INTRODUCTION TO

EXCHANGE RATES
BY E.VELAPPAN
 ◦ A foreign exchange market is a
market for trading one currency
SPOT against the another in such a way
FOREIGN that the delivery takes place
EXCHANGE within 2 days of the execution of
the trade . It is usually takes two
MARKET days to transfer cash from one
bank to the other.
 ◦ Direct and Indirect Rate
Numericals ◦ Understanding foreign exchange rates

based on ◦ USD INR 68.1610/68.1615

HERE
direct & 1. First Currency is USD

indirect rates, It is called as Base Currency

In simple language we can called it as
cross currency Foreign Currency

rates & spread 2. Second Currency is INR

It is Called as variable Currency
& spread % In simple language we can called it as Home
Currency / Domestic Currency
3. First Rate is 68.1610

It is called as Bid Rate

Simply we can called it as Buying
Rate
4. Second Rate is 68.1615

It is called as Ask Rate

 1) 1USD = CAD 1.1630/50
Solution
In Canada
Identify the
CAD → Home Currency
country is which
USD → Foreign Currency
it is direct rate
Here foreign currency is expressed is
1 unit
∴ It is Direct Rate is Canada
 2) 1 EUR = USD 1.2596/ 1.2620
Solution
In USA
Identify the
USD → Home Currency
country is which
EUR → Foreign Currency
it is direct rate
Foreign currency is expressed is 1
unit
∴ It is Direct Rate is USA
 3) 1. USD = NZD 1.5510/ 1.5560
Solution
Identify the In New Zealand
country is NZD → Home Currency
which it is USD → Foreign Currency

direct rate Foreign Currency is expressed is 1

unit
∴ It is Direct Rate is New Zealand
Spread and Spread %

Formula’s
• Spread = Ask – Bid
• Mid Rate = Mid Rate – (Ask +
Bid)/2
• Bid = Mid Rate – ( spread/2)
• Ask = Mid Rate +(Spread/2)
• Spread% = Spread/Ask X 100
 ◦ Calculate
1) Mid Rate 2) Spread 3) Spread%
Solution
Mid Rate = (Ask + Bid) /2
= (1.5220 + 1.5160)/2
Q.1 EUR = 3.038/2

USD 1.5160 / Mid Rate = 1.5190

Spread = Ask – Bid
1.5220 = 1.5220 – 1.5160
= 0.0060
Spread % = (Spread /ask ) X 100
= (0.0060/ 1.5220) X 100
= 0.39%
 ◦ Solution
Given value is 1.1630/50 in CAD.
The following quote is
Hence this is a direct quote in CAD i.e in Canada.
given
USD 1 = CAD (1..1650 + 1.1630)
1.1630/50 Mid Rate = (Ask + Bid)/2 = (1.1650 + 1.1630)/2
= 1.1640
Identify the country in
So , Mid Rate is USD1 = CAD 1.1640
which this is a direct
quote . Spread = Ask –Bid = 1.1650 -1.1630 = 0.0020
Find the mid rate , % Spread =(Spread/Ask) x 100 = 0.17%
spread and the spread To calculate Inverse quote :
percentage Bid = (1/Ask) = (1/1.1650)= 0.8584
calculate the inverse Ask = (1/Bid) = (1/1630) = 0.8598
quote Hence , inverse quote is CAD 1 = USD 0.8584/0.8598
Consider the following quotes:
◦ Spot (Euro/Pound) = 1.6543/ 1.6557 ◦SOLUTION:
 
◦ Spot (Pound/ NZ$) = 0.2786/0.2800 % Spread = ×100

i. Calculate the percentage spread on the i. % Spread(

Euro/Pound rate. = ×100
ii. Calculate the percentage spread on the = 0.0846%
Pound/NZ$ rate. ii. % Spread [Pound/NZ$]
= ×100
= 0.50%
iii) The maximum possible percentage spread on ◦  Cross Rate:
the cross rate between the Euro and the NZ$.
=×
= 1.6543× 0.2786 = 0.46088
= ×
= 1.6557× 0.2800 = 0.4636
Hence, %Spread= ×100
= 0.5846%
Thus , maximum percentage spread is
addition of two spreads.