FOREIGN

EXCHANGE
MANAGEMENT
READY EXCHANGE

RATES

MODULE:4
I. Foreign exchange dealing of bank with its customer is known as “Merchant
Business”.
II. Exchange rate at which transaction takes place is “Merchant Rate”
Ready Transactions are where the agreement to buy and sell of foreign exchange
takes place and actual settlement is completed (i.e., delivery of foreign exchange
and the receipt of the price) on that day itself, it is called ready/cash transaction. It
is also known as Value today.
Spot Transactions is one type of foreign exchange transactions, settled on the
second following business day, except US$ & CAD settled in one day.
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Indian Scenarios:
I. Bank’s major transactions with customer are on ready basis. (Cash & Spot)
II. In practice, the terms ready and spot are used synonymously to refer to
transactions concluded and executed on the same day.
We explain in the following slides how ready rates of merchant business are
calculated in India.
Foreign currency is not a legal tender, however possess value and is considered as the
commodity in foreign exchange dealings.
Purchase and sale transactions:
Any trading has two aspects- Purchase & Sale. Likewise Bank , authorized to deal in foreign
exchange, purchases and sales its commodity i.e. the foreign currency.
 Purchase transaction, Bank acquires foreign currency and parts with home currency(Exports)

 Sale transaction, Bank parts with foreign currency and acquires home currency(Imports)

Exchange Quotations DO NOT SHARE THE SLIDES WITH ANYBODY OUTSIDE THE CAMPUS

 Direct Quotation: (Buy low , Sell High)

The quotation in which exchange rate is expressed as the price per unit of foreign currency in
terms of the home currency is known as “Home Currency Quotation or Direct Quotation.
 Indirect Quotation: (Buy high, Sell low)

The quotation in which the unit of home currency is kept constant(Rs100) & exchange rate is
expressed as so many units of foreign currency, is termed as Indirect or Currency Quotation.
Effective from 2nd August 1993, India has switched over to direct method of quotation.
 SALE PURCHASE
Exporter
SALE
SBI
INTERBANK MARKET
5/6
Bid=Rs70
Ask=Rs71
Quote>1$=70/71
PURCHASE PURCHASE

IMPORTER BOB

SALE
Buying Foreign Currency by Bank
I. When bank buys foreign exchange from the customer , it expects to sell the
same in the interbank market at a better rate to make profit out of the deal.
II. Therefore, the interbank buying rate forms the basis for quotation to the
customer by the bank.
Selling Foreign Currency by Bank
I. Similarly, when Bank sells foreign exchange to customer, it meets the
commitment by buying the requisite foreign exchange from interbank market
at a better rate to make profit out of the deal.
II. Therefore, the interbank selling rate forms the basis for quotation to the
customer by the bank.
The interbank rate on the basis of which the bank quotes its merchant rate is
known as the “Base Rate”. DO NOT SHARE THE SLIDES WITH ANYBODY OUTSIDE THE CAMPUS
 Exchange Margin
If the bank quotes the base rate to the customer, it makes no profit. But banks need
to incur multiple expenses for the deal. Therefore, based on the market trend, some
additional amount should be built over the base rate. The additional amount is
termed as exchange margin. The quantum of margin is determined by the bank
concerned. Till 1995, it was regulated by FEDAI.
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Fineness of Quotation
Exchange rate is quoted up to 4 decimal. The quotation is for one unit of foreign
currency except for Japanese yen where quotation is per [Link] computing
the merchant rates, the calculations can be made up to five decimal and finally
rounded off to the nearest multiple of [Link] rupee amount paid/received
from the customer should be rounded off to the nearest rupee. Now Banks are free
in quoting rate considering the competitive scenarios. USD1 Rs 68.3225
GBP1 Rs90.5950
Examples of major currency quotations: EUR1 Rs80.1925
JPY100 Rs60.7275
 In purchase transaction bank acquires foreign exchange from the customer and
pays Indian Rupees.
 Acquiring foreign exchange may be immediate or with some delays.
 Say, a domestic bank pays a demand draft issued by overseas correspondent, means
buying FOREX. Here Nostro account(Account maintained by domestic bank with
overseas correspondent) has already been credited i.e. forex already in possession by
the Bank.
 On the other hand , if bank purchases a demand /sight bill from the customer,
Nostro account will be credited at least after 20-25 days, depending upon the
location and the promptness in paying the bill by the overseas buyer.
 Therefore bank will receive payment i.e. will receive credit to their Nostro account,
say after 25 days.
 Depending upon the status and time of realization of foreign exchange by the bank,
two types of buying rates are quoted in India
 TT buying Rate and DO NOT SHARE THE SLIDES WITH ANYBODY OUTSIDE THE CAMPUS

