LORD KRISHNA COMMERCE ACADEMY 1

CMA. CHANDER DUREJA 9811981369

SUMMARY OF FOREX

1. Why Forex:
Forex Exchange is needed in the economy because of trade
between two countries. Transaction between two countries can be
made because of following reasons
i. Purchase of goods
ii. Sale of goods
iii. Raising the funds through foreign country
iv. Investing the fund in other country

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v. Tourist

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2. Who will go to Exchanger

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i. The person who will receive the payment in other currency.
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ii. The person who will have to make the payment in other currency
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3. How to convert one currency into another

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Step 1: Exchange rate must be in standard form

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N CR2
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CR1 =
One Unit In L.H.S Few Unit IN R.H.S
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Step 2:
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a. When we have to convert LHS RHS

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RHS Currency = Given Currency x ‘N’

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b. When we have to convert RHS LHS

LHS Currency = Given Currency x 1/N

Spot Rate
4. Exchange Rate
Forward Rate
Spot Rate: It is the exchange rate that will be applicable for a transaction that to be converted today
Forward Rate: It is the exchange rate that is available today for a transaction that to be taken place after
a certain period of time.
In forward contract three things are pre – determine
i. Rate of exchange ii. Timing of conversion iii. Amount of currency

Forward contracts once booked cannot be CANCELLED /

EXTENDED / MODIFIED.
 LORD KRISHNA COMMERCE ACADEMY 2
CMA. CHANDER DUREJA 9811981369

5. IF % Change in any one currency IS GIVEN then effect of such change

will be appllied on other currency.

=} If a bag is costing Rs. 100 today and it is given that Bag will be
costlier by 20 % then the expected price if bag is Rs. 100 + 20% of 100.
Means WHE BAG IS COSTLIER THEN ITS PRICE BE INCREASED BY Rs.20.
Same is applicable with Currency .

e.g. i. 1$ = £40 e.g. ii. 1$ = £50

$ INCREASES BY 20% $ DECREASES BY 20%
Find New Exchange Rate Find New Exchange Rate

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Sol: 1$ = 40 +20% of 40 Sol: 1$ = 50 - 20% of 50

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= £40 + 8 = £50 - 10
1$ = £48 1$ = £40

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e.g. iii. 1$ = £40 e.g.iv. 1$ = £50

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£ INCREASED BY 20% £ DECREASED BY 20%
Find New Exchange Rate as
Find New Exchange Rate
Sol: 1$ +20% of 1 = £40 Sol: 1$ - 20% of 1 = £40
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1.2$ = 1$(1 – 0.20)= £40
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1$ = £40 0.80$ = £40

1.2 1$ = £40
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1$ = £33.33 0.8
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1$ = £50
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6.SELECTION OF BID AND ASK RATES Point to remember while using two way quote
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1. Exchange rate MUST BE in standard form

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(i.e. 1 unit of currency in LHS)

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2. Make ARROW DIAGRAME to satisfy need of

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customer

3. Think from angle of bank / Exchanger

4. Think only for LHS Currency

5. If LHS currency is coming to bank =>

Use BID rate
Generally Exchange rate is given in the form of
OR
TWO WAY QUOTE
If LHS currency is going out from exchanger = >
Use ASK rate
1$ = x £ - y £

BID ASK

Buy Rate of LHS Selling rate of LHS

Currency Currency
 LORD KRISHNA COMMERCE ACADEMY 3
CMA. CHANDER DUREJA 9811981369

7. Whenever there is a change in Exchange rate then it means change is given in the currency with one
unit in exchange rate
e.g. 1$ = £50 e.g. 1£ = 0.02$
Exchange rate = 10% Exchange rate = 10%
=> 1$ DECREASES BY 10% => 1£ INCREASES BY 10%

8.
Hedging Techniques (PROTECTION FROM UNCERTAINTY )
[To convert uncertainty => Certainty]

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MMO Option

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Forward contract
Call Put

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9.
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MMO (HEDGING METHOD )

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Amount receivables in foreign market Amount payable in foreign market

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9(A). MMO: Amount Receivables in foreign market

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Step 1: Take loan in foreign market @ Borrowing rate

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Step 2: Convert such loan into home market @ spot rate

Step 3: Such converted amount will be deposited into home market

@ deposit rate

Step 4:Compare amount receivable with other Hedging techniques &

select higher amount receivable option

9(B) . MMO: Amount payable in foreign market

Step 1: Deposit amount in foreign bank to pay after ‘n’ period @ Deposit rate .
Step 2: Compute equivalent amount required in home country @ spot rate.
Step 3: Take loan from home country @ borrowing rate .
Step 4: Repay amount in home country after ‘n’ period & compare this amount with others hedging
techniques. And select a least amount payable option .
 LORD KRISHNA COMMERCE ACADEMY 4
CMA. CHANDER DUREJA 9811981369

