Foreign Exchange basic numerical
1) TOD rate or Cash Rate Same day (it is also called ready rate)
TOM Rate Next working day
Spot Rate 2nd working day (48 hours)
Forward Rate After few days/months
If Next day or 2nd day is holiday in either of the two countries, the
settlement will take place on next day. For example Spot deal is
stuck on 23rd Dec. 25th is Christmas Day and 26th is Sunday. Under
such circumstances, value date will be 27th i.e. Monday.
There are two types of rates- Fixed and Floating. Floating rates are
determined by market forces of Demand and Supply. India
switched to Floating exchange rates regime in 1993.
2) Buy Low Sell High (Direct Quotations)
Buy rate is also called Bid Rate and Sell Rate is called Offer Rate.
Buy High Sell Low (Indirect Quotations)
When Local Currency is fixed, bank will like to have more foreign
currency while buying and give less foreign currency while selling.
3) Direct Rates Indirect Rates
1 US $ = Rs.49.40 Rs.100 = US $ 2.51
DIRECT QUOTATION
In a direct quotation, there is a variable unit of the home currency and fixed unit of the foreign currency.
When it is quoted that 1 US = Rs.49.10, it is a direct quotation.With a view tomake profit, the rule
followed for quotation is buy low and sell high. For instance, if the US $ is purchased at Rs.48.90 and
sold at Rs.49.10, there will be gain to the dealer. By buying low, the dealer will be required to pay
lesser units of home currency and by selling high, he would receivemore units of home currency.
INDIRECT QUOTATION
In an indirect quote, there is fixed unit of home currency and a variable unit of foreign currency.When
Rs.100 = US $ 2.04 is quoted, it is a case of indirect quotation. The principle followed in indirect
quotation to earn profit is to buy high and sell low. By buying high, the dealer will getmore US $ per
Rs.100 and by selling low he would have to part with lesser US $.
4) TWO WAY QUOTATIONS : Banks quote two rates in foreign exchange quotation out of which one is for
buying and the other for selling. For instance, when the quotation is US $ 1 = Rs.48.90 - 49.10, the buying
rate on the basis of principle of buy low and sell high, would be Rs.48.90 and the selling rate Rs.49.10.
The buying rate is also called a 'bid rate' and the selling rate as 'offer rate'.
5)CROSS RATES OR CHAIN RULE : When rate between two currencies is not directly available, it has
to be calculated through a 3rd currency which is called cross rate. This is done by using chain rule.
For example, US $ 1 = Rs.50.00 and US $ 1 = Euro 0.7500. Euro 1 = 50 / 0.75 = Rs.66.67
A bank is offered to purchase an export bill of Pound 100000 and the inter-bank rates are US $
1 = Rs.50.00/10 and Pound 1 = US $ 1.5000/10.
In this case, the bank will purchase pounds at given US $ rate of Rs.50 and deliver rupees to exporter.
Bank will sell pounds in London in inter-bank market at US $ 1.50. The amount will be worked with chain
rule. Pound 1 = 1.50 x 50 = Rs.75.
6) Date of Contract Delivery
Date / settlement
date
Rate to be used
Oct 12, 2008 Oct 12, 2008 Cash/ Ready Rate
Oct 12, 2008 Oct 13, 2008 Tom Rate
Oct 12, 2008 Oct 14, 2008 TT or Spot Rate
Exchangemargin—While selling or buying foreign exchange banks retain sufficientmargin to cover the
administrative cost, cover the exchange fluctuation and also tomake some profit on the transaction. This is
done by adding or reducing themargin fromthe prevailingmarket rate.
7) Forward Rates (Premium is always added and Discount is always deducted from Spot Rate to
arrive at Forward Rate)
It is required when currency is exchanged after few months/days.
Buy Transactions :
Spot Rate (+ ) premium OR ( - ) Discount
( Lower premium is added OR Higher discount is deducted )
Sale Transactions:
Spot Rate (+ )Higher premium OR (-) Lower discount
(So that currency may become cheaper while buying and dearer while
selling
In India, Forward Contracts are available for Maximum period
of 12 Months.
Examples of
Forward rates
Euro 1 = USD$1.3180/3190
Forward differentials:
1M = 15/18, 2M= 30/37, 3M=41/49
Calculate 2M Bid rate and 3M Offer rate
2M Bid rate = 1.3180+.0030 = 1.3210
3M Offer rate = 1.3190+.0049=1.3239
8) ExchangeMargin::
Exchange margin is deducted while buying and added while selling.
