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BFM MODULE – A
Chapter 1: Exchange Rates and Forex Business (PART-I)
What we will study?
*Exchange Rate Mechanism.
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Foreign Exchange Rate Quotation:
It is the Rate at which one currency will be exchanged for
another currency.
It reflects the Price of one currency in relation to another
currency.
Example
➢ 1$ = ₹ 80
 
It is Base Currency It Price Currency or Other currency

It means currency for which Price/Quotation is given.
It is the first Currency appearing in Foreign Exchange Rate
Quotation.
In the above example, Interpretation will be done as
follows:
→ If a person wants to purchase 1$, he has to pay 80₹.
→ If a person wants to sell 1$, he will get 80₹.
→In Simple Words, we can understand it as follows:
We go to Market & Ask for Price/Quotation of a Pen, i.e.
1 Pen = ₹ 50
It means 50₹ is price for 1 Pen.
Here, Pen is the item for which price is quoted.
Similarly, in above example (1$=₹80),
$ is the item for which 80 ₹ Price is quoted.
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Direct Quote:
If Exchange Rate is quoted in a way which reflects
Number of Home Currency for 1 Unit of foreign currency,
then the quotation is called as Direct Quote.
E.g.: For India for America
1$ = ₹ 80 1 ₹ = 0.0125 $
1£ = ₹ 90 1 £ = 1.2 $
1 ¥ = ₹ 0.60 1 ¥ = 140 $
Indirect Quote:
If Exchange Rate is quoted in a way which reflets Number of
Foreign Currency for 1 unit of Home Currency, then the
quotation is called as Indirect Quote.
E.g.: for India for America
1₹ = 0.0125 $ 1$ = 80 ₹
1₹ = 0.0111 £ 1$ =0.8333 £
1₹ = 0.60¥ 1$=0.0071 ¥
How to read Quotes:
1 USD = Rs. 74.9500/74.9600 or
USD/INR = 74.9500/74.9600

USD/INR = 74.9512/9652 means:

USD/INR = 74.9512/74.9652
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USD/INR = 84.96/05 means: 84.96/105
USD/INR = 84.96/85.05
Example 1:
Spot Rate USD/INR 60.2540/4545
1 month swap 10/15
2 months swap 25/55

1 Month Rate:
60.2540 60.4545
+ 00.0010 + 00.0015
-------------- --------------
60.2550 60.4560
Example 2:
Spot Rate USD/INR 70.4525/71.2525
1 month swap 30/60
1 month swap 105/145
3 months swap 40/70 paisa

1 Month Rate:
70.4525 71.2525
+ 00.0030 + 00.0060
-------------- --------------
70.4575 71.2585
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2 Month Rate:
70.4525 71.2525
+ 00.0105 + 00.0145
-------------- --------------
70.4630 71.2670

3 Month Rate:
70.4525 71.2525
+ 00.40 + 00.70
-------------- --------------
70.8525 71.9525

Direct and Indirect Quotes:

The price of the currency can be expressed either as one unit
of home currency, equal to so many units of foreign currency,
or as one unit of foreign currency equal to so many units of
home currency.
Under direct quotes, the local currency is variable, say as in
India.
1 USD = Rs. 74.9500/74.9600.
The rates are called direct, as the rupee cost of foreign
currency is known directly.
These quotes are also called Home Currency or Price
quotations.
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On the other hand, under indirect method, the local currency
remains fixed, while the number of units of foreign currency
varies.
For example, Rs. 100 = USD 1.3342/1.3340.

It would be worthwhile to mention that globally the practice

being followed is where all currencies, (except a few) are
quoted as direct quotes, in terms of USD.
i.e. 1 USD = so many units of the other currency.
Only in case of GBP (Great Britain Pound/British Pound),
Euro, AUD (Australian Dollars), and NZD (New Zealand
Dollars), the currencies are quoted as indirect rates, i.e.
one GBP, EUR, AUD, or NZD = so many units of USD.
Therefore, the currency rates, as generally quoted on a given
day, can be as under:

USD/INR 74.9500/74.9600 USD/JPY 114.20/114.30

EUR/USD 1.1150/1.1160 USD/CHF 0.9150/0.9160
GBP/USD 1.3670/1.3680 USD/CAD 1.2372/1.2382
AUD/USD 0.7503/0.7513 USD/HKD 7.7824/7.7834

Note: Direct Quote is reciprocal of Indirect Quote or Indirect

Quote is reciprocal of Direct Quote.
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Direct Quote:
USD/INR = Rs. 74.9500/74.9600
1 USD = Rs. 74.9500/74.9600
1 USD = Rs. 74.9500 & 1 USD = 74.9600

Indirect Quote:
1 INR = 1/ (USD/INR) = 1 / 74.95 = 0.013342 $
1 INR = 1/ (USD/INR) = 1 / 74.96 = 0.013340 $
INR/USD = 0.013340/0.013342

Conversion of Amount from One Currency to Another

Currency:
Example:
1 Pen = ₹ 50
Convert 100 pen in ₹. (i.e. Price of 100 Pen)
100 Pen = ₹ 50 × 100 = ₹ 5,000
Convert 250 ₹ in Pen (i.e. Number of Pen in 250 ₹)
𝟐𝟓𝟎 ₹
= 5 Pen
𝟓𝟎₹

