How does one calculate the change in spot rate from
one quotation to the next? In case of direct quotation, it is given by the
equation:
Change in Percentage = Rate N – Rate (N-1)
x 100
Rate
(N-1)
For example, the dollar rate
has changed from Rs 42.50 to Rs 42.85; the change is calculated to be
Change in Percentage = 42.85 - 42.50 x 100 percent or 0.909per cent
42.50
Similarly, if the quotation is in
indirect form, the percentage change is given by equation:
Change in percentage =Rate (N - 1) - Rate
N x 100 per cent
Rate N
For example, the above rate
has passed from 1/42.50 to 1/42.85 so the decrease in the rupee is
Change in
Percentage = 1/42.50 – 1/42.85 x 100
1/42.85
OR Change in
Percentage= 0.02597 – 0.02574 x 100 or 0.89%
0.02574
Cross Rate
Let us say an
Indian importer is to settle his bill in Canadian dollars. His operation
involves buying of Canadian dollars against rupees. In order to give him a Can
$/Re rate, the banks should call for US $/Can $ and US $/Re quotes. That means
that the bank is going to buy Canadian dollars against American dollars and
sell those Canadian dollars to the importer against rupees. Suppose the rates
are
Can$/US$:
1.3333-63
Rupee/US $:
42.3004-3120
Finally, the
importer will get the Canadian dollars at the following rate:
Rupee/Can
$ =42.3120 = Rs 31.7348/Can $
1.3333
That is, importer buys US $ (or bank
sells US $) at the rate of Rs 42.3120 per US $ and then buys Can $ at the
buying rate of Can $ 1 .3333 per US $.
So Rupee 31. 7348/Can $ is a cross
rate as it has been derived from the rates already given as Rupee/US $ and Can
$/ US $. So cross rate can be defined as a rate between a third pair of
currencies, by using the rates of two pairs, in which one currency is common.
It is basically a derived rate.
Likewise, the buying rate would be
obtained as Rs 31.4304/ Can $
(OR)
42.0004
1.3363
Contains cross rates between different pairs
of currencies.
In general, the equations can be
used to find the cross rates between two currencies B and C, if the rates
between A and B and between A and C are given:
(B/C)bid
= (B/A)bid x (A/C)bid
(B/C)ask
= (B/A)ask x (A/C)ask
Here
(B/A)bid = (A/B)ask
and
(B/A)ask = (A/B)bid
Example: Following rates
are given: Rs 22/DM and Rs 6.60/FFr.
What is FFr/DM
rate?
Solution: It is clear from the data that bid and ask
rates are equal. Cross rate will give the relationship between FFr and DM:
Rs22 x 1 = FFr22 x
FFr22 = FFr 3.3333/DM
DM Rs 6.60 DM 6.60 DM 6.60
FFr
Example: From the
following rates, find out Re/DM relationship:
Re/US $:
42.1000/3650
DM/US$:
1.5020/5100
Solution: Applying the
equations we get
(Re/DM)bid
= (Re/US $)bid x (US $/DM)bid
= 42.1000 x 1/
(1.5100)
= 27.8808
(Re/DM)ask
= (Re/US $)ask x (US $/DM)ask
= 42.3650 x
l/(1.5020)
= 28.2057
So, the Re/DM
relationship is
27.8808-28.2057
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