MB & FS 1.pptx

■ Parvesh Aghi
Merchant Banking
CA Parvesh Aghi

Profile
Parvesh Aghi
B. Com , FCA
PROFILE
Qualification:
 Chartered Accountant, 1985
 B Com ( Hons) from Delhi University, 1983
Worked in Industry for 23 years in following
Companies:
 Idea Cellular Ltd (GM finance)
 Grasim Industries Ltd (Sr Manager)
 Reliance Communication Ltd (Vice President)
 SRF Ltd (Chief Manager)
 Hero Group Company (CFO)
 Ballarpur Industries Ltd (Manager)

Teaching Experience- Guest Faculty
IMT
Ghaziabad
Fore School
of
Management
Shiv Nadar
University
O.P Jindal
Global
University
Bennett
University
BM Munjal
University
IIFT

Subjects
Forex Markets
Takeover code
of India
IPO
management &
ICDR (SEBI
Regulations )
Securities
Analysis and
Portfolio
management.
Mergers &
Acquisitions.
Financial
Reporting.
Merchant
Banking &
Financial
Services.
Income Tax.
Goods & Service
Tax , Customs
Act
Venture Capital
Financing.
International
Business
Environment.
Business Ethics
& Corporate
Governance,
4

Subjects :
Financial Risk
Management
Project
Evaluation &
Implementation
Audit and
Assurance
Indirect and
Direct Taxation
Cost
Management.
Strategic
Financial
Management
Stock
simulation
5

Strategic Business
Management
Financial
Derivatives (
Interest rate,
Foreign Currency ,
Stock etc)
Operations
Management
Business Statistics
6

What is a Merchant
Bank ?
7
A merchant bank is a
company that deals
mostly in
international
finance, business
loans for companies
and underwriting

What is a 'Merchant Bank
The term merchant bank refers to a
financial institution that
conducts underwriting, loan services,
financial advising, and fundraising
services for large corporations
and high-net-worth
individuals (HWNIs).

Merchant banks are
experts in international
trade, which makes them
specialists in dealing
with multinational
corporations.

Unlike retail
or commercial banks,
merchant banks do not
provide financial
services to the general
public.
Some of the largest
merchant banks in the
world include J.P.
Morgan Chase, Goldman
Sachs, and Citigroup.

International Trade
The forex dealings of a bank
with any customer are
known as ‘merchant
business’ and the exchange
rate at which the dealing or
transaction takes place is
the ‘merchant rate’.
The merchant business in
which the contract to buy or
sell foreign exchange has to
be executed on the same
day is known as ‘cash
transaction’.
The merchant business in
which the contract to buy or
sell foreign exchange has to
be executed on Future date
is known as forward
transaction’.

Introduction
The forex market is
the market in which
participants can
buy, sell, exchange,
and speculate on
currencies.

FX Market Participants
The forex market is made
up of banks, commercial
companies, central
banks, investment
management firms, hedge
funds, and retail forex
brokers and investors.

Foreign Exchange Market
Most countries of the world
have their own currencies:
the Indian rupee , the U.S
dollar., the euro in Europe,
the Brazilian real, and the
Chinese yuan, just to name
a few.
The trading of currencies is
what makes up the foreign
exchange market.
16

The Forex Market
The forex market is made up of
two levels; the interbank
market and the over-the-
counter (OTC) market.
The interbank market is where
large banks trade currencies for
purposes such hedging their
foreign exchange exposure,
facilitating international trade,
managing their investment
portfolios, and speculating on
currency price movements.
The OTC market is where
individuals trade through online
platforms and brokers.
It is a decentralized market
where participants buy, sell,
and exchange currencies
directly with each other,
without a centralized exchange
or clearing house.

What are Foreign Exchange Rates?
Two kinds of exchange rate transactions make up the foreign exchange market:
18
─ Spot transaction refers to
the buying or selling of a
currency pair for immediate
delivery or settlement,
typically within two business
days after the trade date. It is
the most common type of
transaction in the forex market
and involves the exchange of
one currency for another at the
prevailing spot exchange rate.
─Forward transaction refers to an
agreement between two parties to buy or
sell a specified amount of a currency pair
at a predetermined exchange rate, with
settlement and delivery scheduled for a
future date beyond the standard spot
settlement period (typically beyond two
business days). It is a type of derivative
contract that allows market participants
to hedge or speculate on future currency
exchange rate movements.

Foreign Exchange Market: Exchange Rates
Foreign Exchange Rates are published daily in
newspapers and internet sites such as
www.finance.yahoo.com .
Exchange rates for a currency such as rupee are
quoted in two ways ,US dollar per unit of domestic
currency or domestic currency per US dollar.
For example, on 18th August 2023 , one $ was
quoted as Rs 83.17 and 1 Rupee = $0.01202
19
https://www.xe.com/currencycharts/?from=USD&to=INR

Foreign Exchange Market: Exchange Rates
American generally would regard the
exchange rate with rupee as $0.01202 per
rupee ( or $ 1.2020 per Rs 100) while Indians
think of it as Rs 83.17 per Dollar.
Exchange Rates are quoted for the spot
transaction ( the spot exchange rate) And for
forward transaction ( the forward exchange
rates that will take place one month , three
months , and six months in the future
20

How is Foreign Exchange Traded?
One of the most fascinating things about this market –
there is no brick and mortar marketplace for Forex
trading.
Every transaction is done electronically over-the-
counter.
Unlike the stock exchange, the Forex market remains
open round the clock with currencies traded across
every time zone, five days every week.
21