 Bill Buying Rate.

This rate is applied when the transaction does not involve any delay in realization of the
foreign exchange by the bank i.e. Nostro account of the bank has already been credited.
The rate is calculated by deducting from the interbank buying rate the exchange margin
as determined by the bank. Transactions where TT buying rate applied,
1) Payment of demand drafts, mail/telegraphic transfer. DO NOT SHARE THE SLIDES WITH ANYBODY OUTSIDE THE CAMPUS
2) Foreign Bills collected i.e. Nostro account has already been credited.
3) Cancellation of FC drafts, issued earlier by the bank
Bank A ,on 16th July, received a mail transfer As the FC has already been credited to Nostro
from its US correspondent for US$5,000 account, TT buying rate will be applied.
payable to bank’s customer B, Nostro account The rate will be arrived based on the interbank
already credited . market buying rate of Rs 68.3225
Rupee /US dollar quoted in interbank market Rupee dollar market spot buying rateRs68.32250
Spot USD1=Rs 68.3225 /3425 Less exchange margin at 0.08% (-)Rs 0.05465
Spot August 2200/2300 (Policy of the Bank) Rs68.26785
Bank policy to earn exchange margin of 0.08% Rate quoted to the customer Rs 68.2675(Nearest
Calculate the exchange rate and rupee amount multiple of 0.0025) & Rupee amount= Rs3,41,340
payable to the customer B.
Bank discount export bills and make immediate rupee payment to exporter. Banks send
the documentary bills to overseas correspondent and wait for the credit of bill amount to
Nostro account. FC sight bill will be credited faster than FC usance bill. Usance bill will
be credited on due date. Therefore bank would be able to act on the FC only afterwards.
Basis of Banks rates will not be on spot interbank rate but on the interbank forward rate.
Rule1: If forward margin is at a premium, premium is to be added and when it is at a
discount, to be deducted from the spot rate.
Rule2:If the forward margin is at a premium, transit period and usance period are to be
rounded off to lower month. DO NOT SHARE THE SLIDES WITH ANYBODY OUTSIDE THE CAMPUS

Rule3: If the foreign currency is at a discount , transit period and usance period are to be
rounded off to the same month.
Export Bills discounted by bank on 23rd July Premium Discount
Sight bill with transit period of 25days(Aug Due) Spot Rate July Spot Rate Aug
30 days Usance & transit period 25days(Sep Due) Spot Rate Aug Spot Rate Sept
On 23rd July an exporter A, tenders for purchase, demand bill, payable at US,NY
for US$1,00,000. Transit period 25 days. The spot rates in the interbank market.
Spot USD1 Rs68.3225/3425 What will be the exchange rate & amount to be paid,
Spot/Aug 6000/7000 1)Exchange margin of 0.15% is to be loaded
Spot/Sept 8000/9000 2) Rate of Interest is 10% & other charges Rs500/
Spot/Oct 1.0000/1.1000 3)Customer opts 10% to retain in US dollar
Solution: Notional due date is 25 days from 23rd July i.e. 16th Aug. Since the dollar
is at a premium, the period will be rounded off to lower month i.e. July spot. Rate
will be quoted based on Spot/July rate for US dollar in interbank market.
Interbank Spot Buying Rate 68.32250 Rupee amount payable** 61,39,800
Less Exchange Margin(0.15%) 0.10248 Less Intt for 25 days@10% 42,053
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68.22002 Other Expenses 500 42,553

