Foreign Exchange

Market

1
Introduction

The forex market is

the market in which
participants can
buy, sell, exchange,
and speculate on
currencies.
FX Market Participants

The forex market is made

up of Banks, Commercial
Companies, Central
Banks, Investment
management firms, Hedge
funds, and Retail Forex
Brokers and Investors.
Foreign Exchange Market
Most countries of the world
have their own currencies: the
Indian rupee , the U.S dollar., The trading of currencies is
the euro in Europe, the what makes up the foreign
Brazilian real, and the exchange market.
Chinese yuan, just to name a
few.

4
The Forex Market

The interbank market is

The forex market is made where large banks trade
up of two levels; the The OTC market is where
currencies for purposes individuals trade through
interbank market and the such as hedging, balance
over-the-counter (OTC) online platforms and
sheet adjustments, and brokers.
market. on behalf of clients.
Interbank Market

The interbank
The banks can either
market is the top-
deal with one another
level foreign exchange
market where banks directly, or through
electronic brokering
exchange different
platforms.
currencies.
Interbank Market
The Electronic Broking
Services(EBS) and Thomson
Reuters Dealing are the two
competitors in the electronic
brokering platform business and
together connect over 1000
banks.
The interbank market is an
important segment of the foreign
exchange market. It is a
wholesale market through which
most currency transactions are
channeled. It is mainly used for
trading among bankers.
OTC MARKET
The OTC market is where
individuals trade through online
platforms and brokers.
An over-the-counter (OTC) market
is a decentralized market in
which market participants trade Over-the-counter markets do not
have physical locations; instead,
currencies, or other instruments trading is conducted
directly between two parties and
without a central exchange or electronically.
broker.
What are Foreign Exchange
Rates?
Two kinds of exchange rate transactions make up the foreign exchange market:
Spot transaction is an
agreement between two
parties to buy one
currency against selling
another currency at an
agreed price for
settlement on the spot
date. Most spot market
transactions have a
T+2 settlement date.
Forward transaction is
an agreement between
you and the bank to
purchase one currency
against selling another
currency at a fixed price
for delivery on an agreed
date in the future
9
Foreign Exchange Market: Exchange Rates

Foreign Exchange Rates are published daily in

newspapers and internet sites such as
www.finance.yahoo.com .

Exchange rates for a currency such as rupee are

quoted in two ways ,US dollar per unit of domestic
currency or domestic currency per US dollar.

For example, on 7th June 2022 , one $ was

quoted as Rs 82.8430 and 1 Rupee = $0.0121 .

10
Foreign Exchange Market: Exchange Rates

American generally would regard the exchange

rate with rupee as $0.0121 per rupee ( or $
1.21 per Rs 100) while Indians think of it as Rs
82.8430 per Dollar.

Exchange Rates are quoted for the spot

transaction ( the spot exchange rate) and for
forward transaction ( the forward exchange
rates that will take place one month , three
months , and six months in the future
11
How is Foreign Exchange Traded?
One of the most fascinating things about this market
– there is no brick and mortar marketplace for Forex
trading.

Every transaction is done electronically over-the-

counter.

Unlike the stock exchange, the Forex market

remains open round the clock with currencies
traded across every time zone, five days every week.

12
Forex markets

The foreign exchange or forex

market is the largest financial
market in the world – larger
even than the stock market,
with a daily volume of over $5
tn trillion, vs. over $85 billion
for equities worldwide.
13
BASIC
CONCEPTS

14
 Bid, Ask and Spread

1 March 2024 15
Bid, Ask and Spread
A foreign exchange Bid is the price at
quotes are two-way which the
quotes, expressed as dealer/bank is willing
a 'bid' and ask’ to buy another
rates. currency.

The ask or offer is

the rate at which the
dealer/ bank is
willing to sell another
currency.
16
BID / ASK

ASK, SELL ,
BID, BUY –
OFFER –
dealers/bank’s
dealers/banks
buy price
sell price

17
Bid, Offer and Spread
For example, a dealer may
quote Indian rupees as Rs
80.80 - 80.90 vis-a-vis
dollar.
The difference between the
bid and the offer is called the
spread.
18
That means that he is willing
to buy dollars at Rs 80.80/$
(sell rupees and buy dollars),
while he will sell dollar at Rs
80.90/$ (buy rupees and
sell dollars).
The offer/ask is always
higher than the bid as inter-
bank dealers make money by
buying at the bid and selling
at the offer/ask
Bid / Ask & Spread
If you want to buy currency, you have to pay the
higher ask price, but if you want to sell currency,
you have to sell it at the lower bid price.

