CURRENCY QUOTES

THEORITICAL FRAMEWORK: DECODING THE JARGONS IN THE CASE

Foreign Exchange:
Foreign exchange is the exchange of one currency for another or the conversion of one
currency into another currency.

FOREIGN EXCHANGE

FOREIGN EXCHANGE
SPOT

FOREIGN EXCHANGE
FORWARD
Foreign Exchange Spot ( FX Spot):

The forex spot rate is the current exchange rate at which a currency pair can be bought or
sold. The spot forex rate differs from the forward rate in that it prices the value of currencies
compared to foreign currencies today, rather than at some time in the future.
In other words Spot FX transactions is the purchase or sale of one currency for another .
Structure:
A spot contract is a binding obligation to buy or sell a certain amount of foreign currency at a
price which is the "spot exchange rate" or the current exchange rate for settlement in two
business days time.

SPOT
2
1

Business days

Trade

Value

(Execution Date)

(Delivery
Date)

Fig: 1.1: FX SPOT STRUCTURE

Trade Date:
It is the date when the Spot contract is executed.
Settlement/ Value Date:
It is the date on which the funds are physically exchanged as per market convention for spot
delivery.
How the pricing of currency in Spot exchange is determined?
Pricing of foreign exchange or the spot exchange rate is determined by the demand and
supply of the currency in the market.
Factors that affect the demand and supply of the currency:

Current rate of Inflation in the country.

Expected future inflation rate.
Balance of payment of country.
Monetary and fiscal policy of the country.
Difference between foreign and domestic interest rates.

CURRENCY PAIR:
A currency pair is the quotation and pricing structure of the currencies traded in
the forex market: the value of a currency is determined by its comparison to another currency.
1.

Base ( Fixed currency)

2 Currencies

2. Term / Quotes ( Variable )

It shows How many units of term currency will equal one (1) unit of base currency.

Mathematically, it can be shown as:

1 unit of base currency = X units of term currency

Bid and Ask Rate:

It is a two way price quotation that indicates the best price at which a security can be sold and
brought at a given point of time.
BID:
It is the maximum price that the buyer are willing to pay for the security
Ask:
The minimum price that the sellers are willing to receive for the security.
Spread:
The difference between bid and ask price is called Spread. It is the key indicator of the
liquidity of an asset. The smaller the spread, better the liquidity.
Direct Quotations:
IA direct quotations, the unit of foreign currency is kept constant and its value is expressed in
terms of variable home currency. Thus the unit of home currency varies for every unit of
foreign currency.
E.g. USD 1 = Rs. 67.9350
GBP 1 = Rs. 90.5929
Indirect Quotations:
In, Indirect quotations, the unit of home currency is kept constant and it is expressed in terms
of variable units of foreign currency.
e.g. Rs. 100 = USD 1.47
Rs. 100 = GBP 1.10
Note: India has adopted the direct quotation system from August 6, 1993.

ANALYSIS FROM THE PERSPECTIVE OF MARKET MAKER AND MARKET USER

Market Maker:
Foreign exchange market maker refers to those financial institutions (banks and brokers)
which perform the function of intermediaries by quoting buy or sell rates for transacting
currencies. They actively participate in the market and inform other financial
institutions and corporations about the bid and offer price.
Without a market maker it will take long for the buyer and seller to be matched up because
the market maker buys the FX even if there is no buyer for him is lined up.
Market makers capitalise on the difference between their buying price and their selling price,
which is called the spread.
Market user:
Market user is the participants which buys the base currency from the market maker at the
offer/ask price.

FORMING THE LOOP:

QUOTES?

BANK - A

BANK - B

USD/INR

PRICE
FACER/USER

PRICE MAKER

The above diagram is made from the price makers point of view. The price maker is the bank
or entity that provides the quotes. Thus, when bank A asks for the quotes of USD against INR
from Bank B, Bank B becomes the price maker and Bank A becomes the price facer/user.
In this case bank A buys one currency which is base currency i.e. USD from bank B and the
bank B will buy the corresponding currency i.e. INR.

EXTENDING THE ABOVE LOOP:

PURCHASE FROM BANK- A AT

BID PRICE

BID
(67.9350)
USD?

BANK A

BANK B

ASK
(67.9450)
SELL TO BANK- A AT ASK
PRICE

ANOTHER PERSPECTIVE WHEN BOTH BASE AND QUOTE CURRENCIES ARE

TRADED: TWO WAY QUOTATION:
From the market makers perspective

B WILL SELL INR (QUOTE CURRENCY AT

BID RATE)
B WILL BUY USD (BASE CURRENCY AT
BID RATE)

BID
(67.9350)

QUOTE CURRENCY

BANK A

USD/INR

BANK B

BASE
CURRENCY

B WILL BUY INR (QUOTE CURRENCY AT

ASK RATE)

ASK
(67.9450)

B WILL SELL USD (BASE CURRENCY AT ASK

RATE

From the perspective of market user:

A WILL SELL USD (BASE CURRENCY AT

BID RATE)

BID
(67.9350)
A WILL BUY INR (QUOTE CURRENCY AT
BID RATE)

BANK A

USD/INR

BANK B

A WILL BUY USD (BASE CURRENCY AT ASK

RATE)

ASK
(67.9450)
B WILL SELL INR (QUOTE CURRENCY AT ASK
RATE)

Analysis:
In two way price the spread is always in favour of the Maker and against the User
Reason- (1) This is because the User/facer of price will always take less of the quote
currency for each unit of base currency and,
(2) The User gives more of quote currency for each unit of base currency

From the above diagram it is clear that for the quote of Rs.67.93/94, Bank A (Market user)
Will take less i.e. Rs. 67.93 per USD (Selling) and give more i.e. Rs. 67.94 per USD
(Buying).

ANALYSIS FROM CURRENT MARKET DATA:

Symbol

Bid

Ask

Spread

EURUSD

1.10664

1.10690

0.20

USDJPY

102.330

102.353

0.20

AUDUSD

0.74003

0.74028

0.40

GBPUSD

1.33602

1.33629

1.70

USDCAD

1.30525

1.30550

0.80

NZDUSD

0.70711

0.70736

0.50

EUR/USD:
Base currency EUR
Quote currency USD
MARKET MAKER;

Buy EUR @ 1.10664 USD

Sell EUR @ 1.10690 USD

MARKET FACER:

Buy EUR @ 1.10690 USD

Sell EUR @ 1.10664 USD

There is clear edge for the market maker in the foreign exchange transaction in the spot
market. They will buy at BID price and sell at ASK price. The difference between the
BID & ASK (Pips) is their margin.