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CFA studies: FOREIGN EXCHANGE ARITHMETIC

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CFA studies
Thursday, November 5, 2009
FOREIGN EXCHANGE ARITHMETIC
A foreign exchange transaction has two aspects Purchase (Buy) and Sell. The Foreign exchange transaction is always talked from the Banks point of view and the item referred to is the foreign currency. Hence when we say Purchase, it means that the bank has purchased and it has purchased foreign currency & when we say Sale, the bank has sold and sold the foreign currency. In purchase transaction, the Bank acquires the foreign currency and parts with home currency. In a sale transaction the Bank parts with the foreign currency and acquires home currency. The Exchange rate is quoted as Direct Quotation and / or Indirect Quotation. In a Direct Quotation , the foreign currency is fixed and the home currency is variable. For example, USD Rs. 46. In a Indirect Quotation , the home currency is fixed and the foreign currency is variable. For example, Rs. 100 = USD 2.20. Except in London Market, the direct quotations are only used. In India all quotes are on Direct Method.. There are three markets, where foreign exchange rates are quoted. While quoting rates for customers, the rate is called Merchant Rate and normally quoted either as a sale or purchase transaction. A customer wants a demand draft for USD 100. It implies that the customer wants to purchase USD 100 from the Bank and will sell him foreign currency by acquiring rupees. The rate quoted will be a Sale Rate say USD 1 = 45.00. It means that Bank will take Rs.45 from the customer for each dollar sold to him. The exchange rate is always quoted in four decimals in multiples of
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CFA studies: FOREIGN EXCHANGE ARITHMETIC

0.0025. The rates quoted will be USD 1 45.2525. The last two digits will be rounded off to quarter. All currencies are quoted in the units of One, meaning thereby USD 1 = Rs. 45.2525, GBP 1 = Rs. 80.55. Following currencies are however, quoted in the units of 100. Japanese Yen, Belgian Franc, Italian Lira, Indonesian Rupiah, Kenyan Shilling, Spanish Peseta and currencies of Asian Clearing Union countries ( Bangladesh Taka, Myanmar Kyat, Iranian Riyal, Pakistani Rupee and Sri Lankan Rupee). In India, rupee amount received or paid to the customer on account of exchange transaction should be rounded off to the nearest rupee. ie upto 49 paise ignored and 50 to 99 paise rounded off to higher Rs. TRANSACTIONS IN INTERBANK MARKET While the rates quoted to the customers by their Banks are called merchant rates, the rates quoted by the Bank to another Bank is called interbank rate. Inter Bank Rates are always quoted two way. The market maker bank, ie who is quoting a rate will express his intention either to buy or sell foreign currency. For example, a Bank in Mumbai quotes a rate as under : USD 1 = Rs. 48.1525 / 1650 More often the rate would be quoted as USD 1 = 1525/1650 as the market players understand the big number ie 48. It indicates that the quoting Bank is willing to buy USD 1 from the other party by giving the other Bank Rs. 48.1525 for each Dollar. (It is also called Bid rate or purchase rate). It also indicates that the quoting Bank is willing to sell USD 1 from the other party by taking Rs. 48.1650 for each USD it will be selling. If the Bank buys dollars in the market at Rs. 48.1525 and sells each dollar at Rs. 48.1650, the difference of Rs.0.0125 is spread or profit of the Bank. A few currencies with their present rupee rates are as under: (as on 6.10.2006) CODE CURRENCY TT BUYING (Rs.) TT SELLING (Rs.) USD United State Dollar 45.47 45.87 GBP Great Britain Pound 85.17 86.36 EURO Euro 57.43
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November (1) FOREIGN EXCHANGE ARITHMETIC

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58.35 JPY Japanese Yen (Per 100) 38.36 38.99 AUD Australian Dollar 33.71 34.38 CAD Canadian Dollar 40.11 40.91 CHF Swiss Franc 36.07 36.79 DKK Danish Krone 7.69 7.84 HKD Hongkong Dollar 5.80 5.92 NOK Norwegian Kroners 6.81 6.94 NZD New Zealand Dollars 29.88 30.47 SEK Swedish Krone 6.18 6.31 SGD Singapore Dollar 28.48 29.05 Posted by vickyrocks9009 at 7:22 AM NO COMMENT S : POS T A COMMENT

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CFA studies: FOREIGN EXCHANGE ARITHMETIC

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