Forex markets
The foreign exchange or forex
market is the largest financial
market in the world – larger
even than the stock market,
with a daily volume of $5
trillion, vs. $85 billion for
equities worldwide.
22

EXCHANGE RATES
■ SPOT RATES
■ https://www.oanda.com/currency-
converter/en/?from=USD&to=INR&amount=1
■ FORWARD RATES
■ https://www.fxempire.com/currencies/usd-inr/forward-rates
■ Dollar Index
■ https://in.tradingview.com/chart/?symbol=TVC:DXY
https://tradingeconomics.com/india/composite-pmi

USD / INR Chart
4.76 7.5 8.1
16.64 17.32
43.56
39.27
56.57
71.74
76.67
72.55
80 83
-20
0
20
40
60
80
100
1947 1967 1974 1989 1990 2000 2007 2013 2019 2020 2021 2022 2023
USD Vs INR

DIRECT & INDIRECT
QUOTES
20 September 2023 28

Direct and Indirect Quote
Foreign exchange
quotation can be either a
direct quotation and or
an indirect quotation
Depending upon the
home currency of the
person concerned.
A direct quote is the
home currency price of
one-unit foreign currency
$1= Rs 81.95
Direct and indirect
quotes are reciprocals of
each other
Rs 1 = $ .01220
Direct quote = 1/indirect
quote and vice versa
29

Direct Quote
Direct quotation
is when the one
unit of foreign
currency is
expressed in
terms of domestic
currency.
30
Direct for India
Quotation
$ Rs
1 = 83.17
Direct Quotation ( for USA)
£ $
1 = 1.24
1 EUR = $1.09

Indirect quote
Indirect
quotation is when
one unit of
domestic
currency is
expressed in
terms of
foreign currency.
31
Indirect quotation for India
Rs $
1 = 0.01220
Indirect quotation for USA
$ ₤
1 = .80
■ Indirect quotation for USA
■ 1 $ = 6.88 Chinese Yuan

Direct and indirect quotes
Direct and Indirect quotes are
reciprocals of each other, which can
be mathematically expressed as
follows.
Direct quote = 1/indirect quote and
vice versa
32

Direct indirect quote
33
In a direct quote, the
domestic currency is the base
currency, while the foreign
currency is the quote
currency.
1$ = Rs 83.17
An indirect quote is just the
opposite: the foreign currency
is the base currency, and the
domestic currency is the
quote currency.
1Rs = $ 0.01202

PRACTICE
QUESTIONS

Exercise 1
€1 = US$1.2120
Direct quote in USA
for Euro
US$1 = € ?
Indirect quote in
USA for Euro
1/1.2120
US $ 1=
€ .8250
35
Direct
quote in
Euro
countries
for $

Exercise 2
£1 = US$1.2617
Direct quote in USA
for Pound
US$1 = £?
Indirect quote in
USA for pound
1/1.2617
US $ 1=
£ 0.7926
36

Exercise 3
NZ$1 = US$0.6562
Direct quote in USA
for NZ $
US$1 = NZ$?
Indirect quote in
USA for NZ$
1/0.6562
US $1 =NZ$
1.5239
37

Exercise 4
$1 = Rs 75
Direct quote in
India for US$
1 Rupee = $ ?
Indirect quote in
India for US $
1/75
1 Rupee
=$ .0133
38

AMERICAN TERMS &
EUROPEAN TERMS

American terms & European terms
Currency pairs versus
U.S. dollars tend to be quoted
in one of two ways; in either
American or European terms.
20 September
2023
40

American terms & European terms
American terms
US dollar price per unit of
foreign currency
Example Rs1= $.01202
€ 1 = $.909
A direct quote in the United
States
A indirect quote outside the
United States
European terms
Foreign currency units per
dollar
Example $1 = Rs 83.17
$1 = €1.10
A direct quote outside the
United States
An indirect quote in the
United States

BID, OFFER AND
SPREAD

Bid, Offer and Spread
A foreign exchange
quotes are two-way
quotes, expressed as
a 'bid' and ask’
rates.
Bid is the price at
which the
dealer/bank is
willing to buy
another currency.
The ask or offer is
the rate at which
the dealer/ bank is
willing to sell
another currency.
43

BID / ASK
BID, BUY –
dealers/bank’s
buy price
ASK, SELL ,
OFFER –
dealers/banks
sell price
44

Bid, Offer and Spread
For example, a dealer may
quote Indian rupees as Rs
82.80 - 82.90 vis-a-vis
dollar.
That means that he is willing
to buy dollars at Rs 82.80/$
(sell rupees and buy
dollars), while he will sell
dollar at Rs 82.90/$ (buy
rupees and sell dollars).
The difference between the
bid and the offer is called
the spread.
The offer/ask is always
higher than the bid as inter-
bank dealers make money by
buying at the bid and selling
at the offer/ask
45

Bid / Ask & Spread
If you want to buy currency, you have to pay the
higher ask price, but if you want to sell currency,
you have to sell it at the lower bid price.
So if you were to buy currency, then immediately
sell it back to the same dealer, the dealer would
make money, and you would lose money.
Thus, the spread is the transaction cost of
trading currency.
46

