International Business

How to Interpret the Quotations in International Markets both Spot and Forward

Exchange rates in international markets:  In international markets, all rates are quoted in terms of US dollar. For instance, at Singapore Deutsche Mark may be quoted at 1.7425/7440 and French franc at 6.7252/7308. This should be understood as:

USD 1 = DEM 1.7425 — 1.7440

USD 1 = FFR 6.7250 — 6.7308.

An exception to this rule is the pound-sterling, which is quoted in variable units of US dollar per pound-sterling. The rate of exchange between pound-sterling and US dollar is known as the ‘cable rate’.

In interpreting an international market quotation, we may approach from either the variable currency or the standard currency, viz., the dollar.

Interpreting through the variable currency: Let us consider the quotation USD 1 = DEM 1.7425/7440. While buying Deutsche Mark, the quoting bank would like to acquire as many marks as possible per dollar. While selling marks, it would part with least number of marks per dollar. Therefore, in a way, the quotations follow the rules of indirect quotation and the maxim ‘Buy high, Sell low’ is applicable. Thus, DEM 1.7440 is the mark buying rate and DEM 1.7425 is the mark selling rate.

Interpreting through the dollar: Buying mark is selling dollar and vice versa. Thus, we may interpret the same quotation keeping dollar as the currency traded. The quoting bank, while buying dollar, would part with fewer marks per dollar and while selling dollars require as many marks as possible.

Interpreted this way, DEM 1.7425 is the dollar buying rate and DEM 1.7440 is the dollar selling rate. It may be observed that when viewed from dollar the exchange quotation partakes the character of a direct quotation and the maxim ‘Buy low, Sell high’ is applicable.

We will follow the interpretation through dollar for the following advantages:

(i) It falls in line with the international practice; and

(ii) the same rules that are applied in interpreting the interbank quotations in India can be followed for international quotations also.

Forward Margin/Swap points

At Singapore market dollar may be quoted against Deutsche mark and French franc as follows:
Deutche mark French franc

Spot 1.7425/40 6.7250/75

1 month forward 50/60 75/65

2 months forward 70/80 90/80

As against marks, the forward margin for dollar is DEM 0.0050/0.0060. Since the order in which the forward margin is ascending, forward dollar is at premium. Premium is added to the spot rate to arrive at the forward rates, both in respect on purchase and sale transactions.

Based on the date given above, the forward rates for dollar against Deutsche mark are arrived at as follows:

Dollar Buying Dollar Selling

1 month forward DEM 1.7475 1.7500

2 months forward DEM 1.7495 1.7520

As against French francs, the forward dollar is at a discount. (Note that the forward margin is in descending order.) Discount is deducted from the spot rate to arrive at the forward rate, both for buying and selling. The forward rates for dollar against French franc, based on the data already given are as follows:

Dollar Buying Dollar Selling

1 month forward FFR 6.7175 6.7240

2 months forward FFR 6.7160 6.7195

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