International Financial Management

P G Apte

…a peculiar currency of your own

So much of barbarism, however, still remains in the transactions of most civilized nations, that almost all independent countries choose to assert their

nationality by having, to their own inconvenience and that of their neighbors, a peculiar currency of

their own.

John Stuart Mill, 1894

CURRENCY MARKETS• The foreign exchange market is the market in which currencies are bought and sold against each other.

• The inter-bank foreign exchange market is an over-the-counter (OTC) market. London is the largest centre followed by New York/Tokyo. 20-25 other smaller centres. Average transaction size is about USD 5 million

• The participants in the wholesale market are commercial banks, investment institutions, corporations and central banks. Currency brokers act as middlemen between dealers

• A small number of currencies account for bulk of turnover: USD, EUR, GBP, CHF, JPY, CAD, AUD

Size Of the Global Forex Market

Largest market in the world

• $3.99 trillion average daily turnover in 2007, which is

equivalent to more than 10 times the average daily turnover

of global equity markets. May reach $5 trillion in 2010.

• More than 35 times the average daily turnover of the NYSE

• In 2007, $500 a day for every man, woman, and child on

earth

• Annual turnover more than 10 times world GDP

• Trade related transactions account for about 15% of the

turnover; the rest are related to capital flows.

• 80% of the transactions are estimated to be for speculative

purposes and the rest for commercial purposes

FOREX MARKET TURNOVER (NET)

DAILY AVERAGE, APRIL 2007

(US$ BILLION)

TOTAL 3988

SPOT 1305

OUTRIGHT FORWARDS 433

SWAPS 2250

US$ vs. OTHERS 2660.262

EURO vs. OTHERS 1139.406

JPY vs. OTHERS 509.731

GBP vs. OTHERS 460.779

CHF vs. OTHERS 208.790

2007 BIS SURVEY – FOREX MARKET.

• Average daily FX turnover $3.99 trillion USD.

• Increased by more than 2.7 time since 2001.

• 67% Forwards and Swaps.

• 33% Spot transactions.

• Less than 10% delivered.

• USD involved in 89% of trades – almost $1.7 trillion daily.

• The forex market has not escaped the impact of global deleveraging and the failure of Lehman Brothers in 2008.

• Central banks from around the world have released their semi-annual foreign exchange surveys and based upon all of the reports, forex trading volume decreased significantly between April 2008 and April 2009.

• The lack of participation may explain why the major currency pairs have been stuck in a range since the beginning of May. In New York for example, forex spot trading volume fell to the lowest level in more than 3 years.

• London remains the most active forex trading center followed by NY and Tokyo. The EUR/USD is still the most actively traded currency pair by far.

                                

Geographic Distribution of Turnover(in percent)

0

5

10

15

20

25

30

35

40

1992 1998 2004 2007

UK

US

Japan

Singapore

Switzerland

Source: BIS

• The BIS data in its triennial survey is incomplete.

• The global turnover maybe around 6% higher than reported.

• Turnover in Asian currencies (excluding Japanese Yen) is under-reported to a higher extent – maybe as much as 15%. In some Asian currencies like Chinese Yuan this is much higher.

• Turnover on account of trade-related transactions is a larger fraction of total turnover for Asian currencies than for developed country currencies.

• Although growing fast, the share of Asian currencies (excluding Yen) in the global turnover is only about 7.5%. Australian dollar alone has a 6.6% share. Japanese Yen has 17.5%.

• Asian currencies have a larger share of inter-dealer activity in the total turnover compared to global average.

• The turnover of Asian currencies is low relative to the volume of trade in goods and services compared to the global average. Thus for most Asian currencies activity in the markets is driven largely by trade.

• Due to controls on capital flows, transactions with financial customers form a low share of total turnover for most Asian currencies. The exceptions are SGD and HKD.

• For most Asian currencies, over 90% of the turnover is against the US dollar.

• Again due to capital controls, the share of non-residents in the total turnover is quite small.

CURRENCY MARKETS• Among the participants, primary price makers or professional dealers make a two-way market to each other and to their clients

• Foreign currency brokers act as middlemen between two market makers. Their main function is to provide information to market-making banks

• Corporations usually are price takers. However, some non-bank, non-financial companies do act as market makers.

• Large money centre banks deal in a large number of currencies. Smaller banks have a restricted range.

It is a 24-hour market

• The business day opens in Wellington, New Zealand, followed by Sydney, Tokyo, Hong Kong and Singapore.

