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FOREX - Coggle Diagram

- - - - Day 1
        
        Borrow funds locally
        
        Invest foreign currency in foreign deposit account
        
        Convert into foreign currency (ask rate)
      - On cash-flow settlement date
        
        Pay foreign creditor using amount invested in that country
    - - Day 1
        
        Convert into local currency (bid rate)
        
        Invest rand amount locally in a local investment account
        
        Borrow funds in country from which foreign receipt come
      - On cash-flow settlement date
        
        Receive foreign amount and repay foreign borrowing
  - - - Removes uncertainty as to what the rate will be
    - - Cost (premium) incurred in using FEC
      - If rate is less than FEC on settlement date - must still use FEC
    - - If rate given just use it as is
      - If rate not given calc
        
        FEC rate = spot rate (on entering date) + FEC premium
        
        If premium is an annual premium - pro rata equivalent used
  - - - Option to sell - Put option
      - Option to buy = Call option
      - Gives holder the right to exercise not obligation
      - Date on which option may be exercised is the strike or exercise date
      - Before option used - has to be bought
    - - OTC options is a customized option created specifically for the party wanting it
      - Traded options - Standarised size, specified period & only written for selected currencies
      - OTC option brings flexibility, but a premium must be paid. The premium will be higher than that incurred in purchasing traded options
  - - - Local exporter
        
        Invoice foreign sales in Rand & not in foreign currency
      - Local importer
        
        Ask foreign suppliers to invoice in Rand rather than foreign currency
    - - Leading
        
        Pay foreign creditors earlier than credit terms - thus reducing transaction risk
      - Lagging
        
        Delaying a foreign payment if it's expected that local currency will strengthen
    - - Inter-company transactions
      - Amount owing by divisions in a group is matched against amount owing to the different divisions
      - This reduce currency risk
- - - - Bid rate
        
        Price bank pay for the currency
      - Ask rate
        
        Price bank sell currency to a client
      - Bank buys low and sell high
    - - Direct
        
        number of units of local currency for 1 unit in foreign currency ( always multiply)
      - Indirect
        
        number of foreign currency for 1 unit local currency (always divide)
  - - - Indicates that the base currency is expected to increase in value
      - Exchange rate is lower than currently
    - - Indicates that base currency is expected to loss value
      - Exchange rate is higher than currently
    - - (Forward rate-spot rate)/(spot rate ) x 360/days x 100 = premium or discount
- - - - risk that dealer does not perform as expected
    - - risk that counterparty defaulting in future
  - - - the performance of a country’s currency relative to other currencies has a direct impact on how competitive an enterprise will be in the international market
    - - comes from translating foreign currency into local currency or vase versa
    - - Results from adverse changes in exchange rates between date of entering transaction & date paid
      - Foreign supplier perspective – enterprise functional currency depreciates or weakens
      - Foreign customer perspective – SA currency strengthens or appreciates