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Computation of Exchange Rates

Spot rate and forward rate


The rates quoted for spot transaction are Spot Rates.
TT buying rate is a Spot rate.
TT buying rate is applied to transaction for which foreign
exchange is received by the AD in its Nostro account.

Forward Rates
The rates quoted for forward transaction are
Forward rates.
A forward transaction is one where the exchange
of currencies takes place subsequent to two
working days after the transaction.
The forward rates is a function of forward period.
Bills Buying rate is a forward rate.

Quotation for forward rates


In inter bank/International Market, forward rates are given with reference
to Spot rate.
For example, the forward Quote for a Buying transaction is given as
follows.
Spot USD 1=Rs.50.00
One month Premium=0.70
Two month premium=1.40
Three month premium=2.00
The forward rate is to be calculated by loading the premium.
Premium: means the currency is costlier than the spot rate.
Discount: means the currency is cheaper.
At par : means the currency is of the same price.
Forward Margin: The difference between forward rate and spot rate is
called forward margin.

Interbank quotation
Spot USD 1=49.5000/5200
Spot/Nov
3000/3200
Spot/Dece
3500/3700
First is spot quote.
The 2nd and 3rd are the forward margins
Forward margin 3000 means, it is
3000*.0001= Rs. 0.30= 30 paise.

A bank quotes its ready or spot rates based on inter bank


ready rates. Inter bank ready rates are the Base rates.
For quoting the Buying rate the bank has to take the inter
bank buying rate as the Base rate.
Exchange Margin: profit is to be loaded. Reduce this in
buying rate and add it to the selling rate.
Spot TT buying rate=inter bank spot buying rate-Exchange
margin
Spot TT selling rate= interbank spot selling rate+exchange
Margin
Spot Bills selling rate=Inter bank spot selling rate+exchange
margin

Forward contract
This is a contract between two parties, say, a
banker and his customer to buy or sell a
certain amount of foreign currency on a
specified future date at a predetermined rate
of exchange.
The future date is called Value date.
The future rate is called forward rate.
It is a hedging device.

Rule 7 of FEDAI prescribes that such future date is to


be computed with reference to SPOT VALUE DATE OF
THE TRANSACTION.
If spot value date is 1st october , the date of delivery is
1st Nov.
Where the Forward contract stipulates that the
delivery of foreign exchange would take place on a
specified future date, it is called a Fixed Forward
Contract. Here the date of delivery is fixed.
If the forward contract stipulates that the delivery of fx
can take place on any day during a given period of
time, it is called an Option Forward Contract.

Various steps:
The first portion of the contract specimen relates
to booking of the contract.
Second portion records deliveries under the
contract.
The contract to have a serial number.
Tenor whether sight or usance bill
The delivery period to mention the first date and
the last date within which the delivey to take
place.


VaR: Value at Risk: The loss that might occur

Due to maintaining an open position in a volatile market, the risk associated is called VaR.
EXCHANGE ARITHMATIC
Calculation of TT buying rate
On 15th October Axis Bank received an MT from New York correspondent Bank for USD 6000 payable to its customer.
The amount credited to the Nostro account.
Inter Bank Rate is as follows:
Spot USD 1=Rs. 49.2500/2700
Spot/Nov USD 1=2200/2300.
Let us calculate the exchange rate and the rupee payable to the customer.
Rate applicable is TT buying rate. The rate quoted to the customer is based on the market buying rate of Rs. 49.2500
Dollar/rupee market spot buying rate=
Rs.49.25000
Less: Exchange margin at 0.08% on Rs. 49.25000=0.03940
--------------49.21060
--------------------Rounded off, the rate quoted to the customer is Rs. 49.2100 per dollar. Amt payable to the customer is Rs. 295260/-

Bill Buying Rate


This is the rate to be applied when a foreign bill is purchased.
When a bill is purchased the rupee value is paid. When Rupee is paid out of the bank to the
customer, the bank has to buy the foreign currency of the value of the bill.
The bank gets the payment from the overseas importer only after the bill is presented and paid
which takes time.
The transit period reckoned is 25 days
Even a sight export bill will have a time lag of 25 days for payment.
Therefore the rate quoted to the customer would be based not on the spot rate but 25 days
forward in the interbank market.
In case this is a usance bill of 30 days, (after sight), the rate to be applied is the interbank rate for 55
days forward.
Forward Margins are available for a calender month and not for 25 days.
Where the foreign currency is at premium, while calculating the bill buying rate, the bank will round
off the transit and usance periods to lower month.
Where the foreign currency /margin is at discount, round off the forward margin to the higher
month.

