1. Currency Markets
 ForeignExchange Market- Currencies are
bought and sold against each other.
 Major
Currencies:
USD,GBP,EUR,CHF,JPY,AUD

2. Participants
 Banks and its Customers
 Interbank market- Between banks
 Banks and RBI (Central bank)

3. Currency Markets
 Primary price makers or professional dealers
make a two-way market to each other and to
their clients.
 Foreign currency brokers act as middlemen
between two market makers.
 Corporations are usually price takers.

4. Geographical Spread
 New Zealand to West coast of U.S.
 Gap between NY closing and Tokyo opening
is about 2 ½ hours.
 Tradingvolume- London, Tokyo and NY
accounting for about 50% volume.

5. International Trade on Finance
 At what point of time will the trade be settled?
In what currency?
 Terms of the transaction namely quantity,
quality, price, time etc would be negotiated
and settled between buyer and seller.

6.  Regulations- Both parties conform to the
trade regulations of both the countries.
 Conversion-Financial side by the authorised
banks/agencies.

7. Facilitating Forex Dealings..
 Nostro Account – Our account with you.
Bank of India maintains an account with Nat
west bank in London, maintained in GBP.
While corresponding BOI will refer to its
account as NOSTRO account.

8. Forex Dealings..
 Vostro Account – Your account with us.
The account opened by a foreign bank in Indian
rupee with a Indian bank.
Bank of Middle East, Sharjah, maintains a rupee
account with Syndicate Bank, Mumbai. Syndicate
Bank would refer to this as VOSTRO account.

9. Forex Dealings
 Loro Account – Their account with you.
BOI has an account in USD with Citi Bank in
NY. When BOB wishes to refer the account
of BOI with CB, it would refer to it as LORO
account.

10. Quotation Conventions
 Spot rate Quotations
 Base currency/Quoted Currency
 USD/CHF: USD base, CHF quoted
 Quotation given as no: of units of quoted currency
per unit of base currency, bid rate/offer rate.
 Bid rate- Market maker buying base currency
 Offer rate- Market maker selling base currency

11. Spot Quotes
 USD/CHF SPOT: 1.4575/1.4580
 Bank will buy 1 USD and give CHF 1.4575
 Bank will sell 1 USD and want to be paid
CHF 1.4580
 Shortened to 1.4575/80 or 75/80

12. Spot Quotes
 GBP/USD:1.5665/75
 GBP/EUR:1.2545/50
 USD/INR:45.7585/45.7685
 USD/JPY:110.25/35

13. Quotations
 European Terms: Units of a currency per US dollar.
USD/INR:46.7560/7675
 American Terms: US dollars per unit of a currency:
GBP/USD: 1.5060/65
 Direct Quotations: Units of “home” currency per unit
of “foreign currency”. USD/INR, a direct quote in
India.
 Reciprocal or Indirect Quotes: Units of “foreign”
currency per unit of “home” currency.

14. Quotes
 Identifywhether the following is a direct
quote in USA. If not, find it.
 A. Rs.46 = $1
 B. $1 = S$1.60
 C. GBP 1 = $0.639

15. Exchange Rates
 Interbank Rate – Base Rate
 Customer Rate – Add a margin to the base
rate. Margin as per regulations.

16. Forex Rates
 TT Buying Rate:
– Interbank spot buying rate for the currency
– Less: Exchange Margin
– TT Buying Rate

17.  E.g On September 15, 2001 you (a bank) receive a
TT from your Los Angeles branch for US$ payable to
your customer. Your account with your branch has
been credited with the amount of TT. Assuming that
US$/INR are quoted in the local interbank market as
the following:
Spot: US$ 1 = Rs. 47.50/60
You require an exchange margin of 0.08% to be
loaded on the rate.

18.  USD/INR spot buying rate = Rs.47.500
 Less: Ex.margin @ 0.08% = Rs. 0.038
 TT Buying Rate(R’ded off) = Rs. 47.46
 Amount payable to the = Rs.474,600
customer for $10,000

19.  TT Selling Rate:
– Interbank spot selling rate for the currency
– Add: Exchange Margin
– TT Buying Rate

20.  E.g.Your customer has requested you to
issue a demand draft on NY for USD20,000.
Assuming the E/R quoted in the interbank
market as the following:
 Spot USD/INR = Rs.47.50/60
 The exchange margin to be loaded is 0.15%.

