M-3 Foreign Excchange Management Notes in PDF

PPT on Foreign Exchange Management

1. Subject: Foreign Exchange Management
Module Number: 3
Module Name: International Market Behavior
Syllabus
•Needs and Functions of International Financial Market
•History of foreign exchange
•Function and Structure of the FOREX markets
•Foreign exchange market participants
•Types of transactions and Settlements dates
•Exchange rate quotations
•Currency Derivatives Markets
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2. Foreign Exchange Management
•Eurocurrency Market
•Euro-credit Market
•Eurobond Market
•International Stock Markets
Foreign Exchange Management
AIM:
To make students understand different types of International Financial Market, it functions and
structure.
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3. Course Objectives:
•To understand the Foreign exchange market or FOREX
•To know the different types of FOREX Contract and market , determinant of FOREX, and its effect
on FOREX
•To evaluate the mechanism of FOREX and how different contract buy or sell to earn profit
•To define and memories all the basic concept of FOREX.
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4. Foreign Exchange Management
Course Outcomes:
At the end of the module students will be able:
•Explain the nature and functions of International Markets
•Use types of settlements dates for different transactions
•Analyse the Euro market with respect to bond, currency, and credit.
Table of Content:
•Needs and Functions of International Financial Market
•History of foreign exchange
•Function and Structure of the FOREX markets
•Foreign exchange market participants
•Types of transactions and Settlements dates
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5. Foreign Exchange Management
•Exchange rate quotations
•Currency Derivatives Markets
•Eurocurrency Market
•Euro-credit Market
•Eurobond Market
•International Stock Markets
Needs and Functions of International Financial Market
Meaning: the international financial market is the place in which buyers and sellers transact financial
assets at worldwide level.
For example: Stocks, bonds, currencies, commodities and derivatives at international level.
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6. Foreign Exchange Management
It concern with trade of asset between the agents i.e. surplus to deficit. Who are bind with rules and
regulations?
It is market for foreign exchange, euro currency and related money market, commodity market,
international capital market, swaps, forward, future and other derivative market.
Needs and Functions of International Financial Market
Because of the following four reason due which International financial market required.
1.Difference in interest rates
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7. Foreign Exchange Management
2.International diversification
3.Economic growth
4.Exchange rate fluctuations
Difference in interest rates
By manipulating interest rates, central banks exert influence over both inflation and exchange rates,
and changing interest rates impact inflation and currency values.
⇒ Higher interest rates offer lenders in an economy a higher return relative to other countries.
⇒ Higher interest rates attract foreign capital and cause the exchange rate to rise.
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8. Foreign Exchange Management
The impact of higher interest rates is mitigated, but if inflation in the country is much higher than in
others, or if additional factors serve to drive the currency down
•The opposite relationship exists for decreasing interest rates – that is, lower interest rates tend to
decrease exchange rates.
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9. Foreign Exchange Management
Difference in interest rates
•A country with a consistently lower inflation rate exhibits a rising currency value, as its purchasing
power increases relative to other currencies.
Example, low inflation rate prevail Japan, Germany, and Switzerland, U.S. and Canada.
•Those countries with higher inflation typically see depreciation in their currency about the currencies
of their trading partners. Because of purchasing power decrease.
• High inflation is accompanied by higher interest rates
•Interest rate swap is also arise the need of international financial market. Investor take loan from who
proving lower rate of interest
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10. Foreign Exchange Management
•Another reason is when investor want to replace the fixed interest rate to floating interest rate in
worldwide market.
International diversification
When investor wants to assemble different kind of securities in their portfolio at international level. It is
called international diversification.
Economic growth
Difference in economic growth of the countries bring countries closer because development of one
countries bring development of other by transferring technologies, research and innovative idea.
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11. Foreign Exchange Management
History of foreign exchange
•History begin with Bartering system i.e. Commodities can exchange with other commodities
•Coinage comes into existence like gold, silver and other materials began to be used for foreign trades
•Paper currency arrived promissory notes given out by banks in exchange for holding investors gold and
silver
•Gold standard of the currency being backed by gold held at the bank
•Post WW2- IMF was created , who then put out monetary policies
•All currency were pegged to Dollar ($)
•US dollar was Pegged to Gold @$35/ounce
•In 1913, in London, there were 71 FOREX trading firms, meanwhile Gold standard could not hold up
during the world wars, as countries having to print more money for their financial expenses.
