unit 3-foreign exchange market

7/23/2019 UNIT 3-Foreign Exchange Market

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UNIT 3-Foreign Exchange Market



Foreign Exchange Market

• It is the market where foreign currencies are bought & sold. It broadly comprises of:

• Customer Market

Interbank Market.



Customer market

• It comprises of transactions between banks(authorized dealers) and their customers. Suchtransactions are of two types !iz. "eadydeli!ery & #orward deli!ery.



Interbank Market

• It comprises of:

• $ransactions between different banks in thesame center%country.

• $ransactions between banks in a country and

their correspondents and o!erseas branches.• $ransactions of the central bank of one country with central banks of other countries.



• Interbank foreign echange dealings are of fourtypes:

• 'ash same day deli!ery

• $om deli!ery on immediately succeeding

working day• Spot deli!ery on second successi!e working day

• #orward deli!ery beyond second successi!e working day



Features of FEM

• It is market where foreign currencies are brought and sold.

• g: If an Indian importer import goods from*S+ and has to make payment in *S dollar it

will approach #, to buy *S dollar for rupees.• +n eporter con!erts the eport proceeds

obtained in foreign currency into its owncurrency.



• It is the o!er the counter market.

• It consist of trading desk at ma-or agenciesdealing in foreign echange throughout the world connected by telephone,telex etc

• Transaction are normally oral followed by written communication.



Foreign Exchange Rates & Quotations

• ifferent sets of echange rates are applied for !arioustypes of foreign echange transactions as under:

• (/) $$ Selling "ate: It is applicable for all cleanremittances outside India i.e. the bank undertakes onlycurrency transfers by way of issuance of (demand

draft) ,$(money transfer) $$(telegraphic transfer)etc in terms of foreign currency.

• $he bank does not perform any other function such ashandling documents.



• $$ Selling "ate 0 1ase "ate 2 change ,argin

• 1ase rate is the Interbank selling rate. changemargin is the profit margin that may load sub-ectto the conditions specified by FEDAI(

Foreign Exchange Dealers' Association ofIndia )

http://www.fedai.org.in/








• # +part from accepting deposits and lendingmoney 1anks also carry out on behalf of their

customers the act of transfer of money bothdomestic and foreign. from one place to another.$his acti!ity is known as 3remittance business3 .1anks issue emand rafts 1anker4s 'he5ues,oney 6rders etc. for transferring the money.1anks also ha!e the facility of 5uick transfer ofmoney also know as $elegraphic $ransfer or $ele

'ash 6rders.



• (7) 1ill Selling "ate:

• It is applied for all outward remittances inrespect of import bills payable in India. $his rateis a little worse than $$ Selling "ate as the bank

has to handle documents relating to thetransaction.



• 1ill Selling "ate 0 $$ selling rate 2 change,argin

• #orward 1ill Selling "ate 0 #orward $$ Selling"ate 2 change ,argin

• #orward $$ Selling "ate 0 Interbank SpotSelling "ate 2 #orward 8remium% #orwardiscount 2 change ,argin



• . + wishes to buy pounds 7 months forward tosettle a sight bill. $he market rates are: Spot

selling: "s.99.; 7 months: /9 8aise discount change margin is ;./79< for $$ selling and;./9< for bill selling .

• #orward $$ selling rate 0 (99.;;./9) /.;;/79 0"s.99.97

• #orward 1ill Selling "ate 0 99.97 (/.;;/9) 0

"s.99.;



• (=) $$ 1uying "ate: It is applied for all cleanforeign inward remittances which are payable inIndia. #or e.g. a $$ issued by a bank in +ustraliafor *S /;;;; drawn on 61' >ew elhi will

be con!erted into rupees at $$ buying rate as the bank in +ustralia would ha!e already paid the*S in 61' branch at >ew ?ork.



• $$ 1uying "ate 0 1ase "ate @ change ,argin



• (A) 1ill 1uying "ate: It is applied for purchase%discounting of eport bills resulting in foreignremittance to India after realization. It is worsethan $$ buying rate as there is delay between the

+ paying the eporter and itself getting paid onpresentation of bill to the foreign importer. +lsointerest is reco!ered from the eporter for suchperiod.



• 1ills are of two types:

Sight% demand bills delay in!ol!ed in such billis only the transit period.

$ime% usance bills: delay in!ol!ed is transitperiod plus the usance period i.e. the creditperiod allowed to the importer.



• 1ill 1uying "ate 0 1ase "ate 2 #orward8remium % #orward iscount change,argin.

• NOTE: The forward premium / discountis for transit usance period! in case of

• forward bill buying it is for transit 2 usance 2forward periods.



• (9) 'ross "ates: It is an echange rate betweentwo foreign currenciesB for eg. in India ##"% C, %C are cross rates. + cross rate may be usedto ascertain the price of a foreign currency in

terms of I>" for which direct 5uotations are nota!ailable.



• If ##" D.;9 0 C /

• +nd "s.AA.9= 0 C /

• $hen "s. (AA.9=%D.;9) 0 ##" /

• 6r "s..=7 0 ##" /



• () Spot "ate: It is the pre!ailing market rate onthe day of transaction.

• (D) #orward "ate: It is the rate fied in ad!ance

for a transaction which will mature at a specifieddate or specified period in future. It is at apremium % discount to spot rate.



• In case of direct 5uotes

• #orward "ate 0 Spot "ate 2 #orward 8remium%#orward iscount



Types of Quotations:

• /. irect Euotation: It is the home currencyprice of one unit of foreign currency.

• g. "s.AA 0 C/

• 7. Indirect Euotation: It is the foreign currencyprice of one unit of home currency. .g. "e./ 0C/%AA 0 C.;77D

• irect 5uote 0 /% Indirect 5uote and !ice !ersa.



• =. 1id % 6ffer: 1id is the purchase price of acurrency 5uoted .

• Fhereas offer ( or ask rate) is the selling priceof a currency 5uoted. 1id for one currency is

simultaneously an offer for another currency.• #or instance

• C/ 0 "s.AA.9;%AA.99 offer

• bid



• +n authorized dealer gains by keeping his offerfor a currency higher than his bid for that

currency.• $hus his spread 0 offer @ bid.

• Two"wa# $uote: %s &&'() is bid for *+! atthe same time * + is offer for %s'&&'() or,*') is offer for %e'+

unit 3-foreign exchange market

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