Calculation of Bill buying Rate


On 25th July, a customer presents to the bank at sight documents for USD 100000. Transit period is 25 days. What
rate will the bank quote? Exchange margin is 0.15%. Local Interbank quote is as follows.
Spot
USD 1= Rs. 49.6525/6650
Spot/August
6000/5700
Spot/sep
1.000/0.9700
Spot/October
1.4000/3900
Solution: The bank has to quote bills buying rate.Since dollar is at discount, the transit period will be rounded off
to one month. Rate to be quoted will be based on one month forward buying rate- spot/August

Dollar/Rupee market buying rate


Less: Discount for One month

Rs. 49.65250
Re. 0.60000
------------Rs. 49.05250
Less Exc. Margin
Re. 0.07358
--------------Bill buying rate
Rs. 48.97892
---------------The rate to be quoted to the customer is Rs. 48.9800 per dollar. Amount payable is Rs. 48,98,000/-

TT selling Rate
The bank sells foreign exchange to the customer against receipt of
INR.
This is the rate to be used for all transactions that do not involve
handling of documents by the bank.
Issue of Demand Drafts, MTs,TTs except that of retirement of an
import bill.
Cancellation of foreign exchange purchased earlier.
When an export bill purchased earlier is retd unpaid on its due date,
the bank will apply the TT selling rate for the transaction.
The TT selling rate is calculated on the basis of interbank selling
rate. The rate to the customer is calculated by adding exchange
margin to the interbank rate.

Bills selling Rate


This rate is to be used for all transactions
which involve handling of documents by the
bank.
Payment against import bills.
The bills selling rate is calculated by adding
exchange margin to the TT selling rate.

Problem:
A customer needs to purchase a DD for USD 25,000 on New York.
The rates are as follows:
Spot
USD 1= Rs.49.3575/3825
One month forward
=Rs. 49.7825/8250
The bank requires an exchange margin of 0.15%
What is the rate quoted to the customer and the rupee amount payable by the customer
Solution:
The bank has to quote the TT Selling rate
Dollar/Rupee spot selling rate
=Rs. 49.38250
Add exchange Margin at 0.15%
=Re. 0.07407
-------------------------------49.45657
----------------------------The rate to be quoted is Rs. 49.4575 per dollar. The customer has to pay Rs. 12,36,438.

Problem:
On 10th Feb, an importer receives a bill for USD 10,000/- The Exc. Margin is 0.15%
for TT sales and 0.20% for bills selling rate. How much the importer should pay?
Solution:
The bank will quote bills selling rate,
Dollar/rupee market spot
Selling rate
=48.72000
Add ex margin at 0.15%
= 0.07308
----------------TT selling Rate
=48.79308
Add Exc. Margin at 0.20%
=0.09759
----------------Bills selling rate
=48.89067
--------------------Rate per dollar 48.8900 and customer has to pay Rs. 4,88,900.

A bank had negotiated at sight bill for USD 100000 at Rs. 49.5200 and covered itself by sale in the market for one
month forward delivery at Rs. 49.5400. The bank had to recover the advance as the LC Terms were not complied
with and had to cover its sale in the interbank market at Rs.49.6000.

Spot
USD= Rs.49.5225/5275
One month
= Rs.49.5800/5875
The merchant rates for dollars were as follows.
TT
USD 1= Rs.49.4800
49.5600
One month
= Rs.49.5200
49.6200
At what rate will the bank cancel its purchase contract from the customer? What is INR recovered from the
customer? What is the profit/loss to the customer on the transactions?
Solution
The purchase contract will be cancelled at one month forward TT selling rate prevailing on the date of
cancellation, viz., Rs. 49.5200
Amount paid to customer on purchase of bill
for USD 100000 at Rs. 49.5200
=49,52,000
Amt recovered from customer on cancellation of contract
At Rs. 49.6200
=49,62,000
---------------------Loss to the customer on cancellation
10,000
--------------------

