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CAIIB BFM Notes – Bank Finance Management Short Notes Part 1

CAIIB BFM Notes – Bank Finance Management Short Notes Part 1

CAIIB Exams are conducted by IIBF. CAIIB is one of many the flagship courses offered by IIBF, twice a year. It is conducted in the months of June & December every year. This course of CAIIB has a total of 3 subjects out of which 2 are compulsory and BFM or Bank Finance Management is one of the two & the 3rd one is elective.

Bank Finance Management has 4 modules which are further divided into several units.

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PAPER MODULE
Bank Finance Management 1.    International Banking
2.    Risk Management
3.    Treasury Management
4.    Balance Sheet Management

To check out the detailed syllabus of CAIIB- BFM, BFM & electives click here.

Read Also:- CAIIB: BFM ABM in one Attempt

CAIIB BFM SHORT NOTES:

MODULE – A: INTERNATIONAL BANKING

UNIT – 1: Exchange Rates And Forex Business

Foreign Exchange: Currencies conversion from the currency of invoice to the home currency of the exporters is known as Foreign Exchange.

Foreign Exchange Management Act (FEMA), 1999 defines Foreign Exchange as “All deposits, credits and balances payable in foreign currency and any drafts, traveler’s Cheques, LCs and Bills of Exchange, expressed or drawn in Indian Currency and payable in any foreign currency.”

Foreign Exchange Transaction: It is a contract for the exchange of funds in one currency for the funds in another currency at an agreed rate or arranged basis.

Exchange Rate: It is the price or the ratio or the value at which one nation’s currency is exchanged for another nation’s currency.

Important Topic:- CAIIB BFM (BANK FINANCIAL MANAGEMENT) SYLLABUS PRIORITY

Participants of Foreign Exchange markets are:

  • Central Banks
  • Corporations
  • Commercial Banks
  • Individuals
  • Investment Funds or Banks
  • Forex Brokers

Forex Markets: The Forex markets are highly dynamic as that on average the exchange rates of major currencies fluctuate every four Seconds, which effectively means a forex market registers 21,600 changes in a day (15 times X 60 seconds X 24 hours)

Operation: These markets generally operate from “Monday to Friday” globally, except for the Middle East or other Islamic Countries that function on Saturday & Sunday (with restrictions), to cater to the needs of locals, but remain closed on Friday. Most of the Forex markets work on OTC (Over Counter) basis.

Read Also:- CAIIB Bank Finance Management Short Notes Part 2 ( CAIIB BFM )

Factors Determining Exchange Rates:

  • Fundamental Reasons:
    1. Balance of Payment
    2. Political Issues
    3. Economic Growth rate
    4. Interest Rates
    5. Fiscal policy
    6. Monetary Policy
  • Technical Reasons:
    1. Government Control can lead to unrealistic values.
    2. Free flow of Capital from lower interest rates to higher interest rates
  • Speculative: Higher the speculation higher the volatility in the exchange rates

Because the forex markets are vast and operate in different time zones, most of the ‘Forex deals’ in general are done on a SPOT basis.

Important Topic:- BFM Previous Year Question Papers (Bank Financial Management) PDF Free Download

Delivery: The delivery of Forex (FX) deals can be settled in one or more of the below ways:

  • Ready or Cash
  • Spot
  • TOM (Tomorrow Next)
  • Forward
  • Spot & Forward

Ready or Cash: When funds get settled on the same day (date of Deal) it’s referred to as Ready or Cash.

TOM: In this delivery of forex the funds are settled on the next working day of the deal. If the case, the settlement falls on a holiday in any of the 2 countries, the settlement date will be done the next working day in both countries.

Spot: Settlement of funds takes place on the 2nd working day after or following the Contract or deal date. If the settlement day is a holiday in any of the 2 countries, the settlement date will be the next working day in both countries.

Forward: Fund is delivered on any day after the SPOT date in a forward contract.

Spot and Forward Rates: On the other hand, when the currencies are delivered at a date beyond the Spot date, it is a Forward Transaction and the rate applied is known as forwarding Rate.

