Hello Friends,
First I would like to thank to all you members who supported me for my earlier part. Thank you so much friends.
Last time we saw few basic concepts of forex like Direct and Indirect Quote, Base and Incidental Currency, two way quotes etc etc.
Today we will learn few more concepts of Forex.
* Cross Rates:
What does it mean by?
---> There are many currencies in the world like RS, Dollar, Euro, Dem, Pound etc but it is not necessary that all the currencies are quoted with each other. But there are some common currencies which are quoted with both the currencies. Therefore to compute the rate between the currencies which are not quoted against each other but are quoted against some common currencies, we will have to eliminate common currency to compute rate and the same is called as cross rate.
For Example : Assume that Rs is not quoted against $ (Dollar) in currency market, but DEM is quoted against Rs as well as against $. Then by eliminating common currency we can find out rate between those currencies which are not quoted against each other.
if,
1 Re = DEM 2 and
1 $ = DEM 0.005
then find out rate between Rs and $ ?
Ans --->
1 Re = DEM 2, we can say it like this : 2 DEM/Rs (2 DEM per Rupee)
1 $ = DEM 0.005, we can say it like this : DEM 0.005/$ (0.005 DEM per $)
In the given case DEM is common currency and we have to eliminate this to find out rate between Rs and $ (Dollar). But next question arose is how to eliminate this common currency, right na ?
Now, write above given quotes in such a way that I can eliminate common currency i.e. DEM
RS * DEM (RS divided by DEM into (*) DEM divided by $)
DEM $
Now I have to find out 2 quotes, 1) RS per DEM and 2) DEM per $ .
from above I have DEM per $ (0.005 DEM / $)
but I dont have RS per DEM, but in part 1 of forex we learned that Direct Quote = 1
Indirect Quote
hence, we can write like this,
1 * 0.005 = 0.5*0.005 = 0.0025 RS/DEM (0.0025 Rs per DEM)
2 (It becomes difficult to clear concept only by writing, it will be more effective by talk, i hope you guys are getting)
* Value Date:
What do you mean by Value Date?
---> Friends tell me, many of you may be doing trading in share market, whether your transaction is settled on same day ?
No na, in share market T+2 system is followed i.e. 2 days after transaction your account will be settled.
Same concept is also here, it is the date on which actual exchange of currency will be taking place irrespective of date of transaction.
Sr No TYPE OF QUOTE SETTLEMENT
1. Cash / Ready Same working day
2 TOM Next working Day
3 Spot 2 owrking Days
4 Forward Any day after Spot
Sr No TYPE OF QUOTE Example : Date of Transaction Value Date
1. Cash / Ready 07.02.2014 (Friday) 07.02.2014 (same day)
2 TOM 07.02.2014 (Friday) 10.02.2014 (Monday)***
3 Spot 07.02.2014 (Friday) 11.02.2014 (Tuesday)
4 Forward 07.02.2014 (Friday) any day after 11.02.2014
*** Saturday and Sunday holiday.
* Quotation of Forward rate:
Forward rates are quoted in market as spot rate and forward differentials (Forward point).
If forward differentials are in ASCENDING ORDER then BASE CURRENCY WILL BE AT PREMIUM and forward differentials will be added to spot rate. and
If forward differentials are in DESCENDING ORDER then BASE CURRENCY WILL BE AT DISCOUNT and forward differentials will be DEDUCTED from spot rate.
Now, you may be angry on me that what I am talking, what is forward differentials, what is forward point, what to add and what to deduct and when.... many questions in your mind may be arose, now calm down read further.
Friends, there are many experts in market and who predicts correctly, many time we hear someone by talking that yaar aaj yeh company ka share itne points se kam hua ya fir jada hua...
Here also we predict future market's rate and by what point currency will gain or currency will loose, by whatever amount currency gains or lose, such points can be called as forward differentials.
If these differentials are given in ascending order then we have to add those differentials in spot rate and vice versa.
Example:
Spot Rate = 1$ = Rs 60.0000 - 62.0000
Forward rates:
1 month 17 / 18
3 months 35 / 37
6 months 53/56
And ---> Above forward rates are in ascending order hence shall be added to spot rate.
Spot Rate = 1$ = Rs 60.0000 - 62.0000
Add: 1month 0 .0017 - 0.0018
1 month forward 1$ = Rs 60.0017 - 62.0018
rate
Now how to calculate by what percentage base currency is at premium or Discount:
Formula to calculate PREMIUM / DISCOUNT of BASE CURRENCY
F - S * 100 * 12 (F-S divided by S *100 into 12 divided by N)
S N
where,
F = Forward rate
S = Spot Rate
12 = months***
N = number of months
*** In problem days / weeks can be given instead of months then use 365 / 52, whatever it may be
Formula to calculate PREMIUM / DISCOUNT of INCIDENTAL CURRENCY
S - F * 100 * 12 ( S-F divided by F*100 into 12 divided by N)
F N
where,
F = Forward rate
S = Spot Rate
12 = months***
N = number of months
*** In problem days / weeks can be given instead of months then use 365 / 52, whatever it may be
Guys, it is difficult to understand concept without questions so I request you please solve the problems from your book. It will surely help you.
For today we will stop here, if any problem arose from this please ask me at siddharthbumb@gmail.com
Click below for Part 1:
Thank You
Regards,
Siddharth Bumb
siddharthbumb@gmail.com
CAclubindia