• A few hours later, trading begins in Bahrain.• Late in the Tokyo day, markets open in Europe.• In the early afternoon in Europe, markets open in

the United States.• In the mid to late afternoon in New York, markets

open in the Asia-Pacific area.• Most of the activity takes place when European

markets are open.

CURRENCY MARKETSGeographically, the markets span all the time zones from Auckland, New Zealand to Los Angeles, United States.

3.00 pm in Tokyo 2.00 pm in Hong Kong.

3.00 pm in Hong Kong 1.00 pm in Singapore.

3.00 pm in Singapore 12.00 noon in Bahrain.

3.00 pm in Bahrain 12.00 noon in Frankfurt and Zurich and 11.00 am in London.

3.00 pm in London 10.00 am in New York.

3.00 pm in New York Noon in Los Angeles.

3.00 p.m. in Los Angeles 9.00 a.m. of the next day in Sydney.

London, Tokyo and New York account for about 50% volume.

0

5,000

10,000

15,000

20,000

25,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Measuring FOREX Market Activity: Average Electronic Conversations Per Hour

Tokyoopens

Asiaclosing

10 AMIn Tokyo

Afternoonin America

Londonclosing

6 pmIn NY

Americasopen

Europe opening

LunchIn Tokyo

Geographic Extent of the Market

How Volatile is the Market?

  The dollar’s value changes 18,000 times during an average trading day —that’s once every 4.8 seconds

In 2005 :

– The daily trading range was as much as 1–2%

– The average monthly difference between high and low

was 3–5%

Volatility is always part of the market behaviour

Annual currency volatility is typically 10–20% (or more)

Inter-bank Dealing

Corporate Desk of Bank A or I/B Desk of Bank B

I/B

Desk

of

Bank A

I/B Desk

of Bank C

Corporate Foreign Exchange (CorpFx) Desk of Bank A

Corporate Client of Bank A

CorpFx

Desk

of

Bank A

I/B Desk of Bank A

I/B Desk of Bank B

Dealings of Corporate Foreign Exchange (CorpFx) Desk of Bank A

Client of Bank A

CorpFx Desk of Bank A

Export / Import Desk of Bank A

Outward / Inward Remittance Desk of Bank A

Foreign Exchange Brokers• Foreign exchange brokers are agents who

facilitate trading between dealers without themselves becoming principals in the transaction

• For this service they charge a small commission

• They maintain instant access to hundreds of dealers worldwide via open lines and at times may maintain such lines with several banks, with separate lines for differing currencies, spot and forward rates

                                                                                                          

Currency Distribution of Forex Turnover

Because two currencies are involved in each transaction the percentages sum to 200.

Source: BIS

0

20

40

60

80

100

2001 2004 2007

dollar

euro

yen

pound

Most traded currencies[2]

Currency distribution of reported FX market turnover

Rank Currency ISO 4217 code(Symbol)

 % daily share(April 2007)

1  United States dollar USD ($) 86.3%

2  Euro EUR (€) 37.0%

3  Japanese yen JPY (¥) 17.0%

4  Pound sterling GBP (£) 15.0%

5  Swiss franc CHF (Fr) 6.8%

6  Australian dollar AUD ($) 6.7%

7  Canadian dollar CAD ($) 4.2%

8-9  Swedish krona SEK (kr) 2.8%

8-9  Hong Kong dollar HKD ($) 2.8%

10  Norwegian krone NOK (kr) 2.2%

11  New Zealand dollar NZD ($) 1.9%

12  Mexican peso MXN ($) 1.3%

13  Singapore dollar SGD ($) 1.2%

14  South Korean won KRW (₩) 1.1%

Other 14.5%

Total 200%

DAILY TURNOVER IN INDIAN MARKET

CURRENCY MARKETS

• Spot Markets : Value date two business days from transaction date. If bank holiday in either settlement centre, push to next business day.

• Outright Forwards : Value date three business days and beyond.

• Standard forward dates : 1, 2, 3, 6, 9, 12 months. Spot value date plus required calendar months. If holiday, push forward to next eligible business day; but pushing forward must not carry you to next calendar month; then push back

• Swaps : A spot plus a forward or two forwards. Buy USD spot vs. INR, sell USD 3 month forward vs.INR. Sell USD 1 month forward, buy USD 3 month forward vs. GBP.

