Foreign Exchange Arithmetic

Cross Exchange Rates

Session 3

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Rajat Vashisht

Cross Exchange Rate

The exchange rate for other currencies are quoted to customers based on the rates for the currency concerned prevailing international foreign exchanges: markets like London, Singapore & Hong Kong. These rates are available in terms of US dollar. They have to be converted into Rupees terms quoting to the customers. The exchange rate of currencies other than US Dollar are Cross Rates.

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 dollar buying rate to a customer. In case of the foreign currency being tendered by the customer, the bank should first get foreign currency converted to US dollars in the international market. In other words it has to buy dollars in the international market against foreign currency.

 Therefore the merchant rate for a foreign currency would be calculated by crossing the dollar selling rate against the foreign currency in the international market and dollar buying rate against rupees in inter bank market.

Buying Rate

Question

Times Bank issued a demand draft on Montreal for Canadian Dollar 50,000 at CAD 1 = Rs. 32.4850. However, after a few days the purchaser of the draft requested the bank to cancel the draft and repay the rupee equivalent to him. (Assuming the CAD were quoted in the Singapore Foreign 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%

Solution
The bank cancels the demand draft at TT buying rate. US Dollar/Rupee market buying rate Less: Exchange margin at 0.08% on Rs. 39.5275

USD/CAD market selling rate CAD dollar TT buying rate (39.4959/1.2561) Rounded 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

= Rs. 39.5275 = Rs. -0.0316 = Rs. 39.4959 = CAD 1.2561 = Rs. 31.4433

Buying Rate

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. 39.2800/2875 One 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 50/55 Two Month Forward 105/110 Three month Forward 155/160 What rate will the bank quote for the transaction provided it requires an exchange margin of 0.10%? 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 the whole rupee.

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 buying rate is reckoned, 55 days will be rounded off to lower period, one month. Dollar/Rupee market spot buying rate Add: Premium for one month Less: Exchange margin at 0.1% on Rs. 39.45 Bill buying rate for dollar =Rs. 39.28000 + Rs 0.170000 = Rs 39.45000 - Rs 00.03945 = 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 Add: Premium for two months =CHF 1.4375 + 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 Less: Interest Commission Net amount credited Rs. 13603750 Rs. 204988 Rs. 500 Rs. 205488 Rs 13398262

Selling Rate

When the bank sells foreign exchange (other than dollar) to the customer, it has to acquire the required foreign currency in the international market by selling the equivalent US dollar.

In calculating the merchant selling rate for foreign currency, the relevant rates are dollar buying rate against the foreign currency, concerned in the international market and dollar selling rate against rupee in the inter bank market.

Selling Rate

Question

Solution

Thank You