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12. Foreign Exchange Management
History of foreign exchange
•President Nixon announced a freeze on the dollar convertibility to gold due to rising inflation and
gold run possibilities in 1971
•After the abolishment of gold standard in 1973, foreign exchange switched to free-floating system.
•During that time, currency was printed in massive quantities that lead more currency than gold.
•Post 1973 unpegging started, where IMF creates a system of International currency exchange where
Central Banks Exchange currency between themselves.
•1990s with revolution of technology and internet. starting of globalization give new picture to
FOREX
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History of foreign exchange
•In 1994 , Many countries started float their currencies on the market
•In 1998 , first currency trading system introduced in USA and market opened up for everyone to
trade currencies at the spot market in foreign currencies which was adopt at mass level and growth
in trillion $.
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14. Foreign Exchange Management
Structure of the FOREX markets in India
14
Central Govt.
F.E.D.A.I
Dealers
Authorized
stricteRe d ged Full Fled
nges Cha
ed Money Authoriz
ed personsAuthoriz
BIR
Foreign Exchange Management Act

15. Foreign Exchange Management
Structure of the FOREX markets
Authorized Persons
Authorized Financial Full Fledged Others Dealers Institutions Money Changers
Commercial
Banks
State Co-op
Banks
Urban Coop
Banks
Factoring
agencies
FI
Department of
post
UCB, FFMC
Thomas Cook
India Ltd.
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16. Foreign Exchange Management
Structure of the FOREX markets in India
• Bank and money • Inter bank(bank
changers deposit
(Currencies, bank • Central bank
notes, cheque
Retail Wholescale Market market
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17. Foreign Exchange Management
Function of the FOREX markets
To handle the transfer
purchasing power between
countries
To provide credit for international
transactions
To minimize exposure to
the risks of exchange
changes
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Hedging
Credit
Transfer
FOREX

18. Foreign Exchange Management
Foreign Exchange market participants
•Retails Client
•Commercial Bank
•Foreign Exchange Brokers
•Central Banks
•Speculators
•Hedgers
•Arbitrager
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19. Foreign Exchange Management
Nature & Types of Transactions
Foreign transaction reflects AN AGREEMENT between two parties where to two parties
exchange currencies on agreed exchange rate and date.
It also provides protection when exchange rate are unfavorable
Transaction Why (Reason)
Hedging To avoid loss
Arbitrage To purchase currency of two/more countries
Speculation Price less purchase high sell
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20. Foreign Exchange Management
Types of transactions
Types of Transaction
Spot Forward Future Swap Option
transactionTransaction transactionTransaction transaction
Put option
Call option
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21. Foreign Exchange Management
Settlement date
Value Date: Settlement date is a trade settling dates of bond, equities, foreign, commodities etc. that
describe by securities industry
It refers actual day of transfer of funds and securities in the account of buyers and seller.
Usually T+2 system followed by exchange for settlement which also depends on the security and the
convention in the market it was traded.
Settlement location: To affect the transfers, banks in the countries of the two currencies involved must be
open for business. The relevant countries are called settlement locations.
Dealing locations: The location of the two banks involved in the trade is dealing locations, which need not
be the same as the settlement locations.
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Classification of transactions based on the value date
Where T represents the current day when trading takes place and n represents the number of days.
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23. Foreign Exchange Management
1. Cash – Cash rate or Ready rate is the rate when the exchange of currencies takes place on the date of
the deal itself. There is no delay in payment at all, therefore represented by T + 0. When the delivery is
made on the day the contract is booked, it is called a Telegraphic Transfer or Cash or Value – day Deal.
Settlement date
2. Tom – It stands for tomorrow rate, which indicates that
the exchange of currencies takes place on the next working
day after the date of the deal, and is therefore represented
by T+ 1.
