Professional Documents
Culture Documents
EXCHANGE RATE
DOMESTIC
CURRENCY
DIRECT QUOTE
INDIRECT QUOTE
LINK BETWEEN
DIRECT&INDIRECT
QUOTE
AMERICAN TERM
EUROPEAN TERM
BID
ASK
TWO WAY QUOTE
SPREAD
CONVERTING
TWOWAY QUOTE
Arbitrage
FOREX MARKET
CROSS RATE
SWAP POINTS
SPOT RATE
FORWARD RATE,
FORWARD RATE
APPRECIATION
PREMIUM AND
DISCOUNT
DEPRECIATON
COMPUTATION OF
APPRECIATION
AND
DEPRECIATION
2
EXCHANGE RATE
THE PRICE OF ONE CURRENCY
3. DIRECT QUOTE
X UNITS OF DOMESTIC CURRENCY
4. INDIRECT QUOTE
THE DOMESTIC CURRENCY IS THE
5.CONVERTION (D TO I)
RUPEES Rs44.20=1$- DIRECT QUOTE
RUPEE
?SAUDI RIYAL(SAR) .08 RIYAL PER
RUPEE
? GBP 83.27 RUPEES PER POUND.
6. AMERICAN AND
EUROPEAN TERMS
AMERICAN TERM IS DIRECT.
EUROPEAN TERM INDIRECT.
EXAMPLE-THE RATE $ 1.5 PER POUND IS
AN AMERICAN TERM.
THE QUOTE $1= INR 45 IN EUROPEAN
TERM.
? AMERICA OR EUROPE.
(a) 3.419$ PER QUWAITI DINAR- IN USA IT
IS A DIRECT MODE- AMERICAN TERMS.
EUROPEAN TERM- 1/AMRICAN TERM :
.2925 KWD PER USD.
7
7. SOLVE
(a) 7.760 HKD PER $
American term
1HKD=.128$ European term
.128Rs=1HKD Indirect quote
ANSWERS
(a) PERSON IN AMERICA THE QUOTE IS
RBI
B) Second tire-cooperative and Commercial
Bank licenced to maintain accounts for NRI
C) TOP TIER- Authoried dealers-Scheduled
Banks-full-fledged foreign exchange
business.
11
Spread
ASK MINUS BID=SPREAD
EX. 40-41
SPREAD=
Rs.41-40=Rs.1
Factors:a) Stability of the exchange rate
b) depth of the market-volume of transaction
High volume(deep market)-narrow spread
Low volume (thin market)-wider spread
13
Problem
Indian would like to have travelers cheques: GBP-
STERLING 72.70-73.25
A) explain the quote
B) compute the spread
C) how much would you pay for purchasing 250
pounds in TCS?
D) If you have a balance of pounds 23 in travellers
cheques , how many rupees would you receive if
the bank in india quotes 73.65-73.92?
14
Answer
A)Bank buys at 72.70and Ask rate is 73.25
B)Spread=.55
C) 250*73.25=Rs.18312.50
D)Rs.23*73.65=Rs.1693.95
Note: in practice all forex transactions are
15
Bid(Rs/$)=1/Ask($/Rs)or
Ask(Rs/$)=1/Bid ($/Rs)or
1/40.25 1/41.35
USD/INR
=0.0248
=.02418
16
PROBLEM
CONSIDER THE FOLLOWING
QUOTATIONS IN MUMBAI
Rupee/UAE Dirham(AED)=12.69
Rupee/Swedish kroner(SEK)=5.49
Rupee/New Zealand Dollar(NZD)=25.35
Euro/INR=0.0198
Compute a)The quote for SEK/AED
b) Euro/NZD
17
Solutions
A)SEK/AED=SEK/INR*INR/AED=.18*12
.69
=1 AED
B)
EURO/NZD=EURO/Re*Re/NZD=.0198*2
5.35=.50
18
SPOT RATE
RATE OF EXCHANGE FOR IMMEDIATE
SETTLEMENT
IT IS SETTLED ON THE SECOND WORKING
DAY
SATURDAY AND SUNDAY ARE HOLIDAYS
EX:SPOT RATE:Rs./$40.35-41.36 SUPPOSING
YOU HAVE 124000 DOLLAR RECEIVED ON
THURSDAY THE BANK WILL SETTLE
124000*40.35=50,03,400 ON THE
FOLLOWING MONDAY.
19
FORWARD RATE
RATE CONTRACTED TODAY FOR
EXCHANGE OF CURRENCIES AT A
SPECIFIED FUTURE DATE
THERE IS A FORWARD BID AND
FORWARED ASK
CASH DELIVERY-ON THE SAME DAY
TOM DELIVERY-ON WORKING DAY
ON THE FOLLOWING DAY
20
APPRICIATION AND
DEPRECIATION
IF F>S IN A DIRECT QUOTE THE FOREIGN
CURRENCY IS APPRECIATING
Home depreciate
Indirect quote: Foreign depreciates and HOME
APPRECIATES
Ex: 1.
