---
title: C20 FOREIGN EXCHANGE RISK
description: "## BASICS OF FOREIGN EXCHANGE **DIRECT QUOTE:-** Home currency denoted as one unit of foreign currency Eg. $1= ₹ 65 **INDIRECT QUOTE:-** Foreign currency as one unit of home currency Eg. ₹1= $ 0.0154 ## BID ASK RATES ![](https://falconedufin.com/wp-content/uploads/2021/05/Picture30-300x87.png)![](https://falconedufin.com/wp-content/uploads/2021/05/Picture34-300x85.png)![](https://falconedufin.com/wp-content/uploads/2021/05/Picture32-300x85.png)![](https://falconedufin.com/wp-content/uploads/2021/05/Picture35-300x160.png) ![](https://falconedufin.com/wp-content/uploads/2021/05/Picture31-300x151.png)…"
url: "https://falconedufin.com/book/%25knowledge_base%25/book-3-fmp/c20-foreign-exchange-risk/"
updated: "2022-08-31"
category: Book 3 FMP
---

# C20 FOREIGN EXCHANGE RISK

## BASICS OF FOREIGN EXCHANGE

**DIRECT QUOTE:-** Home currency denoted as one unit of foreign currency Eg. $1= ₹ 65

**INDIRECT QUOTE:-** Foreign currency as one unit of home currency Eg. ₹1= $ 0.0154

## BID ASK RATES

![](https://falconedufin.com/wp-content/uploads/2021/05/Picture30-300x87.png)![](https://falconedufin.com/wp-content/uploads/2021/05/Picture34-300x85.png)![](https://falconedufin.com/wp-content/uploads/2021/05/Picture32-300x85.png)![](https://falconedufin.com/wp-content/uploads/2021/05/Picture35-300x160.png)

![](https://falconedufin.com/wp-content/uploads/2021/05/Picture31-300x151.png)  ![](https://falconedufin.com/wp-content/uploads/2021/05/Picture33-300x134.png)

Exam note:- If transaction is in between **interbank market to BANK** then **interbank market will quote.** (Similar to question in question bank)

## Net exposure (IMP) (FRM PART I May 17 EXAM)

**Net position exposure (Say USD) = (USD  Asset - USD Liability) + (USD Bought - USD Sold )**

**IF ANSWER IS + THEN BANK IS NET LONG AND  ( - ) THEN NET SHORT**

(Note: Refer question bank and its alternate possible variation to be asked in exam in Q No 13 in Question bank Pro)

## FOREIGN EXCHANGE TRADING ACTIVITY

4 KEY TRADING ACTIVITY

1. INTERNATIONAL **COMMERCIAL** BUSINESS **TRANSACTION** SALE/ BUY OF GOODS ETC
2. TAKE POSITION IN REAL FOREX **INVESTMENT**
3. OFSETTING EXPOSURE - **HEDGING**
4. **SPECULATING** OF FOREIGN CURRENCIES.

## PARITIES (PURCHASING POWER PARITY) VIMP (MAY 16)

States exchange price should be reflective of  purchasing power in both the countries.

Forward rate calculation using purchasing power parity.

![](https://falconedufin.com/wp-content/uploads/2021/05/Picture27.png)

F= FWD rate       I~H = inflation in home currency

S= SPOT rate       I~F = Inflation of foreign currency

## PARITIES (Interest Rate) VIMP

Forward rate calculation using interest rate parity.

![](https://falconedufin.com/wp-content/uploads/2021/05/Picture28.png)

Note:- Solve all the questions from the question bank given on these two concepts

If interest rate is in continuously compounded.

![](https://falconedufin.com/wp-content/uploads/2021/05/Picture29.png)

## RELATION BETWEEN  (Int. Rate and inflation)

**(1 + Nominal rate) = (1+ Real Rate )(1 + inflation rate)**