3. pot – When the exchange of currencies takes place on
the second day after the date of the deal (T+2), it is called
as spot rate. The spot rate is the rate quoted for current
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foreign – currency transactions. It applies to interbank transactions that require delivery of the purchased
currency within two business days in exchange for immediate cash payment for that currency.
Settlement date - Example
Term of Settlement date
Date of trade Term Settlement date
January 25, 2024 CASH January 25, 2024
January 25, 2024 TOM; T+1 January 27, 2024
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January 25, 2024 SPOT; T+2 January 30, 2024
4. Forward – The forward rate is a contractual rate between a foreign exchange trader and the trader’s client
for delivery of foreign currency sometime in the future. Here, the rate of a transaction is fixed on the
transaction date for transactions in future. Standard forward contract maturities are 1,2,3,6, 9, and 12 months.
•E.g. 1 month forward purchase of pounds against dollars on 1st Jan. Value date has arrived as follows:
The value date for the spot transaction: is 3rd Jan. Value date for the forward transaction:
3rd Jan + 1 calendar month = 3rd Feb
•If the 3rd Feb. is a holiday in any bank in the dealing location or settlement location deposit will take place
on the next business date.
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•But this must not take you for next month, for e. g. if the value date is Feb 28 is value date and it is
ineligible you cannot shift it to 1st March it must be rolled back to Feb 27.
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Exchange rate quotations
It refers amount of currency to exchange the one currency with another.
Here one unit of base currency quoted in term of foreign currency whose unit depends on relative value.
For example: 1$ = 80.98 Rs.
Types of Forex quotation
Spot rates/ Inter bank / cross
Bid /ask prices Direct /indirect forward rates
currency rates
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Currency Derivatives Markets
•The concept of the currency derivative market reflects 24 hr. of market in reality.
•All over the world business hours are different e.g. as per the Indian time, UK and Europe opens during
the afternoon followed by US, Australia and Japan and the India open.
•Currency market is most active when both Europe and US is open.
•Nearly 2/3
rd
of the day’s activity take place in the morning hours.
•When European market have closed and Tokyo, Singapore and Hong Kong have yet to opened, Activity
normally becomes very slow in New York during mid to late afternoon.
•International currency derivative market is place or system where participants from all over the world
purchase and sell different currencies.
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Currency Derivatives Markets
Banks, corporations, central banks, investment management companies, hedge funds, small-time forex
brokers, and individuals are among the participants.
The importance of the foreign exchange market stems from its role in facilitating international trade,
business acquisitions, loans, and investments.
How the Foreign Exchange Markets Operate
The currency market (also known as the foreign exchange market) is a one-stop marketplace where
different currencies can be bought and sold by various participants operating in diverse jurisdictions
around the globe.
This market plays a very pivotal role in the conduct of international trade and the financial sector.
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Currency Derivatives Markets
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Mechanism of Currency Derivatives Markets
•With an average daily trading volume of $5 trillion, the foreign exchange market is the biggest
financial market in the world.
•Transactions in this market take place not on a single exchange but rather on a global computer
network that connects major banks and brokers from all over the world.
•To make it easier to convert currencies that are required as a result of international trade, the currency
market, also known as the foreign exchange market (or "forex"), was established.
•For instance, a Indian business would like to be paid in INR if it sold a product to a U.S. business. The
American business would have to work with its bank to arrange a currency exchange in order to pay
the Indian business.
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Currency Derivatives Markets
The bank account of the American company would be debited in dollars. The money would be transferred
from the American bank to the Indian business's bank. The money would be credited to the Indian
company's account after being translated to INR at a predetermined exchange rate.
Because it enables businesses to sell their products abroad and be compensated in their home currencies, the
global currency market aids in the facilitation of international trade.
Since a company's expenses, such as payroll, are in its own currency, it must be paid in that currency.
The FX market is distinct from the stock market in that a clearinghouse is not used. Without an intermediary
to guarantee that each party carries out its duties, transactions take place directly between the parties.
Currency prices are expressed in terms of other currencies rather than having a fixed value.
