Download Module - 13 Foreign Exchange Quotations

NPTEL
International Finance
Vinod Gupta School of Management , IIT. Kharagpur .
Module - 13
Foreign Exchange Quotations: Cross, Rates,
TT Buy/Sell Rates, TC Buy/SellRates
Developed by: Dr. Prabina Rajib
Associate Professor
Vinod Gupta School of Management
IIT Kharagpur, 721 302
Email: [email protected]
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NPTEL
International Finance
Vinod Gupta School of Management , IIT. Kharagpur .
Lesson 13
Foreign Exchange Quotations: Cross Rates,
TT Buy/Sell Rates, TC Buy/Sell Rates
Highlights & Motivation:
The objective of the module is to understand the nuances with foreign exchange
quotations. Overtime many standards have been developed to bring in uniformity in
foreign exchange quotations. Understanding these standards, quotation methods, %
appreciation/depreciation of currency are fundamental to undertaken any forex trading.
Learning Objectives:
In this module, the following aspects are discussed in detail
•
Cross Rate calculation
•
Understanding currency appreciation and depreciation
•
Reasons for currency appreciation and depreciation.
•
Understanding TT Buying /Selling Rates, TC Buying/Selling Rates, and Bill
Buying/Selling Rates.
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NPTEL
International Finance
Vinod Gupta School of Management , IIT. Kharagpur .
13.1: Introduction:
Many currency pairs are not directly quoted i.e dealers do not offer a rate for these
currency pairs. For example, an Indian importer is importing oil from Azerbaijan. The
company from Azerbaijan wants that Indian exporter must make the payment in local
currency i.e. Azerbaijanian Manat (AZN). As no bank or dealer is offering INR/AZN
quote, the Indian company has to use a via-media currency to convert the INT to AZN to
make payment. The exchange calculated in this round about manner is known as cross
rates.
Depending on host of factors, a currency may appreciate or depreciate against another
currency. The calculation methodology for currency appreciation and depreciation rate of
is also briefly discussed in this session.
Besides offering spot quotations, banks also quote spot rates for buying/selling or
exchanging TC (Travelers Cheques) and TT (Telegraphic transfers). Banks also buy and
sell bills at different spot rates. All these details are also discussed i
13.2: Spot Rates and Cross Rates:
A cross rate is a rate which can be calculated from two other rates. For calculation of
cross rates, both rates must have one common currency. Suppose USDCAD (US Dollar
and Canadian Dollar) rate is given along with and USDAUD (US Dollar and Aussie
Dollar) quotations as listed in Table 13.1. The rates for CADAUD (or AUDCAD) can
be calculated from the above two quotes.
Table 13.1: Spot Rates and Cross Rate Calculation
USDCAD
Bid
1.1641
Ask
1.1646
USDAUD
Bid
1.2948
Ask
1.2956
CADAUD
Bid
?
Ask
?
From the above quotations, cross rate between CADAUD has to be calculated
Cross rate can be calculated as follows:
•
•
•
•
Bank buys 1USD and pays (sells) 1.1641 CAD
Bank sells 1 USD and receives (buys)1.1646 CAD
Bank buys 1 USD and pays (sells) 1.2948 AUD
Bank sells 1 USD and receives(buys) 1.2956 AUD
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International Finance
Vinod Gupta School of Management , IIT. Kharagpur .
To get the bid rate for CADAUD (CAD as base currency and AUD as quote currency),
the bank must sell AUD and buy CAD. This is achieved in two steps ie. the bank must
sell AUD and buy USD and simultaneously sell USD and buy CAD.
This indicates that 1.1646 CAD = 1.2948 AUD. In other words, 1 CAD = 1.1118 AUD.
To get the ask rate for CADAUD, the bank must sell CAD and buy AUD. This is
achieved in two steps ie. the bank must sell CAD buy USD and simultaneously sell USD
and buy AUD.
This means that 1.1641 CAD = 1.2956 AUD. In other words, 1 CAD = 1.1129 AUD.
Hence the cross rate, given in Table 13.2 is
Table 13.2 :CADAUD cross rates
Bid
1.1118
Ask
1.1129
The following table, Table 13.3 reports the spot rates quoted by different banks for
interbank transactions. Along with the spot rates, the cross rates have been calculated and
reported.
