International Finacial Services

1. Factors Affecting Exchange Rate
Forward Rate
Type of Quotation
Presented By Aji R Lal

2. Factors which
influence the Exchange Rate
Exchange rates are determined by supply and demand.
For example, if there was greater demand for U S goods then
there would tend to be an appreciation (increase in value) of
the $. If markets were worried about the future of the US
economy, they would tend to sell $, leading to a fall in the
value of the $
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Appreciation = Increase in value of Exchange rate
Depreciation = Decrease in value of Exchange rate

3. Inflation
If inflation in the UK is relatively lower than
elsewhere, then UK exports will become more competitive
and there will be an increase in demand for Pound Sterling to
buy UK goods. Also foreign goods will be less competitive
and so UK citizens will buy less imports.
Therefore countries with lower inflation rates tend to see
an appreciation in the value of their currency.
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4. Interest Rates
If UK interest rates rise relative to elsewhere, it will
become more attractive to deposit money in the UK. You
will get a better rate of return from saving in UK banks,
Therefore demand for Sterling will rise. This is known as
“hot money flows” and is an important short run factor in
determining the value of a currency. Higher interest
rates cause an appreciation.
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5. Speculation
If speculators believe the sterling will rise in the future,
they will demand more now to be able to make a profit. This
increase in demand will cause the value to rise. Therefore
movements in the exchange rate do not always reflect
economic fundamentals, but are often driven by the
sentiments of the financial markets.
For example, if markets see news which makes an interest
rate increase more likely, the value of the pound will probably
rise in anticipation.
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6. Change in Competitiveness
If British goods become more attractive and competitive
this will also cause the value of the Exchange Rate to rise.
This is important for determining the long run value of the
Pound. This is similar factor to low inflation
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7. Relative strength of other Currencies
In 2010 and 2011, the value of the Japanese Yen and
Swiss Franc rose because markets were worried about all
the other major economies – US and EU. Therefore,
despite low interest rates and low growth in Japan, the Yen
kept appreciating.
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8. Balance of Payments
A deficit on the current account means that the value
of imports (of goods and services) is greater than the value
of exports. If this is financed by a surplus on the financial /
capital account then this is OK. But a country who
struggles to attract enough capital inflows to finance a
current account deficit, will see a depreciation in the
currency.
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Current account deficit
in US of 7% of GDP was
one reason for
depreciation of $ in
2006-07

9. Government Debt
Under some circumstances, the value of government
debt can influence the exchange rate. If markets fear a
government may default on its debt, then investors will sell
their bonds causing a fall in the value of the exchange rate.
For example, Iceland debt problems in 2008, caused a rapid
fall in the value of the Icelandic currency.
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if markets feared the US would default on its debt, foreign
investors would sell their holdings of US bonds. This
would cause a fall in the value of the dollar.

10. Government Intervention
Some governments attempt to influence the value of
their currency.
For example, China has sought to keep its currency
undervalued to make Chinese exports more competitive.
They can do this by buying US dollar assets which increases
the value of the US dollar to Chinese Yuan
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11. Economic Growth / Recession
A recession may cause a depreciation
in the exchange rate because during a
recession interest rates usually fall.
However, there is no hard and fast rule. It
depends on several factors.
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12. Forward Rate
“A rate applicable to a financial transaction that will
take place in the future. Forward rates are based on the
spot rate, adjusted for the cost of carry and refer to the rate
that will be used to deliver a currency, bond or commodity
at some future time. It may also refer to the rate fixed for a
future financial obligation, such as the interest rate on a
loan payment.”
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13. Quotation
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“A Quotation is a business offer made by a seller to
an interested buyer to sell certain goods at specific prices and
on certain terms and conditions”.
It is a reply by the seller to the prospective buyer. Hence, the
quotation letter should be prepared carefully by the seller. It should
contain information on all points mentioned in the inquiry letter.
The seller should send the best possible quotation so that it induces the
buyer to place an order because it is the basis on which the interested
buyer decides whether to buy or not.
The quotation must be clear, courteous and concise

