Given: 1C$ = $0.7703 (Indirect quote)
To find: How many dollars we get by selling C$
Solution:
Indirect quote means C$ is the base currency.
So, 1 C$ = $0.7703
Selling C$ means buying $.
Therefore, if we sell 1 C$, we get $0.7703
Exercise 6
Given the following
quotes , answer the
following.
if 1£ = $1.2617 , find
how many pounds we
get by selling $1.3
2. Profile
Parvesh Aghi
B. Com , FCA
PROFILE
Qualification:
Chartered Accountant, 1985
B Com ( Hons) from Delhi University, 1983
Worked in Industry for 23 years in following
Companies:
Idea Cellular Ltd (GM finance)
Grasim Industries Ltd (Sr Manager)
Reliance Communication Ltd (Vice President)
SRF Ltd (Chief Manager)
Hero Group Company (CFO)
Ballarpur Industries Ltd (Manager)
3. Teaching Experience- Guest Faculty
IMT
Ghaziabad
Fore School
of
Management
Shiv Nadar
University
O.P Jindal
Global
University
Bennett
University
BM Munjal
University
IIFT
4. Subjects
Forex Markets
Takeover code
of India
IPO
management &
ICDR (SEBI
Regulations )
Securities
Analysis and
Portfolio
management.
Mergers &
Acquisitions.
Financial
Reporting.
Merchant
Banking &
Financial
Services.
Income Tax.
Goods & Service
Tax , Customs
Act
Venture Capital
Financing.
International
Business
Environment.
Business Ethics
& Corporate
Governance,
4
7. What is a Merchant
Bank ?
7
A merchant bank is a
company that deals
mostly in
international
finance, business
loans for companies
and underwriting
8. What is a 'Merchant Bank
The term merchant bank refers to a
financial institution that
conducts underwriting, loan services,
financial advising, and fundraising
services for large corporations
and high-net-worth
individuals (HWNIs).
9. What is a 'Merchant Bank
Merchant banks are
experts in international
trade, which makes them
specialists in dealing
with multinational
corporations.
10. What is a 'Merchant Bank
Unlike retail
or commercial banks,
merchant banks do not
provide financial
services to the general
public.
Some of the largest
merchant banks in the
world include J.P.
Morgan Chase, Goldman
Sachs, and Citigroup.
11.
12. International Trade
The forex dealings of a bank
with any customer are
known as ‘merchant
business’ and the exchange
rate at which the dealing or
transaction takes place is
the ‘merchant rate’.
The merchant business in
which the contract to buy or
sell foreign exchange has to
be executed on the same
day is known as ‘cash
transaction’.
The merchant business in
which the contract to buy or
sell foreign exchange has to
be executed on Future date
is known as forward
transaction’.
14. Introduction
The forex market is
the market in which
participants can
buy, sell, exchange,
and speculate on
currencies.
15. FX Market Participants
The forex market is made
up of banks, commercial
companies, central
banks, investment
management firms, hedge
funds, and retail forex
brokers and investors.
16. Foreign Exchange Market
Most countries of the world
have their own currencies:
the Indian rupee , the U.S
dollar., the euro in Europe,
the Brazilian real, and the
Chinese yuan, just to name
a few.
The trading of currencies is
what makes up the foreign
exchange market.
16
17. The Forex Market
The forex market is made up of
two levels; the interbank
market and the over-the-
counter (OTC) market.
The interbank market is where
large banks trade currencies for
purposes such hedging their
foreign exchange exposure,
facilitating international trade,
managing their investment
portfolios, and speculating on
currency price movements.
The OTC market is where
individuals trade through online
platforms and brokers.
It is a decentralized market
where participants buy, sell,
and exchange currencies
directly with each other,
without a centralized exchange
or clearing house.
18. What are Foreign Exchange Rates?
Two kinds of exchange rate transactions make up the foreign exchange market:
18
─ Spot transaction refers to
the buying or selling of a
currency pair for immediate
delivery or settlement,
typically within two business
days after the trade date. It is
the most common type of
transaction in the forex market
and involves the exchange of
one currency for another at the
prevailing spot exchange rate.
