FAQs related to day to day hedge execution/ Fx conversion
Published on: 27th April 2022
A. Nowadays there are few free sites displaying the spot rates almost matching with the interbank. The rates may lag behind a few seconds from the actual prevailing interbank rate, but that generally does not pose a problem in a relatively stable market. Having a well-paid screen is not enough to get the right rates as the rates are often trended by design in OTC markets. That’s why we at QuantArt use multiple data sources and low latency trade based rates to get the prevailing spot.
Q. Why is the conversion rate different than the spot mentioned?
A. Often a company does the conversion for the same day and in such cases, the rate applicable is the cash rate, not the spot rate. Spot rate, which you can see on the screen is applicable for T+2 business days. For the same day, it is the cash rate, which is equal to the spot rate minus the cash spot. For the next day or T+1 day, it is the tom rate, which is equal to the spot rate minus the tom spot. Please note that the bid-offer is also applicable while adjusting the cash spot/ tom spot. Also cash/spot premium broadly signifies the money market rate spread of two currencies. Hence when 2 business days are actually more days because of the weekend or holiday in between, the cash spot is higher. Also during periods of tight liquidity like financial year-end, cash spots are higher.
Here is an example of how to calculate the effective rate –
Cash spots are given in paisa terms. In the given situation, the cash conversion rate for an exporter will be 76.60 less 0.03 = 76.57 and for an importer will be 76.62 less 0.01 = 76.61. Post that, the bank’s margin will be applicable. Incidentally, we have been able to help 95% of the companies improve the conversion rate so you can understand the scope here.
Q. Which rate is applicable for inward conversion and which is for making payment?
A. For inward you will get conversion rate = spot bid – cash spot ask – agreed on bank margin.
For outward remittance, payment rate = Spot ask – cash spot bid + agreed bank margin.
Example: If we take the rates in the above table and bank margin as 0.5 paise, the inward conversion cash rate will be = 76.6000 – 0.0300 – 0.0050 = 76.5650
Outward remittance cash rate will be = 76.6200 – 0.0100 + 0.0050 = 76.6050
A. forward premium is the interest rate differential between the two currencies. Lower interest rate country’s currency will be at a premium. That is the reason in the case of USDINR, USD is in premium. USDINR rate today is lower than the rate in the future because the USD is in premium. In India up to 13 months, month-end forwards are traded, and for in-between dates up to 13 months are interpolated numbers. Beyond 13 months, it is the interest rate differential.
A.Having a paid screen never gives you a guarantee of a reasonable rate. You need to strategize to get the correct rate. The problems are not the same everywhere, so the strategy should be customized. QuantArt helps its clients get a reasonable rate by strategizing carefully.