So if you were to buy currency, then immediately

sell it back to the same dealer, the dealer would
make money, and you would lose money.

Thus, the spread is the transaction cost of

trading currency.
19
Example
George is an American businessmen visiting Europe.
The cost of purchasing euros at the airport is as
follows:

EUR 1 = USD 1.20 / USD 1.30 (BID / ASK)

George wants to buy EUR 10,000

20
Example
George is an American businessmen visiting Europe. The cost of
purchasing euros at the airport is as follows:

EUR 1 = USD 1.20 / USD 1.30 (BID / ASK)

George wants to buy EUR 10,000

The higher price (USD 1.30) is the cost to buy each euro. So he would
have to pay the dealer the ask price USD 13,000 ( 10,000 X 1.3)

21
Quiz
Quiz 1
John is an American traveller visiting Europe. The cost of purchasing euros at the airport is
EUR 1 = USD 1.20 / USD 1.30 , John wants to buy EUR 15,000 , how many dollars he has to
pay to the dealer .

A. USD 13000

B. USD 19,500

C. USD 18,000

D. USD 15,000

1 March 2024 23
1
John is an American traveller visiting Europe. The cost of purchasing euros at the airport is
EUR 1 = USD 1.20 / USD 1.30 , George wants to buy EUR 15,000 , how many dollars he has
to pay to the dealer .

A. USD 13000

B. USD 19,500

C. USD 18,000

D. USD 15,000

1 March 2024 24
Quiz 2
George is an American traveller returning from Europe. The cost of euros at the airport is
EUR 1 = USD 1.20 / USD 1.30 , George wants to sell EUR 3,000 , how many dollars he will
get from the dealer

A. USD 5,000

B. USD 3,600

C. USD 3,900

D. USD 3,000

1 March 2024 25
2
George is an American traveller returning from Europe. The cost of euros at the airport is
EUR 1 = USD 1.20 / USD 1.30 , George wants to sell EUR 3,000 , how many dollars he will
get from the dealer

A. USD 5,000

B. USD 3,600

C. USD 3,900

D. USD 3,000

1 March 2024 26
DIRECT & INDIRECT
QUOTES

1 March 2024 27
Direct and Indirect Quote

Foreign exchange A direct quote is the

quotation can be either a Depending upon the home currency price of
home currency of the one-unit foreign currency
direct quotation and or
an indirect quotation person concerned.
$1= Rs 83.2655

Direct and indirect

quotes are reciprocals of Direct quote = 1/indirect
each other quote and vice versa
Rs 1 = $0 .01200

28
Direct Quote

Direct quotation Direct

Quotation
for India

is when the one $ Rs

1 = 79
unit of foreign
currency is Direct Quotation ( for USA)
£ $
expressed in 1 = 1.22

terms of domestic
currency. 1 EUR = $1.02

29
Indirect quote
Indirect quotation for India

Rs $
Indirect quotation 1 = 0.0126

is when one unit

of domestic Indirect quotation for USA

currency is $
1 =
₤
.8196
expressed in Indirect quotation for USA
terms of 1 $ = 6.74 Chinese Yuan
foreign currency.
30
Direct and indirect quotes
Direct and Indirect quotes are
reciprocals of each other, which can be
mathematically expressed as follows.