SPOT:
SGD .O370=Re 1
IN SINGAPORE ; FORWARD RATE THREE
MONTHS HENCE 0.0360
SGD APPRECIATES OR DEPRECIATES?
SPOT USD 1.5865= 1 POUND IN UK.
FORWARD 1 MONTH 1.5833 .
?DEPRECIATE OR APPRICIATE
21
SWAP POINTS
DIFFRENCE BETWEEN SPOT BID AND
22
23
24
Factors
1. Inflation rates
2. Interest rates
3. Balance of payment position
25
1.Inflation rates
If domestic inflation rate >foreign inflation rate-
26
27
exchange rate
Ex: If a book costs in USA say $2 but the same book is available in
India for Rs86 the exchange rate between these currencies should be
Rs.43/$
PPPr=Spot rate x [1+r(H)]/[1+r(F)]
= spot rate x P(H)/P(F)
Where PPPr=purchasing power rate
r(H) and r(F)-inflation in the home and foreign countries
P(H) and P(F)-price indices of home and foreign countries.
28
example
Spot rate=Rs 42 The price index is 110 and
29
2.Interest rates
If interest rate in home country( India 10%)>
Impact
Foreign currency is at a premium when
32
33
likely to appreciate
34
4. Volume of International
Reserves/Foreign exchange
It includes gold
currency depreciates.
Release or sell foreign exchange reserves so
that demand for foreign met so further
devaluation is reduced.
The monetary authority can with stand only
to the extend to the reserves in hand.
35
36
conclusion
Low inflation rate
reserves
Higher level of economic activity
Do have positive or negative impact on
exchange rate?
37
Positive impact
38
conclusion
Higher inflation rate
payments
Inadequate reserves with the monetary
authority
Low level of economic activity
What is the impact?
39
answer
Depreciates exchange rates
40
Excercise
See Exercise no.12 and 14
41
Arbitrage
Act of buying currency in one market at
Types of arbitrage
Geographical
Triangular arbitrage
43
Geographical arbitrage
Different prices quoted in two geographical
Exercise-2
The following are three quotes in three
forex markets
1$=Rs.48.3011 in Mumboi
1pound=Rs.77.1125 in London
1Pound=$1.6231 in Newyork.
Are there any arbitrage gains possible?
Assume there are no transaction costs and
the arbitrageaur has $1,000,000.
46
Answer-2
The cross rate between Mumboi and London with
respect to$/pound=77.1125/48.3011
=$1.5965/pound
But in newyork the price is quoted $1.6231
There is an opportunity to earn by buing indian
rupee in in Mumboi market and convert them into
pounds in London Market
Then convert pounds into dollors in NewYork
market.
47
Answer-2 continues
Rs.48.3011X 1 million
dollor=Rs.48,301,100
Pounds=48,301,100/77.1125=626,371.8592
Dollors=626,371.8592X1.6231
=$1,016,664.164.
The gain=$16,664.164.
48
data:
Spot rate Rs.78.10/pound
3 month forward rate Rs.78.60/pound
3 month interest rates:
Rupees: 5%; British pound :9%
Assume Rs10 million borrowings or pound
200,000 as the case may be.
49
Answer-3
Since forward rate is higher than the spot
Method -2
1.Borrow in Uk and invest such pounds
Exercise-4
Spot rate=78.10; interest rates India-5%;
52
Answer-4
Spot rate =78.10
53
Principle
The arbitrageur earns 4% extra interest to
54
Exercise-5
Spot rate-78.10; forward rate for three
55
Answer-5
The British pound is at a forward discount of
Exercise-6
A Ltd is planning to import a multipurpose
57
Answer-6
Borrowing
3400 lakhs yen
Borrowing in Indian rupee=Rs.1000 lakhs
Interest for the first 3 months= 45
Interest for the second quarter=47.025
Total cash outflow at the end of 6 months equals
to Rs.1092.025 lakhs.
If letter of credit is followed:
Borrowings
3400 lakhs yen
Interest for 6 months
34 yen
Commission charges 3400 x .02 x6/12=34
58
Answer-6 continues
Total payments =3468 lakhs yen
59
Exercise-7
Spot Rs.48/$ ;6 month interest rate: India-
60
Answer-7
Difference in rate-7.5%- 2%=5.5%p.a.