Example
George is an American businessmen visiting Europe. The cost of
purchasing euros at the airport is as follows:
EUR 1 = USD 1.20 / USD 1.30 (BID / ASK)
George wants to buy EUR 10,000
The higher price (USD 1.30) is the cost to buy each euro. So he would
have to pay the dealer the ask price USD 13,000 ( 10,000 X 1.3)
47

Rules
Bid priceIndirect = 1/Ask priceDirect
Ask priceIndirect = 1/Bid priceDirect

Example
$1= Rs 80-81
Direct quote for $ in India
Converting
direct into
indirect quote
BID :
Rs1 = $1/81
ASK:
Rs1 =$1/80
Selling dollar is like buying rupees and vice versa
Buying dollar is like selling rupees
Bid priceIndirect = 1/Ask priceDirect Ask priceIndirect = 1/Bid priceDirect

Rules
The bid price for
the trader is
always lower than
the ask price

Example
Rs 1 = $.01234 - $.01250
BID is always lower than ASK
The reciprocal was the bid price of the dollar (selling price
of dollars from customer perspective which becomes ask
price or buying price of Rupee from customers point of view

Example
US $ 1= £ 0.7545 / 0.7574. £1 = $?
£1= $1/.7574 / $1/.7545

Example
£1= $1/.7574 / $1/.7545
£1= $1.3203 / $1.3253

Example
€ 1= $1.2100/ $1.2150 $1 = € ?
$1= €1/1.2150 / €1/1.2100

Example
$1= €1/1.2150 / €1/1.2100
$1= €.8230 / €.8264

Understanding FX Quote
Conventions
We refer $1= Rs 80
as
Rs / $ quote read as
rupees-dollar quote
Thus a dollar –pound
quote is written as
$/£ means
£1= ? $
1.32$/£
Means £1= $ 1.32
Again € 1 = $1.21 is
expressed as
1.21$/€ quote

Dealing with reverse currency
quotation
If a problem carry reverse
notations it becomes a
challenge to solve them
Since we are used to or
familiar with normal
notation
So to overcome this
problem if we know
through general knowledge
how many units of one
currency should another
currency be.
For example if it is given
$/Rs quote as $1= Rs 80
we know that the notation
is reverse
Similarly if it is given
€/$ :1.09
it is a reverse notation and
mean as
Through general knowledge
we know that €1 = $1.09
and not $1= € 1.09

Currency rates vs Indian Rupee –April 23
1 Yen Rs .57
1 Singapore dollar Rs 61.5
1 Australian dollar Rs 53.89
1 Canadian dollar Rs 61.54
1 $ Rs 83.17
1 Euro Rs 90.87
1 Pound Rs 105.81
20 September
2023
59

Example
Given ¥/$ as 145
Is it a normal
or reverse
notation ?
It is a normal
notation
So $1= 145 Yen

Example
Given ¥/$ as .0076
Is it a normal
or reverse
notation ?
It is a
reverse
notation
So ¥1= $.0076

Example
Given SGD/$ as .75
Is it a normal
or reverse
notation ?
It is a
reverse
notation
So SGD1= $.75

PRACTICE
QUESTIONS

Exercise 5
Given the following
quotes , answer the
following.
if 1C$ = $ 0.7703 ,
find how many dollars
we get by selling C$
10,000 ?
We have to sell C$ we
need C$ quote . Since
we have, it we can use
the quote directly to
answer the question
C$ 10,000 X $0.7703 =
$ 7703
64

Exercise 6
if 1¥ = $ 0.0093 , find
how many dollars we
get by selling ¥
20,00,000 ?
We have to sell ¥ we
need ¥ quote . Since
we have it ,we can use
the quote directly to
answer the question
¥ 20,00,000 X $0.0093
= $ 18,600
65

Exercise 7
if 1$ = .94 Swiss Franc ,
find how many dollars we
get by selling 50,000 Swiss
Francs ?
We have to sell Swiss Franc
we need Swiss franc
quote Since we have dollar
quote we convert dollar
quote to swiss franc quote
before using it
Therefore 1 Swiss Franc =
1/.94= $ 1 .0638
50,000 SF X $1 .0638 =
$53,191
66

Exercise 8
if 1 S$ = Rs 54.13 , find
how many Singapore
dollars we get by selling
5,00,000 Rupees ?
We have to sell Rupees so
we need INR quote . Since
we have Singapore dollar
quote we convert
Singapore dollar quote to
Rupee quote before using
it.
Therefore : 1Rupee = S$
1/54.13= $ .01847
500,000 Rs X S$ .01847 =
S$ 9,237
67

Exercise 9
if 1$ = Rs 68.61 , find
how many dollars we
get by selling 25,000
Rupees ?
We have to sell Rupees
so we need INR quote
. Since we have dollar
quote we convert
dollar quote to Rupee
quote before using it.
Therefore 1Rupee =
$ 1/68.61= $ .014575
25,000 Rs X $ .014575
= $ 364.38
68

Exercise 10
if 1 £ = Rs 86.34 , find
how many pounds we
get by selling 25,000
Rupees
. Since we have pound
quote we convert
pound quote to Rupee
quote before using it.
Therefore 1Rupee = £
1/86.34= £ .014575
25,000 Rs X £ 1/86.34
= 25,000/ 86.34= £
289.55
69

Exercise 11
if 1€= Rs 77.44 , find
how many Euros we get
by selling 25,000
Rupees ?
. Since we have Euro
quote we convert Euro
quote to Rupee quote
before using it.
Therefore 1Rupee = €
1/77.44
25,000 Rs X € 1/77.44
= 25,000/ 77.44=
€ 322.83
70