Direct quote = 1/indirect quote and

vice versa

31
Direct indirect quote

In a direct quote, the An indirect quote is just the

domestic currency is the base opposite: the foreign currency
currency, while the foreign is the base currency, and the
currency is the quote domestic currency is the
currency. quote currency.
1$ = Rs 79 1Rs = $ 0.0126

32
PRACTICE
SESSION

1 March 2024 33
Exercise 1

€1 = US$1.2120 US$1 = € ?
Direct quote in USA Indirect quote in USA
for Euro for Euro

34
Exercise 1

€1 = US$1.2120 US$1 = € ?
Direct quote in USA Indirect quote in
for Euro USA for Euro

Direct quote

US $ 1=
in Euro
countries for

1/1.2120 $

€ .8250
35
Exercise 2

£1 = US$1.2617 US$1 = £?
Direct quote in USA Indirect quote in USA
for Pound for pound

36
Exercise 2
£1 = US$1.2617 US$1 = £?
Direct quote in USA Indirect quote in
for Pound USA for pound

US $ 1=
1/1.2617
£ 0.7926
37
Exercise 3

NZ$1 = US$0.6562 US$1 = NZ$?

Direct quote in USA Indirect quote in USA
for NZ $ for NZ$

38
Exercise 3

NZ$1 = US$0.6562 US$1 = NZ$?

Direct quote in USA Indirect quote in
for NZ $ USA for NZ$

US $1 =NZ$
1/0.6562
1.5239
39
Typical Spot Transaction
between Banks

1 March 2024 40
Illustration
Monday Feb
5,10.45 AM: Bank B: “Forty-
Forty Five” Bank A: “Mine”
Bank A calling
“DLR-CHF 25 (1.0540-1.0545”
please”
BankB: “ Ok. I sell
you USD 25 mn Bank A: ” CITIBANK
against CHF at 1.045 NYK for my dollars.
value February7. UBS Thanks and Bye”
Geneva for my CHF”

41
 American terms &
European terms

1 March 2024 42
American terms & European
terms

Currency pairs versus

U.S. dollars tend to be quoted
in one of two ways; in either
American or European terms.

1 March 2024 43
American terms & European
terms
American terms European terms
US dollar price per unit of foreign Foreign currency units per
currency dollar
Example Rs1= $.0126 Example $1 = Rs 79
€ 1 = $.909 $1 = €1.10
A direct quote in the United A direct quote outside the
States United States
A indirect quote outside the An indirect quote in the United
United States States
PRACTICE
SESSION

1 March 2024 45
Exercise 4

if 1C$ = $ 0.7703
Given the following , find how many
quotes , answer the dollars we get by
following. selling C$ 10,000
?

46
Exercise 4

if 1C$ = $ 0.7703 ,
Given the following
find how many dollars
quotes , answer the we get by selling C$
following.
10,000 ?

We have to sell C$ we
need C$ quote . Since
we have, it we can C$ 10,000 X $0.7703
use the quote directly = $ 7703
to answer the
question
47
Exercise 5

if 1¥ = $ 0.0093 ,
find how many
dollars we get by
selling ¥ 20,00,000
?
48
Exercise 5
We have to sell ¥ we
if 1¥ = $ 0.0093 , need ¥ quote . Since
find how many dollars we have it ,we can
we get by selling ¥ use the quote directly
20,00,000 ? to answer the
question

¥ 20,00,000 X
$0.0093 = $ 18,600

49
Exercise 6

if 1$ = .94 Swiss
Franc , find how
many dollars we get
by selling 50,000
Swiss Francs ?
50
Exercise 6
if 1$ = .94 Swiss Franc ,
find how many dollars we
get by selling 50,000
Swiss Francs ?
swiss franc quote before
We have to sell Swiss
Franc we need Swiss
franc quote Since we
have dollar quote we
convert dollar quote to
using it

Therefore 1 Swiss Franc =

1/.94= $ 1 .0638
50,000 SF X $1 .0638 =
$53,191

51
Exercise 7

if 1 S$ = Rs 54.13 ,
find how many
Singapore dollars we
get by selling
5,00,000 Rupees ?
52
Exercise 7
We have to sell Rupees so
if 1 S$ = Rs 54.13 , find we need INR quote .
Since we have Singapore
how many Singapore
dollars we get by selling dollar quote we convert
Singapore dollar quote to
5,00,000 Rupees ?
Rupee quote before using
it.

Therefore : 1Rupee = S$ 1/54.13= S$ .01847

500,000 Rs X S$ .01847 = S$ 9,237

53
Exercise 8

if 1$ = Rs 68.61 , find
how many dollars we get
by selling 25,000 Rupees
?
54
Exercise 8
We have to sell Rupees
so we need INR quote .
if 1$ = Rs 68.61 , find how many
Since we have dollar
dollars we get by selling 25,000
quote we convert dollar
Rupees ?
quote to Rupee quote
before using it.

