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 exchange two 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 currency quoted in terms of another currency for a transaction to be effected within two working days. (Ex. Indian buying perfumes for USD 100 @ Rs 45.56. Inquires in FE market and settles within two working days)

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Forward Exchange Rate is defined as price of one currency quoted in terms of another currency for a transaction to be effected beyond two working days. (Ex. Indian buying a Boiler for USD 10,000 on 10th Feb. with settlement date of three months. The date of actual payment would be 10 + 2 + 3 months = 12th May.) Forward contracts are typically for whole number of months. i.e. 1,2,3,6,9,12. Banks also offer broken date or odd date contracts, say for 68 days. The difference between spot and forward rate is called a swap rate or swap points. The annualized percentage difference between spot and forward rate is called as forward premium (+) or forward discount (-). Forward premium indicates that foreign currency is worth more in the forward market. If its worth less, its forward discount.
Forward Premium / Discount = n-day forward rate spot rate X 365 X 100 spot rate n

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Swap Exchange Contract is defined as simultaneous purchase and sale of identical amounts of a currency at different value dates. In most cases swap is a combination of a spot and a forward in the opposite direction. In few cases it would be a combination of two forward contracts of different value dates in opposite direction. (Ex. One bank enters into a contract with another bank to buy 1 million JY for USD in spot market and also simultaneously agrees with the same bank to sell 1 million JY for USD after 60 days. Exchange rates for both the transactions are agreed at the time of contract.) This is a swap deal. Most of the forward contracts are accompanied by an equivalent spot deal. Thus most of the forward contracts are actually part of a swap deal. Forward contracts without an accompanying spot deal are called as outright forward contracts. Usually, 70% of turnover in markets is spot, 25% in swaps and 5% in outright forward contracts.

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Forex Quotation Indian corporate (customer) approaches a banker (trader) for a USD quote, which is given as : 46.0501 46.2051 Rs / $. 46.0501 is called Bid rate and 46.2051 is called Ask rate. The difference between bid-ask rate is called spread. It is margin to cover transactions cost and other costs. Vehicle Currency It is a common currency through which a trade is effected between two non-common traded currencies. For instance, if Indian 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 to compute effective rate between Rupee and Sequel. Since USD is the currency for routing the trade, it is called a Vehicle currency. Most common VCs are USD, Euro, Pound and Yen.

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Illustration 1. Can$/US$ : 1.3333 1.63 Rs/US$ : 47.3104 47.3240 At 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 / 48.0101 UAE DIR/US$ : 3.6701 / 3.6859 Illustration 3. From following quotes, what is Sing $ / STP rate? Rs 75/STP and Rs 26.52/Sing $.

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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

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Quotations on Forward Markets There are outright forward contracts as well as swap contracts. Forward rates are quoted for different maturities such as one month, 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 for buying and selling, as given in the table. (Rs / Euro quotation)
Buying Rate
Spot 1-month Forward 3-month Forward 6-month Forward 47.9525 47.9625 47.9750 48.0000

Selling Rate
47.9580 47.9700 47.9835 48.0090

Spread
55 points 75 points 85 points 90 points

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If the forward rate is higher than the spot rate, the foreign currency is said to be at forward premium with respect to the domestic currency. This means foreign currency is likely to appreciate vis--vis domestic currency. Apart from the outright form, quotations can also be made with swap points. Number of points represents the difference between forward rate and spot rate. Since currencies are generally quoted in four digits after the decimal point, a point represents unit of currency.
Spot 1-month Forward 3-month Forward 6-month Forward 47.9525 / 80 100 / 120 225 / 255 475 / 510

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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 to be added to the spot quote and discount points to be subtracted.