Friends lets start from the very beginning and discuss all concepts....

Here is 14 Basics Rules for Forex:

Rule 1: In any Transaction involving Foreign currency, u r selling one currency and buying another.

Rule 2: In an exchanged rate, two currencies are involved (a pair).

Rule 3: 'X' units of domestic currency equals 1 unit of foreign currency::::::::::} Direct Quote

contd.. In a direct quote, the price comes first, the commodity comes next.

contd...In a direct quote the foreign currency is the commodity which is being brought and sold..price comes first,commodity next.

Rule 4: In an indirect quote, the domestic currency is the commodity, which is being bought and sold; Commodity comes first;price next.
 

Rule 5: Q:How do you convert a direct quote into indirect, or vice versa?

               Ans:Divide 1 by given direct quote. The result is indirect quote.

                Rs.53.02=1$

                 Rs 1= 1/53.02= 0.02$

Rule 6:The term "For" means product.  That the phrase "for the Dollar" would means dollar is the product.

Rule 7: A quote which is a direct quote for the American  is said to be in American terms. A quote which is an indirect quote for the American is said to be in European terms

The USA                        Term
Direct                             American
Indirect                           European
 

Rule 8: The Bank`s quote of Bid and Ask is from the banker`s perspective. Bid=Buy    Ask=Sell

Spread::::::::::::::}

Formula 1.        Spread   =   Ask-Bid
Formula 2.         Bid(Rs/$)   =  1/Ask ($/Rs.)
Formula 3.        Ask (Rs/$)    = 1/Bid ($/Rs.)

Rule 9:In a numerator denominator format, the denominator currency is bought or sold, as the case may be, in exchange of numerator currency.

Rule 10: Direct/Indirect conversion                                                                                                                                                                                     A two way quote take the inverse of each rate (bid and ask) and switch them around..

:::::} A Cross rate denotes an exchange  rate that does not involve the home currency.
:::::} Cross multiplication is used to find the exchange rate between INR and USD.... (example)
:::::} The Nr. and the Dr. quotes can be expressed in the Numerator-denominator format. The numerator is the price and the denominator is the product.
::::::}The Spot Rate is the rate applicable for immediate settlement.
::::::}The Forward Rate is the rate contracted today for exchange of currencies at a specified future date.

Rule 11:Appreciation and Depreciation      
                                             
Forward Rate>Spot Rate  then Foreign Currency  =A    & Home Currency= D

Forward Rate>Spot Rate  then Foreign Currency  =D   & Home Currency= A

Rule 12: In a Direct quote, the foreign currency is the commodity and the home currency is the price.

::::::::::}Spot Bid :Bank`s buying rate in spot market

::::::::::}Spot Ask: Bank`s selling rate in spot market.

:::::::::}Forward Bid: Bank`s buying rate in forward market.
:::::::::}Forward Ask: Bank`s selling rate in the forward market.

Rule 13:Forward Rate, premium and Discount

Commodity      DQ          IDQ
Appreciating     ADD        Deduct
Depreciating     Deduct   Add

Rule 14: If  Swap Ask> Swap Bid, the foreign currency is appreciating. Hence , add the swap points...and vice versa.

Regarding Rule No 11, 12 & 14.

There is a wrong notion of appreciation & depreciation and it has nothhing  to do with forward rate and swap points. if you add/less the swap points you get forward rate. Swap points are basically the interest rate difference between the two currency( read interest rate parity theory) A currency is said to be appreciated  if on a particular  date let say  the spot rate of USD/INR On 25th OCT is 53.70 and after one month say on 25th Nov it is 53.00. You can say INR has appreciated and USD has depreciated. But on 25th OCT the 1month swap point is say   a premium of 30 points then the forward rate ( 25th  NOV) is 54.00. Then you can't say that INR is a depreciating currency and USD is an appreciating currency. you can conclude a currency is appreciating or depreciating if you compare its spot rate over a period of time.

     when to add or less the swap points

 when swap points are quoted from Low  to High.i.e 30/31 then  swap points are at premium and are always added to spot rate whether it is for import or for export(i.e You want to buy or you want to sell) and when it is quoted from High to low i.e 31/30, then swap points are at discount and are always deducted from spot rate irrespective of you buy or sell

Hope you all are clear with this concept

Regards

Manoj Kanthi

email: manojkanthi @ rediffmail.com

RULE SAYS :  "  in direct quote Foreign currency will get unitized and in INDIRECT vice versa.

in all questions we have to find that.. it is a direct or indirect quote..

in Direct quote - "foreign" currency gets unitized

in indirect-  "HOME" currency gets unitized

write it on a paper..and u will understand this..

this will be reqd in each formula.. whether u Take : PPP or IRP OR Fischer or any formula.. firstly u will have to identify the quote is a direct or indirect than anyy formula can be applied..

it works and also very helpful..

any querry than post it..

Re Manoj Kanthi.

Friend i want to now what is the wrong notion regard point 12. it is i liner definations and no conceptual part.

