Basics of Foreign Exchange

1. Basics of Foreign Exchange • Basic Concept of Foreign Exchange (1)General Meaning of Foreign Exchange (2)Cause for Generation of Foreign Exchange (3)Traits of Foreign Exchange (4)Form & Type of Foreign Exchange 2. Exchange Rate (1)Meaning of Exchange Rate (2)Method for Exchange Rate Indication (3)Terms Relevant to Exchange Rate (4)Customer Rates 3. Correspondence (1)Outline (2)Exchange Transaction Contract with Foreign Exchange Bank (3)Classification of Correspondent Bank

2. Character Character Basics of Foreign Exchange 1. Basic Concept of Foreign Exchange (1)General Meaning of Foreign Exchange What is Exchange ? System or mean to settle bonds and liabilities between remote places through the financial institution, the third party Domestic Exchange Remote place is in the country and bonds and liabilities in same country and currency is settled through bank, the third party Remote place is in foreign country and it is settled through the third party bonds and when liabilities between foreign countries are generated between countries with different currencies. Foreign Exchange (2)Cause for Generation of Foreign Exchange Cause for Generation of Foreign Exchange What is ordinary transaction? Trade transaction or transfer transaction, etc Ordinary Transaction 1.Movement in Fund between Foreign Countries What is capital transaction? Borrowings or loan transaction, etc Capital Transaction 2.Means for Settlement In Overseas Transaction Payment as a Result of Economic Transaction (3)Traits of Foreign Exchange Traits of Foreign Exchange 1. Intervention of Exchange Rate 2. Complex Exchange Settlement Structure 3. Balance of International Payments 4. Intervention of Interest Factors What if exchange rate goes down?? Generation of Exchange Risk Ex> Loss of 60,000 won Exchange Rate USD 1= 926 won Exchange Rate USD 1= 920 won Danger!! USD 10,000 9,260,000\ USD 10,000 9,200,000\ = =

3. Ex for Intervention of Interest Factors> Type of Loan by Difference in Time Bill of Exchange Purchase Bank Bank Foreign Transaction Bank Fund Payment Fund Payment (4)Form & Type of Foreign Exchange Type of Foreign Exchange • Classification based on method to settle accounts between foreign countries Outward Remittance Method for debtor to draw exchange in bank to send fund to creditor. REMITTANCE Inward Remittance Method for creditor to actively receive repayment of loan by requesting the fund through foreign exchange bank without waiting for remittance of debtor Outward Collection COLLECTION Inward Collection 2)Classification based on direction in use of exchange Outward Remittance OUTWARD EXCHANGE In case starting point of foreign exchange transaction is our bank Outward Collection Inward Remittance INWARD EXCHANGE In case starting point of foreign exchange transaction is other bank Inward Collection Drawing of Remittance from Korea Exchange Bank to CITI Bank Outward Exchange! Inward Exchange! Korea Exchange Bank CITI Bank

4. 2. Exchange Rate (1)Meaning of Exchange Rate What is Exchange Rate ? Exchange rate for currency of a country and currency of another country at certain period Price of domestication for type of product called foreign exchange (2)Method for Exchange Rate Indication Method for Exchange Rate Indication Exchange rate indicating how much foreign currency can be exchanged per 1 unit of domestic currency Foreign Currency Indication Exchange Rate Ex. of Foreign Currency Indication Exchange Rate GBP/USD 1.8345 => Indication that Great Britain currency of 1 pound is equivalent to USD 1.8345 GBP is strong when exchange rate goes up and GBP is weak when exchange rate goes down Target Currency EUR, GBP, AUD, NZD Exchange rate indicating how much foreign currency can be exchanged per 1 unit of foreign currency Domestic Currency Indication Exchange Rate Target Currency KRW, JPY, CHF, DKK SEK, HKD, SGD, Etc Ex. of Foreign Currency Indication Exchange Rate USD/KRW960 => Indication that United States currency of 1 dollar is equivalent to 960 won.KRW is weak when exchange rate goes up and KRW is strong when exchange rate goes down (3)Terms relevant to Exchange Rate Terms relevant to Exchange Rate USD/REW=960, USD is FIXED CURRENCY, KRW is VARIABLE CURRENCY Fixed Currency Variable Currency Apple Apple : Fixed Currency Won : Variable Currency 1000 : Exchange Rate Fixed Currency / Variable Currency 1000 won = Exchange Rate Bank notifying the exchange rate taking risk and responsibility considering the economic trend, prospect for foreign currency demand & supply, etc => “perspective of merchant” Quoting Bank (Market Maker) Buy or Not? Perform foreign exchange transaction with the necessity by looking at the notified price => “perspective of consumer” Calling Bank (Market User) How much should it be sold for? Apple Merchant Consumer Bid Rate Exchange rate for Quoting Bank to purchase fixed currency Offered Rate (Asked Rate) Exchange rate for Quoting Bank to sell fixed currency Bid Rate 106.10 USD/JPY 106.10:20 Offered Rate 106.20