Rounded off 68.2200 Net Amount Credited to A 60,97,247
** 90,000X68.2200
US$ 10,000 held in customer’s EEFC account
On 23rd July an exporter A, tenders for purchase, sight bills, payable at US,NY for
US$1,00,000. The spot rate in the interbank market quoted.
What will be exchange rate & amount,1)Exchange margin of 0.15% is to be loaded
Spot USD1 Rs68.3225/3425 2) Rate of Interest is 10% & other charges Rs500/
Spot/Aug 6000/5700 3) Customer opts 50% to retain in US dollar
Spot/Sept 1.000/0.9700 Solution: Notional due date is 25 days from 23rd July
Spot/Oct 1.4000/1.3900 i.e. 16th Aug. Since the dollar is at a discount, the
period will be rounded off to same month i.e. Aug. Rate will be quoted based on
Spot/Aug rate for US dollar in interbank market.
Interbank Spot Buying Rate 68.32250 Rupee amount payable** 33,81,050
Less Discount for Spot/Aug 0.60000 DO NOT SHARE THE SLIDES
Less Intt for 25 days@10% WITH ANYBODY OUTSIDE THE CAMPUS
23,158
67.72250 Other Expenses 500 23,658
Less Exchange Margin(0.15%) 0.10158 Net Amount Credited to A 33,57,392
67.62092 ** 50,000X67.6210
Rounded off 67.6210 US$ 50,000 held in customer’s EEFC account
On 23rd July an exporter A, tenders for purchase, 60 days from sight bills, payable
at US,NY for US$25,000. The spot rate in the interbank market quoted
Spot $1 Rs68.3225/3425 What will be the exchange rate to quote & amount paid,
Spot/Aug 1500/1400
1)Exchange margin of 0.10% is to be loaded
Spot/Sep 2800/2700 DO NOT SHARE THE SLIDES WITH ANYBODY OUTSIDE THE CAMPUS

2) Rate of Interest is 10% & other charges Rs500/

Spot/Oct 4200/4100
Spot/Nov 5600/5500 3) Fineness as per FEDAI rules.(Transit period 25 days)
Solution: Notional due date is (60+25) 85 days from 23rd July i.e. 15th Oct. Since the
dollar is at a discount, the period will be rounded off to same month i.e. Oct. Rate
will be quoted based on Spot/Oct rate for US dollar in interbank market.
Interbank Spot Buying Rate 68.32250 Rupee amount payable** 16,95,875
Less Discount for Spot/Oct 0.42000 Less Intt for 85 days@10% 39,493
67.90250 Other Expenses 500 39,993
Less Exchange Margin(o.10%) 0.06790 Net Amount Credited to A 16,55,882
67.83460 ** 25000X67.8350 (16,55,880)
Rounded off 67.8350
 When a bank sells foreign exchange they receive Indian Rupees from the customer and
part with foreign currency.
 The sale is effected by issuing a payment instrument on the correspondent bank with
whom bank maintains Nostro account.
 Bank immediately on sale, buys requisite foreign exchange from the market and credit
the same to its overseas Nostro account for honoring the instrument issued by them.
 Therefore, for all sales on ready/spot basis, bank resorts to the interbank market
immediately and buy forex for onward credit to Nostro account, at interbank spot
selling rate.
 Say, a domestic bank issued a demand draft, payable at overseas correspondent. Here
bank has to deposit requisite forex to Nostro account to honor the draft.
 Alternatively, if bank pays import bill received from overseas exporter on behalf of
customer, here bank’s Nostro account is normally debited prior to receive of the bill.
 Date of debit to Nostro account depends upon the location and the promptness in
discounting the bill by the overseas exporter. DO NOT SHARE THE SLIDES WITH ANYBODY OUTSIDE THE CAMPUS

 Depending upon the status and time in selling foreign exchange by the bank, two types
of selling rates are quoted in India: TT selling Rate and Bill selling Rate.
Transactions for which TT selling rate is quoted,
I. Issue of demand drafts, mail /telegraphic transfers
II. Cancellation of forex purchased earlier, non payment of export bill
Example: Customer A of a bank requested to issue demand draft for UD$25,000.
The ongoing current spot rate DO NOT SHARE THE SLIDES WITH ANYBODY OUTSIDE THE CAMPUS

