Foreign Exchange Rates and Quotations

A Lagos importer who orders machinery from Germany must pay in euros, and her bank must be given naira in exchange. An exporter of cocoa to the Netherlands is paid in euros, and sells them for naira before he can pay his workers. A company that invests in a plant abroad needs the foreign currency to build it.

All of them make use of the foreign exchange market, where currencies are bought and sold, and the price at which one currency trades against another is the exchange rate.

It looks simple, but it is a frequent source of errors: the rate can be written in two directions, it comes in a “buy” and a “sell” version, and the right one to use depends on which side of the bank you are on. This topic is the foundation for the whole of the risk management area.

It explains why companies need foreign exchange, spot and forward rates, direct and indirect quotes and how to convert between them, strong and weak currencies, the bid and offer rates and the spread, how to calculate a cross rate, and how the Nigerian foreign exchange market works, with worked examples. The next topic covers the risks that arise from exchange rate movements.

The syllabus asks candidates to explain spot rates and what causes them to move, and to describe foreign exchange risk. Read practical considerations in share valuation first.

Why companies need foreign exchange

• Imports: paying a foreign supplier in its currency (or in a currency such as the US dollar).
• Exports: receiving foreign currency from customers and converting it, or keeping it in a foreign currency account.
• Investment and borrowing abroad: buying assets abroad, receiving dividends from foreign subsidiaries, raising and repaying foreign currency loans.

Many currencies can be freely bought and sold in markets run by banks around the world. Others have no liquid market, and foreign firms may be unwilling to be paid in them. In a spot transaction one currency is sold in exchange for another for “immediate” settlement, which in practice means two working days; in the examination, treat it as immediate.

In a forward transaction the rate is agreed today for exchange on a future date, a means of reducing risk (see the later topics).

Direct and indirect quotes

An exchange rate is the price of one currency in terms of another. The currency whose price is quoted is the base currency and the one in which the price is given is the variable currency.

• A direct quote gives the number of units of the domestic currency that exchange for one unit of the foreign currency. Nigeria uses it: in October 2026 the official rate was about ₦1,335 to $1, written ₦1,335/$1.
• An indirect quote gives the number of units of foreign currency that exchange for one unit of the domestic currency: indirect quote = 1 ÷ direct quote.
  From ₦1,335/$1 the indirect quote is 1 ÷ 1,335 = $0.000749 per ₦1.
  (The UK quotes in the indirect way, for example $1.30 per £1, and a direct quote for one country is the indirect quote for the other.)

Strong and weak currencies

As one currency strengthens the other weakens. In a direct quote, a higher number means the domestic currency has weakened: if the rate moves from ₦1,335/$1 to ₦1,400/$1, the naira is weaker (it takes more naira to buy a dollar) and the dollar stronger. The naira has lost 1,335 ÷ 1,400 − 1 = 4.6% of its value in dollars, and the dollar has gained 1,400 ÷ 1,335 − 1 = 4.9% in naira.

Be careful with quotes where the foreign currency is the one being counted: if the rate moves from $1.30 per £1 to $1.40 per £1, the pound has strengthened, because it now buys more dollars.

Bid and offer rates

A bank quotes two rates for a currency pair: the bid rate, at which it will buy the foreign currency, and the offer rate, at which it will sell it. The basic rule: the bank uses the rate that is more favourable to itself and less favourable to the customer: it sells foreign currency at the stronger rate for that currency and buys it at the weaker rate.

The difference is the spread, the bank’s margin and the cost to the customer of a round trip.

A direct quote

A bank quotes ₦1,330 – ₦1,340 per dollar. A Nigerian importer needs $50,000 to pay a US supplier: the bank sells dollars at the higher rate, ₦1,340, so the cost is 50,000 × 1,340 = ₦67,000,000. An exporter with $50,000 to sell receives the lower rate, ₦1,330: 50,000 × 1,330 = ₦66,500,000. A customer who bought and at once sold the dollars would lose ₦500,000 to the spread, which is ₦10 on ₦1,340, about 0.75%.

Check: if the answer gives the customer a gain on a round trip, the wrong rates have been used.

An indirect quote

A UK company wants $10,000 to pay a US supplier; the bank quotes $1.2500 – $1.2600 per £1. The bank sells dollars at the rate that gives it more pounds for the dollars, the lower number of dollars per pound, $1.2500: the cost is 10,000 ÷ 1.2500 = £8,000. Selling $10,000 back would raise only 10,000 ÷ 1.2600 = £7,936.51, a loss of £63.49. With indirect quotes the rule “buy at the higher, sell at the lower” no longer fits; use the check each time.

