Rates

Quotations
1

Direct Quote
So many units of local currency per unit of foreign currency. Rs 50 = $1 Since 2 August 1993, India uses Direct quotations.

Indirect Quote
So many units of foreign currency per unit of local currency. $ 2 = Rs 100 For simplification, Rs is taken as 100. Same applies to JPY.

Two way quote

Dealer quotes two way: The rate at which a dealer or bank is willing to buy (buying rate, bid rate) and the rate at which bank is willing to sell (selling rate, ask rate or price).

Two way quote Spread

Dealer quotes two way: US$ 1 = Rs 50.0000 50.0050
Buying price for dealer
Ask/selling price for dealer

Spread: Difference between Higher (Ask) and Lower (BID)

Two way quote

Dealer quotes two way: US$ 1 = Rs 50.0000 50.0050
Buying price for dealer
Ask price for dealer

Lower is Bid, higher is Ask; irrespective of sequence.

Percent Spread
Ask - Bid = ----------- * 100 Ask
To be remembered, Denominator is Ask

Lower is Bid, higher is Ask; irrespective of sequence.

Percent Spread
0.0100 50.0050 50.0000 = ----------------------- * 100 50.0050
To be remembered, Denominator is Ask

Lower is Bid, higher is Ask; irrespective of sequence.

Two way quote

Usually, in transactions among dealers, only the last two digits are quoted, to save time and rest is understood. US$ 1 = Rs 50.0050 50.0080 Will be expressed as 50-80
9

Two way quotes

For 4 points after decimal, term points is used. One point further decimal right side is called pip.

10

Forward rate
If the exchange of currencies takes place after a certain period from the date of the deal (more than 2 working days), it is called the Forward rate.

11

Forward rate
Normal practice is to quote for 1 month, 2 months and 3 months and 6 months as well.

12

Forward rate
Can be quoted in two ways: 1. Outright rates. 2. In terms of points of premium or discount on the Spot rate. This is used in interbank transactions.
Learn as how to find Outright quotes when 2nd way is given
13

Forward rate
Say point way is given: Spot FFr/US$ 5.2321/2340
Bid Ask

1-m 25/20

3-m 40/32

6-m 20/26

Find outright quotes and their spreads.

14

Forward rate
Say point way is given: Spot FFr/US$ 5.2321/2340 1-m 25 25/20 3-m 40 40/32 6-m 20 20/26

Carefully observe the first figures!

15

Forward rate
Say point way is given: Spot FFr/US$ 5.2321/2340
Bid Ask

1-m 25 25/20

3-m 40 40/32

6-m 20 20/26

Carefully observe the first figures! Remember the tip:

HDS (High Discount Subtract) and LPA (Low Premium Add)

16

Forward rate
Say point way is given: Spot FFr/US$ 5.2321/2340
Bid Ask

1-m 25 25/20

3-m 40 40/32

6-m 20 20/26

Carefully observe the first figures! Remember the tip:

HDS (High Discount Subtract)

Subtract from the Spot Rate.
17

Forward rate
Say point way is given: Spot FFr/US$ 5.2321/2340
Bid Ask Remember the tip:

1-m 25 25/20

3-m 40 40/32

6-m 20 20/26

HDS (High Discount Subtract)

Subtract from the Spot Rate.

5.2321-0.0025 = 5.2296 Bid 5.23400.0020 = 5.2320 Ask Spread = 0.0024

18

Forward rate
Say point way is given: Spot FFr/US$ 5.2321/2340
Bid Ask Remember the tip:

1-m 25 25/20

3-m 40 40/32

6-m 20 20/26

HDS (High Discount Subtract)

Subtract from the Spot Rate.

5.2321-0.0040 = 5.2281 Bid 5.23400.0032 = 5.2308 Ask Spread = 0.0027

19

Forward rate
Say point way is given: Spot FFr/US$ 5.2321/2340 1-m 25 25/20 3-m 40 40/32 6-m 20 20/26

Carefully observe the first figures! Remember the tip:

LPA

(Low Premium Add)

20

Forward rate
Say point way is given: Spot FFr/US$ 5.2321/2340
Bid Remember the tip: Ask

1-m 25 25/20

3-m 40 40/32

6-m 20 20/26

Carefully observe the first figures!

(Low Premium Add)

LPA

5.2321+0.0020 = 5.2341 Bid 5.2340+0.0026 = 5.2366 Ask Spread = 0.0025

21

Practice

Say quote is given this way: Spot 1-m Rs/US$ 32.1010/1100 225/275

3-m 300/350

6-m 375/455

Work out Outright Quotes with their spreads.