CROSS RATES
20 September
2023
71

Cross Rates
The exchange rates
expressed by any
currency pair that
does not involve the
U.S. dollar are called
“CROSS
RATES”
■
72
Examples
1 £ = Rs 99.50
1 € = Rs 90.55
1 ¥ = Rs .72
1 € = £.91
1 swiss franc = €.92
Exchange currency pair which does not involve dollar is called cross rate

Cross currency rate calculation
73
»Cross currency rate
is calculated by
multiplying
two exchange rates
»The USD is the base
currency in one
pairing and the
quote currency in
the other pairings
1 $ = Rs 82
1 € = $ 1.09
1 €= ? Rs
1€ = Rs 89.38
(82 x1.09)
European
Quote
American
quote

Exercise 12
74
1 $ = € .92
1¥ = $ .0076
1¥ = ? €
1 ¥= € .006992
(.92x.0076)

Exercise 13
75
1 $ = Rs 82
1 ₤ = $ 1.25
1 ₤ = ? Rs
1₤= Rs 102.50
(82 x1.25 )

Example
$1=Rs 75
$1 =£ .79
1₤ = ? Rs
£ 1 = 1/.79 =
$1.27
$1=Rs 75
£ 1= $ 1.27
𝑅𝑠
$
×
$
£
=
𝑅𝑠
£
£ 1=Rs 95.25
(75x1.27)
20 September
2023
76

Example
$1= EUR .88
$1 =£ .79
1 ₤ = ? EUR
£ 1 = 1/.79 =
$1.27
$1=EUR 0.88
£ 1= $ 1.27
𝐸𝑈𝑅
$
×
$
£
=
𝐸𝑈𝑅
£
£ 1= EUR 1.117
(0.88x1.27)
20 September
2023
77

Exercise 14
Given
US$1 = ¥ 107.31
£ 1 = US$1.26
A$ 1 = US$ 0.70
(a) Calculate the cross rate for pounds in yen terms
(b) Calculate the cross rate for Australian dollar in yen terms
(c) Calculate the cross rate for pounds in Australian dollar terms
78

(a) Calculate the cross rate for Pounds
in yen terms
■ 1£ = ? ¥
■ US$1 = ¥ 107.31 Dollar buying rate ( European terms)
■ £ 1 = US$1.26 Pound buying rate ( American terms )
■
¥
$
×
$
£
=
¥
£
■
¥
£
= 107.31 x 1.26
■ £1= ¥135.21
20 September
2023
79

(b) Calculate the cross rate for
Australian dollar in yen terms
A$1= ¥ ?
US$1 = ¥ 107 .31 Dollar buying rate ( European)
A$ 1 = US$ 0.70 A$ buying rate ( American)
¥
$
𝑿
$
𝑨$
=
¥
𝑨$
¥
𝑨$
= 107.31 x .70= 75.12
A$1 = ¥ 75.12
20 September
2023
80

(c) Calculate the cross rate for
Pounds in Australian dollar terms
Given : A$1= US$ 0.70 American quote
: £1 = US$1.26 American quote
₤ 1 = A$ ?
A$1= US$ 0.70 A$ dollar buying rate ( American)
US $ 1= A$ 1.4285 Converted to Dollar buying rate ( European)
£1 = US$1.26 Pound buying rate ( American)
𝑨$
$
𝑿
$
£
=
𝑨$
£
= 1.4285 x 1.26 = 1.80
£ 1= A$ 1.80
20 September
2023
81

Exercise 14A
Given
US$1 = ¥ 139.49
£ 1 = US$1.16
A$ 1 = US$ 0.68
(a) Calculate the cross rate for pounds in yen terms
(b) Calculate the cross rate for Australian dollar in yen terms
(c) Calculate the cross rate for pounds in Australian dollar terms
82

(a) Calculate the cross rate for Pounds in
yen terms
■ 1£ = ? ¥
■ US$1 = ¥ 139.49 Dollar buying rate ( European terms)
■ £ 1 = US$1.16 Pound buying rate ( American terms )
■
¥
$
×
$
£
=
¥
£
■
¥
£
= 139.49 x 1.16
■ £1= ¥161.80
20 September
2023
83

(b) Calculate the cross rate for
Australian dollar in yen terms
A$1= ¥ ?
US$1 = ¥ 139.50 Dollar buying rate ( European)
A$ 1 = US$ 0.68 A$ buying rate ( American)
¥
$
𝑿
$
𝑨$
=
¥
𝑨$
¥
𝑨$
= 139.50 x .68= 94.86
A$1 = ¥ 94.86
20 September
2023
84

(c) Calculate the cross rate for
Pounds in Australian dollar terms
Given : A$1= US$ 0.68 American quote
: £1 = US$1.16 American quote
₤ 1 = A$ ?
A$1= US$ 0..68 A$ dollar buying rate ( American)
US $ 1= A$ 1.4706 Converted to Dollar buying rate ( European)
£1 = US$1.16 Pound buying rate ( American)
𝑨$
$
𝑿
$
£
=
𝑨$
£
= 1.4706 x 1.16 = 1.70
£ 1= A$ 1.70
20 September
2023
85

EXERCISE 15
if exchange rate in Mumbai inter –
bank market is US $1 = Rs 75.2550/
2600 and in London inter-bank market
is US $ 1= £ 0.7945/ 0.7974.
What would be the exchange rate
between Indian Rupee and Pound
sterling for buying pounds ( ask rate)
86