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34. Foreign Exchange Management
Currency Derivatives Markets
Currency Market Stock Market
• Currency is traded. • Stock is traded.
• Factors like inflation and unemployment affect
this market.
• Factors like the company’s cash flow, profits,
and debt level affect this market.
• This market is more liquid than the stock
market.
• The stock market is less liquid than the market
forex market.
• For the trading purpose, any two currencies are
paired and traded.
• For trading purposes, the trader takes the stock
of any one company.
• Trading hours are 24/7, five days a week.
• Trading hours are 9:30 am to 4:00 pm, for five
days a week.
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35. Foreign Exchange Management
Eurocurrency Market
The currency market for money issued outside of a country where it is legal tender is known as the eurocurrency
market. Banks, international businesses, mutual funds, and hedge funds all use the eurocurrency market.
They want to avoid the regulations, tax laws, and interest rate ceilings that are frequently seen in
domestic banking, especially in the United States.
The phrase "eurocurrency" is a generalization of "Eurodollar," which is distinct from the euro, the official currency
of the EU. There are numerous financial hubs outside of Europe where the euro-currency market is active.
Eurocurrency market is the money market for borrowing and lending currencies that are held in the form of deposits
in banks located outside the countries where the currencies are issued as legal tender.
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36. Foreign Exchange Management
Eurocurrency Market
The US dollar, the Euro, the British pound, and the Japanese
yen are the four primary Eurocurrencies; they represent the
major international economies.
The Eurodollar market and the Euro yen market are
the two most popular of the several eurocurrency
exchanges. Additionally, there are a number of minor
eurocurrency exchanges, such as the euro euro and
europound markets.
The money market for any currency placed outside of its native market is known as a eurocurrency market. The
major players in these markets include banks, multinational firms, mutual funds, and hedge funds. Because they
can offer situationally cheaper interest rates for borrowers and higher interest rates for lenders than local banks,
the eurocurrency markets are typically preferred as a source of credit.
This is due to the fact that the eurocurrency market has fewer regulatory requirements, tax regulations, and
frequently no interest rate limitations. But there are greater hazards, especially when banks go through times of
weak solvency, which can result in a bank run.
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37. Foreign Exchange Management
Eurocurrency Market
Eurodollar Market
Holdings of US dollars that fall beyond the US Central Bank's purview are included in the Eurodollar market. Two
main methods may result in these assets.
First, purchases of products and services made in US dollars are made from suppliers who have accounts with European
banks; these suppliers may be European or not.
Second, Eurodollar deposits come from US dollar investments in European banks, typically for better interest rate
returns.
Eurocurrency Market
Over 90% of international trade agreements are thought to be financed by the Eurodollar market, which is currently the
greatest global source of capital for nations and corporations.
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The most common type of eurocurrency is this one. approximately 75% of all accounts held in euro currency
worldwide. Political and economic forces are frequently blamed for this prevalence.
1.The US's economic cloud, particularly its sway over global affairs and the slow decline of foreign currencies during
the 1950s, when the Euro was first introduced.
2.The Eurodollar market's lack of interest caps and minimal supervision allows for favorable interest rates for both
lenders and borrowers.
Eurocurrency Market
Euroyen Exchange
•In the Euroyen market, yen are deposited in banks that are not under the control of the Japanese Central Bank.
•During the Japanese asset price bubble that saw Japan pursue financial liberalisation and internalisation, the
market first appeared in 1984.
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39. Foreign Exchange Management
•Interest rates in Japan significantly decreased during the 1990s, making investments with the comparatively
high interest rates offered by Euroyen accounts appealing.
•Non-Japanese businesses now successfully solicit investments from Japanese investors using Euryen deposits.
•Euroyen bonds enable overseas businesses to circumvent Bank of Japan (BoJ) rules and Tokyo Stock
Exchange bond registration requirements (TSE).
Eurocurrency Market
Euro Euro Market
The Euro Euro market involves deposits of euros outside of the jurisdiction of the European Central Bank
Europound Market
The Euro pound market involves sterling deposits outside of the jurisdiction of the Bank of England.
Eurocurrency has two potential effects.
