Cash, Tom, and Spot Transactions
Forex transactions are categorized based on settlement timelines:
Cash (T)
Same-day
Useful for immediate needs
Tom (T+1)
Next Business Day
Tomorrow settlement
Spot (T+2)
Two Business Days
Most common transaction
Example Parameters
- Spot Rate: Rs. 88.50/USD
- Cash Spot Premium: Rs. 0.02/USD
- Tom Next Margin: Rs. 0.01/USD
- Bank Margin: Rs. 0.05
The Formula
Inward Remittance (Export)
Cash Rate
Spot - Cash Spot - Bank Margin
88.50 - 0.02 - 0.05 = Rs. 88.43
Tom Rate
Spot - Tom Next - Bank Margin
88.50 - 0.01 - 0.05 = Rs. 88.44
Spot Rate
Spot - Bank Margin
88.50 - 0.05 = Rs. 88.45
Outward Remittance (Import)
Cash Rate
Spot - Cash Spot + Bank Margin
88.50 - 0.02 + 0.05 = Rs. 88.53
Tom Rate
Spot - Tom Next + Bank Margin
88.50 - 0.01 + 0.05 = Rs. 88.54
Spot Rate
Spot + Bank Margin
88.50 + 0.05 = Rs. 88.55
Bank Margin
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.
Understanding the Spot Rate
The spot rate reflects current market conditions. Banks quote two rates: a Bid Rate (Buying) and an Ask Rate (Selling).
Interbank Spot Example
₹88.50 / ₹88.51
Forward Contracts - Planning Ahead
Forward contracts let you fix an exchange rate for a future date, hedging against volatility.
Calculation Formula
Forward Rate = Spot Rate + Premium (or Discount) ± Bank Margin
= ₹89.25
= ₹89.35
There are two types of forward contracts:
- Fixed Date Forward: Exact date settlement.
- Window Forward: Flexible date range for settlement.
Forward Cancellations and Early Deliveries
Example Calculation:
Original Forward = ₹89.35, Spot = ₹88.75 → Loss = ₹0.60 per dollar
First Day Forward Rate (FDFR) - Smart Benchmarking
FDFR (First Day Forward Rate) is a benchmark calculated using Spot + Forward Premium.
Example: Spot = ₹97 (EURINR), Premium = ₹2.15 → FDFR = ₹99.15
Exporters Strategy
Hedge when forward > FDFR
Importers Strategy
Hedge when forward < FDFR
This benchmark helps avoid emotional decisions and ensures rates are booked based on data.
Cross-Currency Conversions
When dealing with currencies like EUR/JPY or GBP/AUD, banks use USD as a bridge.
Formula
EUR/JPY = EUR/USD × USD/JPY
Example: 1.10 × 150 = 165.00
Bank Margins and Turnover Matrix
Banks charge different margins based on your transaction size.
| Annual Turnover (USD) | Typical Bank Margin (Paisa) |
|---|---|
| < $1 Million | 0.05 - 0.07 |
| $1 Million - $5 Million | 0.03 - 0.05 |
| $5 Million - $10 Million | 0.02 - 0.03 |
| $10 Million - $25 Million | 0.01 - 0.02 |
| > $25 Million | 0.0025 - 0.01 |
Summary Table
Using: USDINR = Rs.88.50, Bank Margin = Rs.0.05
| Transaction Type | Formula Used | Example Output |
|---|---|---|
| Cash (Inward) | Spot - Cash Spot - Margin | Rs. 88.43 |
| Tom (Inward) | Spot - Tom Next - Margin | Rs. 88.44 |
| Spot (Inward) | Spot - Margin | Rs. 88.45 |
| Forward (Inward) | Spot + Premium - Margin | Rs. 89.25 |
| Forward Cancellation | Original Rate - Spot | Rs. 0.60/USD Loss |
Conclusion: Know the Math, Control the Outcome
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.
Frequently Asked Questions
Cash is same-day settlement (T), Tom is next business day (T+1), and Spot is two business days (T+2).
Use Window Forwards when your payment date isn’t fixed. They allow settlement flexibility within a chosen period.
The bank recalculates the rate based on current market conditions. You may face a cost or gain depending on the rate movement.
FDFR (First Day Forward Rate) is a benchmark calculated using Spot + Forward Premium. It helps you decide the best time to hedge.
Banks add margins over interbank rates. A higher margin increases your cost or reduces your revenue, depending on the direction of trade.