21.  USD/INR spot buying rate = Rs.47.60
 Less: Ex.margin @ 0.15% = Rs. 0.07
 TT Buying Rate(R’ded off) = Rs. 47.67
 Amount payable by the = Rs.953,400
customer for $20,000

22. Arbitrage
 Suppose banks A & B are quoting:
A B
 GBP/USD:1.4560/1.4570 1.4548/1.4558
 Is there arbitrage?

23. Inverse Quotes
 USD/CHF:1.4965/1.4972 a bank in Zurich
 CHF/USD: 0.6696/0.6699 a bank in NY
 Is
there any arbitrage profit by buying 1 ml
CHF in Zurich?

24. Implied Quotes
 Implied (CHF/USD) bid = 1/(USD/CHF)ask
 Implied (CHF/USD) ask = 1/(USD/CHF)bid
 What would have been the quotes in NY to
have no arbitrage?

25. Cross Rates
 In London, a dealer quotes:
 GBP/CHF Spot: 3.5250/55
 GBP/JPY Spot: 180.80/181.30
 What do you expect the CHF/JPY rate to be
in Geneva?
 Assume that the Geneva quote is CHF/JPY
51.1530/51.2550. Is there any opportunity for
arbitrage?

26. Cross Rates
 CHF/JPY rate implied by the quotes:
 (CHF/JPY) bid =
 (CHF/GBP) bid X (GBP/JPY) bid
 (1/(GBP/CHF)ask)) X (GBP/JPY) bid
 (1/3.5255) X 180.80 = 51.2835
 (CHF/JPY) ask =
 (CHF/GBP) ask X (GBP/JPY) ask
 (1/3.5250) X 181.30 = 51.4326

27. Cross Rates
 Buy 1 CHF from Geneva – Pay 51.2550
 Sell 1 CHF in London – Rcv GBP 1/3.5255
(0.2836)
 Sell GBP in London – Rcv JPY 51.2748

28. Forward and Swap Quotes
 Forward quotes can be given like spot
quotes.
 USD/CHF 3-months 1.5655/65

29. Forward and Swap Quotes
 Itcan be given as spot quotes plus a pair of
swap points. Each swap point is 0.0001/0.01.
 USD/CHF Spot: 1.6530/40
 1 month:15/10 3 months:35/25
 GBP/USD Spot: 1.4925/35
 1 month:12/15 3 months:28/35

30. Outright Rates
 Spot quote(+/-) swap points
 Rule: If swap points are High/Low, subtract,
base currency at forward discount, quoted
currency at premium.
 If swap points are Low/high, add. Quoted
currency at discount, base currency at
premium.

31. Outright Rates
 USD/CHF Spot: 1.6530/40
 1 month:15/10 3 months:35/25
 Conversion:
 1.6530-0.0015=1.6515
 1.6540-0.0010 = 1.6530
 Outright rate = 1.6515/1.6530

32. Forex Rates…
 Bill buying Rate: Rate applied for foreign bills
purchased. (Export bills)
 In the forward market the forward margins could be
at premium or discount.
 While making calculations, the bank will see that the
period for which forward margin is loaded is
beneficial to the bank. If f.margin is at premium
round off to lower month. If f,margin is at discount
transit period is rounded off to the higher month.

33.  On Sep 25,2006 your customer has presented to
you as their bankers documents for USD100,000
drawn on NY and request you to purchase the same.
 Spot rate USD/INR 47.50/60
 October 0.22/0.26
 Transit period is 20 days and the exchange margin
to be loaded is 0.15%.
 USD is at premium. Transit period would be rounded
off to the lower month. No premium would be
conceded to the customer.

34.  Spot Rate Rs.47.50/60
 Add: Forward premium Nil
 1-month buying rate Rs.47.50
 Less Ex.Margin @ 0.15% Rs.0.07
 Bill buying rate Rs.47.43
 Amount payable to the customer for
USD.100,000 is 4,743,000.

