Foreign Exchange Quotations: Cross, Rates, TT Buy/Sell Rates, TC Buy/SellRates

Many currency pairs are not directly quoted i.e dealers do not offer a rate for these currency pairs. For example, an Indian importer is importing oil from Azerbaijan. The company from Azerbaijan wants that Indian exporter must make the payment in local currency i.e. Azerbaijanian Manat (AZN). As no bank or dealer is offering INR/AZN quote, the Indian company has to use a via-media currency to convert the INT to AZN to make payment. The exchange calculated in this round about manner is known as cross rates.

Depending on host of factors, a currency may appreciate or depreciate against another currency. The calculation methodology for currency appreciation and depreciation rate of is also briefly discussed in this session.

Besides offering spot quotations, banks also quote spot rates for buying/selling or exchanging TC (Travelers Cheques) and TT (Telegraphic transfers). Banks also buy and sell bills at different spot rates. All these details are also discussed .

13.2: Spot Rates and Cross Rates:

A cross rate is a rate which can be calculated from two other rates. For calculation of cross rates, both rates must have one common currency. Suppose USDCAD (US Dollar and Canadian Dollar) rate is given along with and USDAUD (US Dollar and Aussie Dollar) quotations as listed in Table 13.1. The rates for CADAUD (or AUDCAD) can be calculated from the above two quotes.

	Table 13.1: Spot Rates and Cross Rate Calculation
USDCAD		USDAUD		CADAUD
Bid	Ask	Bid	Ask	Bid	Ask
1.1641	1.1646	1.2948	1.2956	?	?

From the above quotations, cross rate between CADAUD has to be calculated

Cross rate can be calculated as follows:

•      Bank buys 1USD and pays (sells) 1.1641 CAD

•      Bank sells 1 USD and receives (buys)1.1646 CAD

•      Bank buys 1 USD and pays (sells) 1.2948 AUD

•      Bank sells 1 USD and receives(buys) 1.2956 AUD

To get the bid rate for CADAUD (CAD as base currency and AUD as quote currency), the bank must sell AUD and buy CAD. This is achieved in two steps ie. the bank must sell AUD and buy USD and simultaneously sell USD and buy CAD.

This indicates that 1.1646 CAD = 1.2948 AUD. In other words, 1 CAD = 1.1118 AUD.

To get the ask rate for CADAUD, the bank must sell CAD and buy AUD. This is achieved in two steps ie. the bank must sell CAD buy USD and simultaneously sell USD and buy AUD.

This means that 1.1641 CAD = 1.2956 AUD. In other words, 1 CAD = 1.1129 AUD. Hence the cross rate, given in Table 13.2 is

Table 13.2 :CADAUD cross rates

Bid                                        Ask

1.1118                                  1.1129

The following table, Table 13.3 reports the spot rates quoted by different banks for interbank transactions. Along with the spot rates, the cross rates have been calculated and reported.

Table 13.3: Spot Rates and Cross Rates http://www.ukforex.co.uk/cgi-bin/interbank-spot-rates.asp

Cross currency rates can also be calculated using three currency pairs.

13.3: Appreciation and Depreciation of Spot Rate:

A currency appreciates against another currency when its value rises in terms of the other currency. In a currency pair, when the value of one currency rises, obviously the value of other currency pair declines.

For example on January 1 2010, the spot rate was INR 48.25/USD. Suppose, on February 1 2010, the spot rate is INR 46.75/USD. During the one month period, as the value of INR has risen in comparison to USD. In other words, INR has appreciated or USD has depreciated.

In a simpler way, the concept can be understood as follows: On 1^st January 2010, 1 USD is equivalent to INR 48.25. Just after a month on 1^st February 2010, 1 USD is equivalent to INR 46.75. This clearly shows that USD value has gone down compared to INR.

The magnitude of percentage appreciation/depreciation (for the base currency USD) is measured as follows:

USD has depreciated by 3.11%. The negative value indicates depreciation.

In a similar token, to find out the percentage appreciation/depreciation for INR can be found out by first converting the existing quotations so that INR becomes the base currency.