─Forward transaction refers to an
agreement between two parties to buy or
sell a specified amount of a currency pair
at a predetermined exchange rate, with
settlement and delivery scheduled for a
future date beyond the standard spot
settlement period (typically beyond two
business days). It is a type of derivative
contract that allows market participants
to hedge or speculate on future currency
exchange rate movements.
19. Foreign Exchange Market: Exchange Rates
Foreign Exchange Rates are published daily in
newspapers and internet sites such as
www.finance.yahoo.com .
Exchange rates for a currency such as rupee are
quoted in two ways ,US dollar per unit of domestic
currency or domestic currency per US dollar.
For example, on 18th August 2023 , one $ was
quoted as Rs 83.17 and 1 Rupee = $0.01202
19
https://www.xe.com/currencycharts/?from=USD&to=INR
20. Foreign Exchange Market: Exchange Rates
American generally would regard the
exchange rate with rupee as $0.01202 per
rupee ( or $ 1.2020 per Rs 100) while Indians
think of it as Rs 83.17 per Dollar.
Exchange Rates are quoted for the spot
transaction ( the spot exchange rate) And for
forward transaction ( the forward exchange
rates that will take place one month , three
months , and six months in the future
20
21. How is Foreign Exchange Traded?
One of the most fascinating things about this market –
there is no brick and mortar marketplace for Forex
trading.
Every transaction is done electronically over-the-
counter.
Unlike the stock exchange, the Forex market remains
open round the clock with currencies traded across
every time zone, five days every week.
21
22. Forex markets
The foreign exchange or forex
market is the largest financial
market in the world – larger
even than the stock market,
with a daily volume of $5
trillion, vs. $85 billion for
equities worldwide.
22
23. EXCHANGE RATES
■ SPOT RATES
■ https://www.oanda.com/currency-
converter/en/?from=USD&to=INR&amount=1
■ FORWARD RATES
■ https://www.fxempire.com/currencies/usd-inr/forward-rates
■ Dollar Index
■ https://in.tradingview.com/chart/?symbol=TVC:DXY
https://tradingeconomics.com/india/composite-pmi
29. Direct and Indirect Quote
Foreign exchange
quotation can be either a
direct quotation and or
an indirect quotation
Depending upon the
home currency of the
person concerned.
A direct quote is the
home currency price of
one-unit foreign currency
$1= Rs 81.95
Direct and indirect
quotes are reciprocals of
each other
Rs 1 = $ .01220
Direct quote = 1/indirect
quote and vice versa
29
30. Direct Quote
Direct quotation
is when the one
unit of foreign
currency is
expressed in
terms of domestic
currency.
30
Direct for India
Quotation
$ Rs
1 = 83.17
Direct Quotation ( for USA)
£ $
1 = 1.24
1 EUR = $1.09
31. Indirect quote
Indirect
quotation is when
one unit of
domestic
currency is
expressed in
terms of
foreign currency.
31
Indirect quotation for India
Rs $
1 = 0.01220
Indirect quotation for USA
$ ₤
1 = .80
■ Indirect quotation for USA
■ 1 $ = 6.88 Chinese Yuan
32. Direct and indirect quotes
Direct and Indirect quotes are
reciprocals of each other, which can
be mathematically expressed as
follows.
Direct quote = 1/indirect quote and
vice versa
32
33. Direct indirect quote
33
In a direct quote, the
domestic currency is the base
currency, while the foreign
currency is the quote
currency.
1$ = Rs 83.17
An indirect quote is just the
opposite: the foreign currency
is the base currency, and the
domestic currency is the
quote currency.
1Rs = $ 0.01202
35. Exercise 1
€1 = US$1.2120
Direct quote in USA
for Euro
US$1 = € ?
Indirect quote in
USA for Euro
1/1.2120
US $ 1=
€ .8250
35
Direct
quote in
Euro
countries
for $
36. Exercise 2
£1 = US$1.2617
Direct quote in USA
for Pound
US$1 = £?
Indirect quote in
USA for pound
1/1.2617
US $ 1=
£ 0.7926
36
37. Exercise 3
NZ$1 = US$0.6562
Direct quote in USA
for NZ $
US$1 = NZ$?
