Foreign Exchange

Preface to the First Edition

Over the last few decades there have taken place dramatic transformations in the realm of foreign exchange and financing of foreign trade. Much of these changes can be attributed to the collapse of the IMF sponsored par value system in the early seventies which saw an onset of unprecedented volatility and upheavals in the international monetary order. In the wake of these changes the financial experts have developed a whole range of new ideas and techniques on management exchange rates, investment of foreign exchange reserve and most of all, management of exchange risks. In the meantime, the banking community, innovative as they are, has spawned a long range of money market and foreign exchange products- derivatives including interest and other kinds of swaps, options and futures, to name only a few- to address the emerging problems concerning management of these risks.

No less dramatic is the growth of foreign exchange business in the international markets. Compared to a modest turnover of a little over $57 billion in 1952, the volume rose nearly 67 times to about $ 1.8 trillion a day by April 2003. It reflects increased globalization, phenomenal growth of international trade and investment, gradual removal of barriers to movement of funds across international frontiers, coupled with aggressive trading activities of the participants in the market. Bangladesh foreign exchange market has also in a small way leapfrogged from a nominal annual turnover of only a billion dollar to nearly 100 billion by the end of 2004.

The advent of a new era of information technology has changed the ways the banks handle their day to day chores of communicating, collecting, collating and dissemination information and date in dealing with their branches, customers and overseas correspondents. It has been creation of communication hubs like SWIFT and CHIP and other gadgets like Reuters and Telerate's real time monitoring and dealing system. The revolutionary improvement in the system of transportation of goods through containerization has led to changes in the concepts of documentation prompting the International Chamber of Commerce to amend the provisions in the Uniform Customs and Practices for Documentary Credits to accommodate through or multimodal transport documents.

The Book, modest as it certainly is, tries to capture not only the concepts underlying these changes for the benefits of the students majoring in foreign exchange and international finance but also provides guidelines to bankers on handling the multifarious work in the foreign exchanges branches of the commercial banks.

The book, the last of a series of treatise authored by me since 1986, represents, for better or worse, the author's humble efforts to fill in the vacuum that exists in the field of literature on this subject, I am grateful to the countless readers encompassing the young students in the universities and especially the bankers, who have shown their appreciation of the benefits they derived from my humble efforts.

I have drawn on the knowledge, expertise and wisdom of many people to prepare the work on this subject. Among those who provided the inspiration are my mentors former Deputy Governors of Bangladesh Bank, Mr Aminul Haque Chaudhury, late Mr. Mahbubur Rahman Khan, former Governors, the legendary Mr. AKN Ahmed, Mr. M Nurul Islam and Mr Khorshed Alam and My friend, philosopher and guide, Dr, Forrest E Cookson who shared with me his treasure of knowledge on money and exchange rates.

My children- Shaila, Arif, Asif and Atique provided the legistic support in tping, scanning and designing of cover.

Syed Ashraf Ali

May 2005

Contents

* Foreign Exchange and international Financial Systems

* Economic and Payments union

* Foreign Exchange Market

* International and Regional institutions

* Sources and uses of foreign exchange

* General and regulatory environment

* FX operation and Documentation

* Dealing in Foreign Exchange