Similarly, 1$= ₹80

Convert 100$ in ₹.
→ 100 × ₹ 80 = ₹800
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Convert 1600₹ in $
𝟏𝟔𝟎𝟎 ₹
→ = 20$
𝟖𝟎 ₹

If Base Currency in Exchange Rate & the Currency in which

Amount is given is

Same Different
 
𝐀𝐦𝐨𝐮𝐧𝐭
Amount x Exchange Rate
𝐄𝐱𝐜𝐡𝐚𝐧𝐠𝐞 𝐑𝐚𝐭𝐞

Example 1: USD/INR 74.50

Now you have 1,00,000 $, convert it into Rupee ₹.
Quote is given for USD and amount also in USD so multiply.
1,00,000 * 74.50 = 74,50,000.

Example 2: USD/INR 74.50

Now you have 1,00,000₹, convert it into USD.
Quote is given for USD and amount also in ₹ so divide.
1,00,000 / 74.50 = 1342.28
Presentation of Exchange Rate:
Direct Quote:
1$= ₹ 80
₹/$ = 80
USD/INR = 80 [ISO code]
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ISO: International Organization for Standardization.
$ is base currency here.
Indirect Quote:
1₹ = 0.0125$
$/₹ = 0.0125
INR/USD = 0.125
₹ is base currency here.
Process in Foreign Exchange Market:
➢ RBI: Regulate for foreign Currency Transactions.
➢ Shopkeeper or Banks [Authorised Dealers]
➢ Customers [Importer, Exporter, Company, firm, etc.]: To
Buy or sell foreign Currency.

Types of Exchange Rate in forex Market:

Bid Rate and offer (Ask) Rate:

Bid Rate is the Rate at which Dealer is willing to Buy the

Base Currency.
(i.e. Lower Rate because Dealer always want to buy
anything at low price)

Offer Rate is the Rate at which Dealer is willing to sell the

Base Currency. This is also called Ask rate.
(i.e. Higher Rate because Dealer always want to sell
anything at High Price).
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The buying rates and selling rates are also referred to as bid
and offer rates, respectively.
In a USD/INR quote of 74.9500/9600, the quoting bank is
bidding to buy for USD at 74.9500 and is offering to sell the
USD at 74.9600.
On the other hand, in a GBP/USD rate 1.3670/80, the quoting
bank is willing to buy GBP at 1.3670 and willing to sell at
1.3680.
For Bank: Buy Low and Sell High

Customer always cry and buy at high price and sell at

low price.
Note:
If bank is buying then the customer is selling.
If bank is selling then the customer is buying.

E.g.: 1$= ₹ 80 / 81
⇓ ⇓
Bid Rate Offer Rate

Dealer Base Currency को :

→ सस्ते में खरीदता है (1$ = ₹ 80)

→ महंगे में बेचता है (1$ = ₹ 81)

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Buy = 80
Sell = 81

Then, it means customer को :

Base Currency → महंगे में Buy करनी पड़ती हैं (1$=₹81)

→ सस्ते में sell करनी पड़ती है (1$=₹80)

Buy = 81
Sell = 80
[Adverse Rate is applied to the Customer]

Note:
(i) We will always think from Bank’s Pont of view.

i.e. Whether Bank is

Buying base currency Selling base currency

 
Low Rate Applied High Rate Applied

E.g.1: 1£ = $ 1.2/1.25 (EUR/USD)

Bank wants to - Buy £ → 1£ = 1.2$
Sell £ → 1£ = 1.25$
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E.g.2: 1£ = $ 1.2/1.25 (EUR/USD)

Customer wants to - Buy £ → 1£ = 1.25$

Sell £ → 1£ = 1.2$
E.g.3: 1£ = $ 1.2/1.25 (EUR/USD)

Bank wants to - Buy $ → Sell £ → 1£ = 1.25$

Sell $ → Buy £ → 1£ = 1.2$

E.g.4: 1£ = $ 1.2/1.25 (EUR/USD)

Customer wants to -
Buy $ → Sell £ → Buy £ (Bank) 1£ = 1.2$
Sell $ → Buy £ → Sell £ (Bank) 1£ = 1.25$

E.g.1: 1₹ = 100 ¥/110¥ (INR/YEN)

Customer wants to

Buy ¥ Sell ¥
 
Sell ₹ Buy ₹
 
1 ₹ = 100 ¥ 1₹ = 110 ¥
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E.g.2: 1₹ = 100 ¥/110¥ (INR/YEN)

Bank wants to

Buy ¥ Sell ¥
 
Sell ₹ Buy ₹
 
1 ₹ = 110 ¥ 1₹ = 100 ¥

E.g.3: 1₹ = 100 ¥/110¥ (INR/YEN)

Bank wants to

Buy ₹ Sell ₹
 
1 ₹ = 100 ¥ 1₹ = 110 ¥
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E.g.4: 1₹ = 100 ¥/110¥ (INR/YEN)

Customer wants to

Buy ₹ Sell ₹
 
Sell ₹ (Bank) Buy ₹ (Bank)
 
1 ₹ = 110 ¥ 1₹ = 100 ¥

(ii) Sometimes, Dealer will go to Another Dealer in Inter-

Bank Market for Buying or Selling the Currency, in that case,
our dealer will be treated as Customer. [Inter Bank Rate]
Spread:
Spread means difference between Bid Rate & offer Rate.
E.g.:
1$ = ₹ 80 / 81 => Spread = 81-80 = ₹1

FX deals can be settled in the following 4 ways:

1-Ready or Cash
2-Tom
3-Spot
4-Farward
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Ready or Cash:
If the settlement of fund takes place on the same Day (on
date of deal) then it is called ready or cash rate.

