NPTEL

International Finance
Vinod Gupta School of Management , IIT. Kharagpur .

Module - 11
Foreign Exchange Quotations:
Spot Market

Developed by: Dr. Prabina Rajib

Associate Professor
Vinod Gupta School of Management
IIT Kharagpur, 721 302
Email: prabina@vgsom.iitkgp.ernet.in

Joint Initiative IITs and IISc Funded by MHRD

-1-

NPTEL
International Finance
Vinod Gupta School of Management , IIT. Kharagpur .

Lesson - 11
Foreign Exchange Quotations: Spot Market
Highlights & Motivation:
The objective of the module is to understand the nuances with foreign exchange
quotations- specifically the spot quotations. Over time many standards have been
developed to bring in uniformity in foreign exchange quotations. Different aspects of
spot quotations are discussed in detail in this session

Learning Objectives:
In this module, the following aspects are discussed in detail

ISO and 3-letter currency code

Foreign exchange quotation types.

o Direct/Indirect
o American/European
o Base and variable/term/quote currency
o Base currency appreciation/depreciation

RBI Reference Rate

Joint Initiative IITs and IISc Funded by MHRD

-2-

NPTEL
International Finance
Vinod Gupta School of Management , IIT. Kharagpur .

11.1: Introduction
Many standards have evolved overtime to standardize foreign exchange quotations.
Forex quotations can be expressed as Direct/Indirect, American/European, Base
and Variable/term/Quote currency. It is important to understand these differences as this
forms the fundamental of any forex trading.
Though regularly we here todays exchange rate is INR 45.75, but this can be termed
as laymans expression as foreign quotations have two rates associated i.e, bid rate and
ask rate. Forex dealers keep changing bid-ask spread depending upon their requirement.
Hence in the subsequent these aspects are discussed in greater details. The focus of this
module is to understand these concepts in relation to spot rates.

11.2. ISO and 3-letter currency code:

It is interesting to note that, each currency is represented as 3-letter code as
prescribed by International Organization of Standardization (ISO). The way ISO
9000 deals with quality standards, ISO 4217 deals with standardization of currency
codes. ISO 4217 specifies a 3- letter alphabetic code as well as 3-digit numeric code.
The first two letters represent the country while the last letter represents the Currency.
For example, USD, INR and AUD are currency of USA, India and Australia respectively.
As it can be seen that the first two letters represent the country name while the last letter
indicates the currency name. In INR, IN stands for India while R stands for
Rupee. Similarly, even though, in common parlance, Peso is the currency of Mexico,
as per the ISO standard, Mexicos currency is represented as MXN. Table 11.1 lists
these details for four countries.
Table 11.1: ISO 3-letter currency code
http://www.currency-iso.org/iso_index/iso_tables/iso_tables_a1.htm
Entity

Currency

Alphabetic Code

Number code

Argentina

Argentine Peso

ARS

032

Hong Kong

Hong Kong Dollar

HKD

344

Iraq
Maldives

Iraqi Dinar
Rufiyaa

IQD
MVR

368
462

Joint Initiative IITs and IISc Funded by MHRD

-3-

NPTEL
International Finance
Vinod Gupta School of Management , IIT. Kharagpur .

Appendix 11.1 lists the currency codes for countries as given by ISO. In the 2008, the
list was updated by the ISO. It is interesting to note that, from time to time the currency
code changes for a given country. Table 11.2 shows some of the currencies to have been
abandoned and the date of withdrawal.
Table 11.2: Historic currency codes to have been dropped
http://www.currency-iso.org/iso_index/iso_tables/iso_tables_a3.htm
Entity

Currency

Alphabetic Code

Date of
Withdrawal

ARGENTINA
ARGENTINA
SOUTH AFRICA
VENEZUELA

Austral
Peso Argentino
Financial Rand
Bolivar

ARA
ARP
ZAL
VEB

1992-01
1985-07
1995-03
2008-01

11.3: American/European, Direct/Indirect Methods of Spot Quotations:

Spot foreign exchange quotations can be given in variety of ways i.e, direct/indirect
American/European, base/variable quotations. Understanding difference in foreign
exchange quotations is the fundamental to understanding forex market. Also, it is to be
noted that a forex quotation will always have one-pair of currency. Forex quotations are
slightly different in interbank market and retail market.
In the interbank market, USD is the most traded currency pair. In other words, for
majority trades one leg of the currency is USD. Banks & professional dealers normally
quote in one of the two ways i.e, a) foreign currency price per one USD, also known as
European Terms b) USD price per unit of foreign currency also known as American
Terms.
For example, Brazilian Real 2.43937/USD is an example of European Terms while
USD 0.40994/Brazilian Real is an example of American Terms. In the same token
INR 48.25/USD is in European Terms while USD0.0207/INR is in American Terms.
Most of the interbank quotations are in European terms except four currencies. For
Australian Dollar, New Zealand Dollar, Euro and Pound Sterling, interbank
transactions are in the from of American Terms. Most banks quote price of USD per one
unit Pound Sterling or USD per unit of Euro/ AUD/ NZD. Reason -- a piece of history is
associated with this exception!

Joint Initiative IITs and IISc Funded by MHRD

-4-

NPTEL
International Finance
Vinod Gupta School of Management , IIT. Kharagpur .

Pound Sterling consisted of 20 shillings and with 12 pence of each Shilling, While USD
followed a decimal system with one hundred pennies in a USD. This lead to difficulties
in quoting a non-decimal currency with a decimal based currency. Hence, for reasons of
convenience, banks started quoting USD price per one unit of Pound Sterling. This
practice continues till date even though Pound Sterling changed to decimals in 1971. But
what about Euro/AUD/NZD!!! Readers have to find out the common thread!!
Foreign exchange quotations can also be in direct or indirect. A direct quote is the
home currency price of one unit of foreign currency. An indirect quote is foreign
currency price of one unit of domestic currency. A forex quotation becomes
direct/indirect quotations depending on who is using this quote. For example, INR
48.45/USD is a direct quotation for resident Indian while it is indirect quotation for
American. Similarly, USD0.020673/ INR is a direct quotation for American person
while it is an indirect quotation for Indian. INR 70.25/Pound is direct quotation for a
resident Indian while Pound 0.01423/INR is an indirect quotation.
Normally, Banks and foreign exchange dealers use direct quotations while dealing with
retail customers. Most of the times when we enter into a shop/hotel accepting foreign
currency give the quotations in direct terms. So also in case of banks prominently
display the home currency price of foreign currency.
Each forex quotation has a base currency and a variable/quote/term currency.
Any exchange rate quotation shows how many units of variable/quote/term
currency for unit of base currency. For example a forex exchange dealer is quoting
USD/HKD as 7.7756. In his case, USD is the base currency while HKD 7.7756
variable/quote/term currency.
Almost all forex quotations have the base currency as the first currency to be listed and
are always equal to one. The second currency is the variable/quote/term currency.
For example, the quote USD/HKD of 7.7756 means one USD costs 7.7756 HKD. In this
USD is the base currency and HKD is the variable/quote/term currency.
The forex trader always purchases and sells a fixed amount of the base currency and
exchange the amount of the variable/quote/term currency.

Joint Initiative IITs and IISc Funded by MHRD

-5-

NPTEL
International Finance
Vinod Gupta School of Management , IIT. Kharagpur .

When the quoted price increases, it means that the base currency is appreciating or
becoming stronger. This indicates one unit of the base currency can purchase more of
the variable/quote/term currency. For example, USD/HKD rate changes to 7.7820 from
7.7756. This means one USD is equivalent to HKD 7.7820 compared to the earlier price
of HKD 7.7756. Also it is to be noted here that when the base currency is appreciating
the variable/quote currency is depreciating. However, it is very important to note here
that percentage appreciation of base currency is not equal to percentage
depreciation of variable/quote currency. This aspect is discussed in detail in later
sessions.
Similarly, if the quote currency price decreases, the base currency is depreciating or
weakening. This means that one unit of the base currency can buy less of the quote
currency. For example, from USD/HKD 7.7756, the rate changes to USD/HKD 7.7690.
In this case the base currency, USD is depreciating as it is worth lesser HKD.
Forex quotation in interbank market is normally expressed upto 4 points after decimal
while for retail quotations it is given upto 2 points after decimal. As the ticket size for
each trade in interbank market is big, even a 1 point difference in the 4th point after
decimal makes a substantial difference. For example, let us compare two quotations:
USD/INR 45.7097 vis--vis USD/INR 45.70. Suppose a trader wants to sell 70,000 USD
and receive INR. Using the first quote, the trader would receive INR 3,199,679 while in
second quote, the trader would receive INR 3,199,000 a difference of INR 679.
All the examples given above are without any bid-ask rate. In real life all forex quotations
are expressed in term of bid and ask rates. In the next section, we discuss this aspect in
detail.

