Foreign exchange transactions can feel complex, but at its core, it's driven by simple mathematics. Whether you're an importer locking in costs or an exporter protecting revenue, understanding the basic calculations behind Cash, Tom, Spot, Forwards, Forward Cancellations, Early Deliveries, Cross Currency rates, and bank margins can empower you to make smarter financial decisions. This blog will explain these concepts using clear examples and definitions along the way.
Forex transactions are categorized based on settlement timelines:
Importer's Perspective: Bank margin is the additional fee or percentage a bank adds to the exchange rate, increasing the cost of converting local currency to foreign currency for payments.
Exporter's Perspective: Bank margin is the markup a bank deducts from the exchange rate, reducing the local currency received when converting foreign earnings.
The Spot Rate reflects current market conditions. Banks quote:
Forward contracts let you fix an exchange rate for a future date, hedging against volatility.
Forward Rate = Spot Rate + Premium (or Discount) ± BM
Example: Spot = ₹83.50, Premium = ₹0.80, BM = ₹0.02 → Forward Rate = ₹84.32
Forward Cancellation: You cancel the contract before maturity. Bank recalculates the rate.
Early Delivery: You settle early, and the bank adjusts for unearned premium.
Example: Original Forward = ₹84.50, Spot = ₹83.90 → Loss = ₹0.60 per dollar
FDFR = Spot Rate + Forward Premium
Example: Spot = ₹97 (EURINR), Premium = ₹2.15 → FDFR = ₹99.15
Exporters: Hedge when forward > FDFR
Importers: Hedge when forward < FDFR
This benchmark helps avoid emotional decisions and ensures rates are booked based on data.
When dealing with currencies like EUR/JPY or GBP/AUD, banks use USD as a bridge:
Formula: EUR/JPY = EUR/USD × USD/JPY
Example: EUR/USD = 1.10, USD/JPY = 150 → EUR/JPY = 165.00
Banks charge different margins based on your transaction size:
Typical Margin Table:
Understanding the logic and formulas behind forex rates allows you to better manage currency exposure. From cash and spot to forwards and cancellations, every transaction can be evaluated through basic arithmetic, reducing hidden costs and optimizing timing. Use data, not guesswork, to navigate global currencies confidently.