Basics of the Forex Rates

8/3/2019 Basics of the Forex Rates

http://slidepdf.com/reader/full/basics-of-the-forex-rates 1/28

FOREIGN EXCHANGEMARKETS & EXCHANGE RATE

MECHANISM



MAJOR FOREX MARKETS(a) Spot Markets

(b) Forward markets© Futures market

(d) Options markets

(e) SWAPs MarketsFuture Swaps and Options are calledDerivatives



Most active Forex market is UK (London)followed by USA, Japan,Singapore, Switzerland, Hongkong ,Germany , France and Australia . Allother markets combined together ,

represent only 15 Percent of the totalvolume, traded globally.



FOREIGN EXCHANGE

TRANSACTION1. PURCHASE TRANSACTION

-Bank acquires Foreign Exchange andparts with Home Currency .

2. SALE TRANSACTION

-Bank acquires Home Currency andParts with the Foreign Currency



FOREX QUOTATIONDirect Quotation

- Exchange rate is expressed as priceper unit of Foreign Currency in terms of home currency. Number of units of Foreign Currency is constant and any

change in the exchange rate will bemade by changing the value in terms of rupees.MAXIM BUY LOW;SELL HIGH



Indirect Quotation

-It is the commodity of the trade-in. Foreign

currency which is varying in accordance withthe change in the exchange rates. For a fixedunit of home currency the bank wouldacquire more units of foreign currency while

buying and part with lesser units of foreigncurrency while selling.

MAXIM BUY HIGH ;SELL LOW



RECIPROCAL QUOTATION

--Currencies can be quoted in terms of

number of units of currency X to per unit of currency Y , or the number of units of currency Y per unit of X. The two ratesrepresent equal value and are reciprocal .

Eg . 1 USD=Rs 42.55 is same as

1 Rs =$0.02350



POINTS & PIPS

Point --- 4 decimals( 0.0001)

PIPS ---5th decimal place is pip

(0.00001)



TERMS

-SPOT The transaction where the exchangeof currencies takes place two days after the

date of contract FORWARD The delivery of foreign currencyand payment in rupees takes place after aspecified future date .

FORWARD RATE =SPOT RATE---AT PARFORWARD RATE SPOT RATE =FORWARDMARGIN



PREMIUM Foreign currency is costlier underforward rate than under the spot rate

DISCOUNT Foreign currency will be cheaperfor the forward delivery than for spot delivery.

DIRECT RATE ADD PREMIUM

MINUS DISCOUNTFORWARD RATE - SPOT RATE = FORWARDMARGIN = SWAP POINTS



SPOT CONTRACTS- Simplest and used by Corporate tocover their receivables and payables

Commitment by a client to buy or sellone currency against another at a fixedrate for delivery two business days after

the transaction



CURRENCY SWAPS-Extended Forward contract andnormally for periods beyond one year.

An Indian Company that has raisedForeign Currency can exchange thesame thereby matching their liabilities.

Companies have to execute ISDAdocumentation with the Bank



FORWARD RATE AGREEMENT

( FRA)Provides means for hedging the interest raterisk arising on account of lending or

borrowing made at fixed/ variable interest rates.

FRA is agreement between Bank andcustomer to exchange interest payments for

a notional principal amount. On settlement date, for a specified period from start date tomaturity date



FORWARD CONTARCTSCommitment by the client to buy or sellcurrency at a fixed rate for delivery on a

specified future date.FIXED( Date Specified ) / OPTIONFORWARD CONTRACTS

Option period of delivery should not bemore than 1 month. Option is with thecustomer ( Rule 7 , FEDAI )



RegulationsDocumentary evidence be there

Maturity of hedge should not exceed

maturity of underlying transactionCurrency of hedge and tenor are left with choice of customer

Contracts having rupee value can berebooked after cancellation/ rolled over

Substitution of contracts permissible



EXCHANGE RATES -BUYING A. TT BUYING RATE

Dollar/ Rupee market spot rate ---Rs---

Less Exchange margin --- Rs ---

TT BUYING Rate *For DD/MT/TT

Rounded off to 0.0025

-Nostro credits- cancellation of ForeignExchange sold earlier



BILLS BUYING RATE

Dollar/ Rs Market spot rate ----Rs --

Add Forward Premium ----Rs --

Less Forward discount

Less Exchange Margin ------- Rs --

BILLS BUYING RATE ----Rs *EXPORTS(FDBP/FBP)

Rounded off nearest 0.0025



EXCHANGE RATES SELLINGTT SELLING RATE *Issue DD/MT/TT

Dollar/ Rs Spot Market selling rate

Add Exchange Margin +-----

TT SELLING RATE

ADD + Exchange margin ---------BILLS SELLING RATE-------------*

IMPORTS



QUESTION

On 10/10/2003, an exporter at Oriental bankof Commerce, A Block, New Delhi Branch

has tendered a demand bill for USD 1,00,000drawn on New York. The spot rates as perthe rate chart are: -

Spot ---------- USD = Rs 43.30000/3500

Spot Sept/October 6000/7000October 8000/9000

November 10000/1000

Transit Period is 20 Days. The Exchange

margin of 0.15% is required.



--Contd --Interest on the export Finance is 10%p.a.

The Exporter opts to retain 15% of the

proceeds in US DollarsPlease Compute

1. The Rate at which the bill will be Purchased

2. The Rupee Equivalent Payable to the ExporterInterest to be recovered from the Exporter



ANSWERSince the currency is on Premium, the transit period will be rounded off to the lower month

i.e. NIL and the rate will be based on spot rates

Dollar / Rupees Spot market rate43.30000

Less Exchange Margin0.06495

43.23505

Rounded off 43.2350



--Contd_-Exporters Account will be credited

USD 85000 X 43.2350 =

36,74,975

Interest charged on Rs 36,74,975 at 10% for 20 days =Rs 20137

------------------------------------



On 12th February your customer has receivedan import bill for USD 10000/-. He asks you

to retire the bill to the debit of his account .Interbank rate for Dollar is

Spot --- USD 1=Rs48.7050/7200

Spot/March 5000/4500

You require an exchange margin of 0.15%forTT sales and 0.20% for bills Selling rate.What amount will you debit from his account?



The Bank will be quoting at market sellingrate = 48.7200

Add Margin0.15% +0.07308TT selling Rate 48.79308

Add Margin 0.20% +0.09759

Bills Selling Rate 48.89067

Round Off 48.8900

Customer to be debited 48.89067x10000=Rs488900

Basics of the Forex Rates

Documents

Transcript of Basics of the Forex Rates