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    Introduction To Exchange Rates

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    Sachin Gaud
    1) A foreign exchange market allows for the trading of one currency for another, where delivery takes place within 2 business days of the trade. It facilitates the exchange of currencies between banks. 2) A direct exchange rate quotes the foreign currency in terms of 1 unit of the foreign currency. An indirect quote expresses the home currency in terms of 1 unit of the foreign currency. 3) Key calculations for exchange rates include the mid-rate, spread (difference between the ask and bid rates), and percentage spread (spread divided by the ask rate).

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    Introduction To Exchange Rates

    Uploaded by

    Sachin Gaud
    353 views12 pages
    1) A foreign exchange market allows for the trading of one currency for another, where delivery takes place within 2 business days of the trade. It facilitates the exchange of currencies between banks. 2) A direct exchange rate quotes the foreign currency in terms of 1 unit of the foreign currency. An indirect quote expresses the home currency in terms of 1 unit of the foreign currency. 3) Key calculations for exchange rates include the mid-rate, spread (difference between the ask and bid rates), and percentage spread (spread divided by the ask rate).

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    Exchange rates

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    INTRODUCTION TO EXCHANGE RATES.pptx

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    1) A foreign exchange market allows for the trading of one currency for another, where delivery takes place within 2 business days of the trade. It facilitates the exchange of currencies between banks. 2) A direct exchange rate quotes the foreign currency in terms of 1 unit of the foreign currency. An indirect quote expresses the home currency in terms of 1 unit of the foreign currency. 3) Key calculations for exchange rates include the mid-rate, spread (difference between the ask and bid rates), and percentage spread (spread divided by the ask rate).

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    353 views12 pages

    Introduction To Exchange Rates

    Uploaded by

    Sachin Gaud
    1) A foreign exchange market allows for the trading of one currency for another, where delivery takes place within 2 business days of the trade. It facilitates the exchange of currencies between banks. 2) A direct exchange rate quotes the foreign currency in terms of 1 unit of the foreign currency. An indirect quote expresses the home currency in terms of 1 unit of the foreign currency. 3) Key calculations for exchange rates include the mid-rate, spread (difference between the ask and bid rates), and percentage spread (spread divided by the ask rate).

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    INTRODUCTION TO

    EXCHANGE RATES
    BY E.VELAPPAN
    ◦ A foreign exchange market is a
    market for trading one currency
    SPOT against the another in such a way
    FOREIGN that the delivery takes place
    EXCHANGE within 2 days of the execution of
    the trade . It is usually takes two
    MARKET days to transfer cash from one
    bank to the other.
    ◦ Direct and Indirect Rate
    Numericals ◦ Understanding foreign exchange rates

    based on ◦ USD INR 68.1610/68.1615


    HERE
    direct & 1. First Currency is USD

    indirect rates, It is called as Base Currency


    In simple language we can called it as
    cross currency Foreign Currency

    rates & spread 2. Second Currency is INR


    It is Called as variable Currency
    & spread % In simple language we can called it as Home
    Currency / Domestic Currency
    3. First Rate is 68.1610

    It is called as Bid Rate


    Simply we can called it as Buying
    Rate
    4. Second Rate is 68.1615

    It is called as Ask Rate


    1) 1USD = CAD 1.1630/50
    Solution
    In Canada
    Identify the
    CAD → Home Currency
    country is which
    USD → Foreign Currency
    it is direct rate
    Here foreign currency is expressed is
    1 unit
    ∴ It is Direct Rate is Canada
    2) 1 EUR = USD 1.2596/ 1.2620
    Solution
    In USA
    Identify the
    USD → Home Currency
    country is which
    EUR → Foreign Currency
    it is direct rate
    Foreign currency is expressed is 1
    unit
    ∴ It is Direct Rate is USA
    3) 1. USD = NZD 1.5510/ 1.5560
    Solution
    Identify the In New Zealand
    country is NZD → Home Currency
    which it is USD → Foreign Currency

    direct rate Foreign Currency is expressed is 1


    unit
    ∴ It is Direct Rate is New Zealand
    Spread and Spread %

    Formula’s
    • Spread = Ask – Bid
    • Mid Rate = Mid Rate – (Ask +
    Bid)/2
    • Bid = Mid Rate – ( spread/2)
    • Ask = Mid Rate +(Spread/2)
    • Spread% = Spread/Ask X 100
    ◦ Calculate
    1) Mid Rate 2) Spread 3) Spread%
    Solution
    Mid Rate = (Ask + Bid) /2
    = (1.5220 + 1.5160)/2
    Q.1 EUR = 3.038/2

    USD 1.5160 / Mid Rate = 1.5190


    Spread = Ask – Bid
    1.5220 = 1.5220 – 1.5160
    = 0.0060
    Spread % = (Spread /ask ) X 100
    = (0.0060/ 1.5220) X 100
    = 0.39%
    ◦ Solution
    Given value is 1.1630/50 in CAD.
    The following quote is
    Hence this is a direct quote in CAD i.e in Canada.
    given
    USD 1 = CAD (1..1650 + 1.1630)
    1.1630/50 Mid Rate = (Ask + Bid)/2 = (1.1650 + 1.1630)/2
    = 1.1640
    Identify the country in
    So , Mid Rate is USD1 = CAD 1.1640
    which this is a direct
    quote . Spread = Ask –Bid = 1.1650 -1.1630 = 0.0020
    Find the mid rate , % Spread =(Spread/Ask) x 100 = 0.17%
    spread and the spread To calculate Inverse quote :
    percentage Bid = (1/Ask) = (1/1.1650)= 0.8584
    calculate the inverse Ask = (1/Bid) = (1/1630) = 0.8598
    quote Hence , inverse quote is CAD 1 = USD 0.8584/0.8598
    Consider the following quotes:
    ◦ Spot (Euro/Pound) = 1.6543/ 1.6557 ◦SOLUTION:
     
    ◦ Spot (Pound/ NZ$) = 0.2786/0.2800 % Spread = ×100

    i. Calculate the percentage spread on the i. % Spread(


    Euro/Pound rate. = ×100
    ii. Calculate the percentage spread on the = 0.0846%
    Pound/NZ$ rate. ii. % Spread [Pound/NZ$]
    = ×100
    = 0.50%
    iii) The maximum possible percentage spread on ◦  Cross Rate:
    the cross rate between the Euro and the NZ$.
    =×
    = 1.6543× 0.2786 = 0.46088
    = ×
    = 1.6557× 0.2800 = 0.4636
    Hence, %Spread= ×100
    = 0.5846%
    Thus , maximum percentage spread is
    addition of two spreads.

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