• FOREIGN EXCHANGE RATE

It is the rate of one currency in terms of another currency.1 Examples:

Direct quote:
In this case there is one unit of foreign currency and corresponding
units of home currency. Examples of direct quotes in India:
1$ = Rs.40 1£ = Rs.82 1 Euro = Rs.54
Indirect quote:
In this case there is one unit of home currency and corresponding units
of foreign currency. Examples of indirect quotes in India:
Re. 1 = $ 0.0250 Re. 1 = £ 0.0122 Re. 1 = Euro 0.0185
International Quotes (also known as cross currency quotes)
In this case, both the currencies are foreign currencies.
Examples of
international quotes in India:
1$ = £ 0.5488 1£ = $ 1.8222 1 Euro = $ 1.2000
In practical life, there are two rates in a foreign exchange
quote. The first rate of the quote (known as bid) is the rate
at which the bank buys left hand currency, the second rate
of the quote (known as ask) is the rate at which the bank
sells the left hand currency. The difference between the
two rates is the profit for the bank.
1 $ = Rs.40.10 / Rs.40.15
It is direct quote with reference to India.
$ is left hand currency. So it is rate of $.
The rate conveys that the bank buys Left hand currency, i.e. $,
@ Rs.40.10.
If you go to bank to sell $1,000, the bank buys $1,000 for
Rs.40,100.
The rate conveys that the bank sells the left hand currency
i.e.$ @ Rs.40.15.
If we go the bank to buy $ 1,000, the bank sells $1,000 for
Rs.40,150.
Example D: 1 £ = Rs.79.95/ Rs.80.05
It is direct quote with reference to India.
£ is left hand currency. So it is rate of £.
The rate conveys that the bank buys Left hand currency,
i.e. £, @ Rs.79.95.
If you go to bank to sell £1,000, the bank buys $1,000 for
Rs.79,950.
The rate conveys that the bank sells the left hand
currency i.e. £, @Rs.80.05.
If we go the bank to buy £ 1,000, the bank sells £1,000 for
Rs.80,050.
Example E : Re.1 = $ 0.0250 / $0.0251
It is indirect quote with reference to India.
Re. is left hand currency. So it is rate of Re.
The rate conveys that the bank buys Left hand currency,
i.e. Re, @ $ 0.0250.
Suppose, You have Rs.1,00,000. You go to the bank to
convert them into $.You
will be selling Rupees to the bank. Bank will be buying
Rupees. So the applicable
rate is $ 0.0250. For Rs.1,00,000, you will get
1,00,000x0.0250 i.e.$ 2500.
Example F: Re.1 = $ 0.0250 / $0.0251
It is indirect quote with reference to India.
Rupee is left hand currency. So it is rate of Re.
The rate conveys that the bank sells Left hand currency,
i.e. Re, @ $ 0.0251.
Suppose, You have $2,500. You go to the bank to convert
them into Rupees.
You will be selling $. The bank will be selling Rupees. The
applicable rate is $
0.0251. For $2,500, you will get 2,500/0.0251, i.e.
Rs.99,602
Example (A)
Convert the following direct quotes (in India)
into indirect quotes:
1$ = Rs.40 1£ = Rs.82
Answer:
Indirect quotes (in India) Re. 1 = $ 1/40 i.e. $
0.0250
Re. 1 = £ 1/82 i.e. £ 0.0122
Example (B)
Convert the following indirect quotes (in India) into
direct quotes:
Re. 1 = $ 0.0222
Re. 1 = £ 0.0122
Answer:
Direct quotes (In India) 1$ = Rs.1 / 0.0222 i.e. Rs.45
1£ = Rs.1/ 0.0122 i.e. Rs.82
International
Foreign Exchange Forward Contract
• With the introduction of inconvertible paper currency and
free floating of currencies, fluctuations of currencies create
problem for the international trades
• Fluctuation of currencies create risk for exporters and
importers
• To help the exporters and importers forward exchange
contract has been introduced as a risk management
product.
• Under forward contract the Ads sell a forward contract to
exporters/importers where the Ads promise to
convert/provide foreign currency at a particular rate
despite the market rate fluctuate.
•
Foreign Exchange Forward Contract
Foreign Exchange Forward Contract
Foreign Exchange Forward Contract
Spot : $ 1 = Rs.40,
Six months Forward: $ 1 = Rs.42.00.
$ is at premium.
If a currency is cheaper in future as compared to
spot, it is said to be at discount.
Example I -
(i) Spot $ 1 = Rs.40,
(ii) Forward (Six months) $ 1 = Rs.39.75.
(iii) Dollar is at discount.
Example J –
(i) Spot Re 1 = $ 0.0250,
(ii) Six months forward Re. 1 = $ 0.0240.
(iii) Rupees are at Discount