Forex Quotes IB. Sess 16

8/3/2019 Forex Quotes IB. Sess 16

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International

Business

International Forex Quotations

Prof Bharat Nadkarni



International Business

Forex Market has its own unique style of quoting currency

rates. In transactions, initially two parties agree to exchangetwo different currencies. This date of agreement is termed as‘contract date’. The day on which actual transfer of two

currencies takes place at a previously arranged price is called‘settlement or value date’. Transactions in foreign exchange

market are classified with respect to settlement dates.Transactions in foreign exchange markets are of three types:Spot, Forward and Swap.

Spot Foreign Exchange Rate is defined as price of on currencyquoted in terms of another currency for a transaction to beeffected within two working days.(Ex. Indian buying perfumes for USD 100 @ Rs 45.56. Inquiresin FE market and settles within two working days)




Forward Exchange Rate is defined as price of one currency

quoted in terms of another currency for a transaction to beeffected beyond two working days.(Ex. Indian buying a Boiler for USD 10,000 on 10th Feb. withsettlement date of three months. The date of actual paymentwould be 10 + 2 + 3 months = 12th May.) Forward contracts are

typically for whole number of months. i.e. 1,2,3,6,9,12. Banksalso offer ‘broken date’ or ‘odd date’ contracts, say for 68 days. The difference between spot and forward rate is called a swaprate or swap points. The annualized percentage difference

between spot and forward rate is called as forward premium(+) or forward discount (-). Forward premium indicates thatforeign currency is worth more in the forward market. If it’s

worth less, it’s forward discount. Forward Premium / Discount = n-day forward rate – spot rate X 365 X 100

spot rate n




Swap Exchange Contract is defined as simultaneous purchaseand sale of identical amounts of a currency at different valuedates. In most cases swap is a combination of a spot and aforward in the opposite direction. In few cases it would be acombination of two forward contracts of different value dates inopposite direction.(Ex. One bank enters into a contract with another bank to buy1 million JY for USD in spot market and also simultaneouslyagrees with the same bank to sell 1 million JY for USD after 60days. Exchange rates for both the transactions are agreed atthe time of contract.) This is a swap deal.

Most of the forward contracts are accompanied by anequivalent spot deal. Thus most of the forward contracts areactually part of a swap deal. Forward contracts without anaccompanying spot deal are called as ‘outright forwardcontracts’. Usually, 70% of turnover in markets is spot, 25% in

swaps and 5% in outright forward contracts.




Forex Quotation

Indian corporate (customer) approaches a banker (trader) for aUSD quote, which is given as : 46.0501 – 46.2051 Rs / $.46.0501 is called Bid rate and 46.2051 is called Ask rate. Thedifference between bid-ask rate is called spread. It is margin tocover transactions’ cost and other costs.

Vehicle CurrencyIt is a common currency through which a trade is effectedbetween two non-common traded currencies. For instance, ifIndian Rupee is to be exchanged for Israeli sequel, then

neither Indian or Israeli banks would have ready rate available.Then they would use Rupee-USD rate and Sequel-USD rate tocompute effective rate between Rupee and Sequel. Since USDis the currency for routing the trade, it is called a ‘Vehicle

currency’. Most common VCs are USD, Euro, Pound and Yen.




Illustration 1.

Can$/US$ : 1.3333 – 1.63Rs/US$ : 47.3104 – 47.3240At what rate Indian importer will get the Canadian dollar?At what rate Indian exporter will get the Indian Rupees?

Illustration 2.From the following rates, find out Rs/UAE Dirham relationship?Rs/US$ : 47.9710 / 48.0101UAE DIR/US$ : 3.6701 / 3.6859

Illustration 3.From following quotes, what is Sing $ / STP rate?Rs 75/STP and Rs 26.52/Sing $.




Ans:

Illustration 1. : (a) Rs 35.4949/Can $ (b) Rs 35.4040/Can $

Illustration 2. : Rs/UAE Dir : 13.0147 – 13.0814

Illustration 3. : Sing $ 2.8281 / STP




Quotations on Forward Markets

There are outright forward contracts as well as swap contracts.Forward rates are quoted for different maturities such as onemonth, two months, three months, six months and one year.There are also broken date contracts to cater to client need.Forward quotations may be given either in outright manner or

swap points. Outright rates indicate complete figures forbuying and selling, as given in the table. (Rs / Euro quotation)

Buying Rate Selling Rate Spread

Spot 47.9525 47.9580 55 points

1-month Forward 47.9625 47.9700 75 points






If the forward rate is higher than the spot rate, the foreign

currency is said to be at forward premium with respect to thedomestic currency. This means foreign currency is likely toappreciate vis-à-vis domestic currency. Apart from the outrightform, quotations can also be made with swap points. Numberof points represents the difference between forward rate and

spot rate. Since currencies are generally quoted in four digitsafter the decimal point, a point represents unit of currency.

Spot 47.9525 / 80

1-month Forward 100 / 120






Looking at the table trader can easily understand whether it is

a premium or discount. If bid points are less than ask points,then it is premium, otherwise discount. Premium points are tobe added to the spot quote and discount points to besubtracted.

Forex Quotes IB. Sess 16

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