COURSE:

IMPORT – EXPORT MANAGEMENT

Lecturer: Dr. Nguyễn Hằng Giang Anh

Email: [email protected]

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 Import - Export Management
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Chapter 6
Foreign Exchange Rate

Lecturer: Dr. Nguyen Hang Giang Anh

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Main Contents
1. Concepts of Foreign Exchange Rate

2. Methods of expressing exchange rates

3. Cross Exchange Rate Calculation Method

4. Types of exchange rates

5. Factors Affecting Exchange Rate Fluctuations

6. Methods of adjusting exchange rates

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1. Concepts of Foreign Exchange Rate

❖ Foreign exchange rate refers to the price of one currency in terms of

another currency. It indicates how much one currency is worth when
exchanged for another.

❖ Example: On March 30, 2025, in the international foreign exchange market,

the following information was available (www.exchangerate.com):
▪ 1 USD = 1.5849 AUD (Australian dollars)
▪ 1 GBP = 1.2949 USD (United States dollars)
▪ 1 USD = 0.9273 EUR (Euro)

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Types of Exchange rate

Free-floating exchange rate: The value of the currency is fully determined by

market conditions, with no intervention from the central bank or government. The
exchange rate can fluctuate significantly in response to changes in economic
factors and market sentiment. Countries like the United States and the Eurozone
use this system.

Managed Float exchange rate: The currency is primarily market-determined,

but the central bank occasionally intervenes to stabilize or influence the
exchange rate by buying or selling its currency. This intervention is typically
aimed at reducing extreme fluctuations or achieving specific economic goals.
Countries like India and Singapore adopt managed float regimes.
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Types of Floating exchange rate

Foreign exchange rates can fluctuate due to various factors, including supply
and demand, inflation rates, interest rates, political stability, and economic
performance of the respective countries.

Fixed exchange rate: the value of a currency is pegged to another currency or

a basket of currencies, and the central bank intervenes to maintain the rate.

Floating exchange rate: the value of the currency is determined by market

forces, such as supply and demand in the foreign exchange market, without
direct intervention by the government.

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2. Methods of expressing exchange rates

Commodity terms = N Currency terms Ex: 1 GBP = 1.2949 USD

(đồng tiền yết giá) (đồng tiền định giá)

Commodity terms/Currency terms = N Ex: GBP/USD = 1.2949

❖ Commodity Term (Base Currency) refers to the currency that is being bought
in an exchange rate quotation → the currency you are buying
❖ Currency Term (Quoted Currency): refers to the currency that is used to price
the base currency → the currency you are selling or using to purchase the
commodity currency

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Currency Symbols

❖ Written in uppercase letters, consisting of 3 characters XXX

▪ The first 2 characters: Country name
▪ The third character: Currency name
❖ Example:
▪ JPY: Japanese Yen
▪ CHF: Confederation Helvetique Franc (Swiss Franc)
▪ GBP: Great Britain Pound
▪ USD: United States Dollar

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Exchange Rate Quotations
❖ Direct Quotation (Domestic Currency Quotation)
▪ How much domestic currency required to purchase one unit of foreign currency.
▪ Direct Quotation = Foreign Currency/Domestic Currency​
▪ Example: In the US, if 1 EUR = 1.0793 USD, as it shows how many domestic
currency (USD) are needed to buy one unit of foreign currency (EUR).
❖ Indirect Quotation (Foreign Currency Quotation)
▪ How much foreign currency that can be purchased with one unit of the domestic
currency.
▪ Indirect Quotation = Domestic Currency/Foreign Currency​
▪ Example: In the US, if 1 USD = 0.9273 EUR, as it shows how much foreign
currency (EUR) can be bought with one unit of the domestic currency (USD)

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3. Cross Exchange Rate Calculation Method (1/2)

▪ BID (Buying Rate): The price at which the market or bank is

willing to buy the foreign currency (USD).
▪ ASK (Selling Rate): The price at which the market or bank is
willing to sell the foreign currency (CHF).
▪ The difference between the BID and ASK rates is called the
Spread → a key element in foreign exchange trading and
reflects market liquidity. 10
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3. Cross Exchange Rate Calculation Method (2/2)

❖A method to determine the exchange rate between two

currencies that do not have a direct exchange rate but both
have exchange rates with a third currency (usually USD).
❖Depending on how the exchange rates of the two currencies
are quoted (direct or indirect), we have three main formulas:
▪ Both currencies are quoted using the direct method
▪ Both currencies are quoted using the indirect method
▪ One currency is quoted indirectly, and the other is quoted directly
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3.1. Both currencies - the direct method

❖ Example:
• USD/CHF = 0.9618/0.9629
• USD/CAD = 1.3650/1.3660 => Find CHF/CAD ?
❖ Calculation:
• Bid CHF/CAD = 1.3650/0.9629 =1.4174
• Ask CHF/CAD = 1.3660/0.9618 =1.4203
=> Result: CHF/CAD = 1.4174 / 1.4203 12
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3.2. Both currencies - the indirect method

❖ Example:
• GBP/USD = 1.2500/1.2510
• AUD/USD = 0.6800/0.6810 => Find GBP/AUD ?
❖ Calculation:
• Bid GBP/AUD=1.2500/0.6810 = 1.8356
• Ask GBP/AUD=1.2510/0.6800 = 1.8397
=> Result: GBP/AUD = 1.8356 / 1.8397 13
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3.3. One currency - indirectly, and the other - directly