Deal date Settlement date

10-07-2020 10-07-2020
08-05-2020 08-05-2020

Settlement of funds takes place on the same day (date of

deal, say 1st Nov 2021), e.g., Bank A bought USD 10,00,000
against INR from Bank B @ 74.9500 Value cash, i.e. 1st Nov
2021.
This means that the delivery of USD 10,00,000 by Bank B and
the settlement of INR 7,49,50,000 by Bank A takes place on
the date of the transaction i.e. 1st Nov 2021.
This is known as Ready / Cash deal.

Tom:
If the settlement of fund takes place on the next Day (from
date of deal) then it is called TOM rate. (Tomorrow)

Deal Date Settlement Date

04-02-2020 05-02-2020
1 Jun 2 June
01-04-2020 02-04-2020
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Settlement of funds takes place on the next working day of
the date of deal, e.g., say 1st Nov 2021), e.g., Bank A bought
USD 1,000,000 against INR from Bank B @ 74.9600 Value Tom
i.e. 2nd Nov 2021.
This means that the delivery of USD 1,000,000 by Bank B and
the settlement of INR 7,49,60,000 by Bank A takes place on
the next working day, i.e. 2nd Nov 2021. This is known as a
Tom deal.
If the settlement date of TOM deal, i.e. 2nd Nov 2021 is not a
working day, settlement date would be 3rd November 2021
provided it is a working day for the markets where currency
is to be settled). Intervening Saturdays and Sundays will also
postpone the settlement date to next working day.

Conditions for settlement:

1-Settlement date or day should be working in both
countries. If holiday in any one of the countries, then
Settlement date should be next common working
day of both the country.
2-Also, if Saturday and Sunday occurs during the Settlement
date then it will also postpone the Settlement date to next
working date.
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Example 1:
A Deal is done on 01-06-2020 for TOM settlement but 02-06-
2020 is holiday in India so when will the settlement take
place.
Solution:
Settlement is TOM basis so 02-06-2020 but there is Holiday
in India on 02-06-2020.
So, actual settlement will take place on 03-06-2020.
(working day in both countries)

Example 2:
A deal is done on 24-01-2021(Wednesday) on TOM basis but
25-01-2021 is holiday in US so the settlement will take place
on?
Solution:
Settlement: 25-01-2021 (Holiday in US) [Thursday]
Next date: 26-01-2021 (Holiday in India) [Friday]
Next date: 27-01-2021 (Market close) [Saturday]
Next date: 28-01-2021 (Market close) [Sunday]
Actual settlement: 29-01-2021 [Monday]
(working day in both countries)
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Spot Rate:
Settlement of funds takes place on second working day after
the date of contract or deal.
Deal date Fund delivery date
01-01-2020 03-01-2020
10-06-2020 12-06-2020
4 October 2020 6 October 2020

Settlement of funds takes place on the second working day

following the date of contract/deal, e.g., say 1st Nov 2021,
e.g., Bank A, Mumbai bought USD 11,55,000 against EUR
from Bank B, Frankfurt @ EUR/USD 1.1550 Value Spot i.e. 3rd
Nov 2021.
This means that the delivery of USD 11,55,000 by Bank B,
Frankfurt and the settlement of EUR 10,00,000 by Bank A
takes place on the spot date i.e. on the second working day
following the date of the deal i.e. 3rd Nov 2021.
This is known as a Spot deal.
If the date of Spot deal is 1st November 2021, settlement
date will be 3rd November 2021, presuming both markets in
Mumbai and Frankfurt are working on 1st, 2nd and 3rd
November 2021.
If not, it will the next working day in both the countries.
Intervening Saturdays and Sundays will also postpone the
settlement date to next working day.
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Forward:
Delivery of funds takes place on any day after the Spot date,
e.g., if the date of forward deal is 1st November 2021 for
value settlement date 30 November 2021, it is a forward deal.
Settlement of funds takes place on 30th November 2021.
E.g., Bank A bought USD 10,00,000 against INR from Bank B
@ 75.3600 Value 30th November 2021.
This means that the delivery of USD 10,00,000 by Bank B and
the settlement of INR 7,53,60,000 by Bank A takes place on
30th November 2021.
This is known as a forward deal.
While entering into forward deals (whether with clients or
with banks in the Inter-bank markets), banks need to ensure
that the settlement date of the forward deal is a working day
and not a Saturday or a Sunday.