Spot rate
$48
Add: 5.5% premium for three months
(48x (5.5/100) x 6/12) =1.32
Forward rate
= 49.32/$
61
Exercise-8
Spot rate- Rs.48.5/$ ; 6 month forward rate-
62
Answer-8
Interest rate differential=6%-2.5%=3.5%pa
48.5)/48.5x100 x(12/6)=1.65%
63
64
Exercise-9
Calculate cross currency rate between
65
Answer-9
Euro/Pound(bid)=Rs/Us $ x $/Pound x
66
Exercise-10
You are required to fill in the missing
Euro
o.6161
1.0
-
0.9287
1.0
1.5259
1.0
-
-----1.0
-
67
Answer-10
1USD
1 pound
1Canadi
1 Yen
1 Euro
US
dollar
1.0
1.623
0.6553
0.0085
1.0767
Pound Canadi
an
o.6161 1.5259
1.0
2.4767
0.4037 1.0
0.0052 0.0129
0.6634 1.6430
Yen
Euro
118.08
191.655
77.3838
1.0
127.145
0.9287
1.5074
0.6086
0.0078
1.0
68
Exercise-11
The following quotations are available to
you:
by a bank in New York $ 1.6012/Pound
By a bank in Paris
FFr4.9800/$
By a bank in London Pound 0.1350/FFr
Is any triangular arbitrage possible?
69
Answer-11
From a direct quote of New York and Paris,
70
Answer-11
1/1.6012 x 1/ 4.9800=0.1254=Pound/FFr
71
72
Exercise-12
On 1st April 3 months interest rate in the US
73
Answer-12
Spot rate is US $ 0.6560/DM
Interest rate parity relationship
S0=[1+imA]/[1+inB
S0= Spot rate; S1= Future exchange rate
inA=Nominal interest in country A(USA)
inB= Nominal interest in country
B(Germany)
S1=0.6560{1+(0.065 x3/12)/1 +(0.045 x 3/12)}
= 0.6560 x (1.01625/1.01125) = USD 0.6592
$/DM
74
Exercise-13
Spot rate
47.88/$
3 month forward rate 48.28/$
3 month interest rates Re.7%
$ 11%
Is there any arbitrage gain?
75
Answer-13
3 month forward rate of dollar is higher than spot rate
implies that the dollar is at premium.
Premium(percentage)= (48.28-47.88) /
76
Exercise-14
On 1st April, 3 months interest rate in the
77
3/12)}
= 0.6560 x ( 1.01125/1.01625)
= USD 0.652772 $/DM
78
Exercise-15
In International Monetary Market an
Exercise-16
ABC Co. have taken 6-month loan from their foreign
Exercise-17
The United States Dollar is selling in India at
81
Answer
Borrow in US at 2% and invest in India
premium.
Forward rate=45.50(1+[.04
x6/12)]=Rs.46.41
82
Exercise-18
A company operation in Japan has today effected
Exercise-19
The following table shows interest rates for
3 months
6 months
1 year
11 %
19 %
?
?
12 %
?
?
6.3%
?
20%
7.5200
?
84
Exercise-20
1)
2)
Probability
1.6
1.7
1.8
1.9
2.0
0.15
0.20
0.25
0.20
0.20
85
Exercise-21
86
Exercise-22
A company operating in a country having the dollar as its unit of
87
Exercise-23
1)
2)
3)
88
Answer-23
Spot rate DM/US $ =1.71
89
Exercise-24
A customer with whom the Bank had entered into
Exercise-25
In 2005 a foreign institutional investor invested
91
Answer
(Rs4,70,00,000 +94,00,000
+70,50,000)/42.30=15,00,000 dollars
Gain=5,00,000 dollars
Suppose stock price is declined by 20% do
92
93
Exercise-25
The following data is available from the
forex market:
US 1 month treasury bill 2.60-2.65% p.a
India 1 month treasury bill 6.80-6.85% p.a
If the dollar spot rate in India is Rs.42.3-42.50
per US $ , find the no arbitrage range of
future prices for a month dollar future.
94
Answer
Two option
1. Borrow rupee, buy dollar,invest in dollar
96
FERM
Various types of risk exposed
FER
97
2.Translation exposure
3. Economic exposure
98
Transaction Exposure
Transactions that require settlement in
foreign currency-obligations
Cross border trade
Domestic purchases and sale of goods and
services
Debtors receivable in foreign currencies
Creditors payable in foreign currencies,
foreign loans and collaborations
investments
99
Example
Infosys incurs loss of Rs.80 crore in the
101
to be paid extra
If depreciation rate is 20% then 0.2 x
56=11.2 million rupees will be written off
as depreciation
102
Economic exposure
It is the most important as it has impact on the
valuation of firm.
Change in the value of a company that
accompanies an unanticipated change in exchange
rates.
Expected change may not have any impact on the
business as it is accommodated well in advance
It is based on the extent to which the value of the
firm-as measured by the present value of the
expected future cash flows will change when
exchange rates change
104
formula
Change in PV/Change in exchange rate
105
106