FOREX DEALINGS

One million ($ 1mn) Invested in U.S. dollar deposits at 7.625 % fetches = $ 10,00,000 x 1.07625 = $ 1076250 including the Principal. If same amount of $ i.e., 10,00,000 invested in Swiss Francs (Sfr) @ of 4.5625%: Convert $ into Swiss Francs. Spot: 1.3125 Sfr / $ $ 1 mn 10,00,000 x 1.3125 = Sfr 1312500 1312500 x 1.045625 = Sfr 1372383

On Sfr Deposits fetch Less interest. But one year forward is 1.275 Sfr/$ Forward Sfr 1372383/1.275 = $ 1076379 Theory of Interest Rate Difference states: Interest rate must equal the difference between Forward and Spot Exchange Rate.

BASICS OF FOREX DEALINGS MERCHANT BUSINESS => Foreign exchange dealings of a bank with its customer. MERCHANT RATE => The Exchange Rate at which transaction takes place. Ready transaction Cash transaction Value next day Spot contract and ready transactions Refer to transactions concluded and executed on the same day.

Interbank Buying Rate: Base rate for banks quotation of buying rate to its customer. It is the rate on the basis of which the bank quotes its merchant rate.
It is the rate at which it buys foreign exchange from its customers & it sells foreign exchange to its customers.

Bank in turn sells its stock of foreign exchange in the market and purchases on behalf of its customers foreign exchange from the market.

Exchange Margin: Base rate + administrative cost + cover of exchange rate fluctuation + some profit. The margin built into the rate is determined by the range prescribed by FEDAI.

Fineness of Quotation. According to FEDAI Rules: Amount paid to or received from a customer should be rounded off to the nearest rupee. Paise 49 to 50 paise => 99 paise to higher rupee.

TYPES OF BUYING RATES TT Buying Rate: Rate applicable to transactions which do not involve delay in realization of foreign exchange. Exchange margin prescribed by FEDAI 0.025% to 0.08% for TT Buying e.g. DDS, mail transfers, telegraphic transfers etc., $/Rupee Market Spot Buying Rate = Rs. Less exchange margin = Rs. TT Buying Rate * =______________ *Rounded off to the nearest paise.

Illustration Bank receives a mail transfer in September from its Chicago correspondent for US $ 5000 payable to its Customer. Assume Rs./US $ in the local market quoted in September. Spot US $1 = Rs. 40.25/30 Spot / October = 0.22/24

Calculate the exchange rate and the Rupee amount payable to the customer with the following terms and conditions: @ Exchange margin is 0.08% to be loaded in the rate.
@ Rupee equivalent should be nearest to the whole rupee.

Buying rate applicable => Rs. 40.25

$/Rs. Market spot buying rate => Rs. 40.25

Less Exchange Margin => Re. 0.0322 At 0.08% on 40.25 40.22 Amount of Rs. Payable = $ 5000 x 40.22 = Rs. 2,01,100/-

Bill Buying Rate Rate applied to the purchase of Foreign Bill. The bill realized normally after 45 days. (Usance period of the Bill 30 + 15 days transit) The bank is able to deliver foreign exchange only after 45 days. The rate to the customer therefore, is based on interbank rate for 45 days forward.

Two points to be noted while loading the bill buying rate with forward margin. i. Forward margin normally available for a period in multiple of months and not for 15 days.
ii. Forward premium may be at a premium or discount. Premium => to be added. Discount => to be deducted.

Bill Buying Rate i. Dollar/Rupee market spot buying rate = Rs. Add: Forward premium (For transit and usance; Rounded off to lower months)

Less: Forward Discount (For transit and usance; Rounded off to higher months) = Rs.________
Less Exchange margin = - Rs.________ Rounded off to the nearest paise = Rs.