14. Contents of Quotation
1.Details about quality of goods offered for sale.
2.Details about quantity of goods offered for sale.
3.Type of quotation.
4.Sale price per unit of the commodity.
5.Term of payment like Cash or Credit, trade discount, cash
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A duty levied in some
countries on various
goods entering a town or
city.
discount and other allowances if any.
6.Time, mode and place of delivery.
7.Details of duties, Octroi, etc., payable.
8.Details of packing, labelling, insurance, etc.
9.Net price payable.
10.E and O.E. (errors and omissions expected)

15. Kinds / Types of Quotations

16. 1. Loco Price Quotation
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Loco means 'On the spot'. Therefore, the loco price
refers to the cost of goods at the factory or godown of the
seller. Once the goods are out of the sellers' factory or
warehouse, all the expenses for carrying the goods from
the seller's warehouse to the buyer's place are to be borne
by the buyer. This is the lowest price quotation.

17. Under this quotation, seller's responsibility is to
send the goods to the nearest railway station from his
warehouse. It includes the cost of carriage of goods to the
station. Since he delivers the goods up to the station, he
charges a little higher price. All further expenses on
goods such as freight, insurance, etc. have to be borne by
the buyer.
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2. Station Price Quotation

18. Free On Rail (FOR) price quotation covers the expenses
of carrying the goods to the railway station nearest to seller
plus the loading expenses, freight and unloading expenses are
to be borne by the buyer.
FOR price quotation = Station price quotation + Loading Charges
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3. Free On Rail (FOR) Price Quotation

19. Cost and Freight (C & F) price quotation includes the cost of
the goods and all the expenses like carriage to the seller's
nearest station, dock and loading charges and freight.
Expenses like insurance, unloading and cartage to the buyer's
place are to be borne by the buyer.
C & F price quotation = FOR price quotation + Railway Freight
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4. Cost and Freight (C & F) Price Quotation

20. 5. Cost Insurance and Freight (CIF) Price
Quotation
There is a risk involved in transporting goods and this
risk is covered by insurance. Generally, the buyer pays
insurance charges but if CIF quotation is mentioned then the
seller pays for the insurance charges along with other
previous mentioned prices. So, the price includes cost of the
goods plus carriage up to seller's nearest station, loading,
freight and insurance charges.
CIF price quotation = C & F price quotation + Insurance.
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21. 6. Franco Price Quotation
Franco price quotation is the highest price quotation.
In spite of being the highest quotation, buyers prefer this
quotation because under this price, the goods are delivered to
the buyers at their door-step. The buyer is relieved from the
tension of transporting goods from the seller's warehouse to
his own warehouse.
Franco price quotation = All expenses up to the buyer's warehouse.
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22. 7. Free Alongside Ship (FAS) Price Quotation
Free Alongside Ship (FAS) price quotation includes the cost
of the goods and all the expenses to deliver the goods at the dock
nearest to the seller. The buyer has to bear the expenses of loading,
insurance, freight and the customs duty, etc., in addition to the cost of
goods. Though this quotation is used in some countries, it is not in
use in India.
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FAS price quotation = Loco price quotation + cost of carriage of
goods up to the harbor nearest to the seller.

23. Free On Board (FOB) price quotation is similar to FOR
in inland trade. This is normally used in foreign trade. Under
FOB quotation, the seller quotes a price which includes all the
expenses incurred until the goods are actually delivered on
board the ship at the port of shipment.
FOB price quotation = cost of goods + expenses up to goods on ship's board
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8. Free On Board (FOB) Price Quotation

24. 9. Cash With Order (CWO) Price Quotation
In Cash With Order (CWO) price quotation, the
buyer has to send cash along with the order, otherwise,
the order may not be executed.
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25. 10. Cash On Delivery (COD) Price Quotation
In Cash On Delivery (COD) price quotation, the buyer
has to pay cash after receiving the delivery of the goods
ordered by him
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