SPOT EXCHANGE RATES

A spot exchange rate is a rate at which currencies are being traded for delivery on the same day. For example, and Indian Importer may need U.S. $ to pay for the shipment that has just arrived. He will have to purchase the $ in the market to make payment for the import. The rate at which he will buy the $ in the market is known as the spot exchange rate. He will make the payments in terms of Rs. and gets in turn the U.S. $ which will be paid to the foreign exporter. The spot exchange rate therefore, for a currency is the current rate at which once currency can be immediately converted into another currency. For example, a spot rate of $0.6912/Euro indicates that one Euro can be converted into $0.6912 in the market place at present. In most of the cases, the spot exchange rates are set by the demand and supply forces in the foreign exchange market.

In the spot exchange market, the quote may be denoted as direct or indirect. A direct quote indicates the number of units of the domestic currency required to buy one unit of foreign currency. That is, in Mumbai, the typical exchange rate quote indicates the number of Re. needed to buy one unit of a foreign currency e.g., Re. Per $ or Re. per Euro etc. The quotes in the spot market in New York are given in the terms of U.S. dollar and in Tokyo, the rates are given in the terms of Yen.

An indirect quote indicates the number of units of foreign currency that can be exchanged for one unit of the domestic currency. For example, in New York, the rates may be given as £ per $ or Euro per $ etc. As already stated, that the foreign exchange rates are relative to each other, the direct quote and indirect quote are related to each other in an inverse relationship i.e., an indirect quote is the inverse of a direct quote. So,

Indirect Quote = 1 / Direct Quote

In International transactions, both the direct quote and indirect quote are used. For example, if the direct quote of Euro in U.S. is Euro/$ = Euro 1.037 and American importer has to pay Euro 1,000 to a German Firm, then how many $ will be required by the American importer? In this case, the quote for $/Euro may be obtained as the inverse of Euro/$ i.e., 1/1.037 = 0.9643. So, he will require $0.9643 x 1,000 = $964.32 to pay for the German firm.