1 Foreign currency transaction

Forex - Foreign Currency Transactions

Introduction and definition

Foreign currency transactions refer to transactions denominated in a
currency other than the local (domestic) currency of the country in which
the banking office is located.
Source Publication:
Guide to the International Banking Statistics, Bank for International
Settlements, Basel, Switzerland, 2000, Part III Glossary of Terms.
DEFINITION of 'Foreign Exchange'(investopedia)
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 term foreign exchange is usually abbreviated as "forex" and
occasionally as "FX.

Individual investors who are considering participating in the foreign

currency exchange (or forex) market need to understand fully the
market and its unique characteristics. Forex trading can be very risky
and is not appropriate for all investors.
It is common in most forex trading strategies to employ leverage.
Leverage entails using a relatively small amount of capital to buy
currency worth many times the value of that capital. Leverage magnifies
minor fluctuations in currency markets in order to increase potential
gains and losses. By using leverage to trade forex, you risk losing all of
your initial capital and may lose even more money than the amount of
your initial capital. You should carefully consider your own financial
situation, consult a financial adviser knowledgeable in forex trading, and
investigate any firms offering to trade forex for you before making any
investment decisions.
Meaning
The objective of a currency is to provide a standard of value, a medium
of exchange, and a unit of measure. Currencies of different nations
perform the first two functions with varying degrees of efficiency but
essentially all currencies provide a unit of measure. To measure a
transaction in their own currencies, businesses around the globe rely on
exchange rates negotiated on a continuous basis in foreign currency
markets.
Generally speaking, there are three ways to trade foreign currency
exchange rates:
1. On an exchange that is regulated by the Commodity Futures
Trading Commission (CFTC). An example of such an exchange
2

is the Chicago Mercantile Exchange, which offers currency futures

and options on currency futures products. Exchange-traded
currency futures and options provide traders with contracts of a set
unit size, a fixed expiration date, and centralized clearing. In
centralized clearing, a clearing corporation acts as single
counterparty to every transaction and guarantees the completion
and credit worthiness of all transactions.
2. On an exchange that is regulated by the Securities and
Exchange Commission (SEC). An example of such an exchange
is the NASDAQ OMX PHLX (formerly the Philadelphia Stock
Exchange), which offers options on currencies (i.e., the right but
not the obligation to buy or sell a currency at a specific rate within
a specified time). Exchange-traded options on currencies also
provide investors with contracts of a set unit size, a fixed expiration
date, and centralized clearing.
3. In

the

off-exchange

market. In

the

off-exchange

market

(sometimes called the over-the-counter, or OTC, market), an

individual investor trades directly with a counterparty, such as a
forex broker or dealer; there is no exchange or central
clearinghouse. Instead, the trading generally is conducted by
telephone or through electronic communications networks (ECNs).
In this case, the investor relies entirely on the counterparty to
receive funds or to be able to trade out of a position.

2 The Foreign Exchange Market

The foreign exchange market provides the physical and institutional
structure through which the money of one country is exchanged for that
of another country, the rate of exchange between currencies is
determined,

and

foreign

exchange

transactions

are

physically

completed. A foreign exchange transaction is an agreement between a

buyer and a seller that a given amount of one currency is to be delivered
at a specified rate for some other currency.
1 Geographical Extent of the Foreign Exchange Market Geographically,
the foreign exchange market spans the globe, with prices moving and
currencies traded somewhere every hour of every business day. The
market is deepest, or most liquid, early in the European afternoon, when
the markets of both Europe and the U.S. East coast are open. The
market is thinnest at the end of the day in California, when traders in
Tokyo and Hong Kong are just getting up for the next day. In some
countries, a portion of foreign exchange trading is conducted on an
official trading floor by open bidding. Closing prices are published as the
official price, or 'fixing' for the day and certain commercial and
investment transactions are based on this official price.
2 The Size of the Market In April 1992, the Bank of International
Settlements (BIS) estimated the daily volume of trading on the foreign
exchange market and its satellites (futures, options, and swaps) at more
than USD 1 trillion. This is about 5 to 10 times the daily volume of
international trade in goods and services. The market is dominated by
trading in USD, DEM, and JPY respectively. The major markets are

