This document discusses foreign exchange quotations. It explains that currencies are quoted relative to each other, with exchange rates representing the price of one currency in terms of another. There are various types of foreign exchange quotations, including bid and ask prices, direct and indirect quotes, cross rates between currencies not directly traded, spot rates for immediate settlement, and forward rates for future settlement. Interbank quotations typically use European terms, quoting the amount of foreign currency per unit of the domestic currency.

1. INTERNATIONAL FINANCIAL
MANAGEMENT
FOREIGN EXCHANGE QU0TATIONS
By
V S SARMA ,PROF, MBA VJIT
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2. INTERNATIONAL FINANCIAL MANAGEMENT
Foreign Exchange quotations:
 Currencies are quoted in terms of other currencies
 Means exchange rate is a relative price
 FE quotation is the amount of currency that is
exchanged for a unit of other currency
 FE rate of rupee im India may be quoted in terms of
Us$. e.g. Us$ 1 = Rs. 67
 A change in price of one currency implies therefore
a change in price of other currency
 E.g. If the price of Rupee against the Us$ moves
from Rs.44 to Rs. 43.50, one can say that Rupee has
appreciated by Rs. 0.50p. Other wise US$ is
depreciated relative to Rupee.
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3. INTERNATIONAL FINANCIAL MANAGEMENT
 FE quote refers to a statement of willingness for buying
or selling of a currency at a given price and time.
 Generally FE quotations are expressed as domestic
currency prices paid.
 Since it is not followed globally, a standardized ‘system
of quoting’ is introduced by inter- banking markets
 There are several types of FE .They are:
1) Bid and Ask Prices 2) Indirect quotes
3) Direct quotes 4) Cross rates
5) Spot rates 6) Forward rates
7) Inter Bank quotations 8) Spread /cost transactions
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4. INTERNATIONAL FINANCIAL MANAGEMENT
(1) Bid and Ask quotations:
 BID refers to the price at which FE dealer is ready to purchase
one currency for other or the rate at which a bank is ready to
buy a currency is called BID rate or Buy rate.
 ASK refers to the price at which FE dealer is ready to sell one
currency for another or the rate at which a Bank is ready to sell a
currency
 BID and ASK terms are alternate to BUY or SELL terms
respectively
 The difference between BID and ASK rate is called ‘spread rate’
 BID rate is always lower than ASK rate 4

5. INTERNATIONAL FINANCIAL MANAGEMENT
(2) Indirect quotes
 It is quote where the exchange rate is expressed in terms of a no.
of units of a foreign currency for a fixed no. of units of a domestic
currency
 Prices of ONE unit of home currency is expressed in terms of
foreign currency
 e.g in UK : 1 Uk pound = us$ 1.9077
in USA 1US$ = 0.5242 pounds

6. INTERNATIONAL FINANCIAL MANAGEMENT
(3) Direct quotations:
 It is a quote where the exchange rate is expressed in terms of a
no. of units of the domestic currency per unit of foreign currency
 The price of one unit of the foreign currency is quoted in
domestic currency.
 e.g. In USA : one pound = us$ 1.9077 ($/UK pound)
 In India : 1US$ = Rs. 67 - US$/Rs
 Direct quote in USA:
 US$ 0.0192 = Rs.1 in USA (Here the price of one unit ol

7. INTERNATIONAL FINANCIAL MANAGEMENT
(4) Cross rates:
 The exchange rate between two inactively traded currencies
usually involve the use of third widely traded currency like US$.
 e.g. 1. (a) Japanese yen : JPY 106.2000/$
(b)Mexican PESO : Ps 10.9680/$
- required exchange rate for … Jpy/Ps
SOLUTION : The cross rate calculation would be :
Exchange rate JPY = $ = JPY106.2 = Ps 10.9680
Therefore : Ps 10.9680 = Jpy 106.2
Ps 1 = 1x106.2 /10.9680 = 1ps = jpy 9.6827
 e.g. 2 (a) So(CHF/USD) = CHF 2.000
 (2) SO (JPY/USD) = JPY 120.000 where SO =Spot rate
SOLUTION:
 2 CHF = 1USD =JPY 120 therefore 2CHF = JPY 120
 1 CHF = 1CHF X JPY120/2CHF = JPY 60 --- 1CHF = JPY 60
 1 JPY = 1CHF/JPY60 --- CHF 0.0167

8. INTERNATIONAL FINANCIAL MANAGEMENT
(4) Cross rates (contd…)
 Note: If you have yens and want to purchase CHF( swiss franc)
then :
1st step: you can purchase one USD by selling 120 yens
2nd step: then you can sell the above one USD and purchase 2CHFs .
i.e. for each CHF you have paid JPY 60 (jpy120/2chf)
Conversely , if you have CHF and want JPYs,
1st step: you could sell 2 CHFs and purchase one USD.
2nd step: Next you can purchase JPY 120 with one USD you have
purchased above.
That means you paid 2CHFS for 120 JPY
Thus 1CHF = jpy 60

9. INTERNATIONAL FINANCIAL MANAGEMENT
(5) Spot Rates :
 Spot purchase means out right purchase
 Spot market refers to that segment of the FE Market, in
which sale and purchase transactions are settled within
two business days of the deal (excluding the
transaction day.) i.e T + 2
 i.e. when buyers and sellers of a currency settle their
transactions with in two day of deal(T+2 i.e. excluding
transaction day and intervening holidays ) then it is
called spot transaction. The rate quoted in the spot
market is called spot rate

10. INTERNATIONAL FINANCIAL MANAGEMENT
(6)Forward Rates:
 Forward market refers to FE deals for sale and purchase of
Foreign Currency at some future date, normally 90 days of the
deal.
 When buyers and sellers enter into an agreement to buy or sell
a foreign currency at a future date usually 90days of the deal at
the agreed rate of FE and exact time agreed today i.e. the date
of forward contract.
 The forward transactions in FE make the forward market.
 The rates quoted for a forward contracts is called forward rates
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11. INTERNATIONAL FINANCIAL MANAGEMENT
(7) Inter Bank quotations:
 The most common way that professional dealers and brokers
state FE quotations and the way they appear on all computer
trading screens word wide, is called ‘European Terms’
 It is expressed in one unit of domestic currency in terms of no.
of units of foreign currency ….… Domestic currency is US$
 e.g. In USA : The European terms of quote shows the no. of
foreign currency needed to purchase one USD.
 E.g. CAD 1.5770/1USD … quotation in USA
 European quotes are Indirect quotes
 American Terms:
 American Terms quote shows the no. of units of USD needed to
purchase one unit of foreign currency… Domestic currency is US$
 American terms of quotes are direct quotes.
 e.g. US$ 0.6341/CAD }