22

Practice

Maturity Spot 1-m 3-m 6-m

Bid/Buy Rs 32.1010/$ Rs 32.1235/$ Rs 32.1310/$ Rs 32.1385/$

Sell/Offer/Ask Rs 32.1100/$ Rs 32.1375/$ Rs 32.1450/$ Rs 32.1555/$

Spread 0.0090 0.0140 0.0140 0.0170

23

Foreign Exchange Market

Forex market is not a physical place. It is a network of banks, Forex brokers and dealers.

24

Foreign Exchange Market

Not confined to any one country but it is dispersed throughout the leading financial centers viz., London, New York, Zurich, Amsterdam, Tokyo, Toronto, Milan, and Frankfurt.

25

Foreign Exchange Market

Business is conducted generally by oral communication- written confirmation occurs later.

26

Foreign Exchange Market

As huge sums are involved in dealings, a small difference in rates mean a lot of money.

27

Foreign Exchange Market

The minimum trading unit in Chicago futures market is reported to be: Aus $: 100000 GBP: 62500 Can $: 100000

28

Foreign Exchange Market

The minimum trading unit in Chicago futures market is reported to be: Japanese Yen: 12.5 mn Swiss Franc: 125000 Euro: 125000

29

Foreign Exchange Market

Indian banks dealing with RBI have to deal with a minimum of $100000 with an addition of $25000 thereafter.

30

24 Hrs market
Because of the time difference between countries as shown in table and the nature mainly viz., OTC the Forex market can be considered as a 24 hrs market.
31

24 Hrs market
The volume of business varies substantially according to market conditions and according to the time of the day.

32

24 Hrs market
The market is the deepest or most liquid only in European afternoon where the worlds largest trading centers London, New York, Frankfurt and Chicago are all open together.

33

Table

34

SWIFT
The banks and brokers dealing in foreign exchange are linked together by telephones, telexes and a satellite communications network called SWIFT.

35

SWIFT
The Society for Worldwide International Financial Telecommunication.

36

SWIFT
This computer based communications system, based in Brussels (Belgium) links banks and brokers in just about every financial center.

37

SWIFT
SWIFT was inaugurated in India in Dec 1991 and 42 banks in India were admitted as users banks.

38

Factors affecting Exchange Rate

Exchange Rates (ER) respond quickly to all sorts of events- tangible and psychological.

39

Factors affecting Exchange Rate

Economic factors, also called fundamental factors are better guides as how a currency moves in the long run.

40

Factors affecting Exchange Rate

In recent years, global interdependence has increased to an unprecedented degree. Changes in one nations economy are rapidly transmitted to that nations trading partners.

41

Factors affecting Exchange Rate

1. Primary determinants. 2. Secondary determinants.

42

Primary determinants
Demand and Supply Clue lies in details of BOP statement. If $ is coming more in country, Re will appreciate and vis a vis.

43

Primary determinants
Demand and Supply Changes in countrys resources. Discovery of North Sea oil in the UK, and natural gas in the Netherlands pushed up the value of the and Netherlands guilder.
44

Primary determinants
Demand and Supply Changes in countrys comparative advantage. Shift in demand from US to Japanese automobiles in the USA and elsewhere pushed up the value of Yen.
45

Primary determinants
Domestic Economic Policies This means, relative inflation rates. Country experiencing higher inflation will see more depreciation.

46

Secondary determinants
Interest rate differentials This means, relative interest rates. Country offering higher interest rate will attract more foreign investors/currencies and thus domestic currency will see more appreciation. However..
47

Secondary determinants
Interest rate differentials This means, relative interest rates.

However.. This (higher interest rate) should not be due to the expectation of higher inflation.

48

Secondary determinants
Expectations and other Psychological factors This means, GENERAL eCONOMY. Present Re $ rate as 50 to one $ is influenced by this factor. (this was sometimes back)
49

Secondary determinants
Political events This means, Political Stability. Political stability strengthens the domestic currency.

50

Forecasting Services
Rothschild in London. Citibank in New York.

51

Nominal Effective Exchange Rate of Rupee

Effective means= A Suitable Weighted Average.

52

Nominal Effective Exchange Rate of Rupee

To find the direction of the movement of the currency on the whole. This is similar to constructing a price index.

53

NEER
RBI uses a 5 country model. The same can be applied to any numbers.

54

NEER
RBI uses a 5 country model.

USA, Germany, Japan, UK and France.

55

NEER
e/ei = exchange rate wi = wt

NEER = (e/ei)wi
i=1

56

NEER Share of countrys total trade

Total trade = x + m

USA : Germany: Japan: UK:

39% 19% 16% 26%

Total = 100%
57

NEER
Refer to xl sheet neer.

58

REER

REER = (e/ei)wi (P/Pi)wi

i=1

59

What will be the rate?

Refer xl sheet neer.

60