9) Direct, Indirect &Cross Rates
Direct Rates
Foreign Currency is fixed ---say 1USD = INR 55.70
Indirect Rates
Local currency remains fixed---say Rs. 100 = 1.93 USD
At present, following 4 currencies are quoted in Indirect mode:
EURO, GBP, AUD and NZ$
Cross Rates
Cross rate is price of currency pair which is not directly quoted. It is arrived
at from price of two other currency equations.
1. Suppose bank hasto Quote GBP against INR, but in India, GBP is
not quoted directly. In India,
1USD =48.10 and GBP/USD is quoted as 1GBP= USD1.6000.
Therefore 1 GBP = 48.10X1.6 = 76.96
2. An Import bill of GBP 100000 has to be retired. Rates are:
1 GBP=1.5975/85 USD
1USD = 48.14/15 INR
TT margin =.20%
Here Cross selling rate of both currencies will apply.
Bank has to remit GBP. GBP/USD Quote (Indirect) will be available in
International market whereas USD/Rupee Quote (Direct) is available in
local market. Bank will sell USD to buy GBP.
While buying GBP, bank would like to quote higher rate as Buy high Sell
Low maxim will apply. 1GBP = 1.5985
While selling USD, bank will opt to quote higher rate as Buy Low Sell High
maxim will apply.
1GBP=1.5985*48.15 = 76.9675 + Margin@.20% = 77.1214 (say
77.1225)
10) Per Unit and 100
Unit Quotes
All currencies are quoted as per unit of currency whereas the following
currencies are quoted as 100 units of Foreign currency:
1. Japanese Yen
2. Indonesian Rupiahs
3. Kenyan Schilling.
4. Belgian Francs
5. Spanish Peseta
Intervening Currencies in India
1. US Dollar
2. British Pond
Cross Rates
where two
markets are
involved and
one of them is
international
market
Suppose, In India, 1USD=42.8450/545 and in UK, 1USD=.7587/.7590
EURO. The customer intends to remit Euro and he desires to know 1 Euro
= ? INR. We will buy Euro against sale of USD. (One is domestic market
and other is International market)
Calculation
Sell rate of 1USD = .42.8545 and Buy Rate of Euro is 1USD=.7587
.7587Euro = 1USD = INR 42.8545
1 EURO = 42.8545/.7587 = 56.48
In India, there is Full Convertibility of Current Account transactions.
Example Where one currency is bought and another currency is sold
A wants to remit JPY 100.00 million at TT spot with margin @.15%. Given
USD/INR at 48.2500/2600 and in Japan USD/JPY = 90.50/60
Solution:
We will buy Japanese Yen and sell USD and the rate to be applied is:
48.2600/90.50 = .533260 per JPY
Rate per 100 JPY = 53.3260 + Margin @.15%(.0799) = 53.4059 (say
53.4050)
Following 4 types of buying and selling rates are important:
1. TT Buying rate
2. Bill Buying rate
3. TT Selling rate
4. Bill Selling rate
In Interbank market, exchange rate is quoted up to 4 decimals in multiples of 0.0025. e.g. 1USD=53.5625/5650
For customers the exchange rate is quoted in two decimal places i.e. Rupees and paisa. e.g. 1 USD =Rs. 55.54.
Amount being paid or received will be rounded off to nearest Rupee.
TT Buying Rate
It is required to calculate when our Nostro account is already credited or being credited without delay e.g. Receipt of DD, MT, TT or collection of Foreign bills. This rate is used for cancellation of Forward Sales Contract.
Calculation
Spot Rate – Exchange Margin
Bill Buying Rate Bill Buying rate is applied when bank gives INR to the customer before receipt of Foreign Exchange in the Nostro account i.e. Nostro account is credited after the purchase transaction. In such cases.
Examples are:
· Export Bills Purchased/Discounted/Negotiated.
· Cheques/DDs purchased by the bank.
Calculation
Spot Rate + Forward Premium (or deduct forward discount) – Exchange margin.
TT Selling RateAny sale transaction where no delay is involved is quoted at TT selling rate. It is desired in issue of TT, MT or Draft. It is also desired in crystallization of Export bills and Cancellation of Forward purchase contract.
Calculation
Spot Rate + Exchange Margin
Bill Selling Rate It is applied where handling of documents is involved e.g. Payment against
Import transactions:
Calculation
Spot Rate + Exchange Margin for TT selling + Exchange margin for Bill Selling
Examples
Q. 1
Bank received MT of USD 5000 on 15th Sep. The Nostro account was already credited. What amount will be paid to the customer: Spot Rate 34.25/30. Oct Forward Differential is 22/24. Exchange margin is .80%
Solution
TT buying Rate will be applied
34.25 - .274 = 33.976 Ans.
