Exchange Rate Mechanism

There is two type of Exchange Rate Mechanism:

A. Direct quotation

B. Indirect quotation

a. Direct quotations:

Under a system of Direct Quotations, the exchange rates are quoted where the unit(s) of

Foreign currency remains constant, whereas the home currency units fluctuates : i.e.

USD 1 = Rs. 66.65

b. Indirect Quotations:

Under a system of Indirect Quotations, the exchange rates are quoted where the unit(s) of

home currency remains constant against variable units of foreign currency. i.e.

Rs. 100/- = USD 1.52

In India we follow the direct method of quoting exchange rates since August 1993.

Types of Rates:

(i) Cash / Ready:

When the deal is entered into and its settlement is done on the very same day then it is known as Cash / Ready Rate.(T + 0)

(II) TOM:

When the deal is entered into but the settlement is done on the next working day then it is known as TOM.(T + 1)

(iii) Spot Rate :

Where the settlement is to take place after two working days from the date of contract. It is termed as "SPOT RATE." (T + 2)

(iv) FORWARD RATES:

All exchange rates quoted, where the settlement is to take place after the spot rate are termed as "FORWARD RATES" (T + > 2).

Forward Rates are generally quoted as a margin against the spot rate for currency concerned. The margin may represent either "PREMIUM" or "DISCOUNT". There is a facility of settlement of forward contract either on a fixed date or with an option of settlement within a period agreed which can be maximum one months period.

Premium:

Premium is a value of exchange in excess of spot rate. In relation to forward exchange rate, it means that the currency is dearer for future delivery than for the spot delivery i.e. currency is dearer for forward purchase than the spot purchase.

Discount:

Discount is a value of exchange below spot rate. In relation to forward exchange rate, it means that the currency is cheaper for future delivery than for the spot delivery i.e. cheaper for forward purchase than the spot purchase.

LIBOR (London Inter-Bank Offered Rate):

LIBOR is a daily reference rate based on the interest rates at which banks offer to lend funds to other banks in the London inter-bank market. LIBOR is published by the British Bankers Association (BBA) at 11:00 A.M London time , every day, and is a filtered average of interbank deposit rates offered by designated contributor banks, for maturities ranging from overnight to one year.

SWIFT:

Society for Worldwide Interbank Financial Telecommunication is a co operative society created under Belgian law and having its corporate office at Brussels. It operates computer – guided communication system for transmission of international payment transfers messages in a secured system driven environment. Only authorized officials can access and decode the data / information / message