London (USD 300 billion), New York (USD 200 billion), and Tokyo (USD
130 billion).
3 Functions of the Foreign Exchange Market The foreign exchange
market is the mechanism by which a person of firm transfers purchasing
power form one country to another, obtains or provides credit for
international trade transactions, and minimizes exposure to foreign
exchange risk. Transfer of Purchasing Power: Transfer of purchasing
power is necessary because international transactions normally involve
parties in countries with different national currencies. Each party usually
wants to deal in its own currency, but the transaction can be invoiced in
only one currency. Provision of Credit: Because the movement of goods
between countries takes time, inventory in transit must be financed.
Minimizing Foreign Exchange Risk: The foreign exchange market
provides "hedging" facilities for transferring foreign exchange risk to
someone else.
4 Market Participants The foreign exchange market consists of two tiers:
the interbank or wholesale market, and the client or retail market.
Individual transactions in the interbank market usually involve large
sums that are multiples of a million USD or the equivalent value in other
currencies. By contrast, contracts between a bank and its client are
usually for specific amounts, sometimes down to the last penny. Foreign
Exchange Dealers: Banks, and a few nonbank foreign exchange
dealers, operate in both the interbank and client markets. They profit
from buying foreign exchange at a bid price and reselling it at a slightly
higher ask price. Worldwide competitions among dealers narrows the
spread between bid and ask and so contributes to making the foreign
exchange market efficient in the same sense as securities markets.
Dealers in the foreign exchange departments of large international banks
5

often function as market makers. They stand willing to buy and sell those
currencies in which they specialize by maintaining an inventory position
in those currencies. Participants in Commercial and Investment
Transactions: Importers and exporters, international portfolio investors,
multinational firms, tourists, and others use the foreign exchange market
to facilitate execution of commercial or investment transactions. Some of
these participants use the foreign exchange market to hedge foreign
exchange risk. Speculators and Arbitragers: Speculators and arbitragers
seek to profit from trading in the market. They operate in their own
interest, without a need or obligation to serve clients or to ensure a
continuous market. Speculators seek all of their profit from exchange
rate changes. Arbitragers try to profit from simultaneous exchange rate
differences in different markets. Central Banks and Treasuries: Central
banks and treasuries use the market to acquire or spend their country's
foreign exchange reserves as well as to influence the price at which their
own currency is traded. In many instances they do best when they
willingly take a loss on their foreign exchange transactions. As willing
loss takers, central banks and treasuries differ in motive and behavior
form all other market participants. Foreign Exchange Brokers: Foreign
exchange brokers are agents who facilitate trading between dealers
without themselves becoming principals in the transaction. For this
service, they charge a small commission, and maintain access to
hundreds of dealers worldwide via open telephone lines. It is a broker's
business to know at any moment exactly which dealers want to buy or
sell any currency. This knowledge enables the broker to find a
counterpart for a client quickly without revealing the identity of either
party until after an agreement has been reached.

5 Transactions in the Interbank Market Transactions in the foreign

exchange market can be executed on a spot, forward, or swap basis.
Spot Transactions: A spot transaction requires almost immediate delivery
of foreign exchange. In the interbank market, a spot transaction involves
the purchase of foreign exchange with delivery and payment between
banks to take place, normally, on the second following business day. The
date of settlement is referred to as the "value date." Spot transactions
are the most important single type of transaction (43 % of all
transactions). Outright Forward Transactions: A forward transaction
requires delivery at a future value date of a specified amount of one
currency for a specified amount of another currency. The exchange rate
to prevail at the value date is established at the time of the agreement,
but payment and delivery are not required until maturity. Forward
exchange rates are normally quoted for value dates of one, two, three,
six, and twelve months. Actual contracts can be arranged for other
lengths. Outright forward transactions only account for about 9 % of all
foreign exchange transactions. Swap Transactions: A swap transaction
involves the simultaneous purchase and sale of a given amount of
foreign exchange for two different value dates. The most common type
of swap is a spot against forward, where the dealer buys a currency in
the spot market and simultaneously sells the same amount back to the
same back in the forward market. Since this agreement is executed as a
single transaction, the dealer incurs no unexpected foreign exchange
risk. Swap transactions account for about 48 % of all foreign exchange
transactions.
6 Foreign Exchange Rates and Quotations A foreign exchange rate is
the price of a foreign currency. A foreign exchange quotation or quote is
a statement of willingness to buy or sell at an announced rate. Interbank
7

Quotations: The most common way that professional dealers and

brokers state foreign exchange quotations, and the way they appear on
all computer trading screens worldwide, is called European terms. The
European terms quote shows the number of units of foreign currency
needed to purchase one USD:
Direct and Indirect Quotations: A direct quote is a home currency price of
a unit of foreign currency.
An indirect quote is a foreign currency price of a unit of home currency.
In the US, a direct quote for the CAD is USD 0.6341 / CAD This quote
would be an indirect quote in Canada.