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•First of all, it can be the culmination of all the national currencies and financial systems that are a part of the
global offshore banking network.
This is not restricted to the four eurocurrencies' domestic markets or the US dollar, euro, yen, or pound.
For instance, a Danish bank that decides to preserve its Swiss franc holdings in London would also be regarded as
being a part of the eurocurrency network.
Eurocurrency Market
• Second, it can refer to the totality of the data processing and communication lines utilised to make it
possible for stakeholders all over the world to communicate with one another and take part in the
eurocurrency market. Eurocurrency Marks are used in the worldwide financial system, and their market
centers are dispersed throughout the world.
Therefore, to connect market centers and facilitate communications and transactions, strong financial technology
and information systems are needed.
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For instance, high-speed communication networks that connect trading centers enable quick euro banking
transactions and gave rise to the overnight market.
Euro-credit Market
•The term "Eurocredit Market" describes a group of banks that accept deposits and offer loans in
significant amounts and in numerous different currencies.
•The only difference between the Eurocredit loans and so-called Eurocurrency loans is that the
Eurocredit loans have a longer period.
•The banks that make up this market are the same institutions that make up the Eurocurrency market.
•A loan with a currency other than the lending bank's home currency is referred to as a Eurocredit.
•The idea is closely related to that of "eurocurrency," which is any currency that is kept or exchanged
outside of its nation of issuance. A Eurocredit loan provided by a U.S. bank would be one that is not
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denominated in USD, as opposed to a Eurodollar, which is a dollar deposit stored or traded outside of
the U.S.
Euro-credit Market working
Due to its simplicity of conversion and lack of domestic trading constraints, the eurocurrency market is a
significant source of funding for international trade. Similar banks participate in both the eurocurrency and
Eurocredit markets, but the loans offered on the Eurocredit market are often bigger and have longer terms.
The Eurocredit market has been able to grow dramatically as the global financial system has become more
linked and deregulated over the past few decades, with many nations first removing capital controls before
allowing foreign banks to participate in domestic banking sectors.
Eurocredit supports both domestic and international investment finance as well as the movement of capital
across nations. Matching surplus units (who deposit money at the bank) with deficit units is a key responsibility
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of banks (who borrow from the bank). The ability to do this internationally, across national boundaries and
between different currencies, increases the liquidity and efficiency of the finance markets.
Euro-credit Market working
•In the Eurocredit market, banks may also participate in syndicated loans, in which a loan is made by a
collection (syndicate) of banks.
•Syndicated loans are frequently used when the loan amount is too large for one bank to handle on its
own and lower the risk of borrower default for each individual bank lending money.
•The fact that the banks in a syndicate frequently have different nationalities while lending in the same
currency is an illustration of how the Eurocredit market might help to increase the flow of money across
borders.
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•A financial instrument known as a "Eurobond" is one that is issued on a market or in a nation where the
native currency is not used.
Eurobond Market
•Investors, banks, borrowers, and trading intermediaries all participate in the purchase, sale, and transfer
of Eurobonds on the market.
•Eurobonds are a specific sort of bond issued by governments and businesses in Europe, but they are
frequently pegged to non-euro currencies like the dollar and the yen.
•Additionally, international organizations like the World Bank issue them.
•Strong interest in bonds denominated in the euro has also been sparked by the introduction of the euro,
but some experts are concerned that the bonds' appeal may be diminished by new EU tax harmonization
regulations.
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•Eurobonds are distinctive, intricate, and relatively new financial products.
•Although they made their debut in 1963, they did not become well known abroad until the early 1980s.
•Since then, they have grown to be a sizable and influential part of global finance.
Eurobond Market
Because they may provide specific tax shelters and anonymity to their buyers, Eurobonds
gained popularity with issuers and investors. However, they varied significantly from
foreign bonds in essential ways. Additionally, they could provide borrowers with
advantageous interest and currency conversion rates.
Due to their low face values, Eurobonds attract businesses with a limited capital market and
offer investors a variety of investment alternatives. Despite the word "euro" being part of
the phrase, it has nothing to do with Europe or its money.
