Foreign Exchange basic numerical

 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.