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How well do you know forex Treasury operations?

How well do you know forex Treasury operations?

In India, over 90% of Treasury operations in forex (foreign exchange) market is between the banks. The inter-bank foreign currency operations are taking place for two purposes namely (i). Buying and selling foreign currency on behalf of their customers as intermediary. (ii). Proprietary trading (buying and selling currencies on its own account) with an intention to make money on movement of exchange rate.     

What is Exchange Rate?

Exchange rate is the rate at which one currency is converted into another currency. It means the price of a currency is in terms of another currency like price of any product in the market. For example, cost of one tooth brush is Rs.30.00 likewise cost of one USD is the foreign exchange market.

How Exchange rate is determined?

The exchange rate of a currency is determined by demand for and supply of each currency. Let us take an example of price of USD in Indian Market. If there is less demand for US Dollar and at the same time there is abundant supply of US dollars available in India, then dollars would be sold in India at cheaper rate. So we pay less Rupees to buy a US dollar, we call it “Rupee become stronger vis-à-vis US Dollar. If demand for US Dollar is outstripping their supply for any reasons like our import (out flow of dollar) is more than our export (in flow of dollars) or FIIs (Foreign Institutional Investors) pulling out their investments from Indian market. In such situation, the price of dollar goes up,and we call it “ Rupee become weak against Dollar”.

How Exchange rates are quoted?

There are two methods of quoting exchange rate. i. Direct method of rate quotation. ii. Indirect method of rate quotation. In India we follow direct method of rate quotation with effect from 01.081993. Till 31.07.1993 India was following indirect method of rate quotation.

What is direct method of rate quotation?

The direct method of rate quotation is called direct quote or home currency quotation. In this quote, the home currency is quoted per unit of foreign currency. In the other words it is a quote where home currency is the variable unit.

For example: I USD = Rs.60.33

What is buying rate?

Buying rate is the purchase rate quoted by Authorized Dealer, at which rate he is ready to buy foreign currency from the public (customer).

What is selling rate?

Selling rate is the rate quoted by Authorized Dealer, at which rate bank (AD) is ready to sell the foreign currency to the public Customer).

The maxim ‘Buy low and sell high’  is coined from the point of view of Authorized Dealer (AD). For the authorized dealer, the foreign currency is a commodity and he makes profit by trading foreign currency, i.e.  Buying and selling rates are not the same. AD is buying the foreign currency at lower rate per unit and selling the same currency at higher rate per unit.  Therefore” buy low and sell high” maxim is coined from the point of view of AD. It means customer gets less local money when he sells a unit of foreign currency and he has to pay more local currency to AD when he buys foreign currency.( Please note in indirect quote the maxim is opposite i.e. ‘buy high and sell low”.)

When TT buying rates are applied?

TT buying rates applied by Authorized Dealer (AD) when clean inward remittance where the cover funds are already credited to the NOSTRO account of the AD.  For following items bank apply TT buying rate.

a)    Realization of instruments sent for collection

b)    Cancellation of DD/MT/TT issued earlier.

c)    Cancellation of Forward Sale contracts.

When TT selling rates are applied by AD?

  1. When banks (AD) issues DD/MT/TT in foreign currencies.
  2. Cancellation of bills purchased/discounted/negotiated if returned unpaid.
  3. Recovery/refund of Inward remittance credited to customer’s account.
  4. Cancellation of forward purchase contract.

When Bill buying rates are applied by AD?

  1. Purchase or discount or negotiation of bills
  2. Where drawing bank at one center remits cover for credit to a different center.

When Bill selling rate is applied?

Bill selling rate is applied while making payment of import bill.

For Travellers cheque/currency notes: Different rates are applied for selling and buying Travelers Cheque and when Currency notes are purchased or sold by the AD. The rates quoted by AD for these items are not attractive compared to other types of instruments.

What is a two way quote?

In earlier days, banks in India used to trade foreign currency through closed electronic system. Like in Stock market, the bank dealer used to quote two rates conveying that he would purchase a currency at one rate and sell at another rate. The method of quoting both buying and selling rate is called two   way  quote.  For example, if the buy/sell rate quoted by the banker is 50.29/50.33 it means he is ready to purchase 1Dollar at 50.29 and would sell 1USD at 50.33. This method of dealer quote a price of a ‘currency pair’ is called two way quote.

How merchant rate is arrived by AD?

The Authorized Dealer would load profit and exchange margin on interbank rate as per their bank’s policy. Such rate is called merchant rate.

Value dates in foreign exchange rates:

Cash transactions:  Rate Today and Settlement same day.

Tom: Rate Today and Settlement on first succeeding working day.

Spot: Rate Today and settlement on second succeeding working day.

Forward: Rate today and settlement from third succeeding working day.

Forward rate quoted at premium or discount:

In direct method of quoting, forward rate at premium means, the foreign currency will be dearer (costlier) at a future date compared to spot rate. The AD would add premium on spot rate on buying as well as selling side to arrive at the forward rate. If forward rate is at a discount, that means the foreign currency will be available at cheaper at a future date, compared to spot rate. The discount is deducted from spot rate on buying as well selling rate to arrive at the forward discount rate. .


The derivative is financial product, it is used to hedge exchange risk, interest rate risk etc. As the value is derived out of underlying, it is called derivative. The examples of derivative are

  1. Forward contract
  2. Options
  3. Forward rate agreement
  4. Interest rate swaps

Derivatives are traded in exchange house or over the Counter (OTC). Most of the derivatives are marked to the market and there is a market risk of loss. However derivatives divert risks from investors who are risk averse to those who are ready to take risk for earning more profit. 

Forward contract

Exchange agreement between two parties to deliver one currency in exchange for another currency at a forward or future date.

Futures contract: 

Futures contract is an agreement to buy or sell a particular commodity, currency or security on a fixed future date, at a fixed price. Unlike option, in future contract, the buyer and seller must complete the deal as agreed in the future contract.

Exchange Contract?

Exchange contract is a Verbal, or written agreement, between two parties, to deliver one currency in exchange for another currency, for a specific value, date, or as in the case of an option contract, for a specific period.

What are the options?

Options are two types. 1. Call option.   2. Put option.

Call option: Call option is the option of the buyer to buy an asset at a specified price and time.

Put option: Put option is the right of a seller to sell an asset at a specified price and time.

Obligation of buyer or seller under option contract:

There is no obligation on the part of buyer or seller to buy or sell the asset at ‘exercise price’ under option contract. They will do so, if the deal is profitable to them. In case of lapse of option, only option money or premium, which is initial purchase money of the option, is lost. The agents of trade and industry normally hedge, by way of options, against the risk of wide fluctuations in prices. Option also allows dealers and speculators to gamble for large profits with limited liability. The maximum option period allowed is one calendar month. If the delivery date or the last date of the option happens to be a holiday, the delivery has to be effected on the preceding working day.

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