Hence the spot rate of 1^st January 2010 = 1/48.25 = USD 0.0207/INR

The spot rate on 1^st February 2010 = 1/46.75 = USD 0.0213/INR

The magnitude of percentage appreciation/depreciation (for the base currency INR) is measured as follows:

INR has appreciated by 3.21%. The positive value indicates appreciation.

Box 6.1: Currency Appreciation/Depreciation

1^st January 2010, USDINR is 48.25.

1^st February 2010, 1 USDINR is 46.75

USD has depreciated by 3.11% or INR has appreciated by 3.21%.

Important to note: One currency will depreciate and other will appreciate but the amount of percentage depreciation/appreciation will be different.

Let us take another example to understand this aspect.

Spot rate of 1^st January 2010 = INR 48.25/ USD. Spot rate on 1^st February 2010 = INR49.40/USD. In this case the INR has depreciated or USD has appreciated

= −2.32 %

Without even converting the spot rate to USD price of INR, appreciation/depreciation ( for INR) can be directly calculated as

13.4: Reasons for Currency appreciation and depreciation:

Though many factors influence the domestic exchange rate, in this section, some important factors affecting the exchange rate are listed.

•      Difference in national inflation rates: The currency of a country experiencing higher inflation will depreciate and vice versa.

•      Changes in the real interest rates: Currency of a country with higher real interest rate will appreciate.

•      Investment climate: A country with better investment climate will attract investment thus leading to appreciation of the currency.

•      Political uncertainty: a country with greater degree of political uncertainty will exhibit higher depreciation.

13.5: Interpreting TC/TT Rates:

Besides quoting spot, forward rates for different maturities banks and financial institutions also quote TC Buying/Selling rate and TT Buying/Selling rate. All these quotes are spot quotations. A typical bank or financial institutions quotation may look like the details given in Table 13.4.

Table 13.4: TC/TT rates and interpretation

As we know that Spot Buying (Cash) is the rate at which the bank buys one unit foreign currency and gives INR.

Similarly TC (Travelers Cheques) buying rate indicates the rate at which bank buys Travellers cheques and pays INR. TC selling rate is the rate at which banks sell Travellers cheques and receives INR. Obviously the TC buying rate will be lesser than TT selling rate.

TT (Telegraphic Transfer) buying rate indicates the rate at which bank convert foreign inward remittances to INR. TT Selling rate indicates the rate at which the bank sends an outward remittance through telegraphic transfer.

 13.6: Interpreting Bill Buying/Bill Selling Rates:

Banks also provide spot quotations for Bill buying/bill selling rates.

Bill Buying rate: Suppose an Indian exporters has exported goods and the foreign counterpart has raised a bill. The Indian exporter would sell the bill to the bank (bank will buy the bill) and bank will pay a discounted value to the exporter. At the maturity of the bill, the bank will place the bill to the drawee (counterparty to the Indian exporter). Depending on the maturity period of the bill, the bank is going to charge a higher commission. Hence the Bill buying rate will be lesser than TT Buying rate. In a bill buying, the bank will pay INR to the exporter and buy foreign currency from the exporter.

Bill Selling Rate: Suppose an Indian importer has raised a bill to the foreign exporter. On the maturity of the bill, the Indian importer has to pay to the foreign counterpart through the bank. In this case, the bill selling rate would be applicable. In bill selling, the bank will pay foreign currency and buy INR from importers. Bill selling is higher than TT selling rates.

 Table 13.5: TT Buying/Selling and Bill Buying/Selling Rates

FOREIGN EXCHANGE RATES ON ALL RATES : PER UNIT

http://www.eximin.net/forex_rates/fer_template.asp

It can be clearly seen from Table13.5 that the banks requires a higher INR rates for selling 1 USD in Bill Selling Rate in comparison to selling 1 USD through Telegraphic Transfer. The reverse happens in case of TT Buying rate and Bill Buying rate. When the bank buys 1 USD using Telegraphic Transfer, it pays higher INR compared to buying 1 USD using Bill Buying rate. In other words, the bid-ask spread rate for Bills is the highest.