Computation of Exchange Rates

8/10/2019 Computation of Exchange Rates

1/25

Computation of Exchange Rates

Spot rate and forward rate

The rates quoted for spot transaction are Spot Rates.

TT buying rate is a Spot rate.

TT buying rate is applied to transaction for which foreignexchange is received by the AD in its Nostro account.


2/25

Forward Rates

The rates quoted for forward transaction are

Forward rates.

A forward transaction is one where the exchange

of currencies takes place subsequent to two

working days after the transaction.

The forward rates is a function of forward period.

Bills Buying rate is a forward rate.


3/25

Quotation for forward rates

In inter bank/International Market, forward rates are given with referenceto Spot rate.

For example, the forward Quote for a Buying transaction is given asfollows.

Spot USD 1=Rs.50.00 One month Premium=0.70

Two month premium=1.40

Three month premium=2.00

The forward rate is to be calculated by loading the premium.

Premium: means the currency is costlier than the spot rate.

Discount: means the currency is cheaper.

At par : means the currency is of the same price.

Forward Margin: The difference between forward rate and spot rate iscalled forward margin.


4/25

Interbank quotation

Spot USD 1=49.5000/5200

Spot/Nov 3000/3200

Spot/Dece 3500/3700

First is spot quote.

The 2ndand 3rdare the forward margins

Forward margin 3000 means, it is3000*.0001= Rs. 0.30= 30 paise.


5/25

A bank quotes its ready or spot rates based on inter bankready rates. Inter bank ready rates are the Base rates.

For quoting the Buying rate the bank has to take the interbank buying rate as the Base rate.

Exchange Margin: profit is to be loaded. Reduce this inbuying rate and add it to the selling rate.

Spot TT buying rate=inter bank spot buying rate-Exchangemargin

Spot TT selling rate= interbank spot selling rate+exchange

Margin Spot Bills selling rate=Inter bank spot selling rate+exchange

margin


6/25

Forward contract

This is a contract between two parties, say, abanker and his customer to buy or sell a

certain amount of foreign currency on aspecified future date at a predetermined rateof exchange.

The future date is called Value date. The future rate is called forward rate.

It is a hedging device.


7/25

Rule 7 of FEDAI prescribes that such future date is tobe computed with reference to SPOT VALUE DATE OFTHE TRANSACTION.

If spot value date is 1st october , the date of delivery is

1stNov. Where the Forward contract stipulates that the

delivery of foreign exchange would take place on aspecified future date, it is called a Fixed ForwardContract. Here the date of delivery is fixed.

If the forward contract stipulates that the delivery of fxcan take place on any day during a given period oftime, it is called an Option Forward Contract.


8/25

Various steps:

The first portion of the contract specimen relatesto booking of the contract.

Second portion records deliveries under thecontract.

The contract to have a serial number.

Tenor whether sight or usance bill

The delivery period to mention the first date andthe last date within which the delivey to takeplace.


9/25

VaR: Value at Risk: The loss that might occur

Due to maintaining an open position in a volatile market, the risk associated is called VaR.

EXCHANGE ARITHMATIC

Calculation of TT buying rate

On 15thOctober Axis Bank received an MT from New York correspondent Bank for USD 6000 payable to its customer.The amount credited to the Nostro account.

Inter Bank Rate is as follows:

Spot USD 1=Rs. 49.2500/2700

Spot/Nov USD 1=2200/2300.Let us calculate the exchange rate and the rupee payable to the customer.

Rate applicable is TT buying rate. The rate quoted to the customer is based on the market buying rate of Rs. 49.2500

Dollar/rupee market spot buying rate= Rs.49.25000

Less: Exchange margin at 0.08% on Rs. 49.25000=0.03940

---------------

49.21060

---------------------

Rounded off, the rate quoted to the customer is Rs. 49.2100 per dollar. Amt payable to the customer is Rs. 295260/-


10/25

Bill Buying Rate

This is the rate to be applied when a foreign bill is purchased.

When a bill is purchased the rupee value is paid. When Rupee is paid out of the bank to thecustomer, the bank has to buy the foreign currency of the value of the bill.

The bank gets the payment from the overseas importer only after the bill is presented and paidwhich takes time.

The transit period reckoned is 25 days

Even a sight export bill will have a time lag of 25 days for payment. Therefore the rate quoted to the customer would be based not on the spot rate but 25 days

forward in the interbank market.

In case this is a usance bill of 30 days, (after sight), the rate to be applied is the interbank rate for 55days forward.

Forward Margins are available for a calender month and not for 25 days.

