2 Forex - Economy

UNIT-II
1. Foreign Exchange & National Economy
2. Registration on International Competitions
3. Competitive & Technological Environment
© CA. Prithvi R Parhi 1

The Basics
Understanding the Quotes
• Domestic Currency & foreign Currency
• Exchange rate, Direct Quote, Indirect Quote, American term,

European Term
• Bid and Ask, Two way quote, Spread, Converting two way quotes
• Cross Rate, Straight Rate, Spot Rate, Forward Rate, Appreciation &
Depreciation
• Computation Appreciation and depreciation, Swap points
• Forward rate, premium and discount

© CA. Prithvi R Parhi, M Com, FCA,DISA(ICAI)
Currency
Domestic Currency Foreign Currency
Currency in which the CFO

Any currency other than domestic
reports companies performance
currency.
to stakeholders.
$, £, Ұ, €
Referred to as home currency.
$, £, Ұ, €
Foreign currency is not only a medium of exchange but a store of value_ an asset
as well.
As an asset foreign currency has purchasing power, at times greater and at times
less than domestic currency.
This affects exchange rate. Hence it is necessary to know about its price.
This price is called as exchange rate.

Exchange Rate
• Rate at which one currency is exchanged i.e. bought and sold for another
currency.
• The price one currency viewed in relation to another currency.
• For any currency, there is an exchange rate for every other traded currency in
the forex market.
• Rule #1 : In any transaction involving forex you are selling one currency and
buying another.
• Rule #2 : In an exchange rate 2 currencies are involved ( pair)
• Rate is generally in terms of the first currency for the 2nd currency.
E,g. FX rates:
SGD 5.2508 / KWD
Normally not given beyond 4 decimals.
Or SGD / KWD = 5.2508 Some times in whole number or in fraction or up to 2 decimals.
Rs 48 / $
Or Rs / $ = 48 There is no©standardization in the jungle of Intl. Fin.
CA. Prithvi R Parhi 4
Rule-3
Direct Quote :
• Expresses exchange rate as “home currency per unit of foreign
currency”
• i.e. the number of home currency required to buy / sell 1 unit of

foreign currency.
• In direct quote price comes 1st, commodity next.
• In direct quote foreign currency is the commodity which is

bought & sold.
• Rs.48/$ or Rs / $ =48 ~ Direct Quote for the Indian
• Internationally people prefer Direct Quote.

Rule-4
Indirect Quote :
• Expresses exchange rate as “foreign currency per unit of home
currency”
• i.e. the number of foreign currency required to buy / sell 1 unit of

home currency.
• In indirect quote commodity comes 1st, price next.
• In indirect quote home currency is the commodity which is

bought & sold.
• 0.02$ / Re or $ / Re =0.02 ~Indirect Quote for the Indian
• A London quote is an indirect quote.

Rule-5
• What is direct quote for 1 country is indirect

quote for another country & vice versa.
• 30p / ¥ is a direct quote for Indian & an

indirect quote for Japanese .
• Indirect quote is the reciprocal of direct

quote.

Rule-6
• Indirect quote is the inverse of direct quote & vice
versa.
• Indirect Rate = 1/ Direct Rate
Rs 50/ $ ~ Direct Rate
Indirect = 1/50=0.02
So 0.02$/Re ~ Indirect rate

Q1
• Identify whether the following quotes given
by a Mumbai banker is direct or indirect.
• Compute direct quote for indirect quotes &
vice versa.
1. 1$ = Rs.48
2. Rs.100/- = 1.6 £
3. Rs.100/ = DM 4.70
4. 1 ¥ = Rs.0.30

A1
1. Direct for Indian ; Corresponding indirect quote
=0.0208 $/Re.
2. Indirect for Indian ; Corresponding direct quote

=62.5 Rs/£.
3. Indirect for Indian ; Corresponding direct quote

=21.28 Rs./ DM.
4. Direct for Indian ; Corresponding indirect quote

=3.33 ¥/Re.
Q#2
• Column 1 gives the nature of the quote for currency named in
column 3 in the city named in column 4.
• Find the quote named in column 5 for the city named in column
6
1 2 3 4 5 6
Quote Rate For City Quote City
Direct 1.6944 Sterling New York Direct London
Direct 52.35 € Chennai Indirect Rome
Indirect 13.13 Pound London Indirect Hong-Kong
Indirect 4.7269 NZ dollar Auckland Direct Oslo

(NZ) (Norway)
A#2
1. 1/6944 =0.5902
2. 52.35
3. 1/13.13 =0.0762
4. 4.7269

Rule-7
European / American Terms
• Now what’s the quote u r satisfied with ? Direct / Indirect ?
• Approximately 150 currencies in global market. So if all quotes will be direct

quote ,then 150*(150-1)*2=44,700 quotes. Hence FX rates r marked with
reference to $.
• A quote which is direct for American is in American Terms.

• A quote which is indirect for American is in European Terms.
• European Terms mean Currency per unit of US$.

• American Terms mean US$ per unit of foreign currency.
• International quotes r generally expressed in European Terms ( except £, €, SA

Rand, AU$, NZ$)
• For a non-American international rates r in direct mode.

