CHAPTER

Foreign Exchange
33 Markets and
Dealings

RQ.33.3 A forex dealer in India gives a quote for the US dollar as `60.9450 – 60.9577.
(a) An importer is looking to buy dollars to pay his import bill of US$ 10,000. How
many rupees will be required to be paid to have US$ 10,000?
(b) An exporter receiving his export income of US$ 10,000 will receive How many ru-
pees?
Solution RQ.33.3
A quote of `/US $ : 47.9450/9550 implies in bid-ask form as `/US $ : `47.9450 – 47.9550.
(a) As importer is to buy dollars, the relevant rate for the importer is `47.9550/US $ (selling
rate of the dealer) so, to buy US $ 10,000, the importer will pay (US$ 10,000 ¥ `47.9550)
= `4,79,550.
(b) In this case, an exporter is to sell dollars, the relevant rate for the exporter is `47.9450/
US $ (buying rate of the dealer) so, by selling US $ 10,000 the exporter will receive (US$
10,000 ¥ `47.9450) = `4,79,450.
RQ.33.4 If in India the rate is `61.5320/61.5866 per US $, what will the direct quote of rupee be
in New York?
Solution RQ.33.4
`/US $ : 48.8450 – 48.8900
Now, (US $/`)bid = 1/(`/US $)ask = 1/48.8900 = 0.02040
(US $/`)ask = 1/(`/US $)bid = 1/48.8450 = 0.0205
So, the direct quote of rupee in New York (US $/`) : 0.0204 – 0.0205.
RQ.33.11 An Indian currency trader receives following currency quotes:

`47.000/Singapore $ in Mumbai
`60.3610/US $ in Mumbai

He checks rates at Singapore and he receives the rate as Singapore $ 1.2900/US$.

Assuming there are no transaction costs, how will the trader use this set of information
for making profit?
33.2 Financial Management – OLC

Solution RQ.33.11
Cross rate of (Singapore $/US $) using quotes at Mumbai is:
Singapore $/US $ = (Singapore $/`) ¥ (`/US $) = 1/28.5000 ¥ `48.3610 = 1.6969
Direct quote of US $ in Singapore is 1.7470, since rates are different, profit can be made
by buying US $ using cross rate and selling it in Singapore. Arbitrage process will involve the
following steps:
(i) Sell 1 million Singaporean $ and get rupees in Mumbai. The proceeds will be `1,000,000 ¥
28.50 = `28,500,000.
(ii) Sell `2,85,00,000 in Mumbai and get US $. The proceeds will be
US $ 2,85,00,000 ¥ 1/48.3610 = US $ 5,89,318
(iii) Sell US $ 5,89,318 in Singapore to receive Singapore $ (5,89,318 ¥ 1.7470) = Singapore
$1,029,538.
Thus, there is a gain of (Singapore $1,029,538 – $1,000,000) = Singapore $ 29,538.
RQ.33.12 The following are the various quotes for the US $ available in a bank in Mumbai.
Spot 1 month forward 3 month forward

`60.9350/60.9550 325/375 520/580

Find the bid and ask rates and spread for all the quotes.
Solution RQ.33.12
Maturity Bid Ask Spread
Spot `48.9350/$ `48.9550/$ `0.0200
1 month forward 48.9575/$ 48.9825/$ 0.0250
3 month forward 48.9750/$ 49.0200/$ 0.0450

RQ.33.13 An Indian importer receives the following quotes of dollar from its banker.
Spot : `61.3250
1 month forward : `61.5230
6 month forward : `62.1050

What is the discount/premium of the dollar forward prices?

Solution RQ.33.13
` 48.9300 - ` 48.8750 12
1 month forward premium = ¥ ¥ 100 = 1.35% per annum
` 48.8750 1
` 49.1050 - ` 48.8750 12
6 month forward premium = ¥ ¥ 100 = 0.94% per annum
` 48.8750 6
RQ.33.14 (a) The following is a direct quote of the dollar provided by a leading Indian bank.
Spot 1 month forward 3 month forward 6 month forward

`60.6500/60.6620 35/30 60/45 30/38

What is the bid–ask rates for these quotes?

RQ.33.14 (b) I f you are a small forex dealer and are required to provide forward rates for 2
month to a client, what forward bid-ask rate will you quote on the basis of rates
provided in RQ 33.14(a)?
Foreign Exchange Markets and Dealings 33.3
Solution RQ.33.14(a)
Maturity Bid Ask
Spot `47.6500/$ `47.6595/$
1 month forward 47.6475/$ 47.6575/$@
3 month forward 47.6460/$ 47.6563/$
6 month forward 47.6520/$ 47.6621/$@@
@ Swap points 25/20 are in decreasing order, implying forward rates are at discount. Therefore, these swap points have been
deducted from the spot.
@@ Swap points 20/26 are in increasing order, implying forward rate is at premium. Therefore, swap points have been added
in the spot rate.

Solution RQ.33.14(b)
To find out a quote for the 2 month forward, the process of interpolation will be used between
1 month and 3 month quote, as follows:
` 47.6460 + ` 47.6475
Bid = = ` 47.6467
2
` 47.6563 + ` 47.6575
Ask = = ` 47.6569
2
Therefore, the 2 month forward rate will be `47.6467/$ – `47.6569/$.
RQ.33.15 From the following data, at what forward rate will no arbitrage gain be possible:
`61.00/$ (Spot)
6 month interest rate:
India : 7.5% per annum
US : 2.0% per annum

Solution RQ.33.15
Here the interest rate differential = 7.5% – 2.0 % = 5.5% pa. So for no arbitrage, the forward
premium differential must be same.
Spot rate `48.00
Add 5.5% premium for 3 month [48 ¥ (5.5/100) ¥ (3/12)] 0.66
Forward rate `48.66/$