Merchant Rates, Exchange Margins and TT or Bill Rates for CAIIB BFM

Introduction

Banks deal in foreign exchange at two broad levels:

• Interbank market: transactions between banks and other eligible market participants.

• Merchant or customer market: foreign exchange transactions between a bank and its customers.

The rate available in the interbank market is therefore not necessarily the final rate given to a customer. The bank has to identify the nature of the customer transaction, choose the appropriate buying or selling side, consider the relevant value date or bill period, and apply its exchange margin or pricing adjustment.

For CAIIB BFM, four terms require special attention:

• TT Buying Rate

• TT Selling Rate

• Bill Buying Rate

• Bill Selling Rate

The arithmetic is usually simple. The difficult part is identifying which rate applies and whether the margin should increase or decrease the rate.

Learning Objectives

After studying this topic, you should be able to:

• understand the difference between interbank and merchant rates;

• identify whether the bank is buying or selling foreign currency;

• distinguish TT buying, TT selling, bill buying and bill selling rates;

• understand how exchange margin affects customer rates;

• recognise when a bill period or forward adjustment becomes relevant; and

• avoid common CAIIB numerical mistakes involving rate selection and margin application.

Merchant Rate: Basic Concept

A merchant rate is the exchange rate applied by an Authorised Dealer bank to a customer foreign exchange transaction.

FEDAI's publicly available Rules, 10th Edition, provide that merchant exchange quotations are to be expressed in direct terms, that is, rupees and paise for one unit or 100 units of foreign currency.

For example, the bank may have an underlying market rate for USD/INR but quote a different customer rate after considering:

• whether the bank is buying or selling USD;

• transaction type;

• value date;

• forward premium or discount where relevant;

• exchange margin or bank pricing; and

• applicable transaction-specific factors.

Therefore:

Market Rate → Appropriate Buying/Selling Rate → Value-Date Adjustment → Exchange Margin → Merchant Rate

Bank's Perspective Comes First

Before calculating any merchant rate, ask:

Is the bank buying foreign currency or selling foreign currency?

This single question determines which side of the quotation should be used.

Bank Buys Foreign Currency

Examples include:

• an exporter sells foreign currency proceeds to the bank;

• an inward foreign remittance is converted into INR;

• the bank purchases or negotiates an export bill.

The bank gives INR and receives foreign currency.

Bank Sells Foreign Currency

Examples include:

• a customer makes an outward remittance;

• an importer purchases foreign currency to meet an import liability;

• the bank provides foreign currency against INR.

The bank receives INR and supplies foreign currency.

Understanding Exchange Margin

The interbank rate is the bank's market reference or cover rate. The customer rate may include an exchange margin.

In a direct quotation such as USD/INR:

• a lower buying rate benefits the bank when it buys USD;

• a higher selling rate benefits the bank when it sells USD.

Therefore, for standard CAIIB numerical logic:

Buying transaction → subtract margin

Selling transaction → add margin

Do not assume an old or memorised fixed percentage of exchange margin unless the question specifically provides it. For examination numericals, use the percentage or margin stated in the question.

Calculating a Percentage Margin

Exchange Margin = Applicable Rate × Margin Percentage ÷ 100

This converts a percentage exchange margin into rate points.

Refer to the Formula Section for a detailed explanation, variables, and solved examples.

Important Distinction: Margin Is Not the Same as Spread

The bid-offer spread is the difference between the market buying and selling quotations.

The exchange margin is an adjustment used while arriving at the merchant/customer rate.

They should not automatically be treated as the same item.

TT Buying Rate

TT means Telegraphic Transfer. In modern banking, the term survives as a rate classification even though transactions are processed electronically.

The TT Buying Rate applies broadly where the bank buys foreign currency from the customer and does not need to price a separate bill realisation period in the manner applicable to purchased export bills.

A common example is conversion of an inward foreign currency remittance into INR.

Current publicly accessible FEDAI Rules state that foreign currency inward remittances are converted at the TT buying rate or contracted rate, as applicable. Export bills sent for collection are also converted at the prevailing TT buying rate or contracted rate after the foreign currency proceeds are credited to the bank's Nostro account.

TT Buying Calculation Logic

For a direct quotation:

TT Buying Rate = Applicable Market Buying Rate − Exchange Margin

This derives the customer buying rate after reducing the appropriate market buying rate by the given margin.

Refer to the Formula Section for a detailed explanation, variables, and solved examples.

Why Is Margin Subtracted?

Suppose the bank can sell foreign currency received from the customer in the market at a particular rate.

The bank should normally buy that foreign currency from the customer at a slightly lower rate after incorporating its pricing margin.

Therefore, the customer receives fewer rupees per unit of foreign currency than the underlying reference buying rate.

TT Selling Rate

The TT Selling Rate applies where the bank sells foreign currency to a customer for a clean outward payment or remittance.