Solution
Mumbai inter-bank we need to purchase US $ by Surrendering
(selling) Rupee & Sell US $ in London interbank market to
purchase Pounds
First Leg : Buy Dollar and Sell Rupee
Second Leg : Buy Pound and Sell Dollar
US $1 = Rs 75.2550/ 2600
Dollar buying rate (customer) US $ 1= Rs 75.2600
87

solution
US $ 1= £ 0.7945 / 0.7974.
1£ = $ 1/0.7974: 1/0.7945
1£ = $ 1.2540 : $1.2586
Pound buying rate ( customer) 1£ = $
1.2586
1 £ = Rs 75.2600X 1.2586= Rs 94.7222
88

solution
Dollar buying rate US $ 1= Rs 75.2600
Pound buying rate 1£ = $ 1.2586
Rs / $ x $ /£ = Rs /£
Rs/ £ = 75.2600 x 1.2586 =
1£ = Rs 94.7222
89

EXERCISE 15A
if exchange rate in Mumbai inter –
bank market is US $1 = Rs 81.5750/
5850 and in London inter-bank market
is US $ 1= £ 0.8245/ 0.8274.
What would be the exchange rate
between Indian Rupee and Pound
sterling for buying pounds ( ask rate)
90

Solution
Mumbai inter-bank we need to purchase US $ by Surrendering
(selling) Rupee & Sell US $ in London interbank market to
purchase Pounds
First Leg : Buy Dollar and Sell Rupee
Second Leg : Buy Pound and Sell Dollar
US $1 = Rs 81.5750/ 5850
Dollar buying rate (customer) US $ 1= Rs 81.5850
91

solution
US $ 1= £ 0.8245/ 0.8274
1£ = $ 1/0.8274: 1/0.8245
1£ = $ 1.2086 : 1.2128
Pound buying rate ( customer) 1£ = $
1.2128
1 £ = Rs 81.5850X 1.2128= Rs 98.94
92

Solution
Dollar buying rate US $ 1= Rs 81.5850
Pound buying rate 1£ = $ 1.2128
Rs / $ x $ /£ = Rs /£
Rs/ £ = 81.5850 x 1.2128 =
1£ = Rs 98.94
93

Exercise 16
The rate between Japanese ¥
and the U.S. $ is
$:¥ = 119.15 - 121.85
and the rate between the
euro and the U.S. $ is
$:€ = 0.8021 - 0.8033.
What will be the
direct quote
between the yen and
the euro in Japan ?
20 September
2023
94

solution
US$1 =
Yen 119.15 – 121.85
US $ 1 =
Euro .8021 - .8033
Euro 1=
US $ 1.2448 –1.2467
Euro 1 = Yen
119.15 x 1.2448
121.85 x 1.2467
Yen / $ X $ /Euro = Yen / Euro ….. Euro 1 = ……Yen

Solution
Euro 1 = Yen 148.31 – 151.91
The lower rate is
the bid, and the
higher rate is the
ask.
Therefore, the
rate between yen
and euro is €:¥ =
148.31 – 151.91

Solution
20 September
2023
97
■ Bid Asked
■ US$1 = Yen 119.15 – 121.85
■ US $ 1 = Euro .8021 - .8033
■ Euro 1= US $ 1.2448 – 1.2467
■ Therefore
■ Euro 1 = Yen 119.15 x 1.2448 / 121.85 x 1.2467
■ Euro 1 = Yen 148.31 – 151.91
■ The lower rate is the bid, and the higher rate is the ask. Therefore, the rate
between yen and euro is €:¥ = 148.31 – 151.91

Exercise 17
■ The following 2-way quotes appear in the foreign exchange market:
■ Spot 2-months forward
■ RS/US $ Rs 46.00/Rs 46.25 Rs 47.00/Rs 47.50
■ Required:
■ (i) How many US dollars should a firm sell to get Rs 25 lakhs after 2 months?
■ (ii) How many Rupees is the firm required to pay to obtain US $ 2,00,000 in the spot market?
■ (iii)Assume the firm has US $ 69,000 in current account earning no interest. ROI on Rupee investment is
■ 10% p.a
■ Should the firm encash the US $ now or 2 months later?

Exercise 17
The following 2-way
quotes appear in the
foreign exchange
market:
Spot : Rs/US $
Rs 46.00/Rs 46.25
2 - month forward rate :
Rs/US $
Rs 47.00/Rs 47.50
Required:(i) How many
US dollars should a firm
sell to get Rs 25 lakhs
after 2 months?
ii) How many Rupees,
the firm required to pay
to obtain US $ 2,00,000
in the spot market?
iii)Assume the firm has
US $ 69,000 in current
account earning no
interest. ROI on Rupee
investment is 10% p.a
Should the firm encash
the US $ now or 2
months later?