3 Forex risk management

Many firms are exposed to foreign exchange risk - i.e. their wealth is
affected by movements in exchange rates - and will seek to manage
their risk exposure. This page looks at the different types of foreign
exchange risk and introduces methods for hedging that risk.
Types of foreign exchange risk
Transaction risk
This us the risk of an exchange rate changing between the transaction
date and the subsequent settlement date, i.e. it is the gain or loss arising
on conversion.
This type of risk is primarily associated with imports and exports. If a
company exports goods on credit then it has a figure for debtors in its
accounts. The amount it will finally receive depends on the foreign
exchange movement from the transaction date to the settlement date.
As transaction risk has a potential impact on the cash flows of a
company, most companies choose to hedge against such exposure.
Measuring and monitoring transaction risk is normally an important
component oftreasury risk management.
The degree of exposure is dependent on:
9

(a) The size of the transaction, is it material?

(b) The hedge period, the time period before the expected cash flows
occurs.
The anticipated volatility of the exchange rates during the hedge period.
The corporate risk management policy should state what degree of
exposure is acceptable. This will probably be dependent on whether the
Treasury Department is been established as a cost or profit centre.
Economic risk
Transaction exposure focuses on relatively short-term cash flows effects;
economic exposure encompasses these plus the longer-term affects of
changes in exchange rates on the market value of a company. Basically
this means a change in the present value of the future after tax cash
flows due to changes in exchange rates.
There are two ways in which a company is exposed to economic risk.
Directly: If your firm's home currency strengthens then foreign
competitors are able to gain sales at your expense because your
products have become more expensive (or you have reduced your
margins) in the eyes of customers both abroad and at home.
If your firm's home currency strengthens then foreign competitors are
able to gain sales at your expense because your products have become
more expensive (or you have reduced your margins) in the eyes of
customers both abroad and at home.
Indirectly: Even if your home currency does not move vis-a -vis your
customer's currency you may lose competitive position. For example
10

suppose a South African firm is selling into Hong Kong and its main
competitor is a New Zealand firm. If the New Zealand dollar weakens
against the Hong Kong dollar the South African firm has lost some
competitive position.
Even if your home currency does not move vis-a -vis your customer's
currency you may lose competitive position. For example suppose a
South African firm is selling into Hong Kong and its main competitor is a
New Zealand firm. If the New Zealand dollar weakens against the Hong
Kong dollar the South African firm has lost some competitive position.
Economic risk is difficult to quantify but a favoured strategy to manage it
is to diversify internationally, in terms of sales, location of production
facilities, raw materials and financing. Such diversification is likely to
significantly reduce the impact of economic exposure relative to a purely
domestic company, and provide much greater flexibility to react to real
exchange rate changes.
Translation risk
The financial statements of overseas subsidiaries are usually translated
into the home currency in order that they can be consolidated into the
group's financial statements. Note that this is purely a paper-based
exercise - it is the translation not the conversion of real money from one
currency to another.
The reported performance of an overseas subsidiary in home-based
currency terms can be severely distorted if there has been a significant
foreign exchange movement.
If initially the exchange rate is given by $/1.00 and an American
subsidiary is worth $500,000, then the UK parent company will anticipate
11

a balance sheet value of 500,000 for the subsidiary. A depreciation of

the US dollar to $/2.00 would result in only 250,000 being translated.
Unless managers believe that the company's share price will fall as a
result of showing a translation exposure loss in the company's accounts,
translation exposure will not normally be hedged. The company's share
price, in an efficient market, should only react to exposure that is likely to
have an impact on cash flows.
Hedging transaction risk - the internal techniques
Internal techniques to manage/reduce forex exposure should always be
considered before external methods on cost grounds. Internal
techniques include the following:
Invoice in home currency
HEDGING TRANSACTION RISK INTERNAL TECHNIQUES
HEDGING TRANSACTION RISK EXTERNAL TECHNIQUES

One easy way is to insist that all foreign customers pay in your home
currency and that your company pays for all imports in your home
currency.
However the exchange-rate risk has not gone away, it has just been
passed onto the customer. Your customer may not be too happy with
your strategy and simply look for an alternative supplier.
Achievable if you are in a monopoly position, however in a competitive
environment this is an unrealistic approach.