Where the foreign currency is at premium, while calculating the bill buying rate, the bank will roundoff the transit and usance periods to lower month.

Where the foreign currency /margin is at discount, round off the forward margin to the highermonth.


11/25

Calculation of Bill buying Rate

On 25thJuly, a customer presents to the bank at sight documents for USD 100000. Transit period is 25 days. Whatrate will the bank quote? Exchange margin is 0.15%. Local Interbank quote is as follows.

Spot USD 1= Rs. 49.6525/6650

Spot/August 6000/5700

Spot/sep 1.000/0.9700

Spot/October 1.4000/3900

Solution: The bank has to quote bills buying rate.Since dollar is at discount, the transit period will be rounded off

to one month. Rate to be quoted will be based on one month forward buying rate- spot/August

Dollar/Rupee market buying rate Rs. 49.65250

Less: Discount for One month Re. 0.60000

-------------

Rs. 49.05250

Less Exc. Margin Re. 0.07358

---------------

Bill buying rate Rs. 48.97892----------------

The rate to be quoted to the customer is Rs. 48.9800 per dollar. Amount payable is Rs. 48,98,000/-


12/25

TT selling Rate

The bank sells foreign exchange to the customer against receipt ofINR.

This is the rate to be used for all transactions that do not involvehandling of documents by the bank.

Issue of Demand Drafts, MTs,TTs except that of retirement of animport bill.

Cancellation of foreign exchange purchased earlier.

When an export bill purchased earlier is retd unpaid on its due date,the bank will apply the TT selling rate for the transaction.

The TT selling rate is calculated on the basis of interbank sellingrate. The rate to the customer is calculated by adding exchangemargin to the interbank rate.


13/25

Bills selling Rate

This rate is to be used for all transactions

which involve handling of documents by the

bank.

Payment against import bills.

The bills selling rate is calculated by adding

exchange margin to the TT selling rate.


14/25

Problem:

A customer needs to purchase a DD for USD 25,000 on New York.

The rates are as follows:

Spot USD 1= Rs.49.3575/3825

One month forward =Rs. 49.7825/8250

The bank requires an exchange margin of 0.15%

What is the rate quoted to the customer and the rupee amount payable by the customer

Solution:

The bank has to quote the TT Selling rate

Dollar/Rupee spot selling rate =Rs. 49.38250

Add exchange Margin at 0.15% =Re. 0.07407

--------------------------------

49.45657

-----------------------------

The rate to be quoted is Rs. 49.4575 per dollar. The customer has to pay Rs. 12,36,438.


15/25

Problem:

On 10thFeb, an importer receives a bill for USD 10,000/- The Exc. Margin is 0.15%for TT sales and 0.20% for bills selling rate. How much the importer should pay?

Solution:

The bank will quote bills selling rate,

Dollar/rupee market spot

Selling rate =48.72000

Add ex margin at 0.15% = 0.07308

-----------------

TT selling Rate =48.79308

Add Exc. Margin at 0.20% =0.09759

-----------------

Bills selling rate =48.89067

---------------------

Rate per dollar 48.8900 and customer has to pay Rs. 4,88,900.


16/25

A bank had negotiated at sight bill for USD 100000 at Rs. 49.5200 and covered itself by sale in the market for onemonth forward delivery at Rs. 49.5400. The bank had to recover the advance as the LC Terms were not compliedwith and had to cover its sale in the interbank market at Rs.49.6000.

Spot USD= Rs.49.5225/5275

One month = Rs.49.5800/5875

The merchant rates for dollars were as follows.

TT USD 1= Rs.49.4800 49.5600

One month = Rs.49.5200 49.6200

At what rate will the bank cancel its purchase contract from the customer? What is INR recovered from thecustomer? What is the profit/loss to the customer on the transactions?

Solution

The purchase contract will be cancelled at one month forward TT selling rate prevailing on the date ofcancellation, viz., Rs. 49.5200

Amount paid to customer on purchase of bill

for USD 100000 at Rs. 49.5200 =49,52,000

Amt recovered from customer on cancellation of contract

At Rs. 49.6200 =49,62,000

----------------------

Loss to the customer on cancellation 10,000

--------------------


17/25

Calculation of Bill Buying Rates based on cross rates

Axis bank issued a demand draft for CAD 50,000 @ CAD 1=Rs. 34.4850. However, after a few days the purchaser ofthe draft requested for cancellation of the draft.

The quotes are: USD 1=CAD 1,4541/4561

USD 1=Rs. 49.5275/5350.

Exchange margin on TT buying is 0.08%.