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NPTEL
International Finance
Vinod Gupta School of Management , IIT. Kharagpur .
Table 13.3: Spot Rates and Cross Rates
http://www.ukforex.co.uk/cgi-bin/interbank-spot-rates.asp
Spot Rates
Cross Rates
Major Rates
Bid
Ask
Bid
Ask
AUD/USD
0.9145
0.9150
GBP/AUD
1.8014
1.8019
USD/CAD
1.0577
1.0582
GBP/CAD
1.7439
1.7444
USD/CHF
1.0164
1.0170
GBP/CHF
1.6751
1.6756
USD/DKK
5.0078
5.0100
GBP/DKK
8.2549
8.2571
EUR/USD
1.4853
1.4858
GBP/EUR
1.1090
1.1095
GBP/USD
1.6474
1.6479
GBP/GBP
1
1
USD/HKD
7.7482
7.7504
GBP/HKD
12.7741
12.7763
USD/JPY
90.49
90.54
GBP/JPY
149.18
149.23
USD/NOK
5.6846
5.6868
GBP/NOK
9.3714
9.3736
NZD/USD
0.7159
0.7164
GBP/NZD
2.2998
2.3003
USD/SEK
6.9889
6.9911
GBP/SEK
11.5166
11.5188
USD/SGD
1.3886
1.3891
GBP/SGD
2.2884
2.2889
USD/ZAR
7.4267
7.4289
GBP/ZAR
12.2405
12.2427
Cross currency rates can also be calculated using three currency pairs.
13.3: Appreciation and Depreciation of Spot Rate:
A currency appreciates against another currency when its value rises in terms of the other
currency. In a currency pair, when the value of one currency rises, obviously the value of
other currency pair declines.
For example on January 1 2010, the spot rate was INR 48.25/USD. Suppose, on February
1 2010, the spot rate is INR 46.75/USD. During the one month period, as the value of
INR has risen in comparison to USD. In other words, INR has appreciated or USD has
depreciated.
In a simpler way, the concept can be understood as follows: On 1st January 2010, 1 USD
is equivalent to INR 48.25. Just after a month on 1st February 2010, 1 USD is equivalent
to INR 46.75. This clearly shows that USD value has gone down compared to INR.
The magnitude of percentage appreciation/depreciation (for the base currency USD)
is measured as follows:
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International Finance
Vinod Gupta School of Management , IIT. Kharagpur .
new − old 46.75 − 48.25
=
= −3.11%
old
48.25
USD has depreciated by 3.11%. The negative value indicates depreciation.
% appreciation / depreciation base currency (USD ) =
In a similar token, to find out the percentage appreciation/depreciation for INR can be
found out by first converting the existing quotations so that INR becomes the base
currency.
Hence the spot rate of 1st January 2010 = 1/48.25 = USD 0.0207/INR
The spot rate on 1st February 2010 = 1/46.75 = USD 0.0213/INR
The magnitude of percentage appreciation/depreciation (for the base currency INR) is
measured as follows:
% appreciation / depreciation base currency ( INR ) =
new − old 0.0213 − 0.0207
=
= 3.21%
old
0.0207
INR has appreciated by 3.21%. The positive value indicates appreciation.
Box 6.1: Currency Appreciation/Depreciation
1st January 2010, USDINR is 48.25.
1st February 2010, 1 USDINR is 46.75
USD has depreciated by 3.11% or INR has appreciated by 3.21%.
Important to note: One currency will depreciate and other will appreciate but the amount
of percentage depreciation/appreciation will be different.
Let us take another example to understand this aspect.
Spot rate of 1st January 2010 = INR 48.25/ USD. Spot rate on 1st February 2010 =
INR49.40/USD. In this case the INR has depreciated or USD has appreciated.
% appreciation / depreciation base currency (USD) =
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new − old 49.40 − 48.25
=
= 2.38 %
old
48.25
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NPTEL
International Finance
Vinod Gupta School of Management , IIT. Kharagpur .