• For an American international rates r in indirect mode.
Q3
• Compute nature of quotes in respect of following
spot rates.
• For each American term give corresponding

European term & vice versa.
1. 1.75 US$ per pound.
2. 1.95 SGD per $

A3
1. Direct for American, Indirect for British,
American terms for both. Corresponding
European term = 1/ $1.75 =0.571£
2. Indirect for American, direct for Singapore

citizen, European terms for both. Corresponding
American term = 1/ SGD 1.95 =0.51$

BID – ASK- SPREAD
BID
• Price @ which bank is willing to buy foreign currency.
ASK
• Price @ which bank is willing to sell foreign currency.
SPREAD
• The difference between ASK & BID. Size of the spread depends on;
1. Stability of xch rate : If stable spread is narrow.

2. Depth of Market : Volume is more means spread is narrow.
MIDDLE RATE
(Bid + Ask) / 2
If bank is buying a currency from u, U will be selling that currency to bank.

Bank always wins.

Rule #8
• A direct quote, which is a bid quote is a bid on
foreign currency.
• A direct quote, which is an ask quote is an ask on

foreign currency.
• An indirect quote, which is a bid quote is a bid on

domestic currency.
• An indirect quote, which is an ask quote is an ask on

domestic currency.

Rule #9
• The normal practice is to write the currency of
home country in LHS
• Rs.48 =1 $ means, quote is from India.
• Ұ 33 = Re 1 means quote is from Japan.

Rule # 10
• Bid on one currency is ask on another & vice
versa.
• E.g. Bid rate Rs.48/ $.

This is buying rate of $. i.e. bank is buying $ &
selling INR.
48 INR is sold for 1$.
1 INR is sold for 1/48 $.

Rule #11
• In a 2 way quote, Bid precedes Ask.
• Eg. In a quote such as Rs.48 - 49 per $

represents Rs. 48 as bid & 49 as ask.
• Spot Bid < Spot Ask

• Spread = Ask - Bid

Q4
a) The quote by a bank is Rs. 48-50 / $.
Compute Bid, Ask & Spread.
b) Spread is 0.43. Middle rate is 22.195. Find

Bid / ask rate.

A4
a) Rs. 48-50 / $ is a direct quote in India for $. Since in a
2 way quote bid precedes ask, Rs. 48 is the buying rate
& Rs.50 is selling rate. Spread = 50-48=2.
b) A-B =0.43
So, B= A-0.43
(B+A)/2 =22.195
(A-0.43+A)/2=22.195
B=21.98
A=22.41

Q5
• INR 47.10 - 47.25 per US$ is a direct quote.
• Another direct quote is Ұ /£ 179-180.
• Identify ;
a) The country where quote is made ?

b) The bid, ask, spread
c) For the ask price (i) currency bought by the bank
and (ii) currency bought by you.
d) For the bid price (i) currency bought by the bank
and (ii) currency bought by you.
A #5
SL Particulars Rs/$ Ұ/ £
a Country India Japan

b i Bid 47.10 179
ii Ask 47.25 180
iii Spread (ii-i) 0.15 1
c i Bought by Bank Rs Ұ
ii Bought by you $ £
d i Bought by Bank $ £
ii Bought by you Rs Ұ
Cross or Straight ?
Cross Rate :
• Rate between 2 currencies not involving home
currency.
E.g. $.1.5 / £
Straight Rate :
• Rate between 2 currencies involving home
currency.
E.g. Rs. 69 / £
Covering 2 way quotes
Rule #12 : Rules for cross multiplications
• Where exchange is given in numerator- denominator form, it is
the denominator currency which is bought or sold with reference
to numerator currency.
• Direct quote can b converted to indirect quote simply by taking
inverse. This holds good when bid & ask are equal. Else the
following formula will be used.
• B (A/B) x B (B/C) = B (A/C)
(Bid on B w.r.t. A * Bid on C w.r.t. B = Bid on C w.r.t. A)
•A (A/B) x A (B/C) = A (A/C)
Bid Ask
•B (A/B) = 1/ A (B/A) Rs/$ 43 44

•A (A/B) = 1/ B (B/A) $/Rs ? ?
© CA. Prithvi R Parhi 1/44 1/43
26
Points for Attention
In a one-way quote
Direct = 1/ Indirect
In a 2way quote
Direct B = 1/ A ( Indirect)
Direct A = 1/ B ( Indirect)

Q6
• Spot rate is 1.817 shekel to USD. Spot rate is
7.15 yen per $. Compute ¥ per shekel.
• Sh ~ Israel currency

A6
• Sh/$ =1.817
• ¥/ $ =7.15
• ¥/ sh = ¥/ $ * $/ sh
=7.15 * 1/1.817
=7.15 * 0.55
=3.935

Q7
• Spot rate is $ 1.771 per £. Spot rate is $
0.544 /DM. Compute £/DM .

