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GOVINDARAJAN RANGACHARY
HEAD-PROFESSIONAL DEVELOPMENT CENTRE,
INDIAN INSTITUTE OF BANKING AND FINANCE,
SOUTH ZONE, CHENNAI.
Spread:
1 USD = Rs. 81.75/81.80
The difference between the Bid rate and ask rate (i.e) 5 paise
is called the Spread.
Pip:
1 GBP = USD 1.1840 rate changes to USD 1.1842 in few seconds
USD has moved by 2 Pips (i.e) 0.0002 change in the Fourth
Decimal Point.
1USD = JPY 142.08 rate changes to JPY 142.12 then JPY has
moved by 4 pips (i.e) 0.04. Here the change is in the second
decimal point. Hence Pips definition may vary among
currencies.
GOVINDARAJAN RENGACHARY-IIBF-CTP-13 06 2023
INDIAN INSTITUTE OF BANKING & FINANCE 19
EXERCISES
Please find out which currency has strengthened and
which currency has weakened at the end of the day
1 USD = Rs. 81.7500 (opening) and Rs. 81.8500 ( closing)
Example:
TT Buying rate Spot USD = Rs. 81.4050-81.4250
Step 1: Find the TT buying rate.
Select Appropriate Base Rate Answer:
( Market Buying rate)
Base rate: Deduct some cushion
Step 2 : from the cover rate.
Deduct exchange margin as per your Cover rate: Rs. 81.4050
bank’s internal guidelines
Deduct cushion: Rs. 00.1000
Step 3 :
Base Rate Rs. 81.3050
Round off the quote as per FEDAI
Less Exchange Rs. 00.1000
guidelines in Four Decimal places and
the last two digits should be in the Margin (Profit)
multiple of 25. (.0025)
TT buying rate Rs. 81.2050
Example:
TT selling rate Spot USD = Rs. 81.4050-81.4250
Step 1: Find the TT selling rate.
Select Appropriate Base Rate Answer:
( Market selling rate)
Base rate: Add some cushion from
Step 2 : the cover rate.
Add exchange margin as per your bank’s Cover rate: Rs. 81.4250
internal guidelines
Add cushion: Rs. 00.1000
Step 3 :
Base Rate Rs. 81.5250
Round off the quote as per FEDAI guidelines
Add Exchange Rs. 00.1000
in Four Decimal places and the last two
digits should be in the multiple of 25. Margin (Profit)
(.0025)
TT selling rate Rs. 81.6250
TT buying rate 1 Clean Inward remittance TT/MT/DD for which cover has already been provided by credit to the Nostro
account of the Bank
Bill buying rate 1 purchase/discount/negotiation of export bills ( where Bank has to Process the Bill)
Bill Selling rate 1 Transaction involving remittance for import bill except the 4th point mentioned in TT selling rate
Consider a Person wants to Borrow USD 100,000 for one year at the rate of
4 % p.a and by converting into Indian rupees wants to invest the amount in Fixed
deposit at the rate 7% p.a.
Suppose the current rate of 1 USD = Rs. 82 and the investor is investing Rs.
82,00,000 for one year in FDR at the rate of 7% p.a
After one year the dollar borrowing stands at USD 104000 (including int.) and
rupee investment brings Rs. 87,74,000 ( including int.)
The parity theorem formula is Spot Price *(1+local interest rate)/ (1+foreign
interest rate) ^1
This leads to Rs. 82.00 * (1.0700/1.0400)^1 = Rs. 82.00*1.0288= Rs.84.3654
Now rupee forward can also be arrived out by dividing Rs. 87,74,000/USD
104000 which fetches 1 USD = Rs. 84.3654 at the end of one year which is
the same arrived by the theorem in the earlier step.
From the above we understand that one year dollar is costlier in forward by
236 paise compared to spot price.
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