(i) How many US dollars should a firm sell
to get Rs 25 lakhs after 2 months?
Rs/US $ two-
month forward rate :
Rs 47.00/Rs 47.50
1 $ = Rs 47.00 – Rs 47.50
1Rs = $1/47.50 – $1/47.00
Selling $ means
buying rupee
Rs 25,00,000 /$47 =
$ 53,191.50

Rs/US $ spot rate
Rs 46.00/Rs 46.25
1$ = Rs 46.00 –Rs 46.25
Dollar spot
buying rate Rs
46.25
$ 2,00,000 X Rs 46.25 = Rs 92,50,000
ii) How many Rupees, the firm required to pay to obtain US $ 2,00,000
in the spot market?

iii) Assume the firm has US $ 69,000 in current account earning no interest. ROI on
Rupee investment is 10% p.a
Should the firm encash the US $ now or 2 months later?
Encashing
US $ 69000
Now Vs 2 month
later
Spot :
1$ = Rs 46.00 –Rs
46.25
Dollar selling rate Rs
46.00
If we can encash in
spot mkt
$ 69000 × Rs 46 =
Rs 31,74,000
Add 10% ROI : 10/100 X 2/12
= Rs 52,900
Total
= Rs 32,26,900

Solution
Proceeds if we can
encash by forward
rate :
1 $ = Rs 47.00 – Rs 47.50
$ 69000 × Rs 47.00
( dollar selling rate )
= Rs 32,43,000
Spot =Rs 32,26,900
Forward = Rs 32,43,000
It is better to
encash the
proceeds after 2
months

Exercise 17A
The following 2-way
quotes appear in the
foreign exchange
market:
Spot : Rs/US $
Rs 79.00/Rs 79.25
2 - month forward rate :
Rs/US $
Rs 79.50/Rs 79.75
Required:(i) How many
US dollars should a firm
sell to get Rs 25 lakhs
after 2 months?
ii) How many Rupees,
the firm required to pay
to obtain US $ 2,00,000
in the spot market?
iii)Assume the firm has
US $ 69,000 in current
account earning no
interest. ROI on Rupee
investment is 10% p.a
Should the firm encash
the US $ now or 2
months later?

(i) How many US dollars should a firm sell
to get Rs 25 lakhs after 2 months?
Rs/US $ two-
month forward rate :
Rs 79.50/Rs
79.75
1 $ = Rs 79.50 – Rs 79.75
1Rs = $1/79.75 – $1/79.50
Selling $ means
buying rupee
Rs 25,00,000 /$79.50
=
$ 31,447

Rs/US $ spot rate
Rs 79.00/Rs 79.25
1$ = Rs 79.00 –Rs 79.25
Dollar spot
buying rate Rs
79.25
$ 2,00,000 X Rs 79.25 = Rs 158,50,000
ii) How many Rupees, the firm required to pay to obtain US $ 2,00,000
in the spot market?

iii) Assume the firm has US $ 69,000 in current account earning no interest. ROI on
Rupee investment is 10% p.a
Should the firm encash the US $ now or 2 months later?
Encashing
US $ 69000
Now Vs 2 month
later
Spot :
1$ = Rs 79.00 –Rs
79.25
Dollar selling rate Rs
79.00
If we can encash in
spot mkt
$ 69000 × Rs 79 =
Rs 54,51,000
Add 10% ROI : 10/100 X 2/12
= Rs 90,850
Total
= Rs 55,41,850

Solution
Proceeds if we can
encash by forward
rate :
1 $ = Rs 79.50 – Rs 79.75
$ 69000 × Rs
79.50 ( dollar
selling rate ) = Rs
54,85,500
Spot =Rs 55,41,850
Forward = Rs 54,85,500
It is better to
encash the
proceeds in spot
market

PIPS
20 September 2023 © The Institute of Chartered Accountants of India 109

Price Interest Point (Pips)
A pip, short for "price
interest point,"
represents a tiny
measure of the change
in a currency pair in
the forex market.
20 September
2023
© The Institute of Chartered Accountants of India 110

Price Interest Point (Pips)
111
A pip is the smallest
price move that an
exchange rate can
make
Most currency pairs
are priced out to
four decimal places
The pip change is
the last (fourth)
decimal point.
in Indian interbank
market, USD-INR
rate is quoted up to
4 decimal point
Hence minimum
value change will
be to the tune of
0.0001

What Is a Pip?
A pip is the smallest
whole unit price move
that an exchange rate
can make, based on
forex market
convention.
Most currency pairs are
priced out to four
decimal places and a
single pip is in the last
(fourth) decimal place.
A pip is thus equivalent
to 1/100 of 1% or
one basis point
20 September
2023

What Is a Pip?
For example, the
smallest whole unit
move the
USD/CAD currency
pair can make is $0.0001
or one basis point.
20 September
2023

Key take aways
Forex currency pairs are
quoted in terms of pips,
short for percentage in
points.
In practical terms, a pip
is one-hundredth of one
percent (1/100 x .01)
and appears in the
fourth decimal place
(0.0001).
A pip equals one basis
point.
The bid-ask spread of a
forex quote is measured
in pips.
The Japanese yen is an
exception because its
exchange rate extends
only two decimal places
past the decimal point,
not four.
20 September
2023

Calculating Pip Value
The value of a pip depends on the currency pair, the exchange rate and the
trade value.
When your forex account is funded with U.S. dollars and USD is the second of
the pair (or the quote currency), such as with the EUR/USD pair, the pip is
fixed at .0001.
Current rate : 1 Euro = 1.0801 US Dollar
20 September
2023

In this case, the value
of one pip is calculated
by multiplying the
trade value (or lot size)
by 0.0001.
So, for the EUR/USD
pair, multiply a trade
value of, say, 10,000
euros by .0001.
The pip value is $1.
If you bought 10,000
euros against the dollar
at 1.0801 and sold at
1.0811,
You'd make a profit of
10 pips or $10.
20 September
2023 © The Institute of Chartered Accountants of India 116