A7
1.771 $=1 £
0.544 $ = 1 DM
£/ DM = £/ $ * $/ DM
= 1/1.771 *0.544
= 0.3071

Q8
• Spot rates are;
DM=$ 0.35 ;
FF1 = DM 0.31.
Compute $ per FF

A8
$ 0.35 = DM
DM 0.31 = 1 FF
$/FF = $/DM * DM/FF

= 0.35 * 0.31
= 0.1085

Q#9
• The rate quoted by a Mumbai banker is Rs.
70-72 per pound.
• Compute relevant pound per Rupee rate.

A9
• Bid (GBP/INR) = 1/ Ask (INR/GBP) = 1/72 =0.0139
• Ask (GBP/INR) = 1/ Bid (INR/GBP) = 1/70 =0.0143
• So the rate is 0.0139-0.0143
• Here the Mumbai banker is bidding & asking for

Rupee.

Q10
Spot rate is DM = $ 0.3302 -10.
Spot Rate is FF= $ 0.1180-90.
Compute direct quote for FF in Germany.

A10
DM = $ 0.3302 - 0.3310
FF = $ 0.1180 - 0.1190
Required DM for FF
B (DM/ FF) = B (DM/$) * B ($/FF)
= 1/ A ($/DM) * B ($/FF)
= 1/0.3310 * 0.1180
= 0.3564
A (DM/ FF) = A(DM/$) * A ($/FF)
= 1/ B ($/DM) * A ($/FF)
= 1/0.3302 *0.1190
=0.3604
Direct Quote for FF in Germany is 0.3564 - 604.

Q11
Given the following quotes at what rate you
can buy Yen against Rs. ?
Rs.47.50 - 53 per pound

$1.5200 - 10 per pound
Yen 123.50 - 60 per $

A11
Yen to be bought against Re.
Hence the applicable rate is bank’s selling rate
i.e. the ask rate
A (Re/¥) =A (Re/£) * A (£/$) * A($/¥)

= 47.53 * 1/ B($/£) * 1/ B(¥/$)
= 47.53 * 1/1.5200 * 1/123.50
= 47.53 * 0.6579 * 0.008
= 0.2533
Q12
• In spot market 1 $ can be exchanged for
1498.2 Italian Lira or for 111.23 ¥ .
• What is the rate between ¥ & Lira ?

A12
1 $ =1498.2 Lit
1 $ = 111.23 ¥
1498.2 Lit = 111.23 ¥
1 Lit = 111.23 / 1498.2
= 0.0742 ¥
1 ¥ = 1498.2 / 111.23 or 1/0.0742

= 13.46 Lit

No Single Exchange Rate
There is no static exchange rate.
The rate would depend upon when the underlying asset( Forex) could be
converted into domestic currency.
Illustrative Rates :
SL INR/SGD Rate
01 Export Bills 26.59
02 TT Buying 26.61
03 TT Selling 27.15
04 Import Bills 27.20
05 TCs - Buy 27.16
06 TCs - Sell 27.22
07 Currency - Buy 26.56
08 Currency- Sell 27.24

Spot Rate
• Is the rate applicable for immediate settlement.
• Both in India and Internationally, by convention spot rate

means the exchange rate at which transaction will be settled
on the 2nd Working day.
• Its the rate @ which currencies are exchanged within next 2

working days. ( t+2 days)
• 2-day time cushion is reasonable for actual movement of

funds through banking channel involving different time zones.
• Spot rate is driven by market forces .

Q 13
• On 9th September, a Thurs day, a garment exporter
in Delhi has received intimation from his customer
in London about a TT remittance of € 1,25,000/-.
1. If INR/ € spot rate is 71.19 -72.00, how much and

when the garment exporter will receive Rupees ?
2. As a banker when would you credit the exporter’s

account ?

A # 13
• Exporter will receive € , sell it to bank and buy INR.
• The bank buys € .
• Hence relevant rate is Bid rate for €.
• Rupee receipt on sale of € = 1,25,000 * 71.19 =88,98,750;

Subject to deduction of bank charges, if any.
• Exporter will get INR on the 2nd working day viz. 13th September,
Mon day.
• The banker will credit the amount to exporter’s account only

after verifying that funds have in fact been received in their
account.
Forward Rate
• Is the rate contracted today for exchange of currencies at a
specified future date.
• Once the rate is contracted, both the parties viz. the

customer and dealer-banker are obliged to perform on the
specified future date irrespective of exchange rate prevailing
on that date.
• Since bank can buy a currency in forward market there is a

forward bid price for the currency.
• Similarly when a bank can sell a foreign currency in the

forward market there is a forward ask price.

Forward exchange rate
• This involves delivery of the foreign exchange

one, three or six months after the contract is
agreed upon.
• Is driven by market forces as forecasted by the

buyers and sellers of foreign exchange of the
period of contract maturity.

Forward discount and forward premium
Forward Discount
• The difference between a higher spot and a lower

forward rate;
Forward Premium
• The difference between a lower spot and a higher

forward rate.