5. Indication of exchange rate to third decimal place Big Figure- to second decimal place, Pip or Point-to fourth decimal place Big Figure & Pips EUR/USD 1.1216 Exception> KRW,JPY,IDR, Etc USD/JPY 116,35 Big Figure Pip Big Figure Pip Spread Difference between Bid Rate & Offered Rate Determination Factor 1.Liquidity of Target Currency 2.Volatility 3.Uncertainty in Market Situation 4.Scale of Transaction 5.Period of Transaction USD/KRW 1178.10/30 → spread 20, USD/JPY 106.10/15 → spread 5pips Exchange rate between foreign currencies without intervention of domestic currency Cross Rate In Foreign Exchange Market : Exchange rate between currencies of third country without intervention of USD GBP/EUR, EUR/JPY, CHF/JPY, Etc In Korea USD/JPY, USD/CHF, AUD/USD, GBP/USD, Etc Exchange rate between currency of a country and the third country calculated indirectly with fixed exchange rate Arbitrated Rate Fixed exchange rate refers to the exchange rate with certain currency that is the basis when calculating the exchange rate between currency of a country and other countries In Korea Foreign currency exchange rate other than USD is all arbitrated rate (4)Customer Rates What is Customer Rates ? Exchange rate applied in foreign transaction between bank and general customer It is voluntarily set in domestic bank, local corporation or target branch or local corporation. Purchase Rate Selling Rate In case bank purchases from bank In case bank sells to customer Type of Customer Rates Exchange rate applied when telegraphic settlement of foreign currency and immediate conversion are available => customer exchange rate in pure meaning Telegraphic Transfer Rate Exchange rate applied in case foreign cash is either purchased or sold Cash Rate -Notification of margin considering the cost relevant to export & import of foreign cash, operation of foreign cash, etc Exchange rate applied in case traveler’s check is sold for price of won. Margin is lower than cash rate Traveler’s Check Selling Rate

6. Calculation Method for Customer Rates Customer Rates = Basic Buying & Selling Rate for each Currency ± Basic Buying & Selling Rate × Buying & Selling Margin Rate for each Currency If basic buying & selling rate of the day is notified as 926.70 won for USD/KRW, what is the cash rate? A) Basic Buying & Selling Rate : 926.70 B) Buying & Selling Margin : 926.70×1.75% ＝ 16.21(cut off unit less than Jeon) C) Cash Rates : A) ＋ B) ＝942.91 If basic buying & selling rate of the day is notified as 926.70 won for USD/KRW, what is the telegraphic transfer rate? A) Basic Buying & Selling Rate : 926.70 B) Buying & Selling Margin : 926.70×0.98% ＝ 9.00(cut off unit less than 10 Jeon) C) Telegraphic Transfer Rate : A) － B) ＝917.70 Customer Rates Structure of Korea USD/KRW Basic Buying & Selling Rate : 926.70 won +1.75% 942.91 won Cash Selling Rate Customer Selling Rate 937.82 won +1.2% T/C Selling Rate +0.98% 935.70 won Telegraphic Selling Rate : Basic Buying & Selling Rate 926.70 won -0.98% 917.70 won Customer Purchase Rate Telegraphic Purchase Rate -1.75% Cash Purchase Rate 910.49 won

7. 3. Correspondent (1)Outline Outline of Correspondent For the smooth performance of foreign exchange transaction, it is mainly regarding the conclusion, change, termination, etc of exchange transaction contract between banks (2)Exchange Transaction Contract with Foreign Exchange Bank Purpose of Exchange Transaction Contract Exchange of various documents necessary in exchange transaction between banks for smooth performance of foreign exchange transaction including outward remittance, outward collection, etc, fund transaction between foreign countries, etc. Document Exchange Contract Documents, List of Authorized Signature, Telegraphic Cipher Text, Swift Authenticator Key, Transaction Conditions & Tariff, Other Supplementary Documents Change in Condition & Termination in Exchange Transaction Revision and change in contract is performed at any time Revision in contract by notifying the contents to the other bank (3)Exchange Transaction Contract with Foreign Exchange Bank Classification of Exchange Transaction Bank Bank that concluded the exchange transaction contract is referred to as exchange transaction bank or correspondent bank Depositary Correspondent Bank Bank that opened the current deposit account in a person’s Name in the other exchange transaction bank - OUR A/C or NOSTRO A/C : Current account our bank has in the other bank - THEIR A/C or VOSTRO A/C : Current account other bank has in our bank - INTER-OFFICE A/C : Account in main branch to settle foreign currency between main branches Bank to maintain the general exchange transaction by not opening the current deposit account in a person’s name Non-Depositary correspondent Bank