Option is an agreement between two parties offering to buy or sell a security (a stock, bond, commodity or other instruments) from or to the other party at a specified price within a specific time period. In option contracts, there is no obligation on the part of buyer or seller to buy or sell the…
A forward contract is a privately negotiated agreement between two parties to buy or to sell an asset at a specified price on a future date. Under forward contract, there is an obligation for the buyer to pay for what has been bought and receive delivery thereof as per contract, and for the seller to give…
A ‘Swap’ is an act of exchanging one thing for another. In derivative market, currencies swap, interest rates swap or commodities swaps are most common. Currency Swap: When buying and selling of a foreign currency with different delivery dates simultaneously take place, it is called SWAP transaction. Currency swaps are used to hedge interest rate…
The export order received by an exporter from a foreign buyer may be on FOB terms, CIF firms, and CIP or CPT terms are among the most common of the 12 international commerce terms (incoterms) established by the International Chamber of Commerce (ICC) in 1936. These are international shipping agreements used in the transportation of…
The maxim practiced by the banks is “Buy Low Sell High” for direct quotations and “Buy high Sell Low” for indirect quotation. Let us take an example of a fruit vendor who purchases apple from the market at 1 KG apple for Rs.75 and sells the same to his customers at 1KG apple for Rs.90/-.…
There are two ways to quote a currency pair, known as direct quote and indirect quote. A direct currency quote or home currency quote is simply a currency pair in which the domestic currency is the quoted currency and the foreign currency is the base currency. In the other words, the direct quote varies the…
Cash/ready rate, tom rate, Spot and forward rates are settlement prices of cash, tom, spot & forward contracts. The cross rates are exchange rate between two currencies computed by reference to a third currency, usually the US dollar. For example, USD is used to compute a business transaction between India and Germany although USD is…
Documentary Collection or bill collection refers to the collection of financial and/or commercial documents. The documentary collection is one of the conventional methods of payment in international trade whereby the seller forwards financial and/or commercial documents to the buyer through his bankers against cash payment or acceptance of a bill of exchange. Unlike a bill…
As per the existing policy on External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency, ECB can be raised under tracks I and III for working capital purposes. As per extant regulations ECB can be raised from direct and indirect equity holders or from a group company for working capital purpose. The above…
Capital Account Convertibility means that the currency of a country can be converted into foreign exchange without any controls or restrictions. The Report of the Tarapore Committee on Capital Account Convertibility (1997) provided the following working definition of CAC: “freedom to convert local financial assets into foreign financial assets and vice versa at market determined…