Appreciation & Depreciation
• Relative to “Spot Rates”, forward rates can
either be favorable or adverse.
• Favorable phenomenon is referred to as

“premium”. ~ Appreciation
• Adverse phenomenon is referred to as

“discount”.~ Depreciation

Rule # 13
• In a direct quote, since foreign currency is the commodity, if
Forward rate is > Spot rate , foreign currency is appreciating
and home currency is depreciating.
• Foreign currency is @ premium & home currency is @

discount.
Spot Rs. 48/$

Forward Rs. 50/$
• $ is appreciating & INR is depreciating
• In a direct quote, if Forward rate is < Spot rate , foreign

currency is depreciating and home currency is appreciating.

Rule # 14
• In an indirect quote, since home currency is
the commodity, if Forward rate is > Spot rate ,
home currency is appreciating and foreign
currency is depreciating.
• In an indirect quote, if Forward rate is < Spot

rate , home currency is depreciating and
foreign currency is appreciating.

To Sum up…
R’ship Direct Indirect
F>S FX FX
Home Home
F<S FX FX
Home Home
• If 1 currency is @ a premium to the other, the other

currency is @ a discount to the first.

Q # 14
• In the following cases identify which currency
is appreciating and which currency is
depreciating.
• Spot 140 Ұ per $ 1 ; Forward 142 Ұ per $ 1
• Spot 1 £ =Rs.70 ; Forward 1 £ =Rs.68

A # 14
LHS Country Given Hence R’ship Hence
Ұ Japan Home/ FX Direct F >S USD is

Ұ/ £ appreci
ating
£ England FX / Home Indirect F < S INR is
Rs./ £ appreci
ating

How to compute Appreciation / Depreciation ?
• Spot : Rs/$= 50
• Forward : Rs/$= 55
• Whether $ become costlier ? Or Rupee become

cheaper ?
• Direct Quote for $. Commodity has become costlier by

10%. $ appreciated by 10%.
• The formula = (F-S) / S * 12/ m * 100
• How much INR has depreciated ?

How much INR has depreciated ?
• Spot : $/ Rs = 1/50= 0.02
• Forward : $/ Rs = 1/55= 0.0189
• The formula = (F - S) / S * 12/ m * 100

• (0.0189 -0.002)/ 0.002 *12/12 *100 = (-)9.09 %
We can revise the formula without changing mode;
The revised formula = (S - F) / F * 12/ m * 100

To sum up…
Quote Commodity Currency Formulae
Direct Foreign Home (F - S) / S * 12/ m * 100
Indirect Home Foreign (S - F) / F * 12/ m * 100
Steps minus formula ;

1. Compute difference between Spot & Forward
2. Identify the time period in the contract
3. Identify commodity & price.
4. Decide the base ; Spot is the denominator for the “
commodity” & Forward is the denominator for the “ price”
5. Annualize the percentage
Q #15
• Spot rate for INR/ AUD is 29.36 & 3 months forward rate is
29.45.
a) Which currency is appreciating and which currency is

depreciating.
b) Which currency is trading at a discount and which at a

premium ?
c) Which currency is more expensive ?
d) Compute the annual % premium or discount.

A # 15
a) Exchange rate is a direct quote on AUD. AUD is the commodity. Since
F>S, AUD is appreciating & INR is depreciating.
b) AUD is appreciating & hence said to be trading at a forward premium to

Rupee. The Rupee is depreciating and hence said to be trading at a
forward discount.
c) AUD is more expensive.
d) % Appreciation of AUD = (F - S) / S *12/3 *100

= (29.45-29.36)/29.36 * 12/3 *100 =1.226%
% Depreciation of INR = (S - F) / F *12/3 *100

= (29.36 - 29.45)/ 29.45 * 12/3 *100 =1.222%

Outright - Swap
Forward rate can b quoted as ;
a) Outright Forward
• E.g. Spot rate is Rs 42/ $
• Forward rate is Rs. 44/ $
b) Adjustment to Spot Rates (Swap rate)

• E.g. Spot rate is Rs 42/ $
# (Forward rate is Rs. 44/ $)
• Swap Rate is 44 - 42 = 2
The forward differentials are called as Swap Rate.

Bid Swap is the difference between Forward Bid $ Spot bid .
Ask Swap is the difference between Forward Ask $ Spot Ask .
Swap points are not same as spread.

Q # 16
• The spot rate for € is Rs. 50-52. The forward
rate is Rs. 53-56.
• Compute swap points, spot and forward

spread.