To demonstrate
how pips work
in currency
pairs, consider
the example
for the
EUR/USD
currency pair.
Let's say the value of one pip is
.926 euros ((0.0001/1.0801) *
10,000).
To convert the value of the pip
to U.S. dollars, just multiply the
value of the pip by the exchange
rate, so the value in U.S. dollars
is $1 (.926 * 1.0801).
20 September
2023
Lot size 10000

To demonstrate
how pips work
in currency
pairs, consider
the example
for the
EUR/USD
currency pair.
Let's say the value of one pip is
8.93 euros ((0.0001/1.1200) *
100,000).
To convert the value of the pip
to U.S. dollars, just multiply the
value of the pip by the exchange
rate, so the value in U.S. dollars
is $10 (8.93 * 1.12).
20 September
2023
Lot size 100,000

The value of one pip is always
different between currency pairs
because of differences between the
exchange rates of various
currencies
A phenomenon does
occur when the U.S.
dollar is quoted as the
quote currency.
When this is the case,
for a notional amount of
100,000 currency units,
the value of the pip is
always equal to US$10.
20 September
2023

On the other hand, when the
USD is the first of the pair (or
the base currency), such as with
the USD/CAD pair, the pip value
also involves the exchange rate.
Divide the size of a pip by the
exchange rate and then multiply
by the trade value.
1 USD = CAD 1.2829
For example, .0001 divided by a
USD/CAD exchange rate of
1.2829 and then multiplied by a
standard lot size of 100,000
results in a pip value of $7.79.
(.0001/1.2829) *1,00,0000 =$ 7.79
If you bought 100,000 USD
against the Canadian dollar at
1.2829 and sold at 1.2830, you'd
make a profit of 1 pip or $7.79.
20 September
2023

( Price Interest Point )Pips
Spot USD/EUR is
quoted at a
bid price of
1.2313 and an
ask price of
1.2319. The
difference is USD
0.0006 equal to 6
“pips”.
121
1 EUR = 1.2313 – 1.2319

( Price Interest Point )Pips
It is the smallest unit by which a currency
quotation can change.
E.g., USD/INR quoted to a customer is INR
61.75. The minimum value this rate can
change is either INR 61.74 or INR 61.76.
In other words, for USD/INR quote, the pip
value is 0.01.
122

Pips
In other words, for USD/INR quote, the pip value is
0.01. Pip in foreign currency quotation is similar to
the tick size in share quotations.
However, in Indian interbank market, USD-INR rate
is quoted upto 4 decimal point. Hence minimum
value change will be to the tune of 0.0001.
Spot EUR/USD is quoted at a bid price of 1.2313
and an ask price of 1.2319. The difference is USD
0.0006 equal to 6 “pips”.
123

1
Direct and indirect quotes are ………….. of each other
A. Reciprocals
B. Proportionate
C. Equal
D. Unequal

2
Direct quotation is when the one unit of foreign currency is
expressed in terms of …………….
A. American terms
B. cross currency
C. domestic currency
D. European terms

3
Indirect quotation is when one unit of domestic currency us
expressed in terms of…………………
A. American terms
B. cross currency
C. Foreign currency
D. European terms

3
Indirect quotation is when one unit of domestic currency us
expressed in terms of ……………………..
A. American terms
B. cross currency
C. Foreign currency
D. European terms

4
Bid is the price at which the dealer is willing to ………. another
currency
A. Sell
B. Buy
C. Hold
D. Dispose

5
The ask or offer is the rate at which he is willing to ……….. another
currency
A. Sell
B. Buy
C. Hold
D. Dispose

6
John is an American traveller visiting Europe. The cost of purchasing euros at the airport is
EUR 1 = USD 1.20 / USD 1.30 , George wants to buy EUR 15,000 , how many dollars he has to
pay to the dealer .
A. USD 13000
B. USD 19,500
C. USD 18,000
D. USD 15,000

7
John is an American traveller returning from Europe. The cost of euros at the airport is EUR 1
= USD 1.20 / USD 1.30 , George wants to sell EUR 3,000 , how many dollars he will get from
the dealer
A. USD 5,000
B. USD 3,600
C. USD 3,900
D. USD 3,000

8
The exchange rates expressed by any currency pair that does not involve the ……. are called
cross rates
A. Euros
B. Pounds
C. US dollar
D. Rupees

9
Spot EUR/USD is quoted at a bid price of 1.0213 and an ask price of 1.0219. The difference is
USD 0.0006 equal to 6 ……….
A. Pips
B. Swaps
C. Cents
D. Points

9
Spot EUR/USD is quoted at a bid price of 1.2313 and an ask price of 1.2319. The difference is
USD 0.0006 equal to 6 ……….
A. Pips
B. Swaps
C. Cents
D. Points

10
In June 2020, one U.S. dollar traded on the foreign exchange market for about .94 swiss
francs. Therefore, one swiss franc would have purchased about
(a) 2.10 U.S. dollars.
(b) 1.10 U.S. dollars.
(c) 0.91 U.S. dollars.
(d) 1.063 U.S. dollars.