Calculation of Bill Buying Rates based on cross rates


Axis bank issued a demand draft for CAD 50,000 @ CAD 1=Rs. 34.4850. However, after a few days the purchaser of
the draft requested for cancellation of the draft.
The quotes are: USD 1=CAD 1,4541/4561
USD 1=Rs. 49.5275/5350.
Exchange margin on TT buying is 0.08%.
How much the customer gains or loses in the transaction?
Solution
The bank cancels the demand draft at TT buying rate.
US Dollar/Rupee market buying rate
=Rs. 49.5275
Less exchange margin at 0.08% on Rs.49.5275=Rs.0.0396
---------------------Rs.
49.4879
-------------------US Dollar/canadian dollar market selling rate= CAD 1.4561
Canadian dollar TT buying rate 49.4879/1.4561=Rs. 33.9866
Rounded off, the rate applicable is Rs. 33.9875
Amt paid for purchase of DD is CAD 50000@Rs. 34.4850 =Rs. 17,24,250.
Amt received by the customer on cancellation of DD for CAD 50,000@ Rs. 33.9875=16,99,375
Loss to the customer Rs. 24875/-

Calculation of Forward selling rate:


From the following information you are required to calculate (a) ready bill buying rate(b) 2 months forward buying
rate for demand bill (c)ready for 60 days usance bill and (d) 2 months forward buying rate for 60 days usance bill.
Interbank rate US dollar:
Spot
USD 1=Rs. 48.6000/6075
1 month
3500/5600
2 months
5500/5600
3 months
8500/8600
4 months
1.1500/1.1600
5 months
1.3500/1.3600
6 months
1.5500/1.6600
Transit period is 25 days. All forward rates are fixed delivery. Exchange margin is 0.10
Solution
(a) Ready bill Buying Rate
Dollar/Rupee market spot buying rate
Rs. 48.60000
Less exc margin at 0.10% on Rs. 48.6000
(-)Re. 0.04860
----------------------------48.55140
----------------------------Rounding off to Rs. 48.5525

(b) 2 months forward buying rate


Dollar/rupee spot buying rate
=48.60000
Add forward premium for 2 months
(transit period 25 days and forward period 2 months rounded off to
lower month)
0.55000
----------------49.15000
Less exchange margin at 0.10%
0.04915
--------------------------------49.10085 rounded off 49.1000
------------

Ready rate for 60 days Usance bill


Dollar/Rupee (market)spot buying rate
Rs. 48.60000
Add forward premium for 2 months
(25days transit periodplus 2 months0.55000
--------------49.15000
Less exchange margin at 0,10% 0.04915
----------------49.10085
-------------------- 40.1000

2 months forward rate for 60 days Bill


Dollar/rupee (market)
Spot buying rate
Rs.48.60000
Add premium for 4 months 1.15000
--------------------49.75000
Less exc. Margin
0.04975
----------------49.70025
--------------------

On 26th Aug, an exporter tenders a usance bill of 60 days for USD 100000/- drawn on New York. The rates are as
follows.
Spot
USD 1=Rs.48.6525/6850
Spot /sep
1500/1400
October
2800/2700
Nov
4200/4100
Dec
5600/5500
Transit period 25 days. Exc. Margin 0.10%.
What is the rate of bill purchase?
Solution The notional due date is 85 days from 26th August, i.e., 19th Nov. Since the currency is at discount,
(forward margin in descending order) the transit period will be rounded off to higher month, i.e end November
and the rate quoted will be based on spot/Nov rate for USD in the interbank market.
Dollar/rupee market spot buying rate
Less Discount for Spot/nov

Less exchange margin at 0.10%

Rs.48.65250
0.42000
--------------------48.23250
0.04823
----------------48.18427 rounded off to 48.1850

READY Rates based on cross rates


So far, exc.rates were calculated for USD. There are other currencies for which interbank rates are
not available in most of the countries. These currencies are also equated to USD
Axis Bank issued a demand draft on Montreal for Canadian Dollar 50,000 at CAD 1=Rs.34.4850.
However after a few days, the purchaser of the draft requested the bank to cancel the draft and
pay him the rupee equivalent to him. The quotes are as follows.
USD 1=CAD 1.4541/4561
USD 1=Rs.49.5275/5350. Exc margin for TT buying is0.08%

Solution The bank cancels the draft at TT buying rate


USD/Re market buying rate
=Rs.49.5275
Less exc. Margin
0.0396
-----------------Buying rate for 1 dollar
49.4879 and CAD is 1.4561

CAD 1.4561= Rs. 49.4879

CAD 1 = 49.4879/1.4561=Rs. 33.9866 rounded off to Rs. 33.9875


AMT PAID TO THE CUSTOMER is CAD 50000*34.4850= Rs. 17,24,250.