A # 16
Swap Bid Forward Bid –Spot Bid 53 - 50 = 3
Swap Ask Forward Ask –Spot Ask 56 – 52 = 4
Spot Spread Spot Ask – Spot Bid 52-50 =2
Forward Spread Forward Ask – Forward Bid 56-53 =3

Rule #15
• Swap rates normally do not carry + /- sign.
• If Bid swap in points is less than Ask swap in points,
forward rate of foreign currency is @ premium , i.e.
foreign currency is appreciating & home currency is
depreciating.
Rs/$ Bid Ask Spread

Spot 46 48 2
Forward 47 50 3
Swap 1 < 2
Rule #16
• If Bid swap in points is greater than Ask swap in
points, forward rate of foreign currency is @ discount
, i.e. foreign currency is depreciating & home
currency is appreciating.
Rs/$ Bid Ask Spread

Spot 46 48 2
Forward 44 47 3
Swap 2 > 1

Rule #17
Swap rate can be converted into outright rate by,

a) Adding swap rate to spot rate, if FX is appreciating.
b) Deducting swap rate from spot rate, if FX is depreciating.
c) Swap A > Swap B = Add
d) Swap A < Swap B = Deduct
Assumptions :
Rule is based on the assumption that,
1. Bid < Ask
2. Forward spread > Spot spread

Q17
Spot = $ 0.006879 / ¥.
3 months forward = $ 0.006902 / ¥.
Compute status of the quote, % appreciation /

depreciation & Swap.

A17
Status :
This is a direct quote for ¥ (In US) with $ as home currency.

Forward > Spot
FX is appreciating & home currency is depreciating.
Appreciation/ Depreciation :
=(Forward – Spot) / Spot * 100 * 12 / 3

=(0.006902- 0.006879)/ 0.006879 * 100 * 12 / 3
=1.34 %
Swap:
= 0.006902- 0.006879 = 0.000023 = 23 points
(Zeros after decimal will b ignored)

( Indirect quote for 1 country is direct quote for another. So similar formula
will apply)

Q18
Spot = $ 1.7015 / £.
3 months forward = $ 1.6745 / £.
Compute status of quote , % appreciation /

depreciation & Swap.

A18
Status :
This is a direct quote for £ ( in US ) with $ as home currency.

Forward < Spot
FX is depreciating & home currency is appreciating.
Appreciation/ Depreciation :
=(Forward – Spot) / Spot * 100 * 12 / 3

=(1.6745- 1.7015)/ 1.7015 * 100 * 12 / 3
=6.3473 %
Swap:
= 1.6745 - 1.7015 = 0.0270 = 270 points
(Swap to be computed up to 4 decimals & then zeros after decimal will b

ignored)

Q19
Identify forward rate.
Indicate whether the currency is quoting at a
premium or discount.
Spot Forward Swap
$ Rs.45.50 -60 1M 20 / 30
£ Rs.75.30 -80 2M 25 / 15

A19a
Swap points (20 / 30) r in ascending order.
Hence they must be added to spot rate to arrive at forward rate
Spot 45.50 - 45.60
Swap points .20 - .30
Forward rate 45.70 - 45.90 Rs/$
Appreciation/ depreciation is always for commodity.

So (F-S)/S *12/M *100 = 5.28%
Re is depreciating & FX is appreciating.
So 5.28 is appreciation
Appreciation on Ask :=(45.90-45.60)/45.60*12/1*100=7.89%
….Contd

A19 b
Swap points (25/15) r in descending order.
Hence they must be deducted to spot rate to arrive at forward
rate
Spot 75.30 - 75.80
Swap points (.25) - (.15)
Forward rate 75.05 - 75.65 Rs/£
Appreciation/ depreciation is always for commodity.

So (F-S)/S *12/M *100 = 1.99%
Re is appreciating & FX is depreciating.
So 1.99 is depreciation
Appreciation on Ask :=(75.65-75.80)/75.80*12/2*100=1.18%

Journey so far…
Exchange Rate
(Price of 1 currency in relation to another
Home Currency Foreign Currency
Direct Quote Indirect Quote
European Terms American Terms
Cross rate Straight rate
Bid rate : Ask rate :

for buying by a banker for selling by a banker
Spot rate Forward rate

•Exchange rate indicative of both buying and selling rate is a two way quote .
•The difference between buying and selling is called spread.
•The difference between spot and forward is called swap.
Journey so far…
There is a verity of rate depending on the nature of txn & cost attributable to
investment in foreign currency asset till it is converted into home currency
Forward Exchange contract

helps in fixing a rate today
Spot rate is the rate for For exchanging currencies
immediate settlement at a Future date.
Internationally 2 days Rate may be higher or
lower than Spot rate.
Not for all Currencies

Binding Contract
Standard Period, 1,3,6 months.
Spot buying for a bank is Cancellation leads to loss.
< Affords protection
Spot selling rate Difference between Spot
& Forward may be premium
Bank or AD always wins or discount ~ Spread.
Case # 2
• You have just joined as a Finance manager of M/s Mayfair Hotels and Resorts Ltd, a company
that runs a chain of hotels located at Bhubaneswar, Puri, Rourkela, Goa, Darjeeling and
Gangtok.
• You are not overloaded with work . On your 1st meeting, D(F) told you to study the foreign
exchange operation of the company.
• You observed, that the company during the course of its operation buys foreign exchange
and TCs from its foreign guests. Internal control system on such activities is weak.
• You found that the company has an agreement with M/s Thomas Cook, an authorized
money changer, who informs the its buying rate everyday morning.
• The company deducts 10 paisa in its rate and publishes it as its own buying rate.
• Company collects foreign currency( mostly $) at its published rate and sells it to M/s Thomas
cook on daily basis. Company does not sell any foreign currency to any one else.
• The company was earning a good profit from this activities. However recently profit from
such activities have drastically come down at Bhubaneswar.
• Can you give some suggestion to improve the situation ? Give a presentation to D (F)

Possible Improvements
• To strengthen internal control. Hotel business might have
become personal business.
• To compare the rates of Thomas Cook with others.
• To consider directly selling of currency to banks.
• To consider intra day variation of exchange rate.
• Possibility of loss in case variation beyond 10 paise.
• Consider retaining for the currency for some period.
• To consider to be registered as an authorized money changer.