Q. 2
On 15th July, Customer presented a sight bill for USD 100000 for Purchase under LC. How much amount will be credited to the account of the Exporter. Transit period is 20 days and Exchange margin is 0.15%. The spot rate is 34.75/85. Forward differentials:
Aug: .60/.57
Sep:1.00/.97
Oct: 1.40/1.37
Solution
Bill Buying rate of August will be applied.
Spot Rate----34.75
Less discount .60
= 34.15
Less Exchange Margin O.15% i.e. .0512
=34.0988 Ans.
( Transit period is rounded to next month since currency will be cheaper as it is buy transaction)
Q. 3
Issue of DD on New York for USD 25000. The spot Rate is IUSD = 34.3575/3825 IM forwardrate is 34.7825/8250
Exchange margin: 0.15%
Solution:
TT Selling Rate will Apply
Spot Rate = 34.3825 Add Exchange margin (.15%) i.e. 0.0516
TT Selling Rate = Spot Rate + Exchange Margin = 34.4341 Ans.
Q. 4On 12th Feb, received Import Bill of USD-10000. The bill has to retired to debit the account of the customer. Inter-bank spot rate =34.6500/7200. The spot rate for March is 5000/4500. The exchange margin for TT selling is .15% and Exchange margin for Bill selling is .20%. Quote rate to be applied.
Solution
Bill Selling Rate will be applied.
Spot Rate + Exchange margin for TT Selling + Exchange margin for Bill selling = 34.7200+.0520+.0695 = 34.8415 Ans.
Forward Contract – Due date and Transit period (Bill Buying Rates and Bill Selling Rates)
If due date after adding transit period and forward period falls in a particular month
Buy Transactions
Quote rates applicable to lower month (if currency is at premium) and same month (if currency is at discount) due to the reason that currency becomes cheaper and Buy low and Sell High
Sale Transactions
Quote rates applicable to Same month (if currency is at premium) and lower month (if currency is at discount) due to the reason that currency becomes dearer and Buy low and Sell High Forward contracts can be booked by Resident Individuals up to USD1lac.
Buy
Spot Rate on 16.07.2012 is 1 USD = 34.6850/7275
Transactions-
Spot August = 4000/4200,
Spot Sep = 7500/7700, Spot Oct = 1.05/1.07
Currency at
Spot Nov =1.40/1.42
Premium
Transit Period = 25 days ,
Exchange Margin = 0.15%
Transit Period is
Calculate Forward Buying Rate of 3 M Usance bill.
rounded off to lower month in
Due date of realization of Bill = 16.7.2012 + 3M + 25 days = 9.11.2012
which due date
By Rounding Transit period to lower month, Oct Rate will be as under:
falls
34.6850+1.05 - .0536 (exchange margin) = 35.6814
Buy
On 22.7.2013,
Transactions-
Spot Rate is 35.6000/6500
Forward 1M=3500/3000
2M=5500/5000
Currency at
3M=8500/8000
Discount
Transit Period ----20 days
Exchange Margin = 0.15%.
Find Bill Buying Rate & 2 M Forward Buying Rate
Transit Period is rounded off to
Solution
same month in
Bill Buying Rate (Ready) : Bill Date +20 days = 11.8.2013
which due date
Spot Rate = 35.6000 Less Forward Discount 1M (0.3500) Less Exchange
falls
Margin 0.15% (0.529)
i.e. 35.6000-.3500-.0529(0.15% of 35.2500) = 35.1971
2 M Forward Buying Rate: = Transaction date +2M +20 days =11.10.13
3 Month Forward Buying Rate will be applied.
Spot Rate = 35.6000 Less Forward Discount of 3M (.8500) Less Exchange Margin (.0521)
i.e. 35.6000-.8500-.0521(0.15% of 34.7500) = 34.6979 Ans.
Cancellation of
Deal Cancellation of Buy contract is done at TT selling rate and cancellation of Sale contract is done at TT buying rate.
Example
A bank purchased export bill of USD 50000 at Rs. 42.66, which was dishonored for non-payment. How much amount will be recovered from exporter, if Spot rate is 42.2000/3000. Exchange margin is 0.15%.
Solution
TT selling rate will be applied to recover the amount TT Selling rate= Spot rate +Exchange margin
=42.3000+0.06345 = 42.36345= 42.3625 (Rounding off to nearest .0025)
Amount to be debited to customers‟ account =50000*42.3625=2118125 --------------Ans.
Value Date
It is date on which payment of funds or entry to an account becomes effective. Under TT transaction, value date is same. In other spot and forward contracts, Value Date is the date when Nostro Account is actually credited.
