Md.

Mamun Ur Rashid, BIBM

Exchange Rate: Price of Foreign Exchange Market
Under floating ER scenario DFC and SFC will determine the exchange rate. DFC, Demand for Foreign Currency = all international payments, i.e. import payment + service payment + debt service payment + foreign investment + foreign aid SFC, Supply of Foreign Currency = all international receipts, i.e. export receipts + service receipts + debt service receipts + foreign investment + foreign aids. Direct quotation: if ER is expressed in variable units of local currencies for a fixed unit of foreign currency. Indirect quotation: if ER is expressed in variable units of foreign currencies for a fixed unit of local currency. American Terms: an ER expressed as a number of currency units per dollar. European Terms: an ER expressed as a number of dollars per currency unit. Basis Point

$/Tk. = 69.50-----------70.75 (Dhaka), Direct quotation or American Term

Big figure Where, $ is base currency Tk. is quoted currency (currency in which unit of currency is variable)

Md. Mamun Ur Rashid, BIBM

Foreign Exchange market Foreign Exchange means exchange between two national currencies. Foreign Exchange Market is the organizational framework within which individual firms and banks buy and sell foreign currencies or exchange one currency for another. It is the financial market where the exchange between two national currencies is taken place. Calculation of Spot Rate: Cost of Fund (COF) = inter-bank foreign exchange rate or purchase rate of foreign currencies Cost of Administration (COA) = non interest cost or transaction cost per dollar turnover Cost of capital (COC) = COA and COC should be adjusted with COF to calculate spot rate. Both of them are deducted from COF-buying rate and added to the COF-selling rate for the calculation of spot rate. Suppose, COF, $/Tk. = 69.50-69.70 COA = .08 tk. Per dollar COC = .05 tk. Per dollar COF $/Tk.= 69.5069.70 -.08 -.05 + .08 + .05

Spot Rate, $/Tk. = 69.37---69.83 Calculation of Cross rate: If both currencies involved in cross transaction are quoted in the same form (direct or indirect) or terms (American or European), divide the spot rate of one currency by the spot rate of other currency.

Md. Mamun Ur Rashid, BIBM

Example: $/Tk. = 69.50---70.75 (Dhaka)

$/

= 104.50---104.90 (Tokyo)

Cross rate, /Tk. = 0.660.68 If one currency is quoted in one form or term and and the other currency is quoted in another form or term, multiply the spot rates. Example: $/Tk. = 69.50---70.75 (Dhaka)

/$ = 1.50----1.55 (London) Cross rate, /Tk. = 104.25109.66 Cross rate is applicable for non intervention currencies. Intervention currency is the foreign currency in terms of which the value of local currency is expressed. In Bangladesh most of the international transactions is taken place in dollar, so dollar is the intervention currency in our country. Calculation of Forward Rate FR is an exchange rate for the transaction to be happened at some future date, but agreement for the transaction is to be done today. FR is quoted either at premium or at discount rate over the spot rate. In case of direct quotation, premium will be added to and discount will be subtracted from spot rate. The reverse is for indirect quotation.

Md. Mamun Ur Rashid, BIBM

Forward Rate = Spot Rate Swap Rate Bank Charge Spot rate: $/Tk == 69.50----70.50 3 month forward: 4060 If spot rate is direct, left lower indicate premium. Simply add. It is also called forward points, premium, discount or swap rate. Swap means spot purchase of foreign currency with the exchange of forward. Swap Rate (SP) == Spot Rate * Interest Rate Differentials * Period Annualized Spot rate: $/Tk == 69.50----70.50 Taka IR is 10% and Dollar IR is 5%, 3 months forward rate? In case of Import, the bank is going to sell foreign currency. If IR differential is loss to the bank, the ER will be expensive for the customers and the reverse is for the gain of interest rate differentials. Here bank will borrow taka and will buy foreign currency for future need of the customer and will invest the same in dollar. Thus IR differential is loss for the bank. So swap rate will be added to ER (Selling) SP = 70.50 * .05 * 3/12 = 0.88, it will be added to the 70.50 to get spot rate In case of selling foreign currency, bank charge should be added to spot rate and subtracted during the buying of foreign currency. Forward Rate (Import) == 70.50 + 0.88 + 0.30 (bank charge per dollar) == 71.68 In case of export, the bank is going to buy foreign currency. Swap rate = 69.50 * 0.05 * 3/12 = 0.87, It will be added to Spot rate because IR differential is profit to the bank (ER will be cheaper for the customers) Forward Rate (Export) == 69.50 + 0.87 0.30 == 70.07

Md. Mamun Ur Rashid, BIBM

Buying (B) Selling (S)

Spot / cash rate: $1 = Tk 69.5070.50

TT (clean) rate: $1 = Tk 69.4570.55, if telex/swift charge Tk .05 per dollar. B rate will be applicable for inward remittance where S rate for outward remittance. TT (Doc) rate: $1 = Tk 69.4070.60, if the documentation charge is Tk 0.5 per dollar. B rate will be applicable for sight export bill under contract where S rate for import payment under contract. NB: In Bangladesh, TT (clean) and TT (Doc) are merged and called TT & OD TT (Trade): $1 = Tk 69.3270.68, if trade charge is Tk .08 per dollar. B rate / OD(sight)- On Demand: applicable for the purchase of sight export bill under L/C. S rate / BC (selling)- Bills for Collection: applicable for import payment under L/C. OD (Transfer): TT (Doc) buying Collection charge In case of purchase of Foreign Cheque, we have to deduct interest charge. Usance Rate (Buying Rate): OD (sight) interest amount per dollar This rate will be applicable for buying or purchasing usance export bill/ time export bills/ deferred payment export bills. Bank purchase today but its A/C will be credited after 30/60/90 days, tenure of bills, so bank has to charge interest. Formula for calculation of interest amount: Interest Amount = Principal * Interest Rate * Period Annualized Or 1.17 = 68.25 (OD sight buying) * IR* 90/360 Or IR = 6.86 %, In case of export interest rate can not exceed 7% in Bangladesh.

Md. Mamun Ur Rashid, BIBM

Overbought or Long Situation (Position) : Buying is higher than selling in relation to the amount. Over Sold or Short Position : selling of foreign currency is higher than buying Squared Position: matching between buying and selling Limit of open position is determined by central bank (Bangladesh Bank) based on the capital of the bank. It is now max 12.5% of banks capital. Intervention Currency: The Foreign Currency in terms of which the value of local currency is expressed. In Bangladesh most of the international transactions are taken place in dollar, so dollar is the intervention currency in Bangladesh. Pegging currency: a basket of foreign currencies with which the value of local currency is tagged/ pegged/ linked up. Market Maker: party who will be quoting the price of FC Market User: party who will be asking price of FC Generally Bankers are market maker but they may be market user in case of Inter-Bank Foreign Exchange Transactions Depreciation fall in value of foreign currency caused by demand and supply of foreign currency where devaluation caused by Govt. declaration Appreciation increase in value of foreign currency caused by demand and supply of foreign currency where revaluation caused by govt declaration.