EXCHANGE RATE AND THEIR APPLICATION
Every country has its own currency and in international transaction it requires conversion of one currency into another. 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 took place is called exchange rate. The bank quotes two rates, one for selling of foreign currency 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 bank’s buying rate and selling rate constitute its dealing spread or the exchange profit.
The rate of exchange between two currencies is quoted in two ways:
- Direct Quotation
- Indirect Quotation
Direct exchange rate is expressed as the price per unit of foreign currency in terms of home currency. For example- USD 1 = TK.69.45. In this arrangement the unit of foreign currency is kept constant and home/local currency is varied.
When the unit home currency is kept constant and the exchange rate is expressed as many unit of foreign currency this is called indirect quotation. For example- TK. 1 = USD.013. Under this arrangement, home currency is kept constant and foreign currency is varied.
[Usually Direct Quotation being followed by SIBL.]
The T.T & O.D selling rate is used for issuance of Foreign Demand Draft, Travelers Cheques, Mail Transfer and Telegraphic Transfer. This rate is used for outward foreign remittance from our country to other country.
B.C selling rate is applied for transactions, which involves handling of documents by the bank against payment of import bills. We determine this rate by adding cushion with T.T & O.D Rate.
This rate is applicable for purchase of TTs or any other clean instrument where cover fund already received by beneficiary’s bank. TT Clean rate will also apply for buying of foreign currency bank draft, mail transfer or any other instrument against which the issuing bank has already paid the value to beneficiary’s bank.
This rate is applicable for execution of 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, bank recovers handling charges on transaction.
This rate is quoted for the transaction of purchase of export bills drawn at sight. In purchasing the export bill bank makes payment in local currency to exporter immediately but foreign currency to be received at foreign center few days later. So the OD Sight buying rate is arrived by loading the TT Clean buying rate with interest at current rate for transit period.
This rate is quoted by bank for purchase of instruments other than export bills and TT’s such as cash currency, personal cheques, drafts, T.C.s etc.
A cross rate is an exchange rate which is calculated from two other rates. For instance Taka/PDS rate can be calculated on the basis of cross rate between USD/Taka and USD/PDS.
The normal rate quoted in the foreign exchange market is the spot rate. This is the basic rate of exchange.
This rate quoted for the transaction to be settled today
The forward rate for a currency is the price at which the currency can be bought or sold for delivery on a future date.
Here it may be noted that only spot buying and selling undertaken by SIBL. No forward or SWAP (advance buying /selling) undertaken by SIBL due to Shariah obligation.
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 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.
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.
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.
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.
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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