Typical situations include:

• foreign outward remittance;

• transfer of funds abroad;

• certain non-documentary foreign currency payments; and

• cancellation of certain purchase contracts where the applicable rule requires a TT selling rate.

FEDAI Rule 4.1 states that outward remittances are effected at the bank's TT selling rate ruling on that date or at the applicable foreign exchange contract rate.

TT Selling Calculation Logic

For a direct quotation:

TT Selling Rate = Applicable Market Selling Rate + Exchange Margin

This derives the customer selling rate by adding the specified margin to the appropriate market selling rate.

Refer to the Formula Section for a detailed explanation, variables, and solved examples.

Why Is Margin Added?

The bank is selling foreign currency to the customer.

Therefore, the customer normally pays a rate higher than the underlying market selling reference after the bank's exchange margin is incorporated.

Bill Buying Rate

The Bill Buying Rate is associated mainly with foreign currency export bills that the bank purchases, discounts or negotiates.

This differs from a clean inward remittance.

When an export bill is purchased today, the bank pays rupees to the exporter immediately, but the corresponding foreign currency may be realised later.

Therefore, the expected realisation period becomes relevant while determining the applicable rate.

FEDAI's publicly accessible rules state that foreign currency export bills purchased, discounted or negotiated are to be converted at the Authorised Dealer's current bill buying rate or contracted rate.

Bill Buying Rate Structure

For CAIIB numerical questions, think in this sequence:

1. Select the appropriate market buying rate.

2. Determine the period for which the foreign currency proceeds are expected later.

3. Apply the relevant forward premium or discount for that period, where given.

4. Apply the exchange margin.

5. Arrive at the bill buying rate.

Conceptually:

Bill Buying Rate = Appropriate Forward-Adjusted Buying Rate − Exchange Margin

This represents the buying rate after considering the relevant bill period and the margin specified in the question.

Refer to the Formula Section for a detailed explanation, variables, and solved examples.

Why Bill Buying Differs from TT Buying

The key difference is timing of foreign currency availability.

In a clean inward remittance, the foreign currency may already have been received or made available to the bank.

In an export bill purchase, the bank may have to wait for the foreign currency proceeds.

Therefore, the rate for the expected future realisation date may become relevant.

Transit Period and Usance Period

These terms often appear in bill-rate numericals.

Transit Period

Transit period represents the period associated with receiving or realising proceeds of a demand export bill.

FEDAI describes Normal Transit Period as the average period normally involved between purchase, negotiation or discounting of an export bill and receipt of its proceeds. It specifically distinguishes this from the physical transit time of the goods.

Usance Period

A usance bill permits payment after a specified credit period.

For such a bill, the expected foreign currency realisation may occur later than for a sight bill.

This affects the relevant value date used in rate construction.

CAIIB Calculation Approach

When a question gives:

• transit period;

• usance period; or

• a specific expected realisation period,

identify the corresponding forward period before applying the exchange margin.

Do not blindly use the spot rate.

Bill Selling Rate

The Bill Selling Rate is primarily associated with documentary foreign currency liabilities where the bank sells foreign currency to meet a customer's bill obligation.

The most important CAIIB example is retirement of an import bill.

Under FEDAI Rule 3.1, where an import bill has a hedge contract, the applicable exchange rate is the hedge contract rate. Where no hedge contract exists, the prevailing Bill Selling Rate applies.

For examination calculations where the required inputs are supplied:

Bill Selling Rate = Appropriate Selling Rate + Applicable Exchange Margin

This represents the customer selling rate after incorporating the margin specified for the transaction.

Refer to the Formula Section for a detailed explanation, variables, and solved examples.

Do not assume that a Bill Selling Rate must always be reconstructed from a TT Selling Rate. Follow the data and method specifically supplied in the question.

TT Rates versus Bill Rates

Contracted Rate versus Current Merchant Rate

A major exam trap is ignoring an existing forward or hedge contract.

If an eligible transaction has already been covered by a valid foreign exchange contract, the contracted rate may apply instead of the current merchant rate.

Important current FEDAI examples include:

• purchased/negotiated export bills: current Bill Buying Rate or contracted rate;

• export collection proceeds: TT Buying Rate or contracted rate;

• outward remittance: TT Selling Rate or FX contract rate;

• inward remittance: TT Buying Rate or contracted rate;

• import bill retirement: hedge contract rate where a hedge exists, otherwise prevailing Bill Selling Rate.

A Reliable Method for Merchant-Rate Numericals

Use the following sequence in every CAIIB question.

Step 1: Identify the Transaction

Look for words such as:

• inward remittance;

• outward remittance;

• export bill;

• import bill;

• negotiation;

• purchase;

• collection; or

• retirement.

Step 2: Determine Bank Action

Ask:

Is the bank buying or selling foreign currency?

This determines the market side and margin direction.

