Forex Presentation-Class3 Rajat

8/2/2019 Forex Presentation-Class3 Rajat

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Foreign Exchange

ArithmeticCross Exchange Rates

Session 3

Rajat Vashisht


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Cross Exchange Rate

The exchange rate for other currencies are quoted

to customers based on the rates for the currencyconcerned prevailing international foreignexchanges: markets like London, Singapore & HongKong.

These rates are available in terms of US dollar. Theyhave to be converted into Rupees terms quoting tothe customers.

The exchange rate of currencies other than USDollar are Cross Rates.


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Buying Rate

The currency for which the exchange rate is to be

calculated as the foreign currency.

The interbank buying rate forms the basis of dollarbuying rate to a customer.

In case of the foreign currency being tendered bythe customer, the bank should first get foreigncurrency converted to US dollars in the internationalmarket.

In other words it has to buy dollars in theinternational market against foreign currency.


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Therefore the merchant rate for a foreign currency would be calculated bycrossing the dollar selling rate against the foreign currency in theinternational market and dollar buying rate against rupees in inter bankmarket.


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Buying Rate


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Question

Times Bank issued a demand draft on Montreal for Canadian Dollar 50,000at CAD 1 = Rs. 32.4850. However, after a few days the purchaser of thedraft requested the bank to cancel the draft and repay the rupeeequivalent to him. (Assuming the CAD were quoted in the SingaporeForeign Exchange market as under:

USD 1 = CAD 1.2541/2561 and the interbank market USD 1 = Rs.39.5275/5350)

How much the customer will gain or lose on cancellation of the draft?Exchange margin on TT buying is 0.08%


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Solution

The bank cancels the demand draft at TT buying rate.

US Dollar/Rupee market buying rate = Rs. 39.5275

Less: Exchange margin at 0.08% on Rs. 39.5275 = Rs. -0.0316

= Rs. 39.4959

USD/CAD market selling rate = CAD 1.2561

CAD dollar TT buying rate (39.4959/1.2561) = Rs. 31.4433Rounded off, the rate applicable is Rs. 331.4425

Amount paid by the customer on the purchase of DD for

CAD 50,000 at Rs. 32.4850 = Rs. 16,24,250

Amount received by the customer on cancellation

of DD for CAD 50,000 at Rs 31.4425 = Rs 15,72,125

Loss to customer = Rs. 52,125


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Buying Rate


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Question

A customer requests the bank to purchase a 30 days sight bill for Swiss Francs 5,00,000.Assuming Rs/USD are quoted in the local interbank market as under:

Spot USD 1 = Rs. 39.2800/2875One Month Forward 1700/1750

Two Month Forward 3500/3550

Three month Forward 5500/5550

And Swiss Frank are quoted in Singapore market as under:

Spot USD 1 = CHF 1.4250/4375

One Month Forward 50/55Two Month Forward 105/110

Three month Forward 155/160

What rate will the bank quote for the transaction provided it requires an exchange margin of0.10%?

Consider also:

Transit period for bills = 25 days

Rate of interest = 10% p.a.

Commission on export bill is Rs. 500

Show the net amount payable to the customer. Rupee amount to be quoted nearest to thewhole rupee.


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Solution

The usance of the bill and transit period come to 55 days. In the $/Rs leg, forward dollar is at premium. In this case since dollar buyingrate is reckoned, 55 days will be rounded off to lower period, one month.

Dollar/Rupee market spot buying rate =Rs. 39.28000

Add: Premium for one month + Rs 0.170000

= Rs 39.45000

Less: Exchange margin at 0.1% on Rs. 39.45 - Rs 00.03945

Bill buying rate for dollar = Rs 39.41055

In the dollar/Swiss Francs quote is at premium in this case since dollar selling rate is taken 55 days will be rounded off to the higher period(2 months)

Dollar/frank market spot buying rate =CHF 1.4375

Add: Premium for two months + CHF 0.0110

= CHF 1.4485

Bill buyin rate for Swiss Franc (39.41055/1.4485) = Rs. 27.2078

Rounded off to the nearest multimle of 0.0025, the rate quoted to the cusomter woulds be Rs. 27.2075 per swiss franc.

Amount payable to customer for CHF 500000 @ Rs 27.2075 per franc is Rs 13603750.

Interest recoverable at 10% for 55 days on Rs. 13603750 is Rs 204988.

Net amount credited to customers account:

Value of bill Rs. 13603750

Less: Interest Rs. 204988

Commission Rs. 500 Rs. 205488

Net amount credited Rs 13398262


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Selling Rate

When the bank sells foreign exchange (other than

dollar) to the customer, it has to acquire the requiredforeign currency in the international market byselling the equivalent US dollar.

In calculating the merchant selling rate for foreigncurrency, the relevant rates are dollar buying rateagainst the foreign currency, concerned in the

international market and dollar selling rate againstrupee in the inter bank market.


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Selling Rate


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Question


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Solution


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Thank You

Forex Presentation-Class3 Rajat

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