1
1
−
new − old 49.40 48.25
% appreciation / depreciation base currency ( INR) =
=
= −2.32 %
1
old
48.25
Without even converting the spot rate to USD price of INR, the %
appreciation/depreciation ( for INR) can be directly calculated as
old − new 48.25 − 49.40
=
= −2.32 %
new
49.4
Figure 13.1 plots the INR rate per USD from August 1998 to August 2011 (these two
dates have been chosen randomly). These rates have been downloaded from RBI website.
As discussed in Session 11, on a daily basis RBI reports a USD-INR rate – popularly
known as RBI reference rate.
% appreciation / depreciation base currency ( INR) =
Figure 13.1: USD-INR Rate ( RBI Refernce Rate)
55
50
45
40
35
30
13.4: Reasons for Currency appreciation and depreciation:
Though many factors influence the domestic exchange rate, in this section, some
important factors affecting the exchange rate are listed.
• Difference in national inflation rates: The currency of a country experiencing
higher inflation will depreciate and vice versa.
• Changes in the real interest rates: Currency of a country with higher real interest
rate will appreciate.
• Investment climate: A country with better investment climate will attract
investment thus leading to appreciation of the currency.
• Political uncertainty: a country with greater degree of political uncertainty will
exhibit higher depreciation.
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NPTEL
International Finance
Vinod Gupta School of Management , IIT. Kharagpur .
13.5: Interpreting TC/TT Rates:
Besides quoting spot, forward rates for different maturities banks and financial
institutions also quote TC Buying/Selling rate and TT Buying/Selling rate. All these
quotes are spot quotations. A typical bank or financial institutions quotation may look
like the details given in Table 13.4.
Table 13.4: TC/TT rates and interpretation.
Cash
Buying
USDINR
48.44
EUROINR 66.05
GBPINR
73.53
Cash
Selling
50.62
68.94
76.61
TC
Buying
48.61
66.15
73.72
TC
Selling
50.50
68.83
76.50
T.T
Buying
48.78
66.52
74.09
T.T
Selling
50.22
68.36
75.97
As we know that Spot Buying (Cash) is the rate at which the bank buys one unit foreign
currency and gives INR.
Similarly TC (Travelers Cheques) buying rate indicates the rate at which bank buys
Travellers cheques and pays INR. TC selling rate is the rate at which banks sell
Travellers cheques and receives INR. Obviously the TC buying rate will be lesser than
TT selling rate.
TT (Telegraphic Transfer) buying rate indicates the rate at which bank convert foreign
inward remittances to INR. TT Selling rate indicates the rate at which the bank sends an
outward remittance through telegraphic transfer.
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International Finance
Vinod Gupta School of Management , IIT. Kharagpur .
13.6: Interpreting Bill Buying/Bill Selling Rates:
Banks also provide spot quotations for Bill buying/bill selling rates.
Bill Buying rate: Suppose an Indian exporters has exported goods and the foreign
counterpart has raised a bill. The Indian exporter would sell the bill to the bank (bank will
buy the bill) and bank will pay a discounted value to the exporter. At the maturity of the
bill, the bank will place the bill to the drawee (counterparty to the Indian exporter).
Depending on the maturity period of the bill, the bank is going to charge a higher
commission. Hence the Bill buying rate will be lesser than TT Buying rate. In a bill
buying, the bank will pay INR to the exporter and buy foreign currency from the
exporter.
Bill Selling Rate: Suppose an Indian importer has raised a bill to the foreign exporter.
On the maturity of the bill, the Indian importer has to pay to the foreign counterpart
through the bank. In this case, the bill selling rate would be applicable. In bill selling, the
bank will pay foreign currency and buy INR from importers. Bill selling is higher than
TT selling rates.
Table 13.5 shows the TT Buying/selling rates and Bill Buying/Selling Rates.