12

Leading and lagging

If an importer (payment) expects that the currency it is due to pay will
depreciate, it may attempt to delay payment. This may be achieved by
agreement or by exceeding credit terms.
If an exporter (receipt) expects that the currency it is due to receive will
depreciate over the next three months it may try to obtain payment
immediately. This may be achieved by offering a discount for immediate
payment.
The problem lies in guessing which way the exchange rate will move.
Matching
When a company has receipts and payments in the same foreign
currency due at the same time, it can simply match them against each
other.
It is then only necessary to deal on the forex markets for the unmatched
portion of the total transactions.
An extension of the matching idea is setting up a foreign currency bank
account.
Decide to do nothing?
The company would "win some, lose some".
Theory suggests that, in the long run, gains and losses net off to leave a
similar result to that if hedged.
In the short run, however, losses may be significant.

13

One additional advantage of this policy is the savings in transaction

costs.
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Hedging transaction risk - the external techniques
Transaction risk can also be hedged using a range of financial products.
These are introduced below with links to more detailed pages.
Forward contracts
The forward market is where you can buy and sell a currency, at a fixed
future date for a predetermined rate, i.e. the forward rate of exchange.
This effectively fixes the future rate.
Money market hedges
The basic idea is to avoid future exchange rate uncertainty by making
the exchange at today's spot rate instead. This is achieved by
depositing/borrowing the foreign currency until the actual commercial
transaction cash flows occur. This effectively fixes the future rate.
Futures contracts
Futures contracts are standard sized, traded hedging instruments.
The aim of a currency futures contract is to fix an exchange rate at some
future date, subject to basis risk.

14

Options
A currency option is a right, but not an obligation, to buy or sell a
currency at an exercise price on a future date. If there is a favourable
movement in rates the company will allow the option to lapse, to take
advantage of the favourable movement. The right will only be exercised
to protect against an adverse movement, i.e. the worst-case scenario.
A call option gives the holder the right to buy the underlying currency.
A put option gives the holder the right to sell the underlying currency.
Options are more expensive than the forward contracts and futures but
result in an asymmetric risk exposure.
Forex swaps
In a forex swap, the parties agree to swap equivalent amounts of
currency for a period and then re-swap them at the end of the period at
an agreed swap rate. The swap rate and amount of currency is agreed
between the parties in advance. Thus it is called a fixed rate/fixed rate
swap.
The main objectives of a forex swap are:
To hedge against forex risk, possibly for a longer period than is possible
on the forward market.
Access to capital markets, in which it may be impossible to borrow
directly.
Forex swaps are especially useful when dealing with countries that have
exchange controls and/or volatile exchange rates.

15

Currency swaps
A currency swap allows the two counter parties to swap interest rate
commitments on borrowings in different currencies.
In effect a currency swap has two elements:
An exchange of principal in different currencies, which are swapped
back at the original spot rate - just like a forex swap.
An exchange of interest rates - the timing of these depends on the
individual contract.
The swap of interest rates could be fixed for fixed or fixed for variable.

16

4 Indian Accounting Standard (Ind AS) 21

The Effects of Changes in Foreign Exchange Rates (This Indian

Accounting Standard includes paragraphs set in bold type and plain
type, which have equal authority. Paragraphs in bold type indicate the
main principles.)
Objective
1 An entity may carry on foreign activities in two ways. It may have
transactions in foreign currencies or it may have foreign operations. In
addition, an entity may present its financial statements in a foreign
currency. The objective of this Standard is to prescribe how to include
foreign currency transactions and foreign operations in the financial
statements of an entity and how to translate financial statements into a
presentation currency
17

. 2 The principal issues are which exchange rate(s) to use and how to
report the effects of changes in exchange rates in the financial
statements.
Scope
3 This Standard shall be applied
(a) in accounting for transactions and balances in foreign currencies,
except for those derivative transactions and balances that are within the
scope

of

Ind

AS

39

Financial

Instruments:

Recognition

and

Measurement;
(b) in translating the results and financial position of foreign operations
that are included in the financial statements of the entity by
consolidation, proportionate consolidation or the equity method; and
(c) in translating an entitys results and financial position into a
presentation currency.
4 Ind AS 39 applies to many foreign currency derivatives and,
accordingly, these are excluded from the scope of this Standard.
However, those foreign currency derivatives that are not within the scope
of Ind AS 39 (eg some foreign currency derivatives that are embedded in
other contracts) are within the scope of this Standard. In addition, this
Standard applies when an entity translates amounts 3 relating to
derivatives from its functional currency to its presentation currency.
5 This Standard does not apply to hedge accounting for foreign currency
items, including the hedging of a net investment in a foreign operation.
Ind AS 39 applies to hedge accounting. 5 This Standard applies to the
presentation of an entitys financial statements in a foreign currency and
sets out requirements for the resulting financial statements to be
18

described as complying with Indian Accounting Standards. For

translations of financial information into a foreign currency that do not
meet these requirements, this Standard specifies information to be
disclosed.
6 This Standard does not apply to the presentation in a statement of
cash flows of the cash flows arising from transactions in a foreign
currency, or to the translation of cash flows of a foreign operation (see
Ind AS 7 Statement of Cash Flows).
Definitions
7 The following terms are used in this Standard with the meanings
specified:
Closing rate is the spot exchange rate at the end of the reporting period.
Exchange difference is the difference resulting from translating a given
number of units of one currency into another currency at different
exchange rates.
Exchange rate is the ratio of exchange for two currencies. Fair value is
the amount for which an asset could be exchanged, or a liability settled,
between knowledgeable, willing parties in an arms length transaction.
Foreign currency is a currency other than the functional currency of the
entity.
Foreign operation is an entity that is a subsidiary, associate, joint venture
or branch of a reporting entity, the activities of which are based or
conducted in a country or currency other than those of the reporting
entity.

19

Functional currency is the currency of the primary economic environment

in which the entity operates. A group is a parent and all its subsidiaries.
Monetary items are units of currency held and assets and liabilities to be
received or paid in a fixed or determinable number of units of currency.
4 Net investment in a foreign operation is the amount of the reporting
entitys interest in the net assets of that operation. Presentation currency
is the currency in which the financial statements are presented. Spot
exchange rate is the exchange rate for immediate delivery. Elaboration
on the definitions Functional currency
8 The primary economic environment in which an entity operates is
normally the one in which it primarily generates and expends cash. An
entity considers the following factors in determining its functional
currency: the currency: (i) that mainly influences sales prices for goods
and services (this will often be the currency in which sales prices for its
goods and services are denominated and settled); and (ii) of the country
whose competitive forces and regulations mainly determine the sales
prices of its goods and services. (b) the currency that mainly influences
labour, material and other costs of providing goods or services (this will
often be the currency in which such costs are denominated and settled).
9 The following factors may also provide evidence of an entitys
functional currency:
(a) the currency in which funds from financing activities (ie issuing debt
and equity instruments) are generated.
(b) the currency in which receipts from operating activities are usually
retained. 10 The following additional factors are considered in
determining the functional currency of a foreign operation, and whether
20

its functional currency is the same as that of the reporting entity (the
reporting entity, in this context, being the entity that has the foreign
operation as its subsidiary, branch, associate or joint venture):
(c) whether the activities of the foreign operation are carried out as an
extension of the 5 reporting entity, rather than being carried out with a
significant degree of autonomy. An example of the former is when the
foreign operation only sells goods imported from the reporting entity and
remits the proceeds to it. An example of the latter is when the operation
accumulates cash and other monetary items, incurs expenses,
generates income and arranges borrowings, all substantially in its local
currency
. (d) whether transactions with the reporting entity are a high or a low
proportion of the foreign operations activities
(e) whether cash flows from the activities of the foreign operation
directly affect the cash flows of the reporting entity and are readily
available for remittance to it.
(f) whether cash flows from the activities of the foreign operation are
sufficient to service existing and normally expected debt obligations
without funds being made available by the reporting entity.
11 When the above indicators are mixed and the functional currency is
not obvious, management uses its judgement to determine the functional
currency that most faithfully represents the economic effects of the
underlying transactions, events and conditions. As part of this approach,
management gives priority to the primary indicators in paragraph 9
before considering the indicators in paragraphs 10 and 11, which are
designed to provide additional supporting evidence to determine an
entitys functional currency.
21

