An overview of Fx Market Basics

With the advent of International Trade, Foreign exchange assumed importance over time. Today the economies are so much interdependent that its impossible to say if any country or its currency is neutral of some other countries inflation or interest rate!
Lets make a move to understand some critical aspect of FX in global financial markets. Most of the people do not understand the notion of expression USD/EUR correctly. By the way, if you are being told USD/EUR = .8534 ; what can you make out of this expression? Lets say you want to Buy 100 EUR how much USD should you spend? Worry not, I am intending to make it simple for you.
First thing first:

When you See USD/EUR or JPY/GBP, you see one currency in numerator and another in denominator. We call the currency in Numerator as 'Base' Currency and Currency in denominator as 'Quote' Currency.
In simple terms 1 unit of  Base currency is bought by paying certain units of Quote Currency.

Reiterating above, whenever you see any expression like X/Y= Z , You should understand it as Buying 1 unit of X currency after selling Z unit of Y currency.
So If USD/EUR = .8534 then I am buying 1 USD after paying .8534 EUR.

Similarly, If the question is I want to buy 100 EUR, then ? Lets inverse both sides of USD/EUR = .8534 . This means, EUR/USD = 1.171783, Now this means To Buy 1 unit of EUR , 1.171783 USD have to be spent or 100 EUR = 117.1783 USD have to be spent.

So Does this help you?.
Do note that,  Fx market quotes currencies to 4  or max 5 decimal places, so 1 EUR = 1.0345 USD or 1.03452 USD

Concept of PIP: I first came across PIP is Charles Dickens novel 'The Great expectation'. What a character was he? So many shades; constantly changing with situation!! there PIP was protagonist and his full name was Philip Pirrip.
Ok, In FX world ..Percentage of change is referred to as PIP. This is somewhat like basis points which is part of 100. For bps (basis points), when  Stock market ( say NASDAQ) has % Change of .23 , we say 23 bps movement. On the same lines , PIP is absolute change in currency after decimal places.
When USD/GBP =1.03452 and next day USD/GBP = 1.3456, we can say a change of 4 pip. So , its actually difference in places after decimal which is 03456-03452 =4  or 4 pip.

What are Major and Crosses: Major are currency pairs where highly liquid currencies, mostly USD and sometimes EUR, are present in either numerator or denominator of currency pair,  . When there is no major in the pair , the pair is called as cross. So a pair of INR/JPY is a cross and INR/USD is a major.

Introduction to IFRS and Overview of IAS 39: Recognition and measurement of Financial instrument

IFRS - International Financial Reporting standards are standards/principles adopted by International Accounting Standards Board (IASB). Earlier IFRS were also known by the name IAS (international Accounting Standard). IFRS are increasingly adopted by more and more countries to bring parity in accounting standards owing to increase in global trades and to bring transparency in reporting financials.

Most of the countries in US and India are converging to IFRS. While Security exchange Commission is rather slow in moving towards IFRS from US GAAP, India is expected to cross the full compliance deadline of 2014. Originally it was expected India will shift to IFRS in three phases stating 1st April 2011.

As per IAS 39, IFRS makes it mandatory to classify securities in three buckets based on their intention/purpose to hold the security for banks and other financial concerns as below:

Held for Trading: Debt and Equity held for trading securities are valued at market price and any unrealized gain/loss is routed through income statement.

Held Till Maturity: Debt securities held till maturity are reported at amortized book cost and no mark to market is done for such securities.

Available for Sale: Available for sale securities are those which are neither 'Held till Maturity' not 'Held for Trading'. Any unrealized gain/ loss on such position is routed through Accumulated other Comprehensive income as a component of Equity in Statement of financial Positions.

Decision to classify a securities not only impacts the performance reporting(Income statement) for an financial insitutional but can also be important for complying with Capital Adequacy norms prescribed for Banks and such Financial institutions.

Its to be noted that reclassification of securities is also possible under IFRS.

Further, IFRS Financials require presentation of below information as per IAS 1:

1)      Statement of Financial position

2)      Statement of Comprehensive Income and/or Income Statement

3)      Statement of Change in equity

4)      Cash Flow statement

5)      Notes including significant accounting policies.

1) Statement of Financial position: Statement of financial position is the balance sheet and depicts position of Assets, Liabilities and Equity on a specified date.

B) Statement of Comprehensive Income: Total Comprehensive Income = Income/Loss reported in Income Statement +/- AOCI (Accumulated Other Comprehensive income)

Accumulated Other comprehensive Income is balance of unrealized gain/loss on available for sale securities, gains/Loss from translating foreign subsidiaries to local currency, Changes in revaluation surplus, Actuarial gains and losses in defined benefit plans recognition and gains/losses from derivative held as cash flow hedge.

AOCI is shown under Equity head under the subhead Accumulated Other Comprehensive income as below:

C) Statement of Changes to Equity: This statement shows the below information as per IFRS requirements:

a)      Total Comprehensive income for the period.

b)      Reconciliation between opening and closing balances for each component of equity head of balance sheet. Separately disclosing

(i)                  Income/loss

(ii)                Each item of AOCI

(iii)             Transactions with owners showing issues/buyback to/from owners and changes in ownership of subsidiaries that do not result in loss of control.

However, dividend distribution should be shown in Notes instead of showing in statement of changes in equity.

D) Cash flow Statement: Cash flow statement aims at reconciling Opening cash balance and closing cash balances by classifying the cash flows during the year under the below heads.

·        Cash flow from Operating activities

·        Cash flow from investing activities

·        Cash flow from financing activities

Cash flow can be prepared using direct or indirect method. Direct and indirect method only impacts method of calculation of cash flow from operating activities.

Indirect method aims at adding back unpaid expenditures and subtracting accrued incomes along with taking into account impact of changes in working capital.

IASC recommend using indirect method, however also allows direct method of reporting cash flow:

E) Notes, including summary of significant accounting policies. Disclosing intention to hold securities up to maturity and their classification based on held to maturity, held for trading or Available for sale. Method to value inventory and charge amortization and depreciation etc.

*Please note that above is not detailed discussion on respective standards and a thorough reading and interpretation is needed to fully understand the implication of compliance.