Indirect quote in
USA for NZ$
1/0.6562
US $1 =NZ$
1.5239
37
38. Exercise 4
$1 = Rs 75
Direct quote in
India for US$
1 Rupee = $ ?
Indirect quote in
India for US $
1/75
1 Rupee
=$ .0133
38
40. American terms & European terms
Currency pairs versus
U.S. dollars tend to be quoted
in one of two ways; in either
American or European terms.
20 September
2023
40
41. American terms & European terms
American terms
US dollar price per unit of
foreign currency
Example Rs1= $.01202
€ 1 = $.909
A direct quote in the United
States
A indirect quote outside the
United States
European terms
Foreign currency units per
dollar
Example $1 = Rs 83.17
$1 = €1.10
A direct quote outside the
United States
An indirect quote in the
United States
43. Bid, Offer and Spread
A foreign exchange
quotes are two-way
quotes, expressed as
a 'bid' and ask’
rates.
Bid is the price at
which the
dealer/bank is
willing to buy
another currency.
The ask or offer is
the rate at which
the dealer/ bank is
willing to sell
another currency.
43
45. Bid, Offer and Spread
For example, a dealer may
quote Indian rupees as Rs
82.80 - 82.90 vis-a-vis
dollar.
That means that he is willing
to buy dollars at Rs 82.80/$
(sell rupees and buy
dollars), while he will sell
dollar at Rs 82.90/$ (buy
rupees and sell dollars).
The difference between the
bid and the offer is called
the spread.
The offer/ask is always
higher than the bid as inter-
bank dealers make money by
buying at the bid and selling
at the offer/ask
45
46. Bid / Ask & Spread
If you want to buy currency, you have to pay the
higher ask price, but if you want to sell currency,
you have to sell it at the lower bid price.
So if you were to buy currency, then immediately
sell it back to the same dealer, the dealer would
make money, and you would lose money.
Thus, the spread is the transaction cost of
trading currency.
46
47. Example
George is an American businessmen visiting Europe. The cost of
purchasing euros at the airport is as follows:
EUR 1 = USD 1.20 / USD 1.30 (BID / ASK)
George wants to buy EUR 10,000
The higher price (USD 1.30) is the cost to buy each euro. So he would
have to pay the dealer the ask price USD 13,000 ( 10,000 X 1.3)
47
50. Example
$1= Rs 80-81
Direct quote for $ in India
Converting
direct into
indirect quote
BID :
Rs1 = $1/81
ASK:
Rs1 =$1/80
Selling dollar is like buying rupees and vice versa
Buying dollar is like selling rupees
Bid priceIndirect = 1/Ask priceDirect Ask priceIndirect = 1/Bid priceDirect
52. Example
Rs 1 = $.01234 - $.01250
BID is always lower than ASK
The reciprocal was the bid price of the dollar (selling price
of dollars from customer perspective which becomes ask
price or buying price of Rupee from customers point of view
53. Example
US $ 1= £ 0.7545 / 0.7574. £1 = $?
£1= $1/.7574 / $1/.7545
57. Understanding FX Quote
Conventions
We refer $1= Rs 80
as
Rs / $ quote read as
rupees-dollar quote
Thus a dollar –pound
quote is written as
$/£ means
£1= ? $
1.32$/£
Means £1= $ 1.32
Again € 1 = $1.21 is
expressed as
1.21$/€ quote
58. Dealing with reverse currency
quotation
If a problem carry reverse
notations it becomes a
challenge to solve them
Since we are used to or
familiar with normal
notation
So to overcome this
problem if we know
through general knowledge
how many units of one
currency should another
currency be.
For example if it is given
$/Rs quote as $1= Rs 80
we know that the notation
is reverse
Similarly if it is given
€/$ :1.09
it is a reverse notation and
mean as
Through general knowledge
we know that €1 = $1.09
and not $1= € 1.09
59. Currency rates vs Indian Rupee –April 23
1 Yen Rs .57
1 Singapore dollar Rs 61.5
1 Australian dollar Rs 53.89
1 Canadian dollar Rs 61.54
1 $ Rs 83.17
1 Euro Rs 90.87
1 Pound Rs 105.81
20 September
2023
59
60. Example
Given ¥/$ as 145
Is it a normal
or reverse
notation ?