RBI Reference Rate FX Thoughts
13th Nov 2011 How to react a change ?

•

•

•
INR / 1 USD : 50.2795
INR / 1 Euro : 68.4460
INR / 100 Jap. YEN : 64.8300
?

• INR / 1 Pound Sterling : 80.0776

Date USD GBP EURO YEN
11/11/2011 50.2795 80.0776 68.4460 64.8300
09/11/2011 49.7810 80.1051 68.8169 64.1600
08/11/2011 49.3800 79.1981 67.8411 63.2700
04/11/2011 49.0840 78.6522 67.7910 62.8500
03/11/2011 49.3748 78.4961 67.5920 63.2600
02/11/2011 49.2508 78.7348 67.6445 63.0600
01/11/2011 49.0775 78.7817 67.7597 62.8200
31/10/2011 48.8730 78.1137 68.3616 61.5100
28/10/2011 48.8210 78.5676 69.2853 64.3600
25/10/2011 49.6598 79.3862 69.1510 65.2800
24/10/2011 49.8745 79.7294 69.5253 65.3700
21/10/2011 50.0670 79.1559 69.0350 65.2600
20/10/2011 49.7110 78.0860 68.0541 64.7800
19/10/2011 49.1775 77.4939 67.9645 64.0700
18/10/2011 49.1360 77.5833 67.5815 63.9700
17/10/2011 48.8925 77.3113 67.7880 63.3900
14/10/2011 49.0675 77.4187 67.7248 63.7800
13/10/2011 49.0228 77.1276 67.5553 63.61

Balance of Payment
• Is the summary of flow of economic

transactions between the residents of a
country & the rest of the world, during a
given time period, usually a year.
• Same as a Source & Application of funds to

a Co.
• Measures the flow of international

payments & receipts.
BoP format.xls
Economic Txns
• Includes all activities whereby 2 countries

exchange something of economic value.
• 2 parties involved
• In reality or implication (NRs fund tfr to migrating

country)
• Exception:
• Txns with only 1 sided eco value is also
recorded (Aids, grants, gifts etc.)
BoP Vs. BoT
• BoT • BoP
• Refers to • Refers all eco txns

merchandise exports/ including invisibles
imports (visibles) like banking,
insurance, services
etc.
• Wider

A/cn’ Principles
• Double entry system
• When no compensation involved ~ treated as

goodwill to satisfy the principle of double entry.
• Outflow ~ Purchase of goodwill
• Inflow ~ Sale of goodwill

Debit- Credit
• Txn which creates demand for domestic currency in
forex mkt ~ Credit (Export)
• Txn increasing supply of domestic currency in forex mkt

~ Debit (Import)
• Sources of Forex ( Export ) ~ Credit
• Application of Forex (Import) ~ Debit
• Credits r recorded with + sign & Debits - sign

Current Account
• Records txns in merchandise &
invisible with rest of the world.
• Exports~ f.o.b. basis

• Imports ~ c.i.f. basis
• However IMF manual provides both expt &

impt should b on f.o.b
• Gnie ~ Govt not included elsewhere~ credit~ fund received from foreign Govts.

Capital Account
• Increase in Countries Foreign Financial Asset ~ Debit
• Decrease in Countries Foreign Financial Asset ~ Credit
• Increase in Countries Foreign Financial Liability ~ Credit
• Decrease in Countries Foreign Financial Liability ~ Debit

• Rupee Debt Service is defined as the cost of meeting interest payments of principal
loan + admn charges
• Monetary movements ~ India’s txn with IMF & India’s forex reserve.

Trade Balance
• Difference between merchandise export &
merchandise import.
• Changes in TB indicates efficiency of the

country in producing & exporting goods.

Terms of Trade
• Ratio of countries export prices to import
prices.
• Constructed by taking an index of prices for

exports & imports
=Index of Export / Index of Import
• Improvement in ToT indicates faster rise of

export prices than imports.

ToT
Year 2009 2010
Index of Export 100 150
Index of Import 100 125
Terms of Trade Index 100 120

Current Account Balance
• Represents the difference between domestic
saving & domestic investment.
• Deficit ~ Domestic saving insufficient to fund

domestic investment.
• Surplus ~ Comfortable.

Current A/c Study
• Growth in export accompanied with high rate
of Investment indicates is a +ve sign.
• High deficit accompanied with high growth

rate in imports is a –ve sign.

