Exchange Rates and Forex Business
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Define Foreign Exchange under FEMA 1999 Section 2.
Foreign currency deposits, credits, balances payable in foreign currency, and instruments (drafts, LC, bills) expressed in any currency.
Why is spot the most liquid settlement convention in forex?
Largest market participation with highest volume, depth and volatility across all participants.
When is a currency at premium in forward markets?
When forward value is higher (costlier) than spot rate; opposite currency is at discount.
What is the dominant driver of forward premium/discount?
Interest-rate differential between the two currencies in frictionless markets.
Which quote system has India followed since August 1993?
Direct quote system (e.g. USD/INR = 83.10/11); replaced earlier indirect system.
Explain cross-rate mechanism in forex.
Computing unavailable currency-pair rate using common intermediate currency (USD) via two available pairs.
Define bid rate in a dealer quote.
Rate at which quoting bank buys the base currency; lower side of two-leg quote.
Distinguish per cent (%) from per mille (‰).
Per cent is per 100; per mille is per 1,000. Per mille used for very small margins in FEDAI rules.
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