies etc
• Enables currency conversion hence assists the international trade
• It is generally an interbank transaction
Convertible and Nonconvertible Currency
• Convertible Currency
– Easily buy and sold in foreign exchange market
– No any Government restrictions are there
– Two Types
– Fully Convertible: USD, GBP, Yen, Euro
– Partially Convertible: Won and Yuan

• Non Convertible Currency

– Not easily buy and sold in foreign exchange market
– Government restrictions on transactions are there
– For no restriction exchange, one has to go to the black market
 How is exchange rate quoted?
• Direct quotation
– Exchange rate listed as number of US dollar to purchase a one unit of foreign
currency
– For example: 1CAD=0.6308 USD
• Indirect quotation
– The number of foreign currency needed to purchase one unit of US dollar
– All other currency except British Pound is traded in terms of indirect quotation.
– For Example: 1USD = 1.5853 CAD
• Cross rate
– Relation between any two currencies other than dollar
– It can be computed by multiplying direct quote of one currency with indirect quote
of other currency
– Cross rate= NPR per Dollar * Dollar per CAD =NPR/Dollar*Dollar/CAD=NPR/CAD
– If 1USD =NPR 130 then, 130/1.5853 =82
– Hence 1CAD=NPR 82
 How is exchange rate quoted?
• Interbank Foreign Currency Quotations
– The home currency price of one unit of foreign currency is direct
quotation
– The foreign currency price for one unit of home currency is
indirect quotation.
• Bid and ask Quotation
– Bid is the exchange rate being offered for buy
– Ask is the exchange rate being offered for sell
– This difference is for
• Transaction cost of dealers
• To make exchange profit for the dealers
How is exchange rate quoted in Nepal?

• Pegged with INR

• When there is rain in India, we open our

umbrella here in Nepal.
• INR 1 = NPR 1.60

• First of all conversion rate for USD is calculated

through price of USD in terms of INR.
• After this, rates for all other currencies are
calculated after fixing price of USD as per above
point
 Determinants of Exchange Rates
• Differential in inflation rates among countries
• Differential in interest rates (Lenders View)
• Current account deficit (Difference in BOP), terms
of trade
• Public Debt (large debt country is attract foreign
investment less), practice of country rating from
Moody’s or Standard and poor’s
– Worst scenario is to print home currency in excess, result
in value on exchange rate of home currency

• Political and Economic Stability

– Capital flight to more stable country
 FEDAN
(Foreign Exchange Dealers Association of Nepal)

• Established by authorized dealers to abide by the forex regulations

of NRB
• Self regulated organization registered in District Administration
Office, which was established in the year 1996.
• Established in order to lay down some rules in trading foreign
exchange
• FEDAN has also developed some rules to protect interest of
exporters, importers, public and dealers.
• Consists of treasury dealers working in different commercial banks
and other member institutions.
• Maintains close contact and bonding between dealers
• Also deals with NRB and MOF in forex issues from the part of
commercial banks
 Functions of FEDAN
• To enlist bank’s treasury dealers as authentic for treasury deals
• To provide platform for authorized dealers to make authentic deals with each
other. Reuter’s messenger and Ekon Messenger is used for treasury dealing in
Nepal, interface of which can only be extended by FEDAN.
• To fulfill reporting requirement of NRB. To report mid rate for USD to the
members within 10 AM to 2 PM each day apart from holidays.
• To deal with NRB, MOE on behalf of banking sector on foreign exchange issues.
• To represent Nepalese Banking Sector in front of foreign delegates in National
and International Seminar regarding the issues of foreign exchange.
• To conduct timely meeting and gatherings of the members
• To conduct training and development programs for treasury dealers
• To act as dispute settlement body in case of any problem among dealers.
 Responsibilities of FEDAN
• To report MID USD rate to NRB and member dealers by
10 AM to 2 PM each day except holiday.
• Update and enlist the authorized treasury dealers in
Nepal
• Conduct regular meeting of dealers to discuss
contemporary and new issues
• Timely settlement of dispute between dealers
• Work closely with NRB and MOE in case of FCY and
money market
• Ensure all FEDAN members to compile compliance
relating to FCY and money market in Nepal
 Concept of Nostro and Vostro Account
• Nostro Account
– Nostro Account means our account with you.
– Derived from latin word “Noster”, which means ours
– Always in foreign currency for transaction settlement
– Dollar account of Nabil Bank with Amex, New York is nostro
account for Nabil Bank.

• Vostro Account
– Vostro Account means your account with us.
– Derived from latin word “Voster”, which means yours
– Always in home currency
– Dollar account of Nabil Bank with Amex, New York is vostro
account for Amex, New York.