FOREIGN EXCHANGE MARKET
NEED FOR FOREX MARKET
BANK INVOLVEMENT IN
FOREX MARKET
SOME OTHER CHARACTERISTICS
IMPORTANT TO CUSTOMERS

COMPETITIVENESS OF QUOTE

SPECIAL RELARIONSHIP WITH BANK

SPEED OF EXECUTION

ADVICE ABOUT CURRENT MARKET CONDITIONS

FORECASTING ADVICE
SPOT RATE

Def : “ The rate at which currencies will be
traded for immediate exchange is known as
Spot rate.”

“Current rate of a currency”

“ Today’s rate of a currency”
BID & ASK PRICE

BID PRICE : Price at which bank is willing
to purchase the currency

ASK PRICE : Price at which the bank is
willing to sell the currency.
BID / ASK SPREAD
It is the difference b/w bid & ask Price

EXAMPLE :
. YOU HAVE RS 1 M
. IF U WANT TO CONVERT RS INTO $
. BID PRICE : 57/=
ASK PRICE : 57.5/=
Calculation @ Ask Price : 1000000 / 57.5
= $ 17391.304
CONVERT $
BACK
TO
Rs
. NOW WHEN U WILL COVERT $ BACK TO RS
Calculation @ Bid Price : 17391.304 * 57
= RS 991304.32
. DUE TO THE BID/ASK SPREAD U GOT A LOSS
( 1000000 - 991304.32 )
= RS 8695.7
FORWARD CONTRACT

Def : “ Contracts which allow for the
purchasing or selling of currencies in future
periods”.
SPECIFICATIONS FOR CONTRACT

Name of the currency

No. of days

No of currency units.
MATURITY DATES

1 WEEK ,2 WEEKS , 1,2,3,6,9, & 12 MONTHS

IN SOME CASES LONG TERM CONTRACTS ARE ALSO AVAILABLE.

If a 3-month forward deal is done on Nov 26th than the maturity will
be on Feb 28th
( i.e : three Calendar months & two business days)
Because if the deal is done on Nov 26th then the contract will start
from 28th Nov.
HOW MNC s USE FORWARD CONTRACTS


When MNC s anticipate future needs or future
receipt of a foreign currency , they can set up
forward contract.
EXAMPLE :
 Payables
 Receivables
 Investments
 Financing
PREMIUM
OR
DISCOUNT

If the forward rate exceeds the spot rate it
contains the premium.

E g : Forward = R s 57.5 Spot = R s 57

If the forward rate is less then the spot rate
it contains a discount.

00 01 02 03 04 05 06
 56 56.5 57 57 57.2 57.8 57.9
EXAMPLE

M r A is expecting receivable of $ 1m
DATA
Home currency = R s
Spot rate
= R s 60 / $ 1
Time period
= 60 days
Receivables in = US $
Are you assure that in 60 days the rate remain same?
Answer : NO
CALCULATION

If the $ depreciates you will have a loss.
 After 60 days if the rate becomes $ 1 = R s 58

Calculation @ spot rate after 60 days :
$
1,000,000 * 58
= R s 58,000,000
Calculation @ spot rate before 60 days :
$
1,000,000 * 60
= R s 60,000,000
LOSS = R s
2,000,000
Calculation @ Forward rate

So it is wise to have a Forward Contract

If Forward rate : $ 1 = R s 59.5

Calculation @ Forward rate (Predetermined):
$
= Rs
So you saved
1,000,000 * 59.5
59,500,000
59,500,000 - 58,000,000
= R s 1,500,000
Forward Contract can backfire
SWAPS

Exchange by barter
Definition

“ The simultaneous spot sale
(purchase ) of an asset against a forward
purchase (sale) of an approximately equal
amount of the asset.”.
Cross Exchange rate

Definition

“ Given the values of currency A
& currency B in terms of the third
currency , the cross rate is the rate
between currency A & B.”
FORMULA FOR CROSS RATE

=
Value of currency A relative to currency B
R s value of A
currency
/
R s value of B
currency
Exchange Rates
In Pak R s.

USD
 EUR
 GBP
 CAD
57.5
71.6
104.5
48.2
Calculation of Cross Ex-Rate
USD / GBP

Example 1 :
 USD 1 = 57.5 / 104.5
= GBP 0.55

Example 2 :
 GBP 1 = 104.5 / 57.5
= USD 1.81