It is the rate of one currency in terms of another currency.1 Examples:
Direct quote: In this case there is one unit of foreign currency and corresponding units of home currency. Examples of direct quotes in India: 1$ = Rs.40 1£ = Rs.82 1 Euro = Rs.54 Indirect quote: In this case there is one unit of home currency and corresponding units of foreign currency. Examples of indirect quotes in India: Re. 1 = $ 0.0250 Re. 1 = £ 0.0122 Re. 1 = Euro 0.0185 International Quotes (also known as cross currency quotes) In this case, both the currencies are foreign currencies. Examples of international quotes in India: 1$ = £ 0.5488 1£ = $ 1.8222 1 Euro = $ 1.2000 In practical life, there are two rates in a foreign exchange quote. The first rate of the quote (known as bid) is the rate at which the bank buys left hand currency, the second rate of the quote (known as ask) is the rate at which the bank sells the left hand currency. The difference between the two rates is the profit for the bank. 1 $ = Rs.40.10 / Rs.40.15 It is direct quote with reference to India. $ is left hand currency. So it is rate of $. The rate conveys that the bank buys Left hand currency, i.e. $, @ Rs.40.10. If you go to bank to sell $1,000, the bank buys $1,000 for Rs.40,100. The rate conveys that the bank sells the left hand currency i.e.$ @ Rs.40.15. If we go the bank to buy $ 1,000, the bank sells $1,000 for Rs.40,150. Example D: 1 £ = Rs.79.95/ Rs.80.05 It is direct quote with reference to India. £ is left hand currency. So it is rate of £. The rate conveys that the bank buys Left hand currency, i.e. £, @ Rs.79.95. If you go to bank to sell £1,000, the bank buys $1,000 for Rs.79,950. The rate conveys that the bank sells the left hand currency i.e. £, @Rs.80.05. If we go the bank to buy £ 1,000, the bank sells £1,000 for Rs.80,050. Example E : Re.1 = $ 0.0250 / $0.0251 It is indirect quote with reference to India. Re. is left hand currency. So it is rate of Re. The rate conveys that the bank buys Left hand currency, i.e. Re, @ $ 0.0250. Suppose, You have Rs.1,00,000. You go to the bank to convert them into $.You will be selling Rupees to the bank. Bank will be buying Rupees. So the applicable rate is $ 0.0250. For Rs.1,00,000, you will get 1,00,000x0.0250 i.e.$ 2500. Example F: Re.1 = $ 0.0250 / $0.0251 It is indirect quote with reference to India. Rupee is left hand currency. So it is rate of Re. The rate conveys that the bank sells Left hand currency, i.e. Re, @ $ 0.0251. Suppose, You have $2,500. You go to the bank to convert them into Rupees. You will be selling $. The bank will be selling Rupees. The applicable rate is $ 0.0251. For $2,500, you will get 2,500/0.0251, i.e. Rs.99,602 Example (A) Convert the following direct quotes (in India) into indirect quotes: 1$ = Rs.40 1£ = Rs.82 Answer: Indirect quotes (in India) Re. 1 = $ 1/40 i.e. $ 0.0250 Re. 1 = £ 1/82 i.e. £ 0.0122 Example (B) Convert the following indirect quotes (in India) into direct quotes: Re. 1 = $ 0.0222 Re. 1 = £ 0.0122 Answer: Direct quotes (In India) 1$ = Rs.1 / 0.0222 i.e. Rs.45 1£ = Rs.1/ 0.0122 i.e. Rs.82 International Foreign Exchange Forward Contract • With the introduction of inconvertible paper currency and free floating of currencies, fluctuations of currencies create problem for the international trades • Fluctuation of currencies create risk for exporters and importers • To help the exporters and importers forward exchange contract has been introduced as a risk management product. • Under forward contract the Ads sell a forward contract to exporters/importers where the Ads promise to convert/provide foreign currency at a particular rate despite the market rate fluctuate. • Foreign Exchange Forward Contract Foreign Exchange Forward Contract Foreign Exchange Forward Contract Spot : $ 1 = Rs.40, Six months Forward: $ 1 = Rs.42.00. $ is at premium. If a currency is cheaper in future as compared to spot, it is said to be at discount. Example I - (i) Spot $ 1 = Rs.40, (ii) Forward (Six months) $ 1 = Rs.39.75. (iii) Dollar is at discount. Example J – (i) Spot Re 1 = $ 0.0250, (ii) Six months forward Re. 1 = $ 0.0240. (iii) Rupees are at Discount