In International markets, barring few exceptions, all rates are quoted in term of US dollar. For instance, at Singapore Swiss franc may be quoted at 1.5425/5440 and Japanese yen at 104.67/70. This should be understood as;
USD 1 = CHF 1.5425 – 1.5440
USD 1 = JPY 104.67 – 104.70
In interpreting an international market quotation, we may approach from the variable currency or the base currency, viz., the dollar. For instance we may take a transaction in which Swiss franc are received in exchange for dollars as
The quotation for Swiss franc is CHF 1.5425 and CHF 1.5440 per Dollar. While buying dollar the quoting bank would part with fewer francs per dollar and while selling dollars would require as many francs as possible. Thus, CHF 1.5425 is the dollar buying rate and DEM 1.5440 is the dollar selling rate. It may be observed that when viewed from dollar, the exchange quotation partakes the character of a direct quotation and the maxim ‘Buy low: Sell high’ is applicable.
Forward Margin/Swap Points.
Dollar/Foreign Currency Quotation
At Singapore market dollar may be quoted against Deutsche mark and French franc as follows:
Swiss Franc Japanese
1 month forward 50/60
2 months forward 70/80
The forward margin (also called swap margin or swap points) is quoted in terms of points. A point is the last decimal place in the exchange quotation. Thus in a four digit quotation, a point is 0.0001. In a two decimal quotation it is 0.01
As against Swiss franc, the forward margin for dollar is CHF 0.0050/0.0060. Since the order in which the forward margin is ascending, forward dollar is at premium. Premium is added to the spot rate to arrive at the forward rates, both in respect of purchase and sale transactions.
Based on the data given above, the forward rates for dollar against Swiss francs are arrived at as follows;
1 month forward CHF 1.5475 1.5500
2 months forward CHF 1.5495 1.5520
Foreign Currency/Dollar Quotation
Let us assume the following exchange rates are prevailing
Pound sterling Euro
Spot 1.4326/48 0.9525/35
1 month forward 50/53 65/62
2 months forward 90/93 84/82
Against dollar, the forward pound – sterling is at premium. Premium should be added to the spot rate to arrive at the forward rate.
Thus the forward rates for pound sterling are as follows.
Pound Sterling Pound sterling
1 month forward USD 1.4376 1.4401
2 months forward USD 1.4416 1.4441
Cross Rates and Chain Rule
In India, buying rates are calculated on the assumption that the foreign exchange acquired is disposed of abroad in the international market and the proceeds realized in US dollars. The US dollars thus acquired would be sold in the local interbank market to realize the rupee. For example, if the bank purchased a CHF 10,000 bill it is assumed that it will sell the Swiss francs at the Singapore market and acquire US dollars there. The US dollars are then sold in the interbank market against Indian rupee.
The bank would get the rate for US dollars in terms of Indian rupees in India. This would be the interbank rate for US dollars. It would also get the rate for US dollars in terms of Swiss franc at the Singapore market. The bank has to quote the rate to the customer for Swiss franc in terms of Indian rupees. The fixing of rate of exchange between the foreign currency and Indian rupee through the medium of some other currency is done by a method known as ‘Chain Rule’. The rate thus obtained is the ‘Cross rate’ between these currencies.
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