It is a normal
notation
So $1= 145 Yen
61. Example
Given ¥/$ as .0076
Is it a normal
or reverse
notation ?
It is a
reverse
notation
So ¥1= $.0076
62. Example
Given SGD/$ as .75
Is it a normal
or reverse
notation ?
It is a
reverse
notation
So SGD1= $.75
64. Exercise 5
Given the following
quotes , answer the
following.
if 1C$ = $ 0.7703 ,
find how many dollars
we get by selling C$
10,000 ?
We have to sell C$ we
need C$ quote . Since
we have, it we can use
the quote directly to
answer the question
C$ 10,000 X $0.7703 =
$ 7703
64
65. Exercise 6
if 1¥ = $ 0.0093 , find
how many dollars we
get by selling ¥
20,00,000 ?
We have to sell ¥ we
need ¥ quote . Since
we have it ,we can use
the quote directly to
answer the question
¥ 20,00,000 X $0.0093
= $ 18,600
65
66. Exercise 7
if 1$ = .94 Swiss Franc ,
find how many dollars we
get by selling 50,000 Swiss
Francs ?
We have to sell Swiss Franc
we need Swiss franc
quote Since we have dollar
quote we convert dollar
quote to swiss franc quote
before using it
Therefore 1 Swiss Franc =
1/.94= $ 1 .0638
50,000 SF X $1 .0638 =
$53,191
66
67. Exercise 8
if 1 S$ = Rs 54.13 , find
how many Singapore
dollars we get by selling
5,00,000 Rupees ?
We have to sell Rupees so
we need INR quote . Since
we have Singapore dollar
quote we convert
Singapore dollar quote to
Rupee quote before using
it.
Therefore : 1Rupee = S$
1/54.13= $ .01847
500,000 Rs X S$ .01847 =
S$ 9,237
67
68. Exercise 9
if 1$ = Rs 68.61 , find
how many dollars we
get by selling 25,000
Rupees ?
We have to sell Rupees
so we need INR quote
. Since we have dollar
quote we convert
dollar quote to Rupee
quote before using it.
Therefore 1Rupee =
$ 1/68.61= $ .014575
25,000 Rs X $ .014575
= $ 364.38
68
69. Exercise 10
if 1 £ = Rs 86.34 , find
how many pounds we
get by selling 25,000
Rupees
We have to sell Rupees
so we need INR quote
. Since we have pound
quote we convert
pound quote to Rupee
quote before using it.
Therefore 1Rupee = £
1/86.34= £ .014575
25,000 Rs X £ 1/86.34
= 25,000/ 86.34= £
289.55
69
70. Exercise 11
if 1€= Rs 77.44 , find
how many Euros we get
by selling 25,000
Rupees ?
We have to sell Rupees
so we need INR quote
. Since we have Euro
quote we convert Euro
quote to Rupee quote
before using it.
Therefore 1Rupee = €
1/77.44
25,000 Rs X € 1/77.44
= 25,000/ 77.44=
€ 322.83
70
72. Cross Rates
The exchange rates
expressed by any
currency pair that
does not involve the
U.S. dollar are called
“CROSS
RATES”
■
72
Examples
1 £ = Rs 99.50
1 € = Rs 90.55
1 ¥ = Rs .72
1 € = £.91
1 swiss franc = €.92
Exchange currency pair which does not involve dollar is called cross rate
73. Cross currency rate calculation
73
»Cross currency rate
is calculated by
multiplying
two exchange rates
»The USD is the base
currency in one
pairing and the
quote currency in
the other pairings
1 $ = Rs 82
1 € = $ 1.09
1 €= ? Rs
1€ = Rs 89.38
(82 x1.09)
European
Quote
American
quote
78. Exercise 14
Given
US$1 = ¥ 107.31
£ 1 = US$1.26
A$ 1 = US$ 0.70
(a) Calculate the cross rate for pounds in yen terms
(b) Calculate the cross rate for Australian dollar in yen terms
(c) Calculate the cross rate for pounds in Australian dollar terms
78
79. (a) Calculate the cross rate for Pounds
in yen terms
■ 1£ = ? ¥
■ US$1 = ¥ 107.31 Dollar buying rate ( European terms)
■ £ 1 = US$1.26 Pound buying rate ( American terms )
■
¥
$
×
$
£
=
¥
£
■
¥
£
= 107.31 x 1.26
■ £1= ¥135.21
20 September
2023
79
80. (b) Calculate the cross rate for
Australian dollar in yen terms
A$1= ¥ ?
