Question

Why correspondent banking is being used so widely in global banking? What are the advantages to banks?

Who are the major participants in the foreign exchange markets and what are their objectives? Explain briefly.

What is the difference between a spot trade and a forward rate? Why would a business use one or the other?

Answer 1

1. Why correspondent banking is being used so widely in global banking? What are the advantages to banks?

Corroespondent Banks are those institution operate under license to provide services related with FInancial Institiution. They act as intermediaries between parties. They provide services like acceptance of deposits, process documenation.

For Eg. For process documentation , regarding the validity of the documents , if corroespondent bank branch is operating in Country Y, In Country X , NewYork Bank required documents to be validated in person, instead of putting / opening NewYork bank branch in Country Y , they have an connection with corroespondent bank in their own country and get the things done on payment of certain commission to corroespondent bank. On commission earning basis Corroespondent bank contact his branch in Country Y and provide the required validation in documentation. Thus saving cost , timing and provide immediate solution at long boundaries around the world.

Advantages are:

- Minimal Cost beared by the FInancial Institution

- Hold Account in Corroespondent bank, and corroespondent bank hold accounts in Financial Institution

- Increase the accessibility at lower cost, Outreach is increased

2. Who are the major participants in the foreign exchange markets and what are their objectives? Explain briefly: Foreign Exchange Market: Where foreign exchange is dealts between the paticpants.

- Commercial Banks: Banks which having license to provide foreign currency services to their customers. They are regulated by the Regualtion Body, for charging foreign remittances, Post shippment, pre shippment services.

- Foreign Exchange Brokers: They are those individuals or partnership firmprovide foreign currency exchange services on commission basis. Eg. Money Exchanger

- Individuals: Individuals are dealt at smaller front simply exchangeing their money to foreign currency , conversion of their money, accepting import and making payment for supporting outside studies.

- Expoters and Inmporters ( Small Enterprenuer): They are those market players who are engaged in export and import business they required to make payment in foreign currency and certain export and imoort documents.

- Corporate firms: They are the players which having contract to be complete in foreign boundaries through their corroespondents , payment , hedging services, Swaps and purchase, trade in foreign exchange.

3. What is the difference between a spot trade and a forward rate? Why would a business use one or the other?  

Spot Rate: It is the price quoted for immediate settlement. Real time quote of an asset / thing / tradable things / exchangable thing/  

Forward Rate: It is the rate used to hedge from the uncertainity about the price at the date of making payment / receiving payment.

Business use one or the other depends upon the market condiition and the transaction obligation.

For Eg:  

Making Payment
Here spot rate is Lower as compared to Forward Market
Market is Favourable
Better to make payment at SPOT Rate
Receiving Payment
Here Spot rate is Lower as Compared to Forward Market
Market is Favourable for Receipient
Better to enter into Forward Agreement for Receive payment at Forward Rate at FORWARD Rate

From Above examples the business will use the Spot or forward rate as per market condition and the obligation and accordingly use their strategy to cover the same.