                                                                                                                       

Top 10 Currency Traders % of Overall Volume, May 2009

Rank               Name                             Market Share

1                    Deutsche Bank                                  20.96% 2                    UBS AG                                        14.58% 3                   Barclays Capital                               10.45% 4              Royal Bank of Scotland                  8.19% 5                      Citi                                          7.32% 6                  JPMorgan                                        5.43% 7                HSBC                                            4.09% 8                 Goldman Sachs                                 3.35% 9                   Credit Suisse                                     3.05% 10               BNP Paribas                                      2.26%

The monthly turnover in the inter-bank segment of the foreign exchange market in India increased from US $405 billion in March 2006 to US $533 billion in March 2007 and that in the merchant segment from US $141 billion to US $192 billion. As of now the average daily turnover is estimated to be around $35 billion.

Bulk of this is in the Mumbai market. Other centres are Delhi, Kolkata and Chennai.

CNY: CHINESE YUAN

KRW: KOREAN WON

TWD: TAIWAN DOLLAR

INR: INDIAN RUPEE

PHP: PHILIPPINES PESO

THB: THAI BAHT

IDR: INDONESIAN RUPIAH

MYR: MALAYSIAN RINGITT

SGD: SINGAPORE DOLLAR

HKD: HONGKONG DOLLAR

CURRENCY MARKETS• A spot GBP/USD deal on Friday December 12: Value date Tuesday December 16

• If December 16 holiday in NY/London, value date December 17.

• Suppose the deal is between a French and a German bank and December 16 is holiday in Paris but not London or NY. Push forward?

• A 2-month forward deal USD/CHF on Monday Dec 22: Value date Feb 24. If holiday in NY/Zurich, Aug 17.

• A 3-month forward USD/JPY on Nov 26, 2008. Value date Feb 28, 2009. If holiday in Tokyo/NY, push forward? NO. Pushing forward must not carry into next calendar month. Push back to Feb 27, 2009. Could have pushed forward in a leap year – February 29.

• Spot deals in some currency pairs in the same time zone such as US dollar-Canadian dollar, US dollar- Mexican peso settled in one business day

CURRENCY MARKETS

ACI QUOTATION CONVENTIONSSPOT RATE QUOTATIONS:• Base Currency/Quoted Currency Bid Rate/Offer Rate• USD/CHF : USD base, CHF quoted• GBP/USD : GBP base, USD quoted

• Most currencies quoted with USD as base. Exceptions are EUR, GBP, AUD, NZD, CAD

• Quotation given as no. of units of quoted currency per unit of base currency, bid rate/offer rate.

• Bid rate applies to market-maker buying base currency. Offer rate applies to market-maker selling base currency.

CURRENCY MARKETS• Currency Codes : All currencies have a 3-letter code used by SWIFT (Society for Worldwide Inter-bank Financial Telecommunications) for all inter-bank transactions. USD : US Dollar AUD : Australian Dollar CAD : Canadian Dollar JPY : Japanese Yen GBP : British Pound INR : Indian Rupee SAR : Saudi Riyal EUR : Euro SEK : Swedish Kroner DKK : Danish Kroner CHF : Swiss Franc SGD : Singapore Dollar KRW : Korean Won THB : Thai Baht

European Currencies which have become history: DEM : Deutschemark FRF : French Franc NLG :Dutch Guilder ITL : Italian Lira ESP : Spanish Peseta PTE : Portugese Escudo BEF : Belgian Franc LUF : Luxembourg Franc IEP : Irish Pound FIM : Finnish Markka ATS : Austrian Schilling GRD : Greek Drachma

CURRENCY MARKETSSPOT QUOTES : EXAMPLES

USD/CHF SPOT: 1.2075/1.2080

Bid Offer (Ask)

Bank will buy 1 USD and give CHF 1.2075

Bank will sell 1 USD and want to be paid CHF 1.2080.

Shortened to 1.2075/80 or even 75/80 between dealers. “1.20” is the “big figure”

CURRENCY MARKETS

SPOT QUOTES : EXAMPLES

Interpret these quotes :

GBP/USD : 1.5218/25 EUR/USD : 1.2525/30

GBP/EUR : 1.2150/55 USD/INR : 49.1850/49.2075

USD/JPY : 98.3550/55

• Most currencies quoted upto six significant figures. Last two figures known as “points” or “pips”. A pip is 0.0001. In the GBP/USD quote the bid-offer spread is 8 pips. Smaller currencies such as JPY and INR are quoted to 2 decimals in merchant segments. Here a pip is 0.01

CURRENCY MARKETS• Quotations in European Terms: Units of a currency per US dollar. Example : USD/INR : 48.5560/675

• Quotations in American Terms : US dollars per unit of a currency. Example : GBP/USD : 1.6650/55

• Direct Quotations: Units of “home” currency per unit of “foreign” currency. Example : USD/INR above, a direct quote in India.

