Chapter.5-Foreign currency activities

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FOREIGN CURRENCY

ACTIVITIES AT

COMMERCIAL BANK

Chapter 05

<b>Reading: Text book – Chapter 6:</b>

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Objectives



Overview of foreign currency activities;



Determination of profit / loss in trading foreign currency;



Evaluation of foreign currency balance at the end of the

period;

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Foreign currency trading (Forex trading) involves

buying and selling foreign currency to:



Secure the balance of the forex trading account,



Secure the source of foreign currency



Seeking profit through exchange rate differences

and interest rates between different currencies.

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 Foreign currency trading was born and developed to adapt the
requirements of international trade activities.

_{For banks, although trading foreign currencies is not a traditional}
activity, but the establishment of a division specialized in foreign
currency trading becomes very necessary to:

_{Ensure that the foreign currency payment to customers between}
countries is done smoothly.

_{Increase the “image” of the bank through the importing and exporting}
activities.

Develop other activities such as international payment services,
guarantee and other related-foreign currencies transactions.

_{Earn revenue and profit for the bank through the foreign exchange}
transactions.

 Enhance the strength and ability to hedge risks due to exchange rate
fluctuations and the competitiveness of the bank industry.

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<b>MEMBERS OF FOREIGN CURRENCY MARKET:</b>
 STATE BANK;

 CREDIT INSTITUTIONS;
 CUSTOMER.

 <b>_{FOREIGN CURRENCY MARKET:}</b>
_INTERBANK;

_{BANKS & CUSTOMERS.}

<b>ALL FOREIGN CURRENCY TRANSACTIONS BETWEEN </b>

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

<b> Currency Exchange Rate </b>

is the price at a point of time, the

currency of one country can be converted to the currency of

another country.



Currency Exchange Rate is determined by the amount of

domestic currency units per unit of foreign currency.



When the exchange rate falls, it means the appreciation of the

domestic currency and the depreciation of the foreign currency.



On the contrary, if the exchange rate increases, the domestic

currency depreciate and the foreign currency appreciate.

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Saigon Commercial Bank, at 9:15 am, there is

information related to foreign currency trading as follows:

1 USD = 0.709 GBP

1 USD = 23,000 VND

1 GBP = 31,000 VND

Assume that a staff in foreign currency trading

department is assigned VND 46,000,000 for trading .

How does the staff trade to get the highest profit in VND?

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1 USD = 0.709 GBP; 1 USD = 23,000 VND; 1 GBP = 31,000 VND

Case 1: VNĐ => Buy USD => Buy GBP => Sale GBP => Take VND:

46KK vnd

_

2K usd

_

1.418K gbp

_

44KK vnd =>

Loss: 2KK vnd

.

Case 2: VNĐ => Buy GBP => Buy USD => Sale USD => Take VND:

46KK vnd

_

1.48K gbp

_

2.09K USD

_

48KK vnd =>

Gain: 2KK vnd

.

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Foreign currency conversion link:

/>

Performing foreign currency trading between:



UER - USD - VND



UER - JPY - VND

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Determining the

results of foreign

currency trading at

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=

= - x

Average
buying

rate
Average

buying

rate =

Beginning
balance

value
Beginning

balance

value ++

Value
purchased
during period
Value
purchased
during period
+
+
Amount
purchased
during period
Amount
purchased

during period

Formula to determining foreign currency trading results at the end of
period

11

-- _xxx

-=
=
=
= _-
-=
= _-
-=

= xx

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<b>=</b>

<b>Exchange rate adjustment: </b>



Currency amount at the end of the

period;



Exchange rate at the end of the

period;



Handle the differences.

VAT and assessment of exchange rate at

the end of the period

<b>VAT </b>
<b>rate</b>

<b>x</b>

<b>Currency </b>
<b>trading </b>

<b>result</b>
<b>VAT </b>

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<b>Date</b> <b>Discription</b> <b>_Amount</b> <b>_Rate</b> <b>Amount left</b>

Begin balance _120.000 20.000 <b>120.000</b>

05/05 Sale USD _80.000 _20.010 <b>40.000</b>

10/05 Purchase USD _30.000 _20.080 <b>70.000</b>

15/05 Sale USD _20.000 _20.170 <b>50.000</b>

25/05 Purchase USD _50.000 _20.160 <b>100.000</b>

Ending rate _20.200 <b>100.000</b>

1
3

Foreign currency trading of the bank in May make profit or loss?
Evaluate the foreign currency differences at the end of May?

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Derivative financial instruments

<b>        </b>

<b>Forwar</b>

<b>ds</b>

<b>Options</b>

<b>Futures</b>

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Thị trường tài chính và các định chế tài chính_ Chapter 08

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