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Formula dought???

CS BHAVIK HARSHAD SHAH (Company Secretary) (1662 Points)

07 October 2012

Hi friends,

Please help me

when to use this two formula?

Formula No 1 : Forward Rate - Spot RAte/Forward RAte

Formula No 2 : Spot rate - Forward RAte/Spot Rate

PLease give ur suggestion

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4 Replies

Mandakini (CA ) (422 Points)
Replied 07 October 2012

Assuming Rs.50 per Dollar,,

We use formula no.1 (F-S/S)*(12/n)*100 to know the currency appreciation or depreciation of dollar.

We use Formula 2 to know app/dep of rupee.

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CA Ashish Pathak (Employed at Cipla Ltd.) (2779 Points)
Replied 07 October 2012

Bhavik, the above formulas are used to find forward premium/discount of currencies. We use the formula-1 when we have direct quote of the currency. And we use formula2 when we have indirect quote of currency.

CA Ashish Pathak (Employed at Cipla Ltd.) (2779 Points)
Replied 07 October 2012

Consider this example Spot rate: $1=Rs.32(DIRECT QUOTE OF dollar) and Rs.1=$1/32 (INDIRECT QUOTE OF DOLLAR) 1year forward rate are- $1=Rs.40 (DIRECT QUOTE of $) and Rs1=$1/40 (INDIRECT QUOTE OF $). Now using indirect quote (using formula 2) we can find forward premium/discount as follows- (1/32 - 1/40)/ (1/40) solving which we get 25% which means dollar currency will be at 25% premium in one year time. Similarly you can get the same answer using Direct Quote by formula1. Hope it helps. Regards.