EXCHANGE FUNCTION

Foreign Exchange Department (also called as the International Banking Division)

Only commercial banks have a foreign exchange department. The function of a foreign exchange department is to carry out the banking transactions that are necessary for the smooth operation of foreign trade and commerce. The foreign exchange department is responsible for dealing with and managing the purchase and sale of foreign currencies and is a highly specialized business. All banks, private or state owned, have foreign exchange departments that work closely with the foreign exchange markets in each country trading with other financial centers worldwide. The greatest share of currency trading is specific to a banks own account although a small proportion will be on behalf of its personal customers.

 The foreign exchange department performs the transfer of money from one currency to another, such as US dollars to the Philippine Peso. Its main function is to make money for the bank by speculating on whether a particular currency will rise or fall against another. Banks compete fiercely with each other using experienced market traders and millions of dollars or currency equivalents are exchanged daily. Each bank has direct links to the main foreign exchange market in the country via dedicated phone lines and computers. The departments contain an array of screens providing constantly updated statistical and analytical data. Complex programs attempt to predict the future movement of currencies and instant decisions, as to whether to buy or sell a currency, can result in a bank making or losing substantial sums in seconds.

Services to Importers:
Opening commercial letters to credit to finance the importation of foreign goods. Selling foreign exchange necessary to pay for imported goods purchased in foreign currency. Financing importers to enable them to carry imported goods between time of payment and of their arrival in the Philippines and to subsequent storage, processing, sale, and collection of accounts receivable.

Services to Exporters:
Furnishing reports on the credit standing of buyers in foreign countries. Submitting reports on market conditions and import and exchange regulation abroad. Collecting drafts drawn by Filipino exporters on foreign importers. Paying drafts drawn by Filipino exporters under letter of credit of foreign or Filipino banks and opened in their favor. Advancing money against drafts for collection, or against letter of credit in favor of exporters.

Services to Travelers:
Selling foreign currency, travelers checks, and travelers letter of credit. Supplying letters of introduction to banks and other third parties abroad

Foreign Exchange Departments-the Public Sector

Foreign exchange departments are different depending on whether banks are part of the private sector or the public sector. Foreign exchange departments of banks in the public sector, often referred to as the central bank, have a different focus to those in the private sector. The prime objective is ensuring external trade and to maintain sufficient currency reserves. A central bank controls the amount of currency available, and implements monetary policy. In some countries central banks set the exchange rate of its currency against another. A central banks foreign exchange department attempts to maintain a status quo and will purchase its own currency to stabilize it.

Foreign Exchange Departments-the Private Sector

The emphasis for a foreign exchange department in the private banking sector is to make money whether for its own account or for customers. Most of the daily currency trades are in the private sector and the global foreign exchange market is the largest participant of all commodity markets in terms of trading volume.

Foreign Exchange Market

The foreign exchange market (forex, FX, or currency market) is a form of exchange for the global decentralized trading of international currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of different currencies.

 The foreign exchange market assists international trade and investment by enabling currency conversion. It also supports direct speculation in the value of currencies, and the carry trade, speculation based on the interest rate differential between two currencies. In a typical foreign exchange transaction, a party purchases some quantity of one currency by paying some quantity of another currency.

The foreign exchange market is unique because of the following characteristics:

its huge trading volume representing the largest asset class in the world leading to high liquidity; its geographical dispersion; its continuous operation: 24 hours a day except weekends, i.e., trading from 20:15GMT on Sunday until 22:00 GMT Friday; the variety of factors that affect exchange rates; the low margins of relative profit compared with other markets of fixed income; and the use of leverage to enhance profit and loss margins and with respect to account size.

FINANCIAL INSTRUMENTS TRADED AT FOREIGN EXCHANGE MARKET

Spot - A spot transaction is a two-day delivery transaction (except in the case of trades between the US Dollar, Canadian Dollar, Turkish Lira, EURO and Russian Ruble, which settle the next business day).This trade represents a direct exchange between two currencies, has the shortest time frame, involves cash rather than a contract; and interest is not included in the agreed-upon transaction.

 Forward - In this transaction, money does not actually change hands until some agreed upon future date. A buyer and seller agree on an exchange rate for any date in the future, and the transaction occurs on that date, regardless of what the market rates are then. The duration of the trade can be one day, a few days, months or years. Usually the date is decided by both parties. Then the forward contract is negotiated and agreed upon by both parties. Swap - The most common type of forward transaction is the swap. In a swap, two parties exchange currencies for a certain length of time and agree to reverse the transaction at a later date. These are not standardized contracts and are not traded through an exchange. A deposit is often required in order to hold the position open until the transaction is completed.

 Future - Futures are standardized forward contracts and are usually traded on an exchange created for this purpose. The average contract length is roughly 3 months. Futures contracts are usually inclusive of any interest amounts. Option - A foreign exchange option (commonly shortened to just FX option) is a derivative where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. The options market is the deepest, largest and most liquid market for options of any kind in the world.