US$1 = ¥ 107 .31 Dollar buying rate ( European)
A$ 1 = US$ 0.70 A$ buying rate ( American)
¥
$
𝑿
$
𝑨$
=
¥
𝑨$
¥
𝑨$
= 107.31 x .70= 75.12
A$1 = ¥ 75.12
20 September
2023
80
81. (c) Calculate the cross rate for
Pounds in Australian dollar terms
Given : A$1= US$ 0.70 American quote
: £1 = US$1.26 American quote
₤ 1 = A$ ?
A$1= US$ 0.70 A$ dollar buying rate ( American)
US $ 1= A$ 1.4285 Converted to Dollar buying rate ( European)
£1 = US$1.26 Pound buying rate ( American)
𝑨$
$
𝑿
$
£
=
𝑨$
£
= 1.4285 x 1.26 = 1.80
£ 1= A$ 1.80
20 September
2023
81
82. Exercise 14A
Given
US$1 = ¥ 139.49
£ 1 = US$1.16
A$ 1 = US$ 0.68
(a) Calculate the cross rate for pounds in yen terms
(b) Calculate the cross rate for Australian dollar in yen terms
(c) Calculate the cross rate for pounds in Australian dollar terms
82
83. (a) Calculate the cross rate for Pounds in
yen terms
■ 1£ = ? ¥
■ US$1 = ¥ 139.49 Dollar buying rate ( European terms)
■ £ 1 = US$1.16 Pound buying rate ( American terms )
■
¥
$
×
$
£
=
¥
£
■
¥
£
= 139.49 x 1.16
■ £1= ¥161.80
20 September
2023
83
84. (b) Calculate the cross rate for
Australian dollar in yen terms
A$1= ¥ ?
US$1 = ¥ 139.50 Dollar buying rate ( European)
A$ 1 = US$ 0.68 A$ buying rate ( American)
¥
$
𝑿
$
𝑨$
=
¥
𝑨$
¥
𝑨$
= 139.50 x .68= 94.86
A$1 = ¥ 94.86
20 September
2023
84
85. (c) Calculate the cross rate for
Pounds in Australian dollar terms
Given : A$1= US$ 0.68 American quote
: £1 = US$1.16 American quote
₤ 1 = A$ ?
A$1= US$ 0..68 A$ dollar buying rate ( American)
US $ 1= A$ 1.4706 Converted to Dollar buying rate ( European)
£1 = US$1.16 Pound buying rate ( American)
𝑨$
$
𝑿
$
£
=
𝑨$
£
= 1.4706 x 1.16 = 1.70
£ 1= A$ 1.70
20 September
2023
85
86. EXERCISE 15
if exchange rate in Mumbai inter –
bank market is US $1 = Rs 75.2550/
2600 and in London inter-bank market
is US $ 1= £ 0.7945/ 0.7974.
What would be the exchange rate
between Indian Rupee and Pound
sterling for buying pounds ( ask rate)
86
87. Solution
Mumbai inter-bank we need to purchase US $ by Surrendering
(selling) Rupee & Sell US $ in London inter- bank market to
purchase Pounds
First Leg : Buy Dollar and Sell Rupee
Second Leg : Buy Pound and Sell Dollar
US $1 = Rs 75.2550/ 2600
Dollar buying rate (customer) US $ 1= Rs 75.2600
87
89. solution
Dollar buying rate US $ 1= Rs 75.2600
Pound buying rate 1£ = $ 1.2586
Rs / $ x $ /£ = Rs /£
Rs/ £ = 75.2600 x 1.2586 =
1£ = Rs 94.7222
89
90. EXERCISE 15A
if exchange rate in Mumbai inter –
bank market is US $1 = Rs 81.5750/
5850 and in London inter-bank market
is US $ 1= £ 0.8245/ 0.8274.