12 An entitys functional currency reflects the underlying transactions,

events and conditions that are relevant to it. Accordingly, once
determined, the functional currency is not changed unless there is a
change in those underlying transactions, events and conditions. 6 If the
functional currency is the currency of a hyperinflationary economy, the
entitys financial statements are restated in accordance with Ind AS 29
Financial Reporting in Hyperinflationary Economies. An entity cannot
avoid restatement in accordance with Ind AS 29 by, for example,
adopting as its functional currency a currency other than the functional
currency determined in accordance with this Standard (such as the
functional currency of its parent). Net investment in a foreign operation 7
An entity may have a monetary item that is receivable from or payable to
a foreign operation. An item for which settlement is neither planned nor
likely to occur in the foreseeable future is, in substance, a part of the
entitys net investment in that foreign operation, and is accounted for in
accordance with paragraphs 32 and 33. Such monetary items may
include long-term receivables or loans. They do not include trade
receivables or trade payables. 15A The entity that has a monetary item
receivable from or payable to a foreign operation described in paragraph
15 may be any subsidiary of the group. For 6 example, an entity has two
subsidiaries, A and B. Subsidiary B is a foreign operation. Subsidiary A
grants a loan to Subsidiary B. Subsidiary As loan receivable from
Subsidiary B would be part of the entitys net investment in Subsidiary B
if settlement of the loan is neither planned nor likely to occur in the
foreseeable future. This would also be true if Subsidiary A were itself a
foreign operation. 7 Monetary items 8 The essential feature of a
monetary item is a right to receive (or an obligation to deliver) a fixed or
determinable number of units of currency. Examples include: pensions
and other employee benefits to be paid in cash; provisions that are to be
22

settled in cash; and cash dividends that are recognised as a liability.

Similarly, a contract to receive (or deliver) a variable number of the
entitys own equity instruments or a variable amount of assets in which
the fair value to be received (or delivered) equals a fixed or determinable
number of units of currency is a monetary item. Conversely, the essential
feature of a non-monetary item is the absence of a right to receive (or an
obligation to deliver) a fixed or determinable number of units of currency.
Examples include: amounts prepaid for goods and services (eg prepaid
rent); goodwill; intangible assets; inventories; property, plant and
equipment; and provisions that are to be settled by the delivery of a
nonmonetary asset.

5 Emerging markets, interest rates and tapering

23

Thanks to the Feds tapering, a wider public is becoming aware of

currency instability in diverse economies, from Turkey to Argentina, and
India to Indonesia. Indeed, on Tuesday night Turkey raised overnight
interest rates by a whopping 4.5% to 12% in an attempt to stop a run on
the lira.
Turkey has her own political problems, perhaps strong enough to knock
the stuffing out of her currency on their own, and Argentina seems to be
permanently fighting off hyperinflation. But it is a mistake to think that the
idiosyncrasies of each currency are solely the cause of their downfall.
The fact that these countries currency problems are all happening at the
same time tells us the common factor is currency itself.
Over the last decade it has been fashionable to invest increasing
quantities of money in these economies. Financial flows have also been
instrumental in accelerating the growth of local domestic credit. Money
flows are now in the process of reverting back to base and the chart
below of the Indian rupee is a good example in which this effect on a
currency can be observed.

24

Between 2002 and 2008 the rupee rose against the dollar (i.e. fewer to
the dollar) reflecting inward investment, and after the Lehman Crisis it
started to fall as the money-tide reversed. Since then the rupee has lost
almost 40% of its value. It is also clear from this chart that the primary
trend for the rupee has been firmly down for some time.
The same is true of most other emerging market currencies: before the
Lehman Crisis investment flows into them fuelled both economic growth
and the expansion of bank credit. Since Lehman, these flows have
reversed mostly offset by yet more expansion of domestic credit.
Over much of the last century US dollar cash and deposits expanded on
the back of a gold standard; in the same way todays emerging markets
have expanded on the back of a dollar standard. Therefore, the
25

redemption of these currencies into the US dollar mirrors pre-WW1 bank

runs, except on a global scale. And In every bank run a bank pretends
there is no problem until it is too late.
Central banks cannot escape the fact that currencies depend entirely on
confidence. Markets are now painfully reminding us of this truism,
following the Feds second tapering announcement. A whisper in New
York becomes a storm in Delhi, Ankara, Sao Paulo, Buenos Aires and
Pretoria.
It is an important point. In the same way that under a gold standard a
central bank had to have sufficient gold stocks to maintain confidence in
its currency, an emerging market central bank has to have sufficient
dollar reserves on hand. And this is why from a monetary perspective a
desperate central bank is compelled to increase interest rates when
Keynesian text books tell us such a move is certain to drive these
economies into a deflationary slump.
The screw is now tightening. Having added unprecedented amounts of
liquidity into its own economy through quantitative easing, the Fed is
now reducing the pace of its expansion of narrow money. Unfortunately
this is bad news for emerging market countries, who will surely conclude
that international monetary co-operation has broken down.