10
In June 2020, one U.S. dollar traded on the foreign exchange market for about .94 swiss
francs. Therefore, one swiss franc would have purchased about
Answer d

11
In June 2020, one U.S. dollar traded on the foreign exchange market for about 1.47 Canadian
dollars. Therefore, one Canadian dollar would have purchased about

11
In June 2020, one U.S. dollar traded on the foreign exchange market for about 1.46 Canadian
dollars. Therefore, one Canadian dollar would have purchased about
Answer c

12
Given : If 1 $ = Rs 74.93 & 1 € = $ 1.14 Calculate the cross rate for euros in rupee terms
A. 85
B. 85.42
C. 85.10
D. 86

13
if 1 SGD = Rs 53.91 , find how many Singapore dollars we get by selling 1,00,000 Rupees ?
A. 1854.94
B. 153,91,000
C. 1,00,000
D. 1800

14
The immediate (two-day) exchange of one currency for another is a
(a) forward transaction.
(b) spot transaction.
(c) money transaction.
(d) exchange transaction.
(e) daily transaction.

15
Today 1 euro can be purchased for $1.13. This is the
(a) spot exchange rate.
(b) forward exchange rate.
(c) fixed exchange rate.
(d) money exchange rate.
(e) financial exchange rate.

15
Today 1 euro can be purchased for $1.13. This is the
(b) forward exchange rate.
(c) fixed exchange rate.
(d) money exchange rate.
(e) financial exchange rate.

16
In an agreement to exchange dollars for euros in three months at a price of $0.90 per euro, the
price is the
(b) money exchange rate.
(c) forward exchange rate.
(d) monthly exchange rate.
(e) fixed exchange rate.

17
When the value of the British pound changes from $1.25 to $1.50, then
(a) the pound has appreciated and the dollar has appreciated.
(b) the pound has depreciated and the dollar has appreciated.
(c) the pound has appreciated and the dollar has depreciated.
(d) the pound has depreciated and the dollar has depreciated.

17
When the value of the British pound changes from $1.25 to $1.50, then
(a) the pound has appreciated and the dollar has appreciated.
(b) the pound has depreciated and the dollar has appreciated.
(c) the pound has appreciated and the dollar has depreciated.
(d) the pound has depreciated and the dollar has depreciated.
Answer: C

18
In April 2020, one U.S. dollar traded on the foreign exchange market for about 75 Indian
rupees. Thus, one Indian rupee would have purchased about

19
If the British pound appreciates from $0.50 to $0.75 per U.S. dollar, the dollar depreciates
from _____ to _____ pounds per dollar.
(a) 2; 2.5
(b) 2; 1.33
(c) 2; 1.5
(d) 2; 1.25

19
If the British pound appreciates from $0.50 to $0.75 per U.S. dollar, the dollar depreciates
from _____ to _____ pounds per dollar.
(a) 2; 2.5
(b) 2; 1.33
(c) 2; 1.5
(d) 2; 1.25
Answer: B

20
£1 = US$1.2679 is a direct quotation of the exchange rate of
sterling.
A. True
B. False

20
£1 = US$1.2679 is a direct quotation of the exchange rate of
sterling.
A. True
B. False
Answer : False

21
In India exchange rates for foreign currencies other than US dollar are calculated as
A. Cross rates
B. European terms
C. TT buying rate
D. Indirect rates

22
The difference in the bid rate and the ask rate in the interbank quotation is called
A. swap points
B. Margin.
C. Spread.
D. Auction

22
The difference in the bid rate and the ask rate in the interbank quotation is called
A. swap points
B. Margin.
C. Spread.
D. Auction
ANSWER: C

How to calculate PIP value
To calculate the pip value, you'll need the
following information:
• Currency Pair: Determine the currency pair for which
you want to calculate the pip value. For example, let's
consider the EUR/USD pair.
• Lot Size: Determine the lot size you are trading. The
standard lot size in forex is 100,000 units, but there
are also mini (10,000 units) and micro (1,000 units)
lots.
• Exchange Rate: Determine the current exchange rate
for the currency pair you are trading. For example,
let's say the exchange rate for EUR/USD is 1.1500.

The formula to calculate the pip value
is as follows:
Pip Value = (0.0001 / Exchange Rate) *
Lot Size
Using the example values provided
above, let's calculate the pip value for
a standard lot:
Pip Value = (0.0001 / 1.1500) *
100,000 = 0.0870 * 100,000 = $8.70
Therefore, the pip value for the
EUR/USD currency pair with a
standard lot size is $8.70.
Note: The above formula assumes
that your trading account is
denominated in the quote currency of
the currency pair. If your account is
denominated in a different currency,
you will need to take into account the
exchange rate between your account
currency and the quote currency.

Over the counter market
It is a decentralized market
where participants buy, sell, and
exchange currencies directly
with each other, without a
centralized exchange or
clearinghouse.
The transactions occur through a
network of electronic platforms,
phone, or other communication
methods, and are conducted 24
hours a day, five days a week,
across different time zones.

Inter bank market
It is a wholesale market where large
volumes of currencies are bought
and sold at interbank exchange
rates, which are the benchmark
rates used in most currency
transactions globally.
The currency interbank market
operates electronically, with
transactions taking place through a
network of electronic trading
platforms, such as EBS (Electronic
Broking Services)
Interbank currency trading is
typically reserved for large financial
institutions, such as banks, central
banks, and large corporations, as
the minimum transaction sizes are
usually very high, ranging from
millions to billions of dollars.
These participants trade currencies
for various purposes, including
hedging their foreign exchange
exposure, facilitating international
trade, managing their investment
portfolios, and speculating on
currency price movements.

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