Factors of Rate Quta

7/29/2019 Factors of Rate Quta

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Rates

Quotations


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Direct Quote

So many units oflocal currency per unitofforeign currency.

Rs 50 = $1

Since 2 August 1993, India uses Directquotations.


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Indirect Quote

So many units offoreign currency per unit oflocal currency.

$ 2 = Rs 100

For simplification, Rs is taken as 100. Same

applies to JPY.


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Two way quote

Dealer quotes two way:The rate at which a dealer or bank iswilling to buy (buying rate, bid rate)

and the rate at which bank is willing tosell (selling rate, ask rate or price).


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Two way quoteSpread

Dealer quotes two way:US$ 1 = Rs 50.0000 50.0050

Buying price for dealerAsk/selling price for dealer

Spread: Difference between Higher (Ask) and Lower (BID)


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Two way quote

Dealer quotes two way:US$ 1 = Rs 50.0000 50.0050

Buying price for dealerAsk price for dealer

Lower is Bid, higher is Ask; irrespective of sequence.


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Percent Spread

Ask - Bid

= ----------- * 100

Ask

To be remembered, Denominator is Ask



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Percent Spread

50.0050 50.0000

= ----------------------- * 100

50.0050

To be remembered, Denominator is Ask


0.0100


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Two way quote

Usually, in transactions among dealers,only the last two digits are quoted, tosave time and rest is understood.

US$ 1 = Rs 50.0050 50.0080Will be expressed as 50-80


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Two way quotes

For 4 points after decimal, termpoints is used.

One point further decimal right side is

called pip.


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Forward rate

If the exchange of currencies takesplace after a certain period from thedate of the deal (more than 2 workingdays), it is called the Forward rate.


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Forward rate

Normal practice is to quote for 1month, 2 months and 3 months and 6months as well.


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Forward rate

Can be quoted in two ways:1. Outright rates.

2. In terms of points of premium or

discount on the Spot rate. This isused in interbank transactions.

Learn as how to find Outright quotes when 2nd way is given


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Forward rate

Say point way is given:Spot 1-m 3-m 6-m

FFr/US$ 5.2321/2340 25/20 40/32 20/26

Find outright quotes and their spreads.

Bid Ask


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Forward rate


FFr/US$ 5.2321/2340 25/20 40/32 20/2625 40 20

Carefully observe the first figures!


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Forward rate


FFr/US$ 5.2321/2340 25/20 40/32 20/2625 40 20


Remember the tip: HDS (High Discount Subtract) andLPA (Low Premium Add)

Bid Ask


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Forward rate


FFr/US$ 5.2321/2340 25/20 40/32 20/2625 40 20


Remember the tip: HDS (High Discount Subtract)Subtract from the Spot Rate.

Bid Ask


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Forward rate


FFr/US$ 5.2321/2340 25/20 40/32 20/2625 40 20


5.2321-0.0025 = 5.2296 Bid5.23400.0020 = 5.2320 Ask

Spread = 0.0024

Bid Ask


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Forward rate


FFr/US$ 5.2321/2340 25/20 40/32 20/2625 40 20


5.2321-0.0040 = 5.2281 Bid5.23400.0032 = 5.2308 Ask

Spread = 0.0027

Bid Ask


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Forward rate


FFr/US$ 5.2321/2340 25/20 40/32 20/2625 40 20


Remember the tip: LPA (Low Premium Add)


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Forward rate


FFr/US$ 5.2321/2340 25/20 40/32 20/2625 40 20


Remember the tip: LPA (Low Premium Add)

5.2321+0.0020 = 5.2341 Bid5.2340+0.0026 = 5.2366 Ask

Spread = 0.0025

Bid Ask


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Practice

Say quote is given this way:Spot 1-m 3-m 6-m

Rs/US$ 32.1010/1100 225/275 300/350 375/455

Work out Outright Quotes with their spreads.