Cross rates

A cross rate between two currencies is derived from their rates against a third. If ₦ per $ is 1,335 and euros per dollar is €0.92 (that is $1 = €0.92), then ₦1,335 = €0.92 and the naira price of a euro is 1,335 ÷ 0.92 = ₦1,451.09. If £1 = $1.30 and $1 = ¥150, then £1 = 1.30 × 150 = ¥195. If ₦1,335 = $1 and $1 = ¥150, then ¥1 = 1,335 ÷ 150 = ₦8.90. The method: write the two rates so that the common currency cancels, multiply or divide, then check whether the answer is sensible.

Where bid and offer rates are quoted for both pairs, work with the rate that applies at each step: a bank customer who buys one currency through a second pays the offer on each leg.

The Nigerian market

• The Nigerian Foreign Exchange Market (NFEM) is the official interbank market, run through the Central Bank of Nigeria’s Electronic Foreign Exchange Matching System, under guidelines the Bank issued in 2024 (with a minimum tradable amount of $100,000). The Bank publishes the day’s official rate as the volume-weighted average of transactions and a reference rate; in October 2026 the official rate was around ₦1,330 to ₦1,345 to the dollar.
• Authorised dealers (the banks) sell foreign exchange to customers at rates based on the interbank market plus their margin, so a company’s own rate is the bank’s offer or bid. Bureau de change operators and a parallel market also exist; the parallel rate (about ₦1,375 to ₦1,390 in October 2026) differs from the official rate by a premium, the size of which is an indicator of pressure in the official market.
• Rules for documentation, repatriation and the use of foreign exchange are in the Central Bank’s Foreign Exchange Manual and circulars; they change often, so check the current rules.

The ideas in more depth

Why the bank has two rates

A dealer makes a market by being ready to buy and sell at any time. The spread pays for the cost of doing so and for the risk of holding currency while its price moves. It widens when the currency is volatile or thinly traded.

For the customer the spread is a real cost of every transaction, which is one reason companies try to net their foreign currency receipts and payments before going to the bank (see the topic on internal hedging).

Why the direction of the quote matters

An exchange rate is a ratio. ₦1,335 per dollar and $0.000749 per naira are the same fact written from opposite ends, and a mistake about the direction turns a gain into a loss in the calculation. Before calculating, write down which currency is being priced and which is domestic; then check the result for sense: a Nigerian company buying dollars should pay more naira than the same dollars sold back would bring.

Sources and references

• The Central Bank of Nigeria’s Foreign Exchange Manual and its guidelines for the Electronic Foreign Exchange Matching System; the daily rates published by the Central Bank and by the FMDQ Securities Exchange. The accounting treatment of foreign currency transactions is in International Accounting Standard (IAS) 21 The Effects of Changes in Foreign Exchange Rates.

These points are stated as at 5 November 2026.

Worked examples

1. Reciprocal.
   1 ÷ 1,335 = $0.000749 per ₦1.

1. Rate. The bank sells at ₦1,340.
2. Cost.
   50,000 × 1,340 = ₦67,000,000.

1. Divide.
   1,335 ÷ 150 = ₦8.90 per ¥1.

How to answer in the exam

• Identify the quote: which currency is domestic, which is priced.
• Select the rate: the bank buys at the bid and sells at the offer; decide which currency the customer is buying.
• Check the answer: a round trip must cost the customer.
• Show the working for any cross rate and state the currency of the answer.

Common mistakes in the exam

• Using the bid for a purchase of foreign currency by a customer, or the offer for a sale.
• Multiplying when the rate should divide (and the reverse) with an indirect quote.
• Saying the naira has strengthened when the naira price of the dollar has risen.
• Forgetting to invert one of the quotes in a cross rate.
• Mixing the currencies in a cross rate calculation.
• Not checking that the bank gains on a round trip.

Quick revision

• Direct quote: domestic per foreign; indirect = 1 ÷ direct.
• A higher direct rate means a weaker domestic currency.
• The bank buys at the bid, sells at the offer; the spread is its margin.
• Cross rates: cancel the common currency.

Practice questions

These are original questions written in the style of the Institute’s exams. Try each one before you open the answer. Section A is a recall check, because the paper itself is written.

Recall check: multiple choice

Section B style: written questions

A further written question

Model answers

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