Swap point:::::} The diffrence between the forward rate and spot rate is known as Swap points.

here is Rule 14 Explaination:
The swap point do not normally come with minus or plus signs. In other words, whether we should add the swap points to arrive at the forward rate or whether we should deduct will have to be inferred.
This inference can be made by employing Rule 14 iro Direct quote.
 

Rule 14(1): if swap ask>swap bid, the foreign currency is appreciating. hence add the swap points.
Rule 14(2): If swap ask<swap bid, the foreign currency is Depreciating. hence deduct the swap points.

This rules pre suppose that the forward spread is greater than the spot spread.

Swap Ask>swap Bid, the foreign currency is appreciating. Notice that Forward spread>Spot spread.

so there is crystal clarity with this concept and no wrong notion regarding point 12, & 14.

Re: Explanation of rule 11

Apreciation and depreciation

Relative to Spot Rate , Forward Rate can either be favourable or adverse. This is reffered to as "Premium or Discount", attributed respectively to appreciation or depreciation in value of one currency against another.

Example:
Suppose a pen costs Rs.10 today and is expected to cost rs. 12 a month latter (Note: the quote for the pen has been given in the direct mode). this means, that wehave to pay more  INR to buy a pen a month later, than if we buy it today itself. This pen is become costlier and the rupee is going to become cheaper a month later. the pen is said to be appreciating in value and the rupee is said to be depreciating in value.

The logic can be extended to currencies as well.

Friends rule 11 also has no wrong notion and please correct me if i am not correct.

Akash you really have very cute way for solving direct/indirect quote.

Originally posted by : *Nishant Jain*
	Akash you really have very cute way for solving direct/indirect quote.

ya it can be said a CUTE way.. but also It makes d complexity of forex a bit easy for me.

if we will apply direct instead of indirect quote.. than we will land somewhere else..

Hi  Nishant,

There is nothing wrong in your Rule No.14, It is just one of the method to decide when swap points are to be added or deducted.  swaps points are added or deducted to arrive at forward rate  and forward rate is nothing but the likely expectation rate on that forward date,  it  is the possible rate on that date. But don't try to correlate it with appreciation or depreciation. According to your rule  if swap ask > swap bid then the foreign currency is appreciating, but to tell you with e.g that USD/INR swap points are seen to be quoted in premium in atleast last 10 years barring one or two occasion .So from your rule USD  should be an appreciating currency and INR a depreciating one. Let me tell you that INR too has appreciated and has reached a high of 39.16 on 7th Nov 2007  and that time swaps points were at premium(swapask >swap bid).

So swap points are not the deciding factor whether a currency is appreciating currency or depreciating. swap point are in existence because of interest rate differential between the two currency,otherwise interest rate arbitrage will be possible. your Rule is good enough to decide when swap points are to be added or deducted from spot rate.

Regards

Manoj Kanthi

Students  normally get confused with Direct quote and indirect quote or American quote and European quote.

This are all various method of  quoting one currency against other.  Dont worry there is is other way to recognise  the currency in the pair. Since Forex involves two currencies, one currency has to be distinguished from other; the best way to do that is to designate one currency as Base currency and another as Quoted or Variable currency.

Base currency: It is on the Left hand side (L.H.S) of the currency pair and its value is always fixed or constant

Quoted/Variable currency: It is always on the Right hand side (R.H.S) of the currency pair and its value is variable or changes and is quoted as per unit of Base currency

USD/INR ----- here USD is base curency which is constant and INR is variable currency which changes

1 USD = 54.00 INR

1 USD = 53.00 INR ----- here the value of INR which variable currency changes

EUR/USD----- here EUR is the base currency and USD is the variable currency which changes

1 EUR = 1.2900 USD

1 EUR = 1.2850 USD---- here value of  USD  which is t variable currency  changes

Direct quote: Means number of unit of domestic currency per unit of foreign currency

1 USD = Rs. 53.00 ………here USD is foreign currency and Rs. is domestic or local currency

Indirect quote: Means number of unit of foreign currency per unit of Domestic currency.

1 Rs. = 0.02040 USD …….. here number of unit of foreign currency changes

Indirect quote = 1/ Direct quote

once you have identified which is base currency and which is variable currency you can put the same in PPP , Fisher or Interest rate parity  formula to find out forward rate.

for e.g

F   = (1+rv )   

S     (1+rb )

Where F = Forward rate, S= Spot rate , rv= Interest rate of variable currency,  rb=Interest rate of base currency

Regards

Manoj kanthi

email: manojKanthi @ rediffmail.com

@ Nishant such a nice way of expressing in gist

@ Akash .... sach  me bada cute sa example h ....

@ Manoj Sir your explanations  r too good Sir

@ Pulkit ... we will wait for u dear

 Now my questions starts here ....

Suppose the spot exchange rates of french franc n Dutch guider are $.2030 n   $.6194,respectively.  AND the cross rate b/w french franc n the CAD doller is  3.6347.  frncs to CAD $)

what is the US $ value of the CAD doller ?