What would be the exchange rate
between Indian Rupee and Pound
sterling for buying pounds ( ask rate)
90
91. Solution
Mumbai inter-bank we need to purchase US $ by Surrendering
(selling) Rupee & Sell US $ in London inter- bank market to
purchase Pounds
First Leg : Buy Dollar and Sell Rupee
Second Leg : Buy Pound and Sell Dollar
US $1 = Rs 81.5750/ 5850
Dollar buying rate (customer) US $ 1= Rs 81.5850
91
93. Solution
Dollar buying rate US $ 1= Rs 81.5850
Pound buying rate 1£ = $ 1.2128
Rs / $ x $ /£ = Rs /£
Rs/ £ = 81.5850 x 1.2128 =
1£ = Rs 98.94
93
94. Exercise 16
The rate between Japanese ¥
and the U.S. $ is
$:¥ = 119.15 - 121.85
and the rate between the
euro and the U.S. $ is
$:€ = 0.8021 - 0.8033.
What will be the
direct quote
between the yen and
the euro in Japan ?
20 September
2023
94
95. solution
US$1 =
Yen 119.15 – 121.85
US $ 1 =
Euro .8021 - .8033
Euro 1=
US $ 1.2448 –1.2467
Euro 1 = Yen
119.15 x 1.2448
121.85 x 1.2467
Yen / $ X $ /Euro = Yen / Euro ….. Euro 1 = ……Yen
96. Solution
Euro 1 = Yen 148.31 – 151.91
The lower rate is
the bid, and the
higher rate is the
ask.
Therefore, the
rate between yen
and euro is €:¥ =
148.31 – 151.91
97. Solution
20 September
2023
97
■ Bid Asked
■ US$1 = Yen 119.15 – 121.85
■ US $ 1 = Euro .8021 - .8033
■ Euro 1= US $ 1.2448 – 1.2467
■ Therefore
■ Euro 1 = Yen 119.15 x 1.2448 / 121.85 x 1.2467
■ Euro 1 = Yen 148.31 – 151.91
■ The lower rate is the bid, and the higher rate is the ask. Therefore, the rate
between yen and euro is €:¥ = 148.31 – 151.91
98. Exercise 17
■ The following 2-way quotes appear in the foreign exchange market:
■ Spot 2-months forward
■ RS/US $ Rs 46.00/Rs 46.25 Rs 47.00/Rs 47.50
■ Required:
■ (i) How many US dollars should a firm sell to get Rs 25 lakhs after 2 months?
■ (ii) How many Rupees is the firm required to pay to obtain US $ 2,00,000 in the spot market?
■ (iii)Assume the firm has US $ 69,000 in current account earning no interest. ROI on Rupee investment is
■ 10% p.a
■ Should the firm encash the US $ now or 2 months later?
99. Exercise 17
The following 2-way
quotes appear in the
foreign exchange
market:
Spot : Rs/US $
Rs 46.00/Rs 46.25
2 - month forward rate :
Rs/US $
Rs 47.00/Rs 47.50
Required:(i) How many
US dollars should a firm
sell to get Rs 25 lakhs
after 2 months?
ii) How many Rupees,
the firm required to pay
to obtain US $ 2,00,000
in the spot market?
iii)Assume the firm has
US $ 69,000 in current
account earning no
interest. ROI on Rupee
investment is 10% p.a
Should the firm encash
the US $ now or 2
months later?
100. (i) How many US dollars should a firm sell
to get Rs 25 lakhs after 2 months?
Rs/US $ two-
month forward rate :
Rs 47.00/Rs 47.50
1 $ = Rs 47.00 – Rs 47.50
1Rs = $1/47.50 – $1/47.00
Selling $ means
buying rupee
Rs 25,00,000 /$47 =
$ 53,191.50
101. Rs/US $ spot rate
Rs 46.00/Rs 46.25
1$ = Rs 46.00 –Rs 46.25
Dollar spot
buying rate Rs
46.25
$ 2,00,000 X Rs 46.25 = Rs 92,50,000
ii) How many Rupees, the firm required to pay to obtain US $ 2,00,000
in the spot market?
102. iii) Assume the firm has US $ 69,000 in current account earning no interest. ROI on
Rupee investment is 10% p.a
Should the firm encash the US $ now or 2 months later?