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Eurobond Market
•The bond's name is derived from the eurocurrency it is denominated in, such as Eurodollar, Euroyen, or
europound bonds, among others. Additionally, it differs from Eurobonds, which start with a capital "E" and
are issued by members of the European Union and the Eurozone.
•The first 15-year Eurobonds in Eurodollars were issued by the Italian company Autos trade for $15 million
in 1963. These dollar-based investments were organised by the London-based investment bank S.G.
Warburg & Co.
•In the end, it assisted European investors in lowering the interest equalisation tax in the US.
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Eurobond Market
•These bonds are issued by organizations that require fixed-rate, time-limited debt in foreign currency.
Private companies, international financial institution syndicates, and governments are some
examples of these entities.
•Any government that accepts foreign currency has these bonds introduced there. The ideal example
of a Eurobond is a Japanese yen external bond issued by an Australian firm in the United States.
•These bonds can be bought on foreign stock exchanges and are quite liquid. In addition, regardless of
the nation or currency denomination, these bonds are immune from withholding tax, disclosure
requirements, and ownership records. Borrowers are required to pay a fixed interest rate even if an
external bond allows the issuer to select the nation and currency of issuance.
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Eurobond Market
Case study
Senegal, Rwanda, and South Africa have recently sought investors to assist in the coronavirus
vaccine development in Africa. With over 1.3 billion people, the continent has only managed to
vaccinate roughly 1% of them against the deadly virus.
Even though governments are in discussions with partners to get funds, they are also considering
external bonds to obtain financing to pay vaccine manufacturers.
Case study
Assume a British corporation wants to start a new business in Canada and needs a large sum of money
in the local currency, i.e., Canadian dollars. Because the firm does not have adequate funds in the
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requisite fiat money, it considers borrowing the funds from Canada. It realizes, however, that the cost
of borrowing would be too high.
Soon, it learns about the Canadian immigrant population in Japan and introduces Canadian dollar
denominated external bonds to the Japanese market.
Investors in Japan who have Canadian dollars in their bank accounts invest in the Eurobond market
and buy bonds in exchange for those dollars. As a result, it enables the British company to obtain
lower-cost financing to establish the venture in Canada.
International Stock Markets
The international stock market refers to all the international markets that negotiate
stocks from their domestic companies. For example, you can buy stocks from Apple at
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50. Foreign Exchange Management
the local American market, but to get stocks from the Japanese Sapporo, you need to go
the international (Japanese) market. Most countries have their own stock exchange.
International Stock Markets
The indexes track the fluctuations in the value of stocks of one market. Some of the most
important indexes are the Dow Jones and NASDAQ, operating in New York, the Nikkei 225 in
Tokyo, the DAX in Frankfurt, and the FTSE in London.
The potential earning of stocks from developing markets is sometimes higher but also involves
more risks, especially because of currency fluctuations. Therefore, international markets usually
represent only a fraction in the portfolio of commercial banks and other institutional investors,
often between 15 and 25%. The difference remains in domestic assets.
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Summary
•The International Financial Market is the place where financial wealth is traded between individuals (and
between countries). It can be seen as a wide set of rules and institutions where assets are traded between
agents in surplus and agents in deficit and where institutions lay down the rules.
•By manipulating interest rates, central banks exert influence over both inflation and exchange rates, and
changing interest rates impact inflation and currency values.
•The main functions of Forex markets: Transfer, Credit and Hedging
•Foreign Exchange market participants are: Retails Client, Commercial Bank, Foreign Exchange Brokers,
Central Banks , Speculators, Hedgers, Arbitrager
•Settlement date is a trade settling dates of bond, equities, foreign, commodities etc. that describe by
securities industry.
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52. Foreign Exchange Management
Summary
•Exchange rate quotations can be quoted in two ways – Direct quotation and Indirect quotation.
•Currency Derivatives are exchange-traded contracts deriving their value from their underlying asset, i.e.,
the currency. The investor buys or sells specific units of fixed currency on a pre-specified date and rate.
•The eurocurrency market is the money market for currency outside of the country where it is legal tender.
