Foreign Exchange Basic Concept - CA Final SFM

 Currency Symbols and Currency Codes

S. No.	Symbol	Code
1.	£	GBP
2.	€	EUR
3.	$	USD
4.	₹	INR
5.	¥	JPY
6.	£ > € > $ > ₹ > ¥

Quotations

1$ = ₹ 60       (Left Hand Side Currency should be treated as Commodity)

Direct Quote

1 Unit of Foreign Currency (FC) = How Many Home Currency (HC)

Indirect Quote

1 Unit of HC = How Many units of FC

1$ = ₹ 60 – 61      (Where 60 is Bid Rate and 61 is Ask Rate)

Ask Rate > Bid Rate

How to Read Quotation

Academic Style

₹/$ = How many Rupee per dollar

Practical Style (ACI – Association CAhambisle International)

₹/$ = How many dollar per Rupee  

How to Identify in Exam

If Rupee Relationship is given then rest of relation shall be read with same style.

Otherwise check for Market Parity

             £ > € > $ > ₹ > ¥

If Market parity is not possible then use Academic style.

Spread

The Difference of Ask Rate and Bid Rate is profit to bank and is known as Spread.

S. No.	Formula
1.	Spread = Or	Ask – Bid Rate Bid Rate
2.	Spread =	Ask – Bid Rate Ask Rate

Exchange Rate

An Exchange Rate between two currencies is the rate at which one currency will exchanged for another.

Spot Exchange Rate

Spot Exchange Rate refers to the current exchange rate.

Forward Exchange Rate

Forward Exchange Rate refers to an exchange rate that is quoted and traded today but for delivery and payment on a specific future period.

In simple words, it is the agreed rate between the buyer and seller of currency to buy and sell the currency at specified rate on specified rates date.

Premium

Premium means increase in the rate of one currency in comparison to price currency.

Example: - 1$ = ₹ 60, after certain period 1$ = ₹ 65, then dollar is said to be at premium.

In above example,

Dollar is at premium.

Purchasing Power of dollar is increases.

Dollar becomes costly.

Dollar has become stronger.

Dollar is appreciating.

Discount

Discount means decrease in the rate of one currency in comparison to price currency.

 Example: - 1$ = ₹ 60 (1₹ = 1/60) and after certain period 1$ = ₹65 ( 1₹ = 1/65), then ₹ is said to be at discount.

In above example,

₹ is at Discount

Purchasing Power of ₹ decreases.

₹ becomes cheaper

₹ is depreciating.

S. No.	Formula
1.	Premium =	FR – SR x100 SR
2.	Discount =	FR – SR x 100 SR
	Premium ≠ Discount (Siegel’s Paradox)

Gain & Loss to Exporter & Importer

S. No.	Particular	Gain	Loss
1.	Exporter	When FC is at Premium When HC is at Discount	When FC is at Discount When HC is at Premium
2.	Importer	When FC is at Discount When HC is at Premium	When FC is at Premium When HC is at Discount

Cross Currency

S. No.	Given Quotation	Required Quotation	Solution
1.	1 $ = ₹ 60 -65   (₹/$) 1£ = $ 1.50 – 1.60  ($/£)	(₹/£)	Bid Rate(₹/$) = (₹/$)Bid Rate x ($/£) = 60 x 1.50 = ₹ 90 Similar Calculation of Ask Rate
2.	1 $ = ₹ 45.85 – 45.90 (₹/$) 1£ = $ 1.7840 – 1.7850 ($/£) 1£ = SGD 3.1575 – 3.1590 (SGD/£)	(₹/SGD)	Bid Rate(₹/SGD) = (₹/$) x ($/£) x (£/SGD) = 45.85 x 1.7840 x 1/3.1590 1 SGD = ₹ 25.9487

Covering Position means to buy what we sell earlier.

Exchange Margin

Margin is charged by bank to exchanger (buyer/seller of currency) on sale or purchase of currency.

Impact of Margin on Exchange Rates

Merchant Rate for Buyer = Inter Bank Rate + Exchange Margin

Merchant Rate for Seller = Inter Bank Rate – Exchange Rate

Swap Points/Forward Points

I. If forward points are given in low – high form i.e. Ascending order then –

LHS Currency (Commodity Currency) would at premium.

Forward Rate = SR + Forward Points 

II. If Forward points are given in High – Low form i.e. Descending order then –

LHS Currency (Commodity Currency) would at discount.

Forward Rate = SR – Forward Points

Modification in Forward Contract

In Case of a forward contract, the time and amount of foreign exchange to be delivered are predetermined and customer is bound by this agreement. If customer may not fulfill their contract as per agreement, in such case forward contract can be altered or modified in following ways: -

Cancellation

Request for Extension

Fulfill of contract before due date

Partial Honor of Contract

In Case of modification original contract will be settled as usual and new contract will executed at new terms. In case of cancellation on or before due date customer will be entitled for profit/loss as case may be but in case cancellation of contract after due date (either by customer or automatically by bank) he will liable for losses only and no entitlement for profit.

Types of Accounts

Nostro: - Our Account with You.

Vostro: - Your Account with Us.

Loro: - Their Account with them.

To Join Us on Facebook Click Here