35.  On Sep 25,2006 your customer has presented to
you as their bankers documents for USD100,000
drawn on a party in NY and request you to purchase
the same.
 Spot rate USD/INR 47.50/60
 October 0.60/0.57
 Transit period is 20 days and the exchange margin
to be loaded is 0.15%.
 USD is at discount. Transit period would be rounded
off to the higher month.

36.  Spot Rate Rs.47.50/60
 Less: Forward discount Re. 0.60
 1-month buying rate Rs.46.90
 Less Ex.Margin @ 0.15% Rs.0.07
 Bill buying rate Rs.46.83
 Amount payable to the customer for USD
100,000 @ Rs. 46.83 is Rs. 4,683,000.

37.  Bill Selling Rate: E.g Import bills
 The bill selling rate is arrived at by adding exchange
margin to the TT selling rate.
 On Sep 12,2006 your customer has received an
import bill for USD.20,000.He asks you to retire the
bill.
 Spot rate USD/INR 47.50/60
 October 0.60/0.67
 Exchange margin to be loaded is 0.15% on TT sales
and 0.20% on bills selling rate.

38.  Spot Rate Rs.47.60
 Add Ex.Margin @ 0.15% Rs.0.07
for TT selling rate
 TT Selling rate Rs.47.67
 Add: E.margin@ 20% Re.0.10
 Bills Selling Rate Rs.47.77
for bills selling rate
 Amount payable by the customer for USD 20,000 @
Rs. 47.77 is Rs.955,400.

39. Broken Dates
 Standard forwards are whole month.
 Bank will do any number of days forward.
These are “broken dates”.
 USD/INR spot 46.95/96
 1 month 10/12 2 months 20/27
 Customer wants to buy 43 days forward.

40. Broken Dates
 15 paise premium from 1 month to 2 months.
 Assume 30 days in the 2nd month.
 0.5 paise per day, 6 paise for 12 days.
 Rate will be 46.96+0.12+0.06

41. Broken Dates
 Today is April 22. You see the following quotes:
 USD/INR Spot: 48.85/48.86
 Spot-April 2/3
 Spot- May 5/7
 Spot – June 11/15
 Spot – July 19/25
 Find the rate for buying USD delivery on July 17.

42. Broken Dates
 Outright rate for June 30 are:
 (48.85+0.11)/(48.86+0.15)
 48.96/49.01
July end spread over june is 8/10
 10 paise offer spread for 31 days.
 For July 17, spread over june is (10/31)17 = 5.48
paise
 July 17th rate = 49.01+0.05=49.06

43. Premia/Discounts
 (Forward-Spot)/(Spot) X (12/No: of months)
 (Forward-Spot)/(Spot) X (365/No: of days)

44. Premia/Discount
A bank is giving the following quotes:
 USD/AUD spot: 1.3045/50
 91-day forward:1.3425/35
 Which currency is at premium?
 How much is the annualised percentage
premium?

45. Premia/Discount
 Use mid rates:
 (1.3430-1.30475)/(1.30475) (365/91)
 11.76%

46. Investment Return
A UK investor purchased a 91-day
instrument (Face value $1000) for $987.65.
At that time, the exchange rate was $1.75
per GBP. At maturity, the exchange rate was
$1.83 per GBP. What was the investor’s
holding period return in Pounds?

47. Investment Return
 Instrument Cost = 987.65/1.75
 GBP 564.37
 Maturity value = $1,000
 Value in GBP = 1000/1.83 = GBP 546.45
 HP return = (546.45-564.37)/564.37
 -0.0317 or -3.18%

48. Investment Option
 Suppose the following rates are available to an
investor whose functional currency is DEM.
 Euro GBP 6-M LIBOR:6.64% p.a
 Euro CHF 8-M LIBOR: 2.06%p.a
 Spot E/R CHF/DEM : 1.1000
 6-M forward :1.1107
 Spot rate: GBP/DEM : 2.8000
 6-M forward: 2.7475
 Which investment is better if he has DEM 100 as
surplus funds for next six months?

49. Investment Option
 DEM 100 invest in CHF
– (100/1.1)(1.0103)(1.1107) = DEM 102.0128
 DEM 100 invest in GBP
– (100/2.8)(1.0332)(2.7475) = DEM 101.3827