Encashing
US $ 69000
Now Vs 2 month
later
Spot :
1$ = Rs 46.00 –Rs
46.25
Dollar selling rate Rs
46.00
If we can encash in
spot mkt
$ 69000 × Rs 46 =
Rs 31,74,000
Add 10% ROI : 10/100 X 2/12
= Rs 52,900
Total
= Rs 32,26,900
103. Solution
Proceeds if we can
encash by forward
rate :
1 $ = Rs 47.00 – Rs 47.50
$ 69000 × Rs 47.00
( dollar selling rate )
= Rs 32,43,000
Spot =Rs 32,26,900
Forward = Rs 32,43,000
It is better to
encash the
proceeds after 2
months
104. Exercise 17A
The following 2-way
quotes appear in the
foreign exchange
market:
Spot : Rs/US $
Rs 79.00/Rs 79.25
2 - month forward rate :
Rs/US $
Rs 79.50/Rs 79.75
Required:(i) How many
US dollars should a firm
sell to get Rs 25 lakhs
after 2 months?
ii) How many Rupees,
the firm required to pay
to obtain US $ 2,00,000
in the spot market?
iii)Assume the firm has
US $ 69,000 in current
account earning no
interest. ROI on Rupee
investment is 10% p.a
Should the firm encash
the US $ now or 2
months later?
105. (i) How many US dollars should a firm sell
to get Rs 25 lakhs after 2 months?
Rs/US $ two-
month forward rate :
Rs 79.50/Rs
79.75
1 $ = Rs 79.50 – Rs 79.75
1Rs = $1/79.75 – $1/79.50
Selling $ means
buying rupee
Rs 25,00,000 /$79.50
=
$ 31,447
106. Rs/US $ spot rate
Rs 79.00/Rs 79.25
1$ = Rs 79.00 –Rs 79.25
Dollar spot
buying rate Rs
79.25
$ 2,00,000 X Rs 79.25 = Rs 158,50,000
ii) How many Rupees, the firm required to pay to obtain US $ 2,00,000
in the spot market?
107. iii) Assume the firm has US $ 69,000 in current account earning no interest. ROI on
Rupee investment is 10% p.a
Should the firm encash the US $ now or 2 months later?
Encashing
US $ 69000
Now Vs 2 month
later
Spot :
1$ = Rs 79.00 –Rs
79.25
Dollar selling rate Rs
79.00
If we can encash in
spot mkt
$ 69000 × Rs 79 =
Rs 54,51,000
Add 10% ROI : 10/100 X 2/12
= Rs 90,850
Total
= Rs 55,41,850
108. Solution
Proceeds if we can
encash by forward
rate :
1 $ = Rs 79.50 – Rs 79.75
$ 69000 × Rs
79.50 ( dollar
selling rate ) = Rs
54,85,500
Spot =Rs 55,41,850
Forward = Rs 54,85,500
It is better to
encash the
proceeds in spot
market
111. Price Interest Point (Pips)
111
A pip is the smallest
price move that an
exchange rate can
make
Most currency pairs
are priced out to
four decimal places
The pip change is
the last (fourth)
decimal point.
in Indian interbank
market, USD-INR
rate is quoted up to
4 decimal point
Hence minimum
value change will
be to the tune of
0.0001
121. ( Price Interest Point )Pips
Spot USD/EUR is
quoted at a
bid price of
1.2313 and an
ask price of
1.2319. The
difference is USD
0.0006 equal to 6
“pips”.
121
1 EUR = 1.2313 – 1.2319
122. ( Price Interest Point )Pips
It is the smallest unit by which a currency
quotation can change.
E.g., USD/INR quoted to a customer is INR
61.75. The minimum value this rate can
change is either INR 61.74 or INR 61.76.
In other words, for USD/INR quote, the pip
value is 0.01.
122
123. Pips
In other words, for USD/INR quote, the pip value is
0.01. Pip in foreign currency quotation is similar to
the tick size in share quotations.
However, in Indian interbank market, USD-INR rate
is quoted upto 4 decimal point. Hence minimum
value change will be to the tune of 0.0001.
Spot EUR/USD is quoted at a bid price of 1.2313
and an ask price of 1.2319. The difference is USD
0.0006 equal to 6 “pips”.
123