Capital Account Balances
• Shows how the balances in the current A/c has been financed.
• If balance in current a/c & Capital A/c taken together is -ve ,

~ BoP deficit.
• This has 2b managed by matching surplus on official reserve

account (i.e. reduction of foreign exchange & gold reserve)
• Txn in current A/c & Capital A/c are autonomous txns,

responding to economic situation, while official reserve txns
are compensating in nature.

The Balance
• How BoP always balances ?
• Same as Household exp =

Income + Withdrawals from SB a/c +
borrowings

The equation
• Balance in Current A/c +Balance in
Capital A/c + Change in monetary
movements = Zero
• Change in Monetary Movements

reflects the overall BoP position.

Monetary Movements
• Increase in Forex Reserve or net repurchase from
IMF ~ Surplus.
• Decrease in Forex Reserve or net purchase from IMF

~ Deficit.

If no monetary movement :
• Surplus/ Deficit in Current A/c = Deficit/ Surplus in
Capital A/c
• Country neither borrows nor lends.
• In reality BoP seldom balances ‘coz – Imperfect

nature of data, different data sources, different
exchange rates applied to receipts & payments
• E & O inserted.

Exchange Rate Regimes
• Fixed Exchange rate – the exchange rate tends to remain fixed
for considerable time and closely monitored by regulating
authority.
• Floating Exchange rate is market determined and influenced by

demand and supply of the Currency. Government has no
responsibility to peg the exchange rate.
• Managed Float – Government seeking to alter market valuation
by influencing economic fundamentals to maintain desired
range.
• Clean Float
• Dirty Float

Purchasing Power Parity Theory / Inflation Theory
• If a product in India, quotes a certain price, the

product in a foreign country, say US should quote an
identical price, in order to ensure that there is no
arbitrage. The exchange rate should therefore be
determined by equating the price of 2 products.
• Eg. A bike costs Rs.40,000/- in India & 1,000$ in US .

The xch rate should therefore be Rs. 40/$.

Purchasing Power Parity Theory /Inflation Theory
• If the xch rate is not in line with purchasing power parity
theory, arbitrage opportunity will open up.
• The theory is to be used with inflation index (i.e. a basket of

commodities), rather than with individual products.
• High inflation rate in 1 country is offset by depreciation in

the currency of that country.
• Conversely Depreciation in Currency of a country shall lead

to increase in inflation reduction of purchasing power in a
country.
Weaknesses
• The index of 2 countries may not consists of
identical products with identical weightages .
• The products themselves may be different in 2

countries.

Interest Rate Parity Theory
• High interest rate in 1 country is offset by

depreciation in the currency of that country.
• Conversely Depreciation in Currency of a

country shall lead to increase in interest rate,
Cost of capital in a country.

Pegging of Currency
• Developing countries peg their currencies
either to a strong currency or to a currency of
the country with which it has large share of
trade.
• This system provides a fixed exchange rate

between 2 currencies.
• It may float with respect to other currencies.

Crawling peg
• It’s the hybrid of fixed & floating rate system.
• The exchange rate of a currency which is fixed

is stable in short run but it changes gradually
over a period of time. In order to reflect
changes in the market.
• The system has advantage of stability &

flexibility.

Target Zone Arrangement
• Exchange rates are fixed with respect to
currencies of countries of a particular zone &
exchange rate floats with respective countries
outside the zone.

Competitive & Technological Environment
• Refers to factors, activities those surround/ encircle
international business.
• Means factors that affect / influence international business.
• Extremely competitive & technology driven.
• Such factors include; ~ STEPIN

1. Socio Cultural Factors (S)
2. Techno-Logical Factors (T)
3. Economic Factors(E)
4. Political / Governmental Factors (P)
5. International Factors (I)
6. Natural Factors (N)

International Competition : advantages
• High living Standard
• Increased socio economic welfare
• Wider market
• Reduced effect of business cycle
• Reduced Risks
• Large scale economies
• Potential untapped market
• Opportunity for & Challenges to domestic business
• Division of labour & specialization
• Economic growth of the world
• Optimum & proper utilization of world resources
• Cultural transformation
• Knitting the world into a closely interactive Traditional Village

International Competition : Problems
• Political factors
• Huge foreign indebtedness
• Exchange instability
• Entry requirements ~ eg. Only thro’ JV
• Tariffs quotas & trade barriers
• Corruption
• Bureaucratic practices of Govt
• Technological pirating
• Quality maintenance ~ Failure to confirm standards.
• High cost

Technological Environment
• Influences life
• Require investment
• Helps in economic development
• Helps in competition

Technology Transfer
• Thro’ Subsidiaries in developing countries
• JVs in host country
• M&A
• Arranging Technological transfer thro’

alliances

Technology management in IB
• Study of compatibility of home country technology with
host country.
• If not compatible, select appropriate technology.
• Compare with culture, taste, preference.
• Compare with Governmental policy
• Find out modes of technology transfer.
• Impact of technology on environment .