6 Corporate annual report

26

An annual report is a comprehensive report on a company's activities

throughout the preceding year. Annual reports are intended to
give shareholders and other interested people information about the
company's activities and financial performance. They may be considered
as grey literature. Most jurisdictions require companies to prepare and
disclose annual reports, and many require the annual report to be filed at
the company's registry. Companies listed on a stock exchange are also
required to report at more frequent intervals
Typical annual reports will include:

General Corporate Information

Accounting policies

Balance sheet

Cash flow statement

Contents: non-audited information

Profit and loss account

Notes to the financial statements

Chairpersons statement

Director's Report

Operating and financial review

Other features

Auditors report

Other information deemed relevant to stakeholders may be included,

such as a report on operations for manufacturing firms or corporate
social responsibility reports for companies with environmentally or
27

socially sensitive operations. In the case of larger companies, it is

usually a sleek, colorful, high-gloss publication.
The details provided in the report are of use to investors to understand
the company's financial position and future direction. The financial
statements are usually compiled in compliance with IFRS and/or the
domestic GAAP, as well as domestic legislation (e.g. the SOX in the
U.S.).
In the United States, a more-detailed version of the report, called a Form
10-K, is submitted to the U.S. Securities and Exchange Commission. A
publicly held company may also issue a much more limited version of an
annual report, which is known as a "wrap report." A wrap report is a
Form 10-K with an annual report cover wrapped around it.
Directors' Role
Statement of Directors' responsibilities for the shareholders' financial
statements
The Directors are responsible for preparing the Annual Report and the
financial statements in accordance with applicable Law of the Republic
of Ireland, including the accounting standards issued by the Accounting
Standards Board and published by The Institute of Chartered
Accountants. Irish company law requires the directors to prepare
financial statements for each financial period which give a true and fair
view of the state of affairs of the company and of the profit or loss of the
company for that period.
In preparing these financial statements, the Directors are required to:

select suitable
consistently

accounting

policies

and

then

apply

them

make judgements and estimates that are reasonable and prudent

prepare the financial statements on the going concern basis unless

it is inappropriate to presume that the Company will continue in
business
The three main elements of financial accounts are:

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 INCOME STATEMENT
This measures the business' performance over a given period of
time, usually one year. It compares the income of the business
against the cost of goods or services and expenses incurred in
earning that revenue.
BALANCE SHEET
This is a snapshot of the business' assets (what it owns or is
owed) and its liabilities (what it owes) on a particular day - usually
the last day of the financial year.
CASH FLOW STATEMENT
This shows how the business has generated and disposed of cash
and liquid funds during the period under review.
Infosys
Information technology consulting company
Infosys Limited is an Indian multinational corporation that provides
business consulting, information technology, software engineering and
outsourcing services. It is headquartered in Bangalore,
Karnataka. Wikipedia
Stock price: INFY (NSE) Rs. 1,168.65 +36.50 (+3.22%)
9 Oct, 3:02 PM IST - Disclaimer
CEO: Vishal Sikka
Founded: July 2, 1981, Pune
Headquarters: Bengaluru
Founders: N. R. Narayana Murthy, K. Dinesh, Nandan Nilekani, Ashok
Arora, S. D. Shibulal, Kris Gopalakrishnan, N. S. Raghavan
Subsidiaries: Infosys BPO Limited, Panaya, Lodestone Management
Consultants, Infosys China, Infosys Australia

29

CONCLUSION
The foreign exchange market is the mechanism by which a person
of firm transfers purchasing power form one country to another,
obtains or provides credit for international trade transactions, and
minimizes exposure to foreign exchange risk.
A foreign exchange transaction is an agreement between a buyer
and a seller that a given amount of one currency is to be delivered
at a specified rate for some other currency.
A foreign exchange rate is the price of a foreign currency.
A foreign exchange quotation or quote is a statement of willingness
to buy or sell at an announced rate.

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BIBLIOGRAPHY
http://www.mca.gov.in
http://www.colorado.edu
http://www.investopedia.com
http://www.answers.com
reports and articles reffered
economic times of india

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