Foreign Exchange Rates

 

 

Foreign Exchange Rate

Foreign exchange rate is the price at which currency of one country is exchanged with currency of another currency.

There are two methods of presenting currencies;

1. Direct Quote
2. Indirect Quote

1) Direct Quote

Direct quote is the number of units required for domestic currency to be exchanged with foreign currency. In the direct quote domestic currency is written first.
For example, Pakistan rupees with US dollar can be expressed in direct quote as Rs.160 for US $ 1.
This is written as Rs.160 / $1.

2) Indirect Quote

Indirect quote is the number of units required for foreign currency to be exchange with local currency.In the indirect quote foreign currency is written first.
For example, US dollar with Pakistan rupees can be expresses in the indirect quote as US$ 1/Rs.160 or US$ 0.00625 / Rs.1.

How currency conversion of Foreign Currency is Performed

 

If a person has Rs.5,000 and he wants to convert in US$. How these can be converted? If direct quote is Rs.160 / $1.

US $ is stronger than Rupee and stronger currency means lesser amount in number but it is actually higher in terms of value.

To convert Rs.5,000 into US $ we need to divide Rs.5,000 by Rs.160 to get lesser amount of US$ which is infect higher in terms of value.

Rs.5,000 / 160 = $31.25

 

Whatever we do in direct quote always reverse shall happened in the indirect quote.

 

Indirect quote conversion shall be 1 US$ /Rs.0.00625 ($1 divide by Rs.160 = 0.00625)
We divided Rs.5,000 in the direct quote by 160 for indirect quote we shall do reverse which is multiply.

Rs.5,000 x 0.000625 = $31.25.

What happen when currency exchange fluctuate and which currency is considered to be strong

 

Domestic currency depreciation and foreign currency appreciation

 

For direct quote when exchange rates devalues (loose value) for example if Rs.160 / $1 (Rs.160 per 1 US $) becomes Rs.170 / $1 (Rs.170 per 1 US $) it means that rupee is getting weaker and $ is getting strong as it takes 10 rupees more to buy 1$.

If we continue with the previous example of Rs.5,000 conversion;
Rs.5,000 / 170 = $ 29.41 which is lesser then $31.25, means rupees has become weaker that only $29.41 can be bought as compared to previous buying of $31.25.

In the indirect quote US$ 1/Rs.160 becomes US$ 1/Rs.170 (1 divide by 170 = 0.00588). If we continue with the previous example of Rs.5,000 conversion into US $ then;
Rs.5,000 x 0.00588 = $29.4 which is lesser than $31.25. Hence, domestic currency devalued.

Domestic currency appreciation and foreign currency depreciation

 

On the contrary, if exchange rates are Rs.150 / 1 US$ from Rs.160 / 1 US$ it means rupees is getting stronger and $ is getting weaker and it takes less 10 rupees to buy 1 $.

If we continue with the previous example of Rs.5,000 conversion;
Rs.5,000 / 150 = $ 33.33 which is higher then $31.25 means rupees has become stronger that $33.33 can be bought as compared to previous buying of $31.25.

In the indirect quote US$ 1/Rs.150 becomes US$ 1/Rs.150 (1 divide by 150 = 0.00666). If we continue with the previous example of Rs.5,000 conversion into US $ then;
Rs.5,000 x 0.00666 = $33.33 which is higher than $31.25. Hence, domestic currency appreciated.

 

Bid rates and Offer rates

Two rates are quoted for buying and selling currencies, bid rate and offer rate.

These rates are quoted by banks, in the direct quote higher rate shall always be selling rate (offer rate).

At this rate banks sells foreign currency. In the indirect quote lower rate shall be the selling rate (offer rate) by the bank.

Lower rate shall always be buying rate (bid rate). At this rate banks buy foreign currency.

 

“Bid and offer rates are quoted in perspective of bank. In the direct quote higher rate shall be the selling rate and lower rate shall be the buying rate, for indirect quote take vice versa.”

 

Foreign Exchange Rate Example :

Direct quote (Rs. / US $) Rs.160 – 162 rupees per dollar. The bank shall sell US $ at 162 and buys at 160.

Indirect quote (US $ / Rs.) 0.00617 – 0.00625. As mentioned earlier, in the indirect quote everything is reversed so 0.000617 which is the lesser amount is the stronger rate in the indirect quote and bank shall sell 0.00617 and buy at 0.00625.

If a Pakistani Company has Rs.5,000 and it wants to buy US$ and sale Rupees. The bank will sell @ 162 which is higher rate and buy at Rs.160 which is the lower rate.

Direct Quote = Rs.5,000 / 162 (selling rate of bank) = $30.86.

Indirect Quote = Rs.5,000 x 0.00617 = $30.86

If a Pakistani Company has $31.25 and it wants to sell US $ and buy Rupees.

Director Quote = $31.25 x 160 (buying rate of bank) = Rs.5,000.

Indirect Quote = $31.25 / 0.00625 = Rs.5,000