Step 3: Select TT or Bill

Use the nature of the transaction:

• clean inward receipt → TT Buying;

• export bill purchased/negotiated → Bill Buying;

• clean outward payment → TT Selling;

• import bill retirement → Bill Selling, unless the applicable contracted rate governs.

Step 4: Check for a Contract

If a forward or hedge contract is mentioned, determine whether its rate applies.

Step 5: Determine the Relevant Value Date

For bills, examine:

• transit period;

• usance period;

• expected realisation date; and

• forward premium or discount information.

Step 6: Apply Exchange Margin

For a direct quotation:

• bank buying FC → margin reduces rate;

• bank selling FC → margin increases rate.

Step 7: Round Only at the Required Stage

Keep sufficient decimal places during intermediate calculations.

Apply the rounding instruction given in the question. FEDAI Rule 5.8 allows settlement of merchant transactions in rounded rupee amounts or actual paise according to the bank's own policy.

CAIIB Exam Focus

1. Buying and Selling Are From the Bank's View

An exporter selling USD to the bank means the bank buys USD.

An importer purchasing USD means the bank sells USD.

Reversing this perspective leads to the wrong rate.

2. Margin Direction Is Critical

For direct quotations:

Buying → Reduce

Selling → Increase

This is often more important than the arithmetic itself.

3. TT Buying and Bill Buying Are Not Interchangeable

Both involve the bank buying foreign currency, but the timing of receipt differs.

The existence of an export bill and its expected realisation period is the main clue for Bill Buying Rate.

4. TT Selling and Bill Selling Are Not the Same Label

An outward remittance normally points towards TT Selling.

Retirement of an uncovered import bill points towards Bill Selling under the FEDAI rule described above.

5. Forward Premium or Discount May Affect Bill Buying

An export bill purchased today may realise after the spot date.

Where the question supplies forward points for the relevant period, incorporate them before applying the customer margin.

6. Do Not Invent Exchange-Margin Percentages

Use the margin given in the numerical.

Do not rely on old percentages memorised from outdated study material unless the examination question itself specifies them.

7. Existing Hedge Changes the Answer

Always look for phrases such as:

• “covered under forward contract”;

• “contracted rate”;

• “hedge available”; or

• “forward booked”.

These can change the applicable rate completely.

Common Exam Traps

Trap 1: Adding Margin to a Buying Rate

A learner sees “exchange margin” and automatically adds it.

Why it is wrong: For a direct quotation, adding margin improves the customer's buying rate. In a bank-buying transaction, the margin normally reduces the rate payable to the customer.

Trap 2: Subtracting Margin from a Selling Rate

This makes the foreign currency cheaper for the customer.

Why it is wrong: Where the bank sells foreign currency under a direct quotation, the margin normally increases the customer rate.

Trap 3: Using TT Buying for Every Export Transaction

An exporter's transaction does not automatically mean TT Buying.

Why it is wrong: A purchased or negotiated export bill normally requires Bill Buying treatment, while realised collection proceeds may involve TT Buying.

Trap 4: Using TT Selling for an Import Bill

The learner identifies that the bank is selling foreign currency and stops there.

Why it is wrong: An uncovered import bill retirement is specifically associated with Bill Selling Rate under the FEDAI rule.

Trap 5: Ignoring the Bill Period

The learner uses today's spot buying rate for an export bill that will realise later.

Why it is wrong: The expected realisation period may require a forward-rate adjustment.

Trap 6: Applying Margin Before Correcting the Value Date

A learner first calculates a merchant spot rate and then adjusts it for the bill period.

Why it can cause error: Follow the sequence specified in the numerical. Normally, determine the appropriate underlying rate for the required value date and then apply the customer margin.

Trap 7: Ignoring an Existing Forward Contract

The entire merchant-rate calculation is performed even though the transaction is already covered.

Why it is wrong: Where an applicable contract exists, the contracted rate can govern the transaction instead of the prevailing TT or Bill Rate.

Trap 8: Confusing Exchange Margin with Forward Margin

These are different concepts.

Exchange margin relates to the customer pricing adjustment.

Forward premium or discount reflects the difference between spot and forward exchange rates for different value dates.

One should not be substituted for the other.

Memory Techniques

“Bank Buys = Rate Goes Down”

For direct INR quotations:

When the bank buys foreign currency, the exchange margin generally moves the customer's rate downward.

Think:

BUY → SUBTRACT

“Bank Sells = Customer Pays More”

When the bank sells foreign currency:

SELL → ADD

“TT = Transfer, Bill = Documents”

As a first screening rule:

• clean transfer/remittance → think TT;

• export/import documentary bill → check Bill Rate.

Then verify the exact transaction before selecting the rate.

“Contract Before Current”

Before calculating a current TT or Bill Rate, ask:

Is there an applicable contracted or hedge rate?

This single check can prevent an otherwise completely unnecessary calculation.