International Finance
The Market for Foreign Exchange
EXCHANGE RATE DETERMINATION
An exchange rate measures the value of one currency in units
of another currency.
A decline in a currency’s value is often referred to as
depreciation.
Increase in a currency value is often referred to as
appreciation.
Percentage change in foreign currency value = (S – St-1)/St-