The eurocurrency market is utilized by banks, multinational corporations, mutual funds, and hedge funds.
•Eurocredit market comprises banks that accept deposits and provide loans in large denominations and in a
variety of currencies. The banks that constitute this market are the same banks that constitute the
Eurocurrency market; the difference is that Eurocredit loans are longer-term than so-called Eurocurrency
loans.
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53. Foreign Exchange Management
Summary
•A Eurobond is a debt instrument that's denominated in a currency other than the home currency of the
country or market in which it is issued. Eurobonds are frequently grouped together by the currency in
which they are denominated, such as Eurodollar or Euroyen bonds.
•The international stock market refers to all the international markets that negotiate stocks from their
domestic companies.
Self Assessment Question
1. Which of the following is the function of forex market.
a.Credit
b.Hedge
c.Both of these
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d.None of these Answer: c
Self Assessment Question
2. when the abolishment of gold standard and free floating system start.
a.1970
b.1873
c.1983
d.1973
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Answer: d
Self Assessment Question
3. The currency market also known as the
a.Foreign exchange market
b.Future Market
c.Forward Market
d.None of these
Answer: a
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Self Assessment Question
4. Tom reflects
a.T
b.T+0
c.T+1
• d. T+2
Answer: c
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Self Assessment Question
5. what is the difference between Forward currency market and future currency
market a. Standardization
b.Customization
c.Not over the counter market
d.A and B
Answer: d
Self Assessment Questions: SOLVED NUMERICAL PROBLEMS
1.If direct quote is Rs 39/US $, how can this exchange rate be presented under indirect quote?
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• Solution
• US $ 1/Rs 39 = US $ 0.0256/Re.
2. If indirect quote is US $ 0.025/Re, how can this exchange rate be shown under direct quote?
• Solution
• Re 1/US $ 0.025 = Rs 40/US $.
3. Consider the following bid-ask prices: Rs 40 − 40.40/ US $. Find the bid-ask spread.
• Solution
•Bid-ask spread = {(ask rate - bid rate)/ask rate} × 100
•(40.40 − 40.00)/40.40 = 0.0099 or 0.99%
Self Assessment Questions: SOLVED NUMERICAL PROBLEMS
4. Find out the forward rate differential if spot rate of US $ is Rs 40.00 and one-month forward rate is
Rs 40.80.
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• Solution
•Forward rate differential = {(For. rate – spot rate)/spot rate} × A × 100
•360/30 {(40.80 − 40.00)/40.00} × 100 = 2.0% It will be known as a forward ...
Document Links
Topic URL Notes
Direct Quote
https://corporatefinanceinstitute.com/resources/foreignexchange/direct-
quote/
Quotation and FOREX
Types Of Forex
Market
https://www.icsi.edu/media/webmodules/publications/FTFM_F
inal.pdf
International FOREX
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60. Foreign Exchange Management
Video Links
Topic URL Notes
What Is Forex?
SIMPLIFIED
https://www.youtube.com/watch?v=NhFlqFVBmx
c
Forex and Types of Forex market
Exchange Rate Quotation (Two
Way Quotation)
https://
www.youtube.com/watch?v=Of8v_MaQXWQ
Exchange Rate Quotation
E- Book Link
E-book name
Chapter
1
Page No.Notes URL
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61. Foreign Exchange Management
Financial
Treasury and
Forex
Management
Lesson 12381-421 Basics of Foreign Exchange
https://www.icsi.edu/media/web
modules/publications/FTFM_Fi
nal.pdf
References
•Chromeextension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.srcc.edu/sites/default/files/BA
E_Sem%204_BCH%204.4(B)_%20ERDFEM_W2_CG_Unit%204%20B2_0.pdf
•https://www.linkedin.com/learning/finance - strategies - for - business - leaders/currency - rates - and - fx rates?
u=92695330
•https://www.icsi.edu/media/webmodules/publications/FTFM_Final.pdf
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3.V.I.J Madhu (2010) International Financial Management , 3th edition
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4.P. G. Apte (2010) International Finance Management. 1st edition, McGraw Hill.
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