• Reciprocal or Indirect Quotations: Units of “foreign” currency per unit of “home currency”. Example:

USD/GBP : 0.5085/0.5090, an indirect quote in US.

GBP/USD : 1.6650/55, an indirect quote in UK

INTERBANK SPOT DEALING• Friday December 25, 10.45 am • BANK A : "Bank A calling. Dollar-Swissy 25 please.”

(Bank A is specifying the size of the deal because it is much larger than the market lot)

• BANK B : "Forty -Fortyfive” (Bank B is specifying a two-way price. Knowing that the caller is also a forex dealer, the dealer in Bank B quotes only the last two decimals of the full quotation. For instance the full quotation might be 1.1540/1.1545. The quote is valid for 3-5 minutes.)

•BANK A : “Mine”

(Bank A dealer finds bank B’s price acceptable and wishes to buy USD 25 million. She conveys this by saying “mine”; if she wanted to sell USD she would say “yours”)

SPOT DEALING (Contd.)

• BANK B : OK. I sell you USD 25 million against CHF at 1.1545, value 29 December. UBS Geneva for my CHF.

• BANK A : CITIBANK NYK for my dollars. Thanks & Bye.

• Deal is consummated. Back office staff will retrieve details, exchange confirmatory faxes/telexes and arrange settlement.

• Spot deals (including those in swaps) account for about 60 % of total turnover.

• Dealers work within limits assigned by management

• Counter-party must be acceptable credit.

CURRENCY MARKETS

Inter-bank Arbitrage : Suppose banks A and B are quoting : A BGBP/USD : 1.6550/1.6560 1.6338/1.6348

--------- Bank A Bid Ask ---------- Bank B Bid AskBuy GBP from bank B, sell to bank A. Prices will move. A BGBP/USD : 1.6652/1.6662 1.6648/1.6658 --------- Bank A ---------- Bank B

No arbitrage. Quotes must “overlap”.

INVERSE QUOTES AND TWO-POINT ARBITRAGE

USD/CHF : 1.2955/1.2962 A bank in Zurich

CHF/USD : 0.7728/0.7735 A bank in NY

Arbitrage Opportunity? Buy Swiss francs 1 million in Zurich sell in New York.

$(1,000,000/1.2955) i.e. $771902.74 needed to acquire the Swiss francs.

$(0.7728 1000000) i.e. $772800, obtained on selling, a riskless profit of $897. Zurich USD/CHF quotes imply certain CHF/USD quotes:

Implied (CHF/USD)bid = 1/(USD/CHF)ask

Implied (CHF/USD)ask = 1/(USD/CHF)bid

INVERSE QUOTES AND TWO-POINT ARBITRAGE

USD/CHF : 1.2955/1.2962 implies CHF/USD :0.7715/0.7719. Any quote which does not overlap this would lead to arbitrage. For example CHF/USD : 0.7728/0.7735 allows arbitrage.A quote such as 0.7718/0.7723 will not lead to arbitrage though it may lead to a one-way market for the banks.

The rates actually found in the markets will obey the above relations to a very close approximation.

GBP/USD: 1.6015/20 USD/GBP ?USD/INR: 48.7550/48.7650 INR/USD ?GBP/EUR: 1.2735/45 EUR/GBP?

CROSS-RATES AND THREE-POINT ARBITRAGEA New York bank is currently offering these quotes :

USD/JPY : 110.25/111.10 USD/AUD : 1.6520/1.6530

At the same time, a bank in Sydney is quoting : AUD/JPY : 68.30/69.00

Is there an arbitrage opportunity?

Consider this sequence of transactions: Sell yen against US dollars and the US dollars against Australian dollars both in New York and finally sell the AUD for yen in Sydney. This is known as 3-point arbitrage : Sell A, buy B; Sell B buy C; Finally sell C buy A.

