Foreign Exchange

Foreign Exchange
It includes all Currency, deposits, Credits and Balances payable in Foreign
currency. It also includes Drafts/TCs, LCs and Bills of Exchange payable in
Foreign currency. In nut shell, all claims payable abroad is Foreign
Exchange.
On the other hand, Foreign Currency is narrow term which includes hard
currency say Pounds, Dollars etc.
Forex Market It comprises of individuals and entities including banks across the globe
without geographical boundaries. Forex market is dynamic and it operates
round the clock. Exchange rate of major currencies change after about
every 4 seconds. It opens from Monday to Friday except in Middle east
countries where it is closed on Friday and opens on Saturday and Sunday.
Exchange Rate
mechanism
When settlement of funds and exchange
of currency takes place_________
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.
Buy and Sell
Maxim
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.
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.

3
Examples of
Forward rates
Euro 1 = USD$1.3180/3190
Forward differentials:
1M = 15/18, 2M= 30/37, 3M=41/49
Calculate 2M Bid rate and 3M Offer rate
2M Bid rate = 1.3180+.0030 = 1.3210
3M Offer rate = 1.3190+.0049=1.3239
Exchange
Margin
Exchange margin is deducted while buying and added while selling.
Direct, Indirect
and Cross Rates
Direct Rates
Foreign Currency is fixed ---say 1USD = INR 55.70
Indirect Rates
Local currency remains fixed---say Rs. 100 = 1.93 USD
At present, following 4 currencies are quoted in Indirect mode:
EURO, GBP, AUD and NZ$
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)

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