Exchange Rate Drivers
International Self fulfilling

Trade prophesy
Speculation Inflation rate
Balance of Interest rate

Payment Parity
Intervention by Political
Central Bank Stability
Economic
Fundamentals
111
What drives Xch rate ?
• Currency is a commodity ~ Forces of demand & supply determine the price of a
commodity. Factors that drive exchange rates are;
1. International Trade : Demand & supply of currencies emanates from import &
export of goods & services, raising money from global market.
2. Speculation : Players in Forex market wait to seize opportunities to buy or sell

foreign currency. Thrust of movement of rates comes more from speculators than
from international trade. This may have stabilizing/ dis-stabilizing effect.
3. Balance of Payment : Healthy BoP leads to strengthening of the currency, Levered

BoP would lead to weakening of the currency. A very adverse BoP would mean the
country have to buy foreign currency to meet its obligation which would lead to
greater demand for foreign currency , pushing its price up. This would mean
weakening domestic Currency.
4. Intervention by Central Bank : Central bank of the country would be interested in

some kind of stability in the exchange rate.~ If INR strengthens it would be adverse
for the exporter & if INR weakens it would be adverse for the importer. RBI may step
in to keep the currency rate within a certain zone.~ Pure floating rate / Dirty floating
rate.
112
What drives Xch rate ?
5. Economic Fundamentals : Country blessed with rich natural resources would
automatically benefit from a net surplus on its current account. Further it would
attract long term capital investment from overseas. Hence on account of
advantageous fundamentals, the currency of such country going to be strong.
6. Political Stability : Uncertain political stability or an uncertain economic future

would weaken countries currency since international investors would not be
showing interest in investing in these countries.
7. Interest rate Parity : According to IRPT, a high interest rate ( in real terms) in
one country would lead to depreciation in the currency of that country.
8. Inflation rate : According to IRPT, if inflation is higher in 1 country than another,

the former currency will tend to weaken against the other country’s currency.
9. Self fulfilling prophesy : Expectations of the players in the market also drives
the exchange rate.
113
Thanks
CA. Prithvi R Parhi,
clickprithvi@yahoo.com
8763434746


2 Forex - Economy

Caricato da

Informazioni sul documento

Titolo originale

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

2 Forex - Economy

Caricato da

Copyright:

Formati disponibili

UNIT-II

1. Foreign Exchange & National Economy

2. Registration on International Competitions

3. Competitive & Technological Environment

© CA. Prithvi R Parhi 1

• Domestic Currency & foreign Currency

• Exchange rate, Direct Quote, Indirect Quote, American term,

• Computation Appreciation and depreciation, Swap points

• Forward rate, premium and discount

Domestic Currency Foreign Currency

Currency in which the CFO

This price is called as exchange rate.

• The price one currency viewed in relation to another currency.

• Rule #2 : In an exchange rate 2 currencies are involved ( pair)

• i.e. the number of home currency required to buy / sell 1 unit of

• In direct quote price comes 1st, commodity next.

• In direct quote foreign currency is the commodity which is

• Rs.48/$ or Rs / $ =48 ~ Direct Quote for the Indian

• Internationally people prefer Direct Quote.

© CA. Prithvi R Parhi 5

• i.e. the number of foreign currency required to buy / sell 1 unit of

• In indirect quote commodity comes 1st, price next.

• In indirect quote home currency is the commodity which is

• 0.02$ / Re or $ / Re =0.02 ~Indirect Quote for the Indian

• A London quote is an indirect quote.

• What is direct quote for 1 country is indirect

• 30p / ¥ is a direct quote for Indian & an

• Indirect quote is the reciprocal of direct

© CA. Prithvi R Parhi 7

• Indirect Rate = 1/ Direct Rate

Rs 50/ $ ~ Direct Rate

So 0.02$/Re ~ Indirect rate

© CA. Prithvi R Parhi 8

© CA. Prithvi R Parhi 9

2. Indirect for Indian ; Corresponding direct quote

3. Indirect for Indian ; Corresponding direct quote

4. Direct for Indian ; Corresponding indirect quote

Quote Rate For City Quote City

Direct 1.6944 Sterling New York Direct London

Direct 52.35 € Chennai Indirect Rome

Indirect 13.13 Pound London Indirect Hong-Kong

Indirect 4.7269 NZ dollar Auckland Direct Oslo

© CA. Prithvi R Parhi 12

• Approximately 150 currencies in global market. So if all quotes will be direct

• A quote which is direct for American is in American Terms.

• European Terms mean Currency per unit of US$.

• International quotes r generally expressed in European Terms ( except £, €, SA

• For a non-American international rates r in direct mode.

• For each American term give corresponding

1. 1.75 US$ per pound.

2. 1.95 SGD per $

© CA. Prithvi R Parhi 14

2. Indirect for American, direct for Singapore

© CA. Prithvi R Parhi 15

1. Stability of xch rate : If stable spread is narrow.

If bank is buying a currency from u, U will be selling that currency to bank.

© CA. Prithvi R Parhi 16

• A direct quote, which is an ask quote is an ask on

• An indirect quote, which is a bid quote is a bid on

• An indirect quote, which is an ask quote is an ask on

© CA. Prithvi R Parhi 17

• Rs.48 =1 $ means, quote is from India.

• Ұ 33 = Re 1 means quote is from Japan.