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Practice

Maturity Bid/Buy Sell/Offer/Ask SpreadSpot Rs 32.1010/$ Rs 32.1100/$ 0.0090

1-m Rs 32.1235/$ Rs 32.1375/$ 0.0140

3-m Rs 32.1310/$ Rs 32.1450/$ 0.0140

6-m Rs 32.1385/$ Rs 32.1555/$ 0.0170


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Foreign Exchange Market

Forex market is not a physical place.It is a network of banks, Forexbrokers and dealers.


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Not confined to any one country but itis dispersed throughout the leadingfinancial centers viz., London, New York,Zurich, Amsterdam, Tokyo, Toronto,

Milan, and Frankfurt.


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Business is conducted generally by oralcommunication- written confirmationoccurs later.


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As huge sums are involved in dealings,a small difference in rates mean a lot ofmoney.


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The minimum trading unit in Chicagofutures market is reported to be:

Aus $: 100000

GBP: 62500

Can $: 100000


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The minimum trading unit in Chicagofutures market is reported to be:

Japanese Yen: 12.5 mn

Swiss Franc: 125000

Euro: 125000


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Indian banks dealing with RBI have todeal with a minimum of $100000 withan addition of $25000 thereafter.


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24 Hrs market

Because of the time difference betweencountries as shown in table and thenature mainly viz., OTC the Forex

market can be considered as a 24 hrsmarket.


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24 Hrs market

The volume of business variessubstantially according to marketconditions and according to the time of

the day.


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24 Hrs market

The market is the deepest or mostliquid only in European afternoonwhere the worlds largest trading

centers London, New York, Frankfurtand Chicago are all open together.


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Table


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SWIFT

The banks and brokers dealing inforeign exchange are linked togetherby telephones, telexes and a satellite

communications network called SWIFT.


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SWIFT

The Society for Worldwide InternationalFinancial Telecommunication.


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SWIFT

SWIFT was inaugurated in India in Dec1991 and 42 banks in India wereadmitted as users banks.


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Factors affectingExchange Rate

Exchange Rates (ER) respond quicklyto all sorts of events- tangible andpsychological.


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Economic factors, also calledfundamental factors are better guidesas how a currency moves in the long

run.


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In recent years, global interdependencehas increased to an unprecedenteddegree. Changes in one nations

economy are rapidly transmitted to thatnations trading partners.


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1. Primary determinants.

2. Secondary determinants.


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Primary determinants

Demand and SupplyClue lies in details of BOP statement.

If $ is coming more in country, Re will

appreciate and vis a vis.


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Demand and SupplyChanges in countrys resources.

Discovery of North Sea oil in the UK,and natural gas in the Netherlands

pushed up the value of the andNetherlands guilder.


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Demand and SupplyChanges in countrys comparativeadvantage.

Shift in demand from US to Japanese

automobiles in the USA and elsewherepushed up the value of Yen.


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Domestic Economic PoliciesThis means, relative inflation rates.

Country experiencing higher inflation

will see more depreciation.


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Secondary determinants

Interest rate differentials

This means, relative interest rates.However..

This (higher interest rate) should not bedue to the expectation ofhigher inflation.


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Expectations and other Psychological

factorsThis means, GENERAL eCONOMY.

Present Re $ rate as 50 to one $ is

influenced by this factor. (this wassometimes back)


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Political eventsThis means, Political Stability.

Political stability strengthens the domesticcurrency.


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Forecasting Services

Rothschild in London.

Citibank in New York.


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Nominal Effective ExchangeRate of Rupee

Effective means= A Suitable

Weighted Average.


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Nominal Effective ExchangeRate of Rupee

To find the direction of the movement ofthe currency on the whole.

This is similar to constructing a priceindex.


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NEER

RBI uses a 5 country model.

The same can be applied to anynumbers.


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NEER

RBI uses a 5 country model.

USA, Germany, Japan, UK andFrance.


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NEER

NEER = (e/ei)wi

i=1

5e/ei = exchange ratewi = wt


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NEERShare of countrys total trade

USA : 39%

Germany: 19%

Japan: 16%

UK: 26%

Total trade = x + m

Total = 100%


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REER

REER = (e/ei)wi (P/Pi)

wi

i=1

5


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What will be the rate?

Refer xl sheet neer.

Factors of Rate Quta

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