Arbitrage
It consists of purchase of one currency in one center accompanied by
immediate resale against same currency at other center.
Per Cent and Per
1% is on part of 100 whereas per mille is 1 part of thousand
Mille
AuthorizedDealers
Authorized dealers are called Authorized Persons. The categories are as
under:
AP category 1 -----AD banks, FIs dealing in Forex transactions.
AP category 2-----Money changers authorized to sell and purchase
Foreign currency notes, TCs and Handle remittances.
AP category 3----Only purchase of Foreign currency and Travelers
Cheques. These were earlier called “Restricted Money Changers.”
Forward Point
Spot Rate
Calculation
Euro 1 = US$1.3180
3 Month Forward Rate
Euro 1 = US$1.3330
Forward Point = 1.3330 – 1.3180 = 150 points
Arbitrage &;
It consists of purchase of one currency in one center accompanied by
Forward Point
immediate resale against same currency at other center.
Calculation
Example:
Let us borrow from one center and lend at other center at higher rate. In
USA, rate of interest is 6% whereas in Germany, rate of interest is 3% for EURO. We will borrow from Germany and lend in USA where 1EURO =1.5 USD
Forward Point Calculation for 3 Months
Spot Rate x Interest rate difference x Forward Period 100 x Nos. of days in a year
= 1.5 x 3 x 90
100*360
=0.01125
3 month swap rate = 1.5 + 0.01125 = 1.5112
Calculation of Interest Differential
Forward Points x Nos. of Days x 100
Forward Period x Spot Rate
= 0.01125 x 360 x 100
=3%
1.5 x 90
Some additional examples
Ex.1
Calculate TT selling rate for GBP/INR, if USD/INR is 43.85/87 & GBP/USD is 1.9345/49. A
margin of 0.15% is to be loaded.
Solution ; TT selling rate of GBP/INR
1 GBP = 1.9349 USD
= (1.9349 *43.87)+Margin 0.15%
=84.8841+.1273=85.0114 INR 85.0114-------------------------Ans.
Ex.2
A foreign correspondent intends to fund his Vostro Account maintained with Mumbai branch of SBI. What rate will be quoted if 1 USD = 44.23/27 and margin is 0.08% Solution : TT buying rate will quoted
44.23-.035 = 44.195 ---------------------------------------Ans.
Ex.3
If Swiss Franc is quoted as USD = CHF 1.2550/54 and in India, USD =INR43.50/52, how much INR will exporter get for his export bill of CHF 50000.
Solution :
Swiss Franc will be sold for USD in overseas market and USD will be bought in local market i.e. Sell Rate of CHF and Buy rate of USD.(Buy Low Sell High in both quotations)
1 USD = 1.2554 CHF and 1USD=INR 43.50
1CHF=43.50/1.2554 = 34.6503
Amount as paid to exporter = 34.6503*50000=17,32,515/- ----------------Ans.
(Both are direct quotations and Maxim Buy Low Sell High will apply in both)
Ex.4
If Swiss Franc is quoted as USD = CHF 1.2550/54 and USD =INR43.50/52, how much INR will Importer pay for his import bill of CHF 50000.
Solution :
Swiss Franc will be bought against USD in overseas market and USD will be sold in local market i.e. Buy rate of CHF and Sell rate of USD.
1 USD = 1.2550 CHF and 1USD=INR 43.52 1CHF=43.52/1.2550 = 34.6773
Amount to be received from Importer = 34.6773*50000 =17,33,865/- ----Ans.
(Both are direct quotations and Maxim Buy Low Sell High will apply in both)
Q. 5
Exporter received Advance remittance by way of TT French Franc 100000.
The spot rates are in India IUSD = 35.85/35.92 1M forward =.50/.60
The spot rates in Singapore are 1USD = 6.0220/6.0340 1M forward =.0040/.0045 Exchange margin = 0.8%
Solution
Cross Rate will apply
USD will be bought in the local market at TT Buying rate and sold at Spot Selling Rates in
Singapore for French Francs:
TT Buying Rates USD/INR = Spot rate – Exchange margin = 35.8500-.0287 = 35.8213 Spot Selling Rate for USD/Francs = 6.0340
Inference:
6.0340 Franc = 1USD
= INR 35.8213
1 franc = 35.8213/6.0340 = INR 5.9366 Ans.
(Both are direct quotations and Maxim Buy Low Sell High will apply in both)
Q.6 What rate will be quoted for repatriation of FCNR deposit (spot rate or TT rate) Ans. No rate as the amount is to be paid in Foreign currency itself.
