Exchange Rate in Transactions

Exchange Rate in  Transactions

Exchange Rate in Transactions

Exchange Rate in Foreign Exchange Transactions


Each country has their own currency and in international transaction it requires conversion of one currency into another. These conversions take place in the Foreign Exchange Market. In Foreign Exchange Market, foreign currencies are bought and sold. The rate of exchange needs to be settled before conversion of one currency with another currency and thus the rate at which the conversion is done is called Exchange rate.

The Bank quotes two rates, one for selling and other for buying of foreign currency. The selling rate is the rate at which bank sells foreign currency to customer and buying rate is the rate at which bank purchases foreign currency from the customer. The difference between a bank’s buying rate and selling rate constitute its “dealing spread” or the exchange profit or exchange gain.

The rate of exchange between two currencies is quoted in two ways : Direct Quotation (Pence rate) – Indirect Quotation (Currency rate)

Direct Quotation / Pence Rate : Direct / Pence rate is the rate where the unit of foreign currency is kept constant and home/local currency is varied.

Indirect Quotation / Currency Rate : Indirect / Currency Rate is the rate where the home currency is kept constant and foreign currency is varied.

Maxim of Rate:

Direct / Pence Rate : Buy low-sell high.

Indirect / Currency Rate : Buy high-sell low.

Quoting Rate in Bangladesh : At present in Bangladesh direct rates are quoted.

Selling Rate :
a. Clean Sale ( T. T. and O. D. )
b. B. C. Sale

a. T.T and O.D ( Telegraphic Transfer and On Demand ) Rate :

The TT selling rate, which is the finest rate is used for clean sales. OD (on demand) rate is applied for issuance of Demand Draft, Cheque, TT, MT etc. in Bangladesh same rate is quoted for TT selling and OD selling rate.

b. B. C. ( Bills for Collection ) Selling Rate :

B.C. selling rate is applied against import which required some extra work for bank to handle of the import documents. The extra work arises from scrutiny of documents and collection of bills. So bank quotes slightly higher rate for sale of foreign currency against imports, regardless whether it is covered by a letter of credit or not. The rate used for this purpose is known as B.C. rate ( Bills for collection rate ). B.C. selling rate is applied for sale transactions against import documents, irrespective of whether the remittance is effected by TT , Airmail Transfer, Draft or Bill of exchange.

Buying Rate :

A. TT Buying Rate

i. TT Clean
ii. TT (DOC)

OD Buying Rate

i. OD ( Sight )
ii.  OD ( Transfer )

(i) TT Clean: This rate is applicable for purchase of TTS or any other clean instrument where no
interest / profit factor is involved i.e. DD, MT against which fund has already been covered by the
issuing bank.

(ii) TT (DOC) :

This rate is applicable for the instruction to pay a sum of money to a certain person on presentation of some documents ( invoice, bill of lading, bill of exchange etc. ), which makes a documentary transaction. Due to handling of some documents, banks recover handling charge on the transaction. Due to handling of some documents, banks recover handling charges on the transaction.

OD Buying Rate :

OD buying rates are quoted for the transaction of purchase of Demand Drafts ( Bill of
Exchange ) on sight bills. In purchasing a draft of this nature, the bank makes the payment immediately,
but is reimbursed at the foreign centre after some days where draft / documents are paid buy the drawee.

In our country OD ( Sight ) rates are applied for the exporter and OD ( Transfer ) rates applied for the purchase of DD. TC . MT. , Personal cheques etc ( if fund is not covered by the issuing bank ).

Long Rate:

Long rate is used for purchase of usance bill / long bills. In our country, the transactions usually involved, purchase of Export Bills payable 30, 60, 120 and 180 days after sight i.e. incase of discounting the bills.

Telquel Rate :

Long bills presenting for discounting of which a part of usance have already run and in this case premium / discount is taken into account only for the remaining period of maturity of the bill i.e. the rate quoted for the bill with broken period of usance are called Telquel rate. For example a 90 days bill is presented for discounting 50 days after acceptance. If bank quotes a rate based on TT buying rate after loading a margin equivalent to amount of interest / profit for the broken period (90-50)=40 days plus grace period if any.

Basis of Quoting Rate by Authorized Dealers :

The basic rate is the TT rate and this rate does not involve any loss of interest/ profit. All other rates ate quoted based on TT rate, depending on the nature of transaction and its ancillary costs associated with the transaction, for the purpose of conducting its business of buying and selling of foreign currency.

Selling Rate : TT selling rates are used for remittance from one country to another by telegraphic transfer and payment involves no loss of interest/ profit . BC selling rate is applied against import, which require some extra work. Therefore the rate represents the bank’s basic TT selling rate plus the costs involved in the handling of documents.

Buying Rate : For buying foreign currency from the customer bank will make payment to the customer at the TT ( buying ) rate, TT rate will also apply for buying a foreign currency bank draft, mail transfer or any other instrument against which the issuing bank has already paid the value to the drawer bank’s account with itself or another bank even though the money is not transferred through TT or Telex.
For buying an export bill, a bank draft or a personal cheque drawn on an account abroad, the bank pays the money immediately to the customers, but needs to wait for a few days before being able to collect the proceeds to recoup the money. Purchase of these instruments in effect, involves provision of short term credit to customer. These are known as OD ( On Demand ) buying rates. A still inferior rate is quoted for buying an usance bill. The rate here will depend on the interest / profit element for waiting period plus additional costs on account of handling and postage / telex cost.

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