Presented by:- ROLL NO.

Birendra kumar 10

Hardik Kothari

21

EXCHANGE RATE MECHANISM

What Does Exchange Rate Mean

The rate at which one currency can be exchanged for another currency. In other words it is value of one currency in terms of other. say: US $ 1 = Rs.48.88

Foreign Exchange Market Process

Deal / Contract

Settlement / Delivery

Types of Transaction: Value Date Concept

Due to vastness of the market and origin of transactions, settlements may take place at different time zones, most of times deal dates and settlement date differs.

Type of TXN Cash/Ready

TOM

Date of Deal
12.09.2011 Monday 12.09.2011 Monday

Value Date
12.09.2011 Monday 13.09.2011 Tuesday 14.09.2011 Wednesday Any day after 14.09.2011

Spot Forward

12.09.2011 Monday 12.09.2011 Monday

Value date
Value date means the date on which the deal will be
settled.

Also known as delivery date when the currency is to be delivered by one party to another.

Forward Contract?
A Forward Exchange Contract is an agreement between two
banks or between a bank and a customer to exchange one currency for another at some future date.
FORWARD RATES:

Forward rates are derived from Spot rates.

Forward rate is the spot rate adjusted for the premium / discount.

 If the future price (forward) is higher than Spot rate, then it is said to be at a premium. If the future price is lower than Spot rate, then it is at a discount.

e.g. USD/INR

Spot (14.09.2011) 1 $= Rs.48.44 /46

Forward (14.10.2011) 1 $= Rs.48.94/96 ( Premium)

USD is dearer and at Premium. INR is at Discount against USD

Methods of Quotation
Direct Quotation
The Quotation in which the local currency is expressed in terms of Foreign Currencies (USD,EUR,GBP,JPY,AUD,NZD).

Indirect Quotation
The Foreign Currencies are expressed in terms of the local currency.

Method - I DIRECT(FC fixed) USD 1 = Rs 48.88 GBP 1 = Rs.85.99 EUR 1 = Rs 57.92

Method - II INDIRECT( LC fixed) Rs 100 = USD 2.0458 Rs 100 = GBP 1.1629 Rs 100 = EUR 1.7265

With Effect from 02.08.1993, all exchanges are quoted in Direct Method

Cross Rate
The rate at which two currencies exchange, based on exchange rates using a third currency. For example, the cross rate of EURO for JPY might be based on the rate of EURO for USD and USD for JPY.

Cross rates usually do not involve the U.S. dollar.

India is a market maker for INR. But what about other currencies?

 Where do rates for CHF, GBP, EUR,CAD,JPY, etc. come from? How are they calculated?

Computation of CHF / INR Rate: A CHF/INR rate is a cross of USD/INR & USD/CHF.

USD/INR = Rs. 45.16/18 USD/CHF= $1.2570/73 CHF 1 = Rs. 56.7796 (buying) Rs. 56.7912 (selling)