Spot USD1=Rs68.3225/3425 1) exchange Margin@0.15%

I month forward Rs68.6825/7250 Quote the rate and amount paid by A
Solution: Bank has to quote its TT selling rate based on the market selling rate
and to add exchange margin regarding various cost involve for the transaction.
InterbankSpot Selling Rate for USD1 Rs 68.34250
Add exchange margin @ 0.15% Rs 0.10251
Rs 68.44501
Rounding off, the quote will be Rs68.4450 per dollar
Amount to be paid by customer A=25,000X 68.4450=Rs 17,11,125+Rs500/(HC)
I. Bill selling rate is to be used for all transactions which involve handling of
documents by the bank, for example payment against import bill.
II. Bill selling rate calculated by adding exchange margin to TT selling rate.
III. The exchange margin enters into the bill selling rate twice-once on the
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interbank rate and again on the TT selling rate.
On 23rd July, Bank received an import bill The bank has to quote bill selling rate to the customer based
on behalf of customer A for USD10,000. A on market selling rate.
requested to retire the bill . Inter bank rate
for dollar Market spot selling rate 68.34250
Add exchange Margin@0.15% 0.10251
Spot USD1= Rs 68.3225/3425
Spot/Aug 5000/4500 TT selling rate 68.44501
Add exchange margin @0.20% 0.13689
Bank needs an exchange margin of 0.15%
Total 68.58190
for TT sales and 0.20% on bill selling rate.
How much amount bank will debit the Rounding off Rs68.5825(nearest multiple of 0.0025).
account A. Other charges are Rs500 A’s account is debited with Rs6,85,825+Rs500
=Rs 6,86,325
On 16th July, customer A, presented an export bill for US$1,00,000 duly purchased by
Bank @68.2200. The bill was unpaid on presentation at NY and customer A authorized
bank to debit the bill amount at the prevailing market rate.
Interbank spot rate on date Rs 68.3225/3425.
Bank require an exchange margin of 0.15% to be loaded on the exchange rate .
What rate bank will quote? Any profit/loss for the customer?
A’s account will be debited at the TT selling Rate
Spot Rate =Rs68.34250
Add Exchange Margin@0.15% 0.10251
Rs68.44501
(Rounded off at Rs68.4450)
A’s account debited (Unpaid Bill) Rs68,44,500
(1,00,000 X Rs68.4450)
A’s account credited earlier Rs68,22,000
(1,00,000 X Rs68.2200)
Loss for A= (Rs68,44,500-Rs68,22,000)=Rs22,500 / ANYBODY OUTSIDE THE CAMPUS
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Bank had discounted “At Sight” bill under an irrevocable letter of credit for USD1,00,000
at Rs 68.5200 and covered bank by sale in the market for one month forward delivery at
Rs68.5400. Due to some discrepancies, bank had to recover bill amount from the
customer. Bank now cover it earlier sale in the interbank market at Rs68.6000.
The interbank rates today for dollar is as under a. At what rate will bank cancel banks purchase
Spot USD1=Rs68.5225/5275 contract ?
One month Rs68.5800/5875 b. What will be the rupee equivalent bank will
The merchant rates for dollar is as under recover from the customer?
TT USD 1= Rs68.4800 68.5600 c. What will be the profit/loss to the customer
on the transaction?
One Month Rs68.5200 68.6200
Solution: Purchase contract will be cancelled at one month forward TT selling rate
prevailing today i.e.Rs68.6200.(It may be noted that the bank covers the cancellation by
buying one month forward in the market)
Amount earlier paid to customer on purchase of bill @ Rs68.5200 Rs68,52,000
Amount recovered from customer on cancellation of contract @Rs68.6200 Rs68,62,000
Loss to the customer(Rs68,62,000-Rs68,52,000) =Rs10,000/
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 State Bank of India ( 26/7/2018)

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 GOOD
WISHES
TO
ALL