Forward Rates: These rates are derived from Spot Rates & are the function of the spot rates and forward premium or discount of the currency that is being quoted.

Forward Rate = Spot Rate + Premium

Or

= Spot Rate – Discount

 

Premium: If the currency value is more than what is quoted for Spot, then it is said to be at a premium.

Discount: If the currency is cheaper than what is being quoted for Spot, then it is said to be at a Discount.

The forward premium & discount: These are generally based on the interest rate differentials of the currencies (two) involved.

In a perfect market where there is no restriction on finance and trade, the interest factor becomes the basic factor in arriving at the forward rate.

Read Also:- CAIIB 2022 STUDY MATERIAL

The Forward price of a currency against another: It can be worked out with the help of the following factors:

  • The spot price of the involved currencies
  • The Interest rate differentials for the currencies.
  • The term that is ‘the future period for which the price is being worked out.

The price of the currency can be expressed in 2 ways:

  1. Direct Quote
  2. Indirect Quote.

In Direct Quote –  the local currency is variable. Example: 1 USD = Rs. 74.92

These Direct Quote rates are also called Home/Price Quotations.

In indirect Quote – the local currency remains fixed, while the no. of units of foreign currency varies. Example: Rs.100 = 1.33 USD

On the global level, all currencies (except GBP) are quoted as Direct Quotes. In the case of GBP (Great Britain Pound) £, AU$, €, and NZ$, the currencies are quoted as indirect rates.

Japanese Yen: It is quoted per 100 Units.

Cross Currency Rates: When while dealing in market rates for a particular currency pair is not directly available then the price for the said currency pair is then obtained indirectly with the help of the Cross rate mechanism.

Calculation of Cross Rate:

The calculation is simple algebra: [a / b] * [b / c] = a / c

Substitution of pairs of currency for the fractions shown above (algebra) would get you, for instance, = GBP/AUD x AUD/JPY = GBP/JPY.

This is the implied (also known as theoretical) value of the GBP/JPY, based on the value of the other 2 pairs. The actual value of the GBP/JPY will vary around this implied value, as per the following calculation:

Let us suppose values for the closing BID prices for the 3 currency pairs in this example:

GBP/AUD = 1.73449,

AUD/JPY = 0.85535 and

GBP/JPY = 1.48417.

Now, the interesting part!! Let’s do the math!!

GBP/AUD x AUD/JPY = GBP/JPY

1.73449 * 0.85535 = 1.4836

The above values might not be the exactly same as the actual market price because of the reason that during market hours (Sunday afternoon to Friday afternoon, EST), all prices are LIVE, and the small departures from the mathematical relationships can exist momentarily leading to the difference.

Fixed Vs Floating Rates: The fixed exchange rate is the official rate set by the monetary authorities for 1 or more currencies. It is usually pegged to 1 or more currencies while under floating exchange rate, the value of the currency is decided by supply and demand factors for a specific currency.

The world economies have adopted a floating exchange rate system since 1973 whereas, India adopted a floating exchange rate regime in 1993.

Bid & Offered Rates: The buying & selling rates are referred to as Bid & Offered rates.

Read Also:- Pass Bank Financial Management (BFM) in 1 Attempt

Exchange Arithmetic – Theoretical Overview:

Chain Rule: This rule is used in attaining a comparison or ratio b/w 2 quantities linked together through other quantities and consists of a series of equations.

Percent or Per mille: It’s a percentage (%) that is a proportion to per hundred. Per Mille is per thousand.

Value Date: The date on which funds payment or an entry to an account becomes actually effective and/or subjected to interest if any. In the case of TT, the value date is usually the same in both centers.

Important Topic:- CAIIB BFM SYLLABUS 2022 | BFM – BANK FINANCE MANAGEMENT

Valuer Compense:  The payments that are made on the same day, so that no gain or loss of interest accrues to either party is known as Valuer Compense.

Arbitrage in Exchange: Arbitrage consists of simultaneous buying and selling of a commodity in 2 or more markets to take advantage of temporary price discrepancies.

 

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CAIIB BFM Previous Year Question Papers (Bank Finance Management) PDF Link
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