CROSS-RATES AND THREE-POINT ARBITRAGEThe calculations are :(N: NY S: Sydney)

1 JPY in NY gets USD [1/(USD/JPY)ask(N)] = USD (1/111.10)

Sell USD [1/(USD/JPY)ask(N)] in NY to get AUD

{[1/(USD/JPY)ask(N)](USD/AUD)bid(N) } = AUD (1/111.10)(1.6520)

Sell AUD {[1/(USD/JPY)ask(N)](USD/AUD)bid(N) } in Sydney to get

JPY{[1/(USD/JPY)ask(N)](USD/AUD)bid(N)(AUD/JPY bid(S) }

= JPY (1/111.10)(1.6520)(68.30) = JPY 1.0156

A riskless gain of JPY 0.0156 per yen you started with.

CROSS-RATES AND THREE-POINT ARBITRAGESynthetic Rates must overlap observed market rates

Synthetic (C/A)bid = (C/B)bid (B/A)bid

Synthetic (C/A)ask = (C/B)ask (B/A)ask

e.g. USD/INR: 44.7550/44.7725 USD/CHF: 1.2765/70

Synthetic (CHF/INR)bid = (CHF/USD)bid (USD/INR)bid =

[1/(USD/CHF)ask] (USD/INR)bid = (1/1.2770)(44.7550) = 35.0470

Synthetic (CHF/INR)ask = (CHF/USD)ask (USD/INR)ask =

[1/(USD/CHF)bid] (USD/INR)ask = (1/1.2765)(44.7725) = 35.0744

----------------- 35.0470 35.0744

---------------- --------------- Acceptable

--------------- ------------- not acceptable

Citibank $1.2223/€

Barclays Bank $1.8410/£

Dresdner Bank €1.5100/£

Foreign Exchange Rates & Quotations

• Intermarket Arbitrage– Cross rates can be used to check on

opportunities for intermarket arbitrage– Example: Assume the following exchange

rates are quoted

Citibank New York

Dresdner Bank Barclays Bank, London

(1) Sell $1,000,000 to Barclays Bank at $1.8410/£

(2) Receive £543,183

(3) Sell £543,183 to Dresdner Bank at €1.5100/£

(4) Receive €820,206

(5) Sell €820,206 to Citibank at $1.2223/€

(6) Receive $1,002,538

End with $1,002,538 Start with $1,000,000

3-Point ARBITRAGE….

Foreign Exchange Rates & Quotations

Intermarket ArbitrageThe cross rate between Citibank and Barclays is

($1.8410/₤) ---------------- = €1.5062/ ₤ ($1.2223/€)

This cross rate is not the same as Dresdner’s rate quote of €1.5100/£

Therefore, an opportunity exists for risk-less profit or arbitrage

EUR Locking RatesEUR Locking RatesEUR/ATS= 13.760300EUR/BEF= 40.339900EUR/DEM= 1.955830EUR/ESP= 166.386000EUR/FIM= 5.945730EUR/FRF= 6.559570EUR/IEP= 0.787564EUR/ITL= 1936.270000EUR/LUF= 40.339900EUR/NLG= 2.203710EUR/PTE= 200.482000

FORWARD AND SWAP QUOTES

• Forward outrights can be given like spot quotes.

• USD/CHF 3-months 1.2555/65 bid/ask

• More commonly given as a spot quote and a pair of swap points

USD/CHF Spot : 1.2525/35

1 month : 15/10 2 months : 25/18 3 months : 35/25

GBP/USD Spot : 1.7555/65

1 month : 12/15 2 months : 20/25 3 months : 28/35

FORWARD AND SWAP QUOTES• To find outrights : Spot quote ± Swap Points

• Each swap point is 0.0001 ( or 0.01)

• When to add, when to subtract?

• Take USD/CHF Spot : 1.2525/35 1 month : 15/10

• If you add, 1 month outright : (1.2525+0.0015)/(1.2535+0.0010) = 1.2540/45

• If you subtract, 1 month outright : 1.2510/1.2525

• Which is correct?

• Two “rules” :

(1) Market makers’ Ask rate must exceed Bid rate

(2) Bid-Ask spread must widen as you go farther out into future

FORWARD AND SWAP QUOTES

• Using rule 2, 1.2540/1.2545 is wrong. 1.2510/25 is correct.

• Now take GBP/USD Spot 1.7555/65 2 months : 20/25

• If swap points added, 2 month outrights 1.7575/1.7590; if subtracted 1.7535/1.7540. The former is correct.

• Mechanical Rule : If swap points are Big/Small, subtract, base currency at forward discount, quoted currency at premium. If swap points Small/Big, add. Quoted currency at discount, base currency at premium.