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International Finance
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Table 13.5: TT Buying/Selling and Bill Buying/Selling Rates
FOREIGN EXCHANGE RATES ON ALL RATES : PER UNIT
http://www.eximin.net/forex_rates/fer_template.asp
Name of the TT Selling Bill
Selling TT
Buying Bill Buying Rates
Currency
RatesRates
for Rates-Clean
for EXPORTS
clean
IMPORTS
Remittance
Remittance
Inwards
Outwards
U.S.Dollar
45.01
45.10
44.50
44.47
U.K.Pound
68.98
69.11
67.71
67.67
Euro
60.92
61.04
60.09
60.05
Japanese Yen
47.85
47.95
47.03
47.00
(100)
Swiss Franc
42.61
42.70
41.91
41.89
Swedish
6.31
6.33
6.18
6.18
Kroner
Canadian
44.82
44.91
44.05
44.02
Dollar
Australian
41.57
41.65
40.85
40.82
Dollar
Singapore
32.39
32.45
31.69
31.67
Dollar
Hong
Kong
5.82
5.83
5.70
5.70
Dollar
It can be clearly seen from Table13.5 that the banks requires a higher INR rates for
selling 1 USD in Bill Selling Rate in comparison to selling 1 USD through Telegraphic
Transfer. The reverse happens in case of TT Buying rate and Bill Buying rate. When the
bank buys 1 USD using Telegraphic Transfer, it pays higher INR compared to buying 1
USD using Bill Buying rate. In other words, the bid-ask spread rate for Bills is the
highest.
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International Finance
Vinod Gupta School of Management , IIT. Kharagpur .
Multiple choices questions and fill in the Blanks:
1. The value of the Australian dollar (A$) today is $0.73. Yesterday, the value of the
Australian dollar was $0.69. The Australian dollar ________ by _______%.
i. depreciated; 5.80
ii. depreciated; 4.00
iii. appreciated; 5.80
iv. appreciated; 4.00
2. Assume the Canadian dollar is equal to USD 0.78 and the value INR is equal to
USD 0.01923. The value of the INR in Canadian dollars is:
i. about 0.015 Canadian dollars.
ii. about 0. 0.02466 Canadian dollars.
iii. about 66.66 Canadian dollars.
iv. about 51.99 Canadian dollars.
v. None of these.
3. Among TT Buying/selling and Bill Buying and selling rate which one will have a lowest
INR per USD for one bank at any given point of time.
i)
ii)
iii)
iv)
TT Buying rate
TT selling Rate
Bill Buying Rate
Bill Selling Rate
4. If Euros are quoted at price $1.2055 in Citibank in New York, this means that:
i)
ii)
iii)
iv)
every other bank is quoting the same price.
this is the price used by the Central Bank.
large banks will quote their own rate while small banks will follow the lead
of Citibank.
most banks will probably be in that range.
5. Which of the following might affect the cost of a trip to Japan by a resident of Britain?
a)
b)
c)
d)
The depreciation of the Euro.
The depreciation of the US dollar.
The time at which the British resident purchases Yen.
All of the above.
6. The statement “the yen rose today from 121 to 117” makes sense because
a)
b)
c)
d)
e)
f)
The U.S. gains when Japan loses.
These numbers measure yen per dollar, not dollars per yen.
These numbers are indexes, defined relative to a base of 100.
These numbers refer to time of day that the change took place.
The yen is a reserve currency.
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International Finance
Vinod Gupta School of Management , IIT. Kharagpur .
Short Questions:
7. What are the difference between Bill Buying rate, TT buying rate and TC selling
rate? Give examples when a bank would quote these three rates.
8.
During a period 5 months Euro/USD rate changed from Euro0.9745/USD to Euro
0.9920/USD. Find out the annual % appreciation/depreciation for Euro.
Answers to Multiple Choice Questions:
1.
2.
3.
4.
5.
6.
(iii)
(ii)
(iii)
( iii)
(c)
( b)
References:
1. ISO
4217
currency
and
funds
name
and
http://www.iso.org/iso/support/currency_codes_list-1.htm
code
elements,
2. Spot Rates and Cross Rates, http://www.ukforex.co.uk/cgi-bin/interbank-spotrates.asp.
3. The Foreign Exchange Market, (Chapter 4), Multinational Business, Finance,
Stone Hill et al. 10th Edition.
4. Exchange Rate data, http://www.rbi.gov.in
5. FOREIGN EXCHANGE RATES ON ALL RATES : PER UNIT
http://www.eximin.net/forex_rates/fer_template.asp
A
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