10. IRPT: a. When F/R & S/R are so designed that they compensate the effect of two different
interest rates of two countries then such situation is said to be as per IRPT.

b. AS per IRPT
F/R = 1 + r (RHS)
S/R 1 + r (LHS)
c. % Premium / Discount Computations
Through Exchange rates:
% Premium / Discount is LHS Currency = Forward Rate – Spot Rate x 100
Spot Rate
% Premium / Discount in RHS Currency = Spot Rate – F/R x 100
F/R

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Through Interest Rates

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% Premium / Discount on one currency = R (other) – R (Same)

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1 + R (Same)

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d. Currency of a country will be at premium if it has lower interest rate than other currency
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13. There is no rule for reversal of same forward contract
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A forward contract once entered will be implemented on due date. It can be reversed only through
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entering another forward contract .

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14. Customer may request the bank for cancelation of forward contract in following
cases;-
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Time of How cancelled Date of New Due date of new Rate of

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request forward reverse contract exchange for

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New Forward
Contract
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A Before due Bank will enter into a On the date of Due date of original F/R available on
date new forward contract request contract the date of
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reverse of previous one . request for

original forward
contract due
date
B At due date By entering into a new Oringial Due date of original Spot rate
foreign exchange Contract Due contract available on
contract in spot market date Original due
reversal of previous . date.
C After Due By entering into a new Date of request Date of request Spot rate on the
date (within foreign exchange date of request .
15 days) contract in spot market
reverse of previous one .
D Customer not By entering into a new Due date + 15 Due Date + 15 days Spot Rate
comes to foreign exchange days available on
bank within contract in spot market Due date + 15th
15 days from reverse of previous one . day.
due date
 LORD KRISHNA COMMERCE ACADEMY 5
CMA. CHANDER DUREJA 9811981369

Recovery of loss will be made from customer in all above cases i.e. A, B, C,& D from reversal of new
contract
Transfer of profit to customer will be made in case of A & B only

15. Extension of forward contract:

We have to follow following two steps
Step 1 :Make a reverse contract for exchange of currency for same expiry date of original contract

Step 2 :Enters into a new forward contract for required Time by Customer .

16. Rupee Roll over contract:

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Maximum period of a forward contract is only 6 months. But if customer required a forward

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contract for more than 6 months then bank will enters into a rupee roll over contract. In this case bank will
make a forward contract for 6 months & on expiry, bank will enter a new reverse the forward contract .

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And profit or loss on such reversal will be given or taken to/from customer

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Bank will also enters into a new forward contract for another 6 months on its suo – moto
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17. In case of 14, 15, 16 above be carefull while computing profits
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Profit of customer = Receivable of customer – Payable of customer

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Or
Profit of bank = Receivables of bank – Payable of bank
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18. Interest Rate Swap

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Under Interest Rate Swap, parties can have benefit from exchange of interest through a middleman
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Middleman
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Int. of his choice gain(x) Int. of his choice gain (y)

Co – X Co – Y
Loan x Loan y

Bank Bank

 Gain in Interest rate swap arises due to different credit rating of different companies

Gain in interest rate Swap = Difference of interest in fixed rate – Difference of interest of floating rate

 Burden on company x & y = Interest paid by company – Reimbursement from middleman

 Gain to Middleman = Interest received – Interest paid
 LORD KRISHNA COMMERCE ACADEMY 6
CMA. CHANDER DUREJA 9811981369

19. Cross currency rates

One Way Two Ways

1 A = n1 B 1 A = n1 – n2 B
1 B = n2 C 1 B = n3 – n4 C
A/C = A/B x B/C A/C = A/B x B/C
1A = n1B => B/A
BID ASK
If we require B/A => 1A = n1 – n2B
A/B = 1/n1
A/B = 1/n2 – 1/n1

20. Arbitrage gain through different exchange rates

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If we have two different exchange rates then one currency can be bought from one exchange rate

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& sell in another exchange rate. Arbitrage gain through such buy & sell is possible if ‘Ask’ rate of exchange
of one exchange rate is less than BID rate of another exchange rate

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Or IF Bid Rate Of One Exchange rate is > Ask Rate of Other Exchange Rate

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Means Arbitrage is possible as
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21. Inflation rate parity: It is similar to interest rate parity theorem with the exception that it will design
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forward rate & spot rate to compensate inflation of two different countries
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 If we have spot rate & inflation rate then

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Forward rate = 1 + r (Inflation) (Other)

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Spot rate 1 + r (Inflation) (Same)

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& Also Premium & Discount can be computed with the difference of forward rate & spot rate or
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with the inflation rates of two different countries

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22. PLEASE COPY HERE RULES GIVEN FOR ARBITRAGE GAIN IN ONE WA Y QUOTE AND TWO WAY QUOTE
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IF SPOT RATE AND FOREARD RATES ARE NOT AS PER IRPT .