Therefore 1Rupee = $ 1/68.61= $ .014575

25,000 Rs X $ .014575 = $ 364.38

55
CROSS RATES

1 March 2024 56
Cross Rates
A cross rate is a foreign Examples
currency
exchange transaction 1 £ = Rs 103.50
between two currencies
that are both valued 1 € = Rs 88.55
against a third currency. 1 ¥ = Rs .67
1 € = £.91
1 Swiss Franc = €.92
1 SGD = Rs 55.06
“CROSS RATES”

57
Cross currency rate calculation
The USD is the base European
Cross currency rate 1 $ = Rs 75 Quote
currency in one
is calculated by
pairing and the quote 1 € = $ 1.13
multiplying currency in the other
two exchange rates 1 €= ? Rs American
pairings
quote

1€ = Rs 84.75
(75 x1.13)

58
Exercise 9

1 $ = € .88
1¥ = $ .0093
1¥ = ? €
59
Exercise 9
1 $ = € .88
1¥ = $ .0093
1¥ = ? €

1 ¥= € .00818
(.88x.0093)

60
Exercise 10

1 $ = Rs 75
1 ₤ = $ 1.26
1 ₤ = ? Rs
61
Exercise 10
1 $ = Rs 75
1 ₤ = $ 1.26
1 ₤ = ? Rs

62
Exercise 11

$1=Rs 75
$1 =£ .79
1₤ = ? Rs

63
Exercise 11
$1=Rs 75
£ 1 = 1/.79 = $1=Rs 75
$1 =£ .79
$1.27 £ 1= $ 1.27
1₤ = ? Rs

!" $ !" £ 1=Rs 95.25

× £= £
$ (75x1.27)

64
Exercise 12

$1= EUR .88

$1 =£ .79
1 ₤ = ? EUR
65
Exercise 12
$1= EUR .88 $1=EUR 0.88
£ 1 = 1/.79 =
$1 =£ .79 £ 1= $ 1.27
$1.27
1 ₤ = ? EUR

!"# $ !"# £ 1= EUR 1.117

$
×£ = £ (0.88x1.27)

66
Rules

The bid price for

the trader is
always lower than
the ask price
Example

Rs 1 = $.01315 - $.01333
BID is always lower than ASK

The reciprocal was the bid price of the dollar (selling price of
dollars from customer perspective which becomes ask price
or buying price of Rupee from customers point of view
Example

US $ 1= £ 0.7545 / 0.7574.

£1 = $?
Example

£1= $1/.7574 / $1/.7545

£1= $1.3203 / $1.3253

Example

€ 1= $1.2100/ $1.2150

$1 = € ?
Example

$1= €1/1.2150 / €1/1.2100

$1= €.8230 / €.8264

Understanding FX Quote Conventions
We refer $1= Rs 79 Thus a dollar –pound
as quote is written as $/£ 1.32$/£
means
Rs / $ quote read as Means £1= $ 1.32
rupees-dollar quote £1= ? $

Again € 1 = $1.21 is
expressed as
1.21$/€ quote
EXERCISE 15
if exchange rate in Mumbai inter – bank
market is US $1 = Rs 75.2550/ 2600
and in London inter-bank market is
US $ 1= £ 0.7945/ 0.7974.

What would be the exchange rate

between Indian Rupee and Pound
sterling for buying pounds ( ask rate)
74
Solution
Mumbai inter-bank we need to purchase US $ by Surrendering (selling)
Rupee & Sell US $ in London inter- bank market to purchase Pounds

First Leg : Buy Dollar and Sell Rupee

Second Leg : Buy Pound and Sell Dollar

US $1 = Rs 75.2550/ 2600

Dollar buying rate (customer) US $ 1= Rs 75.2600

75
solution
US $ 1= £ 0.7945 / 0.7974.