FORWARD AND SWAP QUOTES

• A quote like : USD/SEK Spot 6.7565/70 3 month : 10/20

• Bank will do either swap:

(1) Buy USD spot, sell USD 3 months forward against SEK. The forward selling or “ask” rate would be 20 points above the spot rate.

(2) Sell USD spot, buy 3 months forward, forward buying or “bid” rate would be 10 points above spot.

In a swap, amount of one currency - usually the base currency- is kept same in the spot and the forward leg. Buy USD 1m spot, sell USD 1m forward. Amount of SEK will be different.

BROKEN DATES• Standard forwards are whole months. Banks will do any number of days forward - 63 days, 135 days etc. These are “broken date” or “odd date” forwards.

• Interpolate between two whole month dates. OK if the gap between the two dates is not too long and no special technical factors are at work. Example:

• USD/INR spot 48.55/56 1 month:8/10 2 months:15/20

• Recall that for INR each point is 0.01.

• Customer wants to buy USD 43 days forward.

• 10paise (Rs.0.10) premium on the offer side from 1month to 2months. Suppose 30 days in 2nd month. 1/3paisa (1/3 of Rs.0.01) per day, 4 paise(Rs.0.04) for 12 days. The interpolated rate would be : 48.56+0.10+0.04 = 48.70

SHORT DATES

• Delivery same day- cash

• Delivery next day - Tomorrow or “Tom”.

• Markets quote Overnight (O/N), Tom(orrow)/Next (T/N) and Spot/Next (S/N) swaps. These are used to compute rates for short date transactions.

• Reverse swap points and follow add/subtract rule.

• USD/CHF Spot 1.1745/50 T/N : 5/3 3/5

• Outright for Tom : 1.1748/55

What’s the logic? Consider again

USD/CHF Spot 1.1745/50 T/N : 5/3

This means: Going from TOM to NEXT CHF has a premium – 3 points on bank buying CHF, 5 points on bank selling CHF. “NEXT” after “TOM” is SPOT.

If you buy USD delivery tomorrow and sell delivery day-after i.e. Spot date, you will suffer a 5-point discount on the sale compared to your buying price. If you sell tomorrow buy spot you will get a 3 point discount on your selling price.

Suppose you want to buy CHF delivery tomorrow. Bank buys it delivery spot; then does a swap – buy tomorrow sell spot i.e. it sells USD delivery tomorrow, buys USD delivery spot; it gains 3 points. It passes on the gain to you – gives you CHF 1.1748 per USD.

If you wish to sell CHF (buy USD) delivery tomorrow bank sells delivery spot and then does a swap – buy CHF (sell USD) delivery spot, sell CHF (buy USD) delivery TOM. In this the bank suffers a 5-point discount which it would recover from you. Hence it charges you CHF 1.1755 per USD you wish to buy.

Hence the rule: Reverse swap points and follow the rule

BIG/SMALL subtract, SMALL/BIG add.

Same logic works for cash – same day – delivery. Now look at O/N swap points. From spot and T/N derive TOM quotes; then from TOM quotes and O/N swap quote derive CASH quotes following the same rule.

SWIFT

WHAT IS SWIFT?

• The acronym SWIFT stands for Society for Worldwide Inter- bank Financial Telecommunication.

• SWIFT allows member financial institutions worldwide to electronically exchange information amongst each other.

• Messages are transmitted globally through high speed communication channels on standardized message formats for many international banking operations.

• SWIFT provides a quick, reliable and cheap medium for communication of financial messages which has a direct impact on customer service. Under SWIFT, if both the members are hooked, messages can be transmitted within seconds.

• Financial and non-financial messages can be transmitted which cover Funds Transfers between customers/banks, letters of credit/bank guarantees, customer account status, draft advices, foreign exchange transactions, nostro/vostro accounts status etc.

• Message security is better as compared to other means of message transmission.

• Standardized message formats eliminate ambiguity and facilitate automated handling at the source and the destination.

• Message authentication is automatic.

• SWIFT has a Regional Processor (RP) in each host country through which all messages meant for that country are routed. In India RP is located in the premises of M/s. CMC Ltd. at World Trade Centre, Cuffe Parade, Bombay. Each user in that country is required to install a Computer based Terminal (CBT) in his own premises. The CBT is a device for interfacing with the SWIFT RP through the telephone lines.