Professional Documents
Culture Documents
shivusira.webs.com
• Individuals
– tourists ~ insignificant volume
• Intermediaries – Brokers
– mostly service commercial banks and trading houses
– anonymous
– connected to many banks ~ shop for best price (exchange rate)
• Direct Dealing
– through dealing system
– quotes valid for 20 sec.
Exchange Control Regimes
• Fixed Exchange Rate vis-à-vis One Currency (Official parity)
– This was adopted under Bretton-woods Agreement in 1945
– allows “bit” players to economize on transactions costs
• Fixed Exchange Rate vis-à-vis a Basket
– This system adopted after 1972
– A target parity for a basket of currencies was adopted
– European Currency Unit (ECU)
– Basket is revised every five years
• Flexible Exchange Rates
– Form 1996 most of the countries adopted
Exchange Rates
• Exchange Rate = Relative Price of Currencies
• Exchange Rate: The price of one currency expressed in terms of
another.
• Direct Quote (Natural or Right Quote/American Terms): The
exchange rate for a foreign currency is quoted in terms of the
number of units of local currency that are equal to a unit of the
foreign currency. (Rs.45 for one dollar)
• dollar price of 1 unit foreign currency; $/FX1 = dollars per
unit foreign exchange
• used in futures market
• Indirect Quote (Reverse or Left Quote/European Terms): The
exchange rate for a foreign currency is quoted in terms of the
number of units of foreign currency that are equal to a unit of the
local currency. ($2.25 for Rs. 100)
• foreign currency price of $; FX/$1
• used in Cash market. Most currencies quoted this way,
except £
• Spot Exchange Rate: The rate applicable to transactions in
which settlement (delivery) is made in two business days after the
date of transaction.
• Forward Exchange Rate: The exchange rate fixed today but the
settlement is at some specified date in the future.
How to Read a Currency Quote
• Currency Pair
• Base Currency
• Quote Currency
• Bid Price
• Ask Price
SIMPLE !!
Foreign Exchange Exposure (Risk)