1£ = $ 1/0.7974: 1/0.7945

1£ = $ 1.2540 : 1.2586
Pound buying rate ( customer) 1£ = $
1.2586
1 £ = Rs 75.2600X 1.2586= Rs 94.7222
76
solution
Dollar buying rate US $ 1= Rs 75.2600

Pound buying rate 1£ = $ 1.2586

Rs / $ x $ /£ = Rs /£

Rs/ £ = 75.2600 x 1.2586 =

1£ = Rs 94.7222
77
 NOSTRO, VOSTRO AND
LORO ACCOUNTS

1 March 2024 78
NOSTRO, VOSTRO AND LORO ACCOUNTS

In interbank transactions, Therefore, the banks

foreign exchange is maintain three types of
transferred from one current accounts in order
account to another to facilitate quick transfer
account and from one of funds in different
center to another center. currencies

79
NOSTRO, VOSTRO AND LORO
ACCOUNTS
Therefore, the banks maintain three types of current accounts in order to facilitate quick
transfer of funds in different currencies.

Nostro Vostro
Account Account

Loro
Account
80
Nostro Account

A bank's foreign currency

account maintained by the
bank in a foreign country
and in the home currency
of that country is known as
Nostro Account
81
 Example-NOSTRO AND VOSTRO
ACCOUNT INDIA USA

Let us say, SBI Bank, India wants to make and receive

payments in US Dollar, in the US.
•for this transaction, SBI, India will tie up with , say,
Citibank in the US. SBI CITI BANK
Nostro account
•Citibank, US will act as its representative or correspondent Of SBI
bank.
•SBI, India will have an account in Citibank US
•Its USD receipt and payment will happen from this SBI opened a current account
account with Citi bank in USD in
•this account of SBI, India in Citibank, US is SBI's Nostro USA This is called a
Account and Citibank's Vostro Account. Nostro a/c

82
NOSTRO ACCOOUNT
A Nostro account is a The Nostro account is
reference used by Nostro is a shorthand the record of the
way of talking about
Bank X to refer to bank that has money
"our" account held by "our money that is on on deposit at another
Bank Y. deposit at your bank bank.

These accounts are

often used to simplify
settlements of trade
and foreign exchange
transactions.

1 March 2024 83
VOSTRO ACCOOUNT

Vostro is a reference
Vostro is the term to "yours" and refers
used by Bank Y,
to "your money that is
where bank X's
on deposit at our
money is on deposit.
bank."

1 March 2024 84
NOSTRO and VOSTRO Accounts

The terms are used when

"Nostro" and "vostro" one bank has another
are two different bank's money on deposit,
terms used to describe the typically in relation to
same bank account. international trading or
other financial transactions

1 March 2024 85
NOSTRO and VOSTRO Accounts

Nostro comes from Vostro comes from

the Latin word for the Latin word for
"ours," as in "our "yours," as in "your
money that is on money that is on
deposit at your bank." deposit at our bank."

1 March 2024 86
Loro account
which holds a
When domestic
Nostro account to
banks use the
settle foreign
account of third
exchange
party banks
transactions

these type of
transactions are
included under
the Loro Account.

1 March 2024 87
Loro account - Example
IDBI Bank has to pay
but IDBI Bank
HDFC Bank has an the bill of imported
doesn’t have any machinery from the
account with Citi Nostro account with
Bank USA on behalf of its
Citi Bank customers

IDBI Bank
HDFC bank worked
approaches to HDFC
Bank and ask to as an intermediary
between Citi Bank
settle the invoice on
its own behalf. and IDBI Bank

1 March 2024 88
 PIPs

1 March 2024 89
Price Interest Point (Pips)

A pip, short for "price

interest point,"
represents a tiny
measure of the change in
a currency pair in
the forex market.

1 March 2024 90
Price Interest Point (Pips)

A pip is the smallest

Most currency pairs The pip change is
price move that an
exchange rate can are priced out to the last (fourth)
four decimal places decimal point.
make

in Indian interbank Hence minimum

market, USD-INR value change will
rate is quoted up to be to the tune of
4 decimal point 0.0001

91
( Price Interest Point )Pips

Spot USD/EUR
is quoted at a
bid price of
1.2313 and an
ask price of
1.2319. The
difference is USD
0.0006 equal to
6 “pips”.
1 EUR = 1.2313 – 1.2319
92
THANK YOU

93