How much the customer gains or loses in the transaction?

Solution

The bank cancels the demand draft at TT buying rate. US Dollar/Rupee market buying rate =Rs. 49.5275

Less exchange margin at 0.08% on Rs.49.5275=Rs.0.0396

----------------------

Rs. 49.4879

--------------------

US Dollar/canadian dollar market selling rate= CAD 1.4561

Canadian dollar TT buying rate 49.4879/1.4561=Rs. 33.9866

Rounded off, the rate applicable is Rs. 33.9875 Amt paid for purchase of DD is CAD 50000@Rs. 34.4850 =Rs. 17,24,250.

Amt received by the customer on cancellation of DD for CAD 50,000@ Rs. 33.9875=16,99,375

Loss to the customer Rs. 24875/-


18/25

Calculation of Forward selling rate:

From the following information you are required to calculate (a) ready bill buying rate(b) 2 months forward buyingrate for demand bill (c)ready for 60 days usance bill and (d) 2 months forward buying rate for 60 days usance bill.

Interbank rate US dollar:

Spot USD 1=Rs. 48.6000/6075

1 month 3500/5600

2 months 5500/5600

3 months 8500/8600

4 months 1.1500/1.1600 5 months 1.3500/1.3600

6 months 1.5500/1.6600

Transit period is 25 days. All forward rates are fixed delivery. Exchange margin is 0.10

Solution

(a) Ready bill Buying Rate

Dollar/Rupee market spot buying rate Rs. 48.60000

Less exc margin at 0.10% on Rs. 48.6000 (-)Re. 0.04860

----------------------------- 48.55140

-----------------------------

Rounding off to Rs. 48.5525


19/25

(b) 2 months forward buying rate

Dollar/rupee spot buying rate =48.60000

Add forward premium for 2 months

(transit period 25 days and forward period 2 months rounded off tolower month)

0.55000

-----------------

49.15000

Less exchange margin at 0.10% 0.04915

--------------------------------- 49.10085 rounded off 49.1000

------------


20/25

Ready rate for 60 days Usance bill

Dollar/Rupee (market)spot buying rate

Rs. 48.60000

Add forward premium for 2 months

(25days transit periodplus 2 months0.55000 ---------------

49.15000

Less exchange margin at 0,10% 0.04915

-----------------

49.10085

-------------------- 40.1000


21/25

2 months forward rate for 60 days Bill

Dollar/rupee (market)

Spot buying rate Rs.48.60000

Add premium for 4 months 1.15000

---------------------

49.75000

Less exc. Margin 0.04975

-----------------

49.70025

--------------------


22/25

On 26thAug, an exporter tenders a usance bill of 60 days for USD 100000/- drawn on New York. The rates are asfollows.

Spot USD 1=Rs.48.6525/6850

Spot /sep 1500/1400

October 2800/2700

Nov 4200/4100

Dec 5600/5500

Transit period 25 days. Exc. Margin 0.10%.

What is the rate of bill purchase? SolutionThe notional due date is 85 days from 26 th August, i.e., 19thNov. Since the currency is at discount,

(forward margin in descending order) the transit period will be rounded off to higher month, i.e end Novemberand the rate quoted will be based on spot/Nov rate for USD in the interbank market.

Dollar/rupee market spot buying rate Rs.48.65250

Less Discount for Spot/nov 0.42000

---------------------

48.23250

Less exchange margin at 0.10% 0.04823

-----------------

48.18427 rounded off to 48.1850


23/25

READY Rates based on cross rates

So far, exc.rates were calculated for USD. There are other currencies for which interbank rates arenot available in most of the countries. These currencies are also equated to USD

Axis Bank issued a demand draft on Montreal for Canadian Dollar 50,000 at CAD 1=Rs.34.4850.However after a few days, the purchaser of the draft requested the bank to cancel the draft andpay him the rupee equivalent to him. The quotes are as follows.

USD 1=CAD 1.4541/4561

USD 1=Rs.49.5275/5350. Exc margin for TT buying is0.08%

Solution The bank cancels the draft at TT buying rate

USD/Re market buying rate =Rs.49.5275

Less exc. Margin 0.0396

------ -------------

Buying rate for 1 dollar 49.4879 and CAD is 1.4561

CAD 1.4561= Rs. 49.4879

CAD 1 = 49.4879/1.4561=Rs. 33.9866 rounded off to Rs. 33.9875

AMT PAID TO THE CUSTOMER is CAD 50000*34.4850= Rs. 17,24,250.


24/25


25/25

Documents

Computation of Exchange Rates