Originally Posted by sunandaC
We know that US dollar being the currency of intervention only US dollar/rupee exchange rate is available in the Indian Forex market and exchange rates of rupee with all other foreign currencies are derived from this rate through crosses.
If we want to remit French from India, exchange rate of French franc/rupee has to be arrived at. What we have to do is the first buy US dollar against rupee and by selling US dollar so bought, say in London market, we buy French franc.
Let us understand by an example…
If exchange rates in Mumbai interbank market and London market are as follows:
Interbank market Mumbai
US $ 1 = Rs. 41.2550-41.2650
US $ 1 = FRF 6.0500-6.0550
The transaction will proceed like, interbank market takes rupees 41.2650 and gives US $ 1.
This US $ is taken to the London market for conversion in the FRF. The London market takes US $ 1 and gives FRF 6.0500.
So we can calculate the direct rate between FRF and INR.
FRF 6.0500 = US $1 And US $ 1 = RS. 41.2650 Therefore, FRF 6.0500 = US $ 1 = RS. 41.2650
So, FRF 1 = RS.41.2650/6.0500 = RS. 6.8206
In this way, banks can calculate exchange rate between any two currencies.
Hey sunanda nice post,
Here I am sharing Cross-Section Study on Structural Factors Affecting Exchange Rate Volatility, so please download and check it.