❖ Example:
• GBP/USD = 1.2500/1.2510
• USD/CHF = 0.9618/0.9629 => Find GBP/CHF ?
Calculation:
• Bid GBP/CHF=1.2500×0.9618 = 1.2023
• AskGBP/CHF=1.2510×0.9629 = 1.2046
=> Result: GBP/CHF = 1.2023 / 1.2046 14
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Example

▪ A company D in Vietnam earns 100,000 EUR from exports and

needs to sell it to the bank to exchange for local currency. What
exchange rate will the company be paid by the bank? given
given the following rates:
▪ USD/VND = 21,780/40
▪ EUR/USD = 1.0978/84

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Example

▪ Company C in Vietnam needs to purchase 100,000 CHF to pay

for imported goods. At what exchange rate will the company
need to buy, given the following rates:
▪ USD/VND = 21,780/40
▪ USD/CHF = 0.9688/29

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Example

▪ Company B in the UK wants to purchase 200,000 JPY to pay for

imported goods. At what exchange rate will the company need to
buy, given the following rates:
▪ GBP/USD = 1.5488/92
▪ USD/JPY = 123.68/81

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4. Types of Exchange Rates

❖ Based on the method of foreign exchange transfer

❖ Based on the method of international payment
❖ Based on the timing of foreign exchange transactions

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4.1. Based on the method of foreign exchange transfer

❖ The telegraphic transfer rate (T/T) is the exchange rate applied when
a bank transfers foreign currency electronically. The exchange rates
listed at banks are usually T/T rates, which serve as the basis for
determining other exchange rates.

❖ The mail transfer rate (M/T) is the exchange rate applied when a bank
transfers foreign currency via mail.

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4.2. Based on the method of international payment
❖ Check Exchange Rate: The exchange rate applied when buying or selling
foreign currency checks.
❖ Sight Draft: The exchange rate applied when buying or selling sight bills (bills
of exchange payable immediately) in foreign currency.
❖ Time Draft: The exchange rate applied when buying or selling forward bills
(bills of exchange with a future maturity date) in foreign currency.
❖ Transfer Exchange Rate: This is the exchange rate applied to foreign currency
transactions where funds are transferred between banks rather than exchanged
in cash. The transfer rate is usually higher than the cash exchange rate.
❖ Cash Exchange Rate: This is the exchange rate applied to foreign currency
transactions where the exchange is conducted in cash.

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4.3. Based on the timing of foreign exchange transactions

❖ Opening Exchange Rate: The exchange rate used in the first transaction of
the day.
❖ Closing Exchange Rate: The exchange rate used in the last transaction of the
day. This rate is considered a key indicator of exchange rate fluctuations during
that trading day.
❖ Spot Exchange Rate: The exchange rate applied to foreign currency
transactions where delivery is completed within two business days.
❖ Forward Exchange Rate: The exchange rate applied to foreign currency
transactions where delivery occurs at a specified future date, as agreed in the
contract

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5. Factors Affecting Exchange Rate Fluctuations

❖International balance of payments

❖Inflation
❖Foreign currency supply and demand
❖Herd mentality
❖Other factors such as adjustments in monetary and fiscal
policies (interest rates), economic and social events, wars,
natural disasters, etc.

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6. Methods of adjusting exchange rates

❖Using the foreign exchange stabilization reserve fund

❖Using discount policy
❖Exchange rate devaluation
❖Exchange rate revaluation

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6.1. Using the foreign exchange stabilization reserve fund

❖ The foreign exchange stabilization reserve fund is a fund established by

the government, partially backed by gold and partially by foreign
currencies.
❖ It is used to intervene in the foreign exchange market when necessary
to maintain exchange rate stability and implement national economic
policies in different periods.

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6.2. Using Discount Policy
❖ The discount policy is a monetary policy used by the central bank (CB) to
adjust the exchange rate by changing the discount interest rate.
❖ Tool: Discount interest rate.
❖ Adjustment Methods:
• When the exchange rate increases: Increase the discount interest rate to
attract foreign currency.
• When the exchange rate decreases: Decrease the discount interest rate
to reduce foreign currency holdings.

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6.3. Exchange Rate Devaluation

❖ Exchange rate devaluation is when the government officially

announces an increase in the exchange rate of a foreign currency
relative to the domestic currency (usually the most important
exchange rate).
❖ Effects:
• Exports increase
• Imports decrease

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6.4. Exchange Rate Revaluation

❖ Exchange rate revaluation occurs when the government officially

announces a decrease in the exchange rate of a foreign currency relative
to the domestic currency (usually the most important exchange rate).
❖ Effects:
• Exports decrease
• Imports increase

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Example
❖ Company A earned 500,000 JPY from its import-export business. The
company plans to use this amount to pay 10,000 USD to Company C. The
remaining amount will be converted into EUR.
❖ Please determine how many EUR Company A will receive. Given that the
spread is 0.2%.

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Example

❖ Mr. John needs to pay 500 USD. He wants to pay 100 EUR, and the
remaining amount will be paid in GBP.
❖ Determine how much GBP Mr. John needs to pay. Conduct the
transaction from Mr. John's perspective, given the exchange rates:
• EUR/USD = 1.0978/84
• GBP/USD = 1.5488/92

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Example
❖ Looking at the exchange rate table, write down the rates and calculate
the exchange rates for AUD/CAD, GBP/EUR, and EUR/CAD through
VND, assuming you are the customer.

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