11.4: What is RBI reference rate?

Everyday Reserve bank of India publishes reference rate for spot USD/INR and spot
EUR/INR. The methodology of calculation of these reference rates is given in Text
Box.11.1. RBI reference rate is an indicative rate what is the average foreign exchange
rate prevailing on a given date. This rate is also used by companies to convert their
foreign currency import payment and export receipt to INR for financial reporting.

Joint Initiative IITs and IISc Funded by MHRD

-6-

NPTEL
International Finance
Vinod Gupta School of Management , IIT. Kharagpur .

Text Box 11.1: RBI Reference Rate Calculation Methodology

Source: http://www.rbi.org.in
RBI Press Release
The Reserve Bank of India compiles on a daily basis and publishes reference rates for
Spot USD/INR and Spot EUR/INR. The rates are arrived at by averaging the mean of the
bid / offer rates polled from a few select banks around 12 noon every week day (excluding
Saturdays). The contributing banks are selected on the basis of their standing, marketshare in the domestic foreign exchange market and representative character. The Reserve
Bank periodically reviews the procedure for selecting the banks and the methodology of
polling so as to ensure that the reference rate is a true reflection of the market activity.

Multiple choices questions and fill in the Blanks:

Multiple Choice Questions:
1. 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.
2. 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.

3. 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.

Joint Initiative IITs and IISc Funded by MHRD

-7-

NPTEL
International Finance
Vinod Gupta School of Management , IIT. Kharagpur .

4. The statement the yen rose today from 121 to 117 makes sense because
a)
b)
c)
d)
e)

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.

5. Speculation in foreign exchange markets entails

.
a) covering in the forward market
b) covering in the money market
c) hedging in the option market
d) buying in the current spot market and selling in the future spot market
e) covering in the futures market

Short Questions:

6. Can currency quotations pair be different for direct and indirect quotations.? Why
or why Not?
7. Why forex quotations are expressed in 4 point after decimal in interbank
quotations while expressed in 2 point after decimal in retail market.

Answers to Multiple Choice Questions:

1.
2.
3.
4.
5.

(ii)
(iii)
( c) The time at which the British resident purchases Yen
(b )
(d)

References:
1. ISO 4217 currency and funds name and code elements,
http://www.iso.org/iso/support/currency_codes_list-1.htm
2. The Foreign Exchange Market, (Chapter 4), Multinational Business, Finance,
Stone Hill et al. 10th Edition.
3. Exchange Rate data, http://www.rbi.gov.in

Joint Initiative IITs and IISc Funded by MHRD

-8-

NPTEL
International Finance
Vinod Gupta School of Management , IIT. Kharagpur .

Appendix 11.1
ISO 4217 currency and funds name and code elements
Source: http://www.iso.org/iso/support/currency_codes_list-1.htm

Entity

Currency

Alphabetic code

Numeric
code

AFGHANISTAN

Afghani

AFN

971

LAND ISLANDS

Euro

EUR

978

ALBANIA

Lek

ALL

008

ALGERIA

Algerian Dinar

DZD

012

AMERICAN SAMOA

US Dollar

USD

840

ANDORRA

Euro

EUR

978

ANGOLA

Kwanza

AOA

973

ANGUILLA

East Caribbean Dollar

XCD

951

ANTARCTICA

No universal currency

ANTIGUA AND
BARBUDA

East Caribbean Dollar

XCD

951

ARGENTINA

Argentine Peso

ARS

032

ARMENIA

Armenian Dram

AMD

051

ARUBA

Aruban Guilder

AWG

533

AUSTRALIA

Australian Dollar

AUD

036

AUSTRIA

Euro

EUR

978

AZERBAIJAN

Azerbaijanian Manat

AZN

944

Joint Initiative IITs and IISc Funded by MHRD

-9-