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CFA studies: FOREIGN EXCHANGE ARITHMETIC

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CFA studies
Thursday, November 5, 2009
FOREIGN EXCHANGE ARITHMETIC
A foreign exchange transaction has two aspects – Purchase (Buy) and Sell. The Foreign exchange transaction is always talked from the Bank’s point of view and the item referred to is the foreign currency. Hence when we say “Purchase”, it means that the bank has purchased and it has purchased foreign currency & when we say “Sale”, the bank has sold and sold the foreign currency. In purchase transaction, the Bank acquires the foreign currency and parts with home currency. In a sale transaction the Bank parts with the foreign currency and acquires home currency. The Exchange rate is quoted as “Direct Quotation” and / or “Indirect Quotation”. In a “ Direct Quotation “, the foreign currency is fixed and the home currency is variable. For example, USD – Rs. 46. In a “ Indirect Quotation “, the home currency is fixed and the foreign currency is variable. For example, Rs. 100 = USD 2.20. Except in London Market, the direct quotations are only used. In India all quotes are on “Direct Method.”. There are three markets, where foreign exchange rates are quoted. While quoting rates for customers, the rate is called Merchant Rate and normally quoted either as a sale or purchase transaction. A customer wants a demand draft for USD 100. It implies that the customer wants to purchase USD 100 from the Bank and will sell him foreign currency by acquiring rupees. The rate quoted will be a “ Sale Rate” say USD 1 = 45.00. It means that Bank will take Rs.45 from the customer for each dollar sold to him. The exchange rate is always quoted in four decimals in multiples of
thecostlystudy.blogspot.in/2009/11/foreign-exchange-arithmetic.html

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