QA S No 26 - Forex Rates - Part 1

 

The Banking Tutor

Question Answer Series 2025

S No 26                                                                    21-07-2025

Rates in Forex – Part 1 

01. What is Rate of Exchange (or Exchange Rate) in Forex Market ?

In the forex market, exchange rates represent the value of one currency against another. 

An exchange rate is the price of one currency in terms of another, indicating how much of one currency is needed to purchase one unit of another. 

02. What factors determine Rate of Exchange ? 

Exchange rates are primarily determined by the forces of supply and demand in the global forex market. 

03. What are Floating Exchange Rate ? 

Floating Exchange Rates fluctuate based on market conditions, with their values rising or falling based on supply and demand. 

04. What are Fixed Exchange Rates ? 

Fixed or Pegged Exchange Rates are set by a country's central bank and are fixed against another currency or a basket of currencies. 

05. What is a Dirty Float in the context of Forex Market ? 

Managed Float (Dirty Float): This system combines aspects of both fixed and floating rates. The exchange rate is market-determined, but central banks may intervene periodically to manage excessive volatility or achieve specific policy goals, such as maintaining export competitiveness. 

06. What is Ask Rate? 

Selling Rate (Ask Rate): The rate at which a bank or financial institution sells foreign currency to a customer. 

07. What is Bid Rate ? 

Buying Rate (Bid Rate): The rate at which a bank or financial institution buys foreign currency from a customer. 

08. What is Spread in the context of Exchange Rates in Forex Market ? 

Spread: The difference between the buying and selling rates, representing the profit margin for the institution. 

09. What is a Restricted Currency ? 

A Restricted currency has its value set by the government. 

10. What is Spot Rate in Forex Market ? 

Spot Rate: This is the current market price for immediate delivery and settlement of a currency pair, typically within two business days. It reflects the real-time supply and demand dynamics and is used for instant transactions like international payments or tourism-related currency exchanges.

11. What is Forward Rate in Forex ? 

Forward Rate: This is a predetermined exchange rate agreed upon today for the future delivery and settlement of a currency pair at a specified date and time. It allows parties to hedge against currency risk by locking in a rate for future transactions, providing certainty in cash flows for businesses engaged in international trade. 

12. When we say Currency is at Premium? 

If a currency's forward exchange rate is higher than its spot rate, it's considered to be at a forward premium. 

13. When we say Currency is at Discount? 

If the forward rate is lower than it’s spot rate, it's at a forward discount. 

14. What is “At Par Rate”  in forex trading ? 

When Spot Rate and Forward Rate are equal (no premium and no discount) such rate is called At Par Rate. 

15. What is Two way Quotation in Forex Market? 

The quotation in the interbank market is a Two – way quotation. It means  the rate quoted by the market maker will indicate two prices. One at which it  is willing to buy the foreign currency, and the other at which it is willing to sell the foreign currency. For example, a Mumbai bank may quote its rate for US dollar as under      

                             USD 1 = Rs 48.1525/1650 

In the given  quotation, one rate is Rs.48.1525 per dollar and the other rate is    Rs.48.1650 per dollar. 

In above case the Bank is  willing to buy dollars at Rs 48.1525 and sell     dollars at Rs 48.1650. If one dollar bought and sold, the bank makes a  gross profit of Rs. 0.0125. 

16. What is the Big Number in Forex Market ? 

In Forex trading, the "big figure" (also known as the "handle") refers to the first few digits of a currency pair's price quote, which are often omitted in conversation due to their stability. These digits represent the "stem" or whole number of the price. 

In the Rate ----- USD 1 = Rs 48.1525/1650, Rs 48 is Big Number. 

17. What is Direct Quotation? 

Direct quotation also known as Home currency quotation.  In this method the Foreign currency is the fixed as base currency and Home currency is the variable unit. 

Example : 1 USD – Rs. 62.24/25 

18. What is the Rule applied by Bank in case of Direct Quote? 

In a direct quotation, Bank will apply the rule: ― Buy Low; Sell High. 

19. What is Indirect Quotation ? 

In case of Indirect quotation (Foreign currency quotation) the home currency is the fixed unit as the base currency  and the foreign currency is the variable currency. 

Example: Rs. 100 = USD1.6182/6177 

20. What is the Rule applied by Bank in case of Indirect Quote? 

In case of Indirect Quotation Bank will apply the rule: ―Buy High: Sell Low.

21. What is meant by Settlement in Forex Market ?

In Forex, settlement refers to the final stage of a currency trade where the agreed-upon exchange of currencies takes place. It involves one party paying the agreed amount of one currency, while the other party delivers the corresponding amount of the other currency. This process ensures the completion of the transaction and the transfer of ownership. 

22. How many types of Settlements are there in Forex Market ? 

The transactions in the interbank market may place for settlement          

            (a) on the same day; or

            (b) two days later; or

            (c) some day late; say after a month 

23. What is a Ready Transaction in Forex Trading ? 

Where the agreement to buy and sell is agreed upon and executed on the same date, the transaction is known as Cash or Ready Transaction. It is also known as Value Today. 

24. What is Spot Transaction in Forex Trading ? 

The transaction where the exchange of currencies takes place two days   after  the date of the contact is known as the Spot Transaction.        For instance, if the contract is made on Monday, the delivery should take   place on Wednesday. If Wednesday is a holiday, the delivery will take   place on the next day, i.e. Thursday. Rupee payment is also made on the  same day the foreign currency is received. 

25. What is Forward Transaction in Forex Trading ? 

The transaction in which the exchange of currencies takes places at a     specified future date, subsequent to the spot date, is known as a Forward Transaction. The forward transaction can be for delivery one month or two months or three months etc. A forward contract for delivery one month means the  exchange of currencies will take place after one month from the date of contract. A forward contract for delivery two months means the exchange  of currencies will take place after two months and so on. 

26. What is Forward Margin (or Swap Point) ? 

The difference between the forward rate and the spot rate is known as the  “Forward Margin‘ or ‘Swap Points’. 

27. Given Spot Rate how to arrive at Forward Rate under Direct Method ? 

Under Direct Quotation, Premium is added to spot rate to arrive at the forward rate. This is done for both purchase and sale transactions.  Discount is deducted from the spot rate to arrive at the forward rate. 

28. Given Spot Rate how to arrive at Forward Rate under Indirect Method?

Under Indirect Quotation, Premium is deducted from spot rate to arrive at the forward rate. This is done for both purchase and sale transactions.  Discount is added to the spot rate to arrive at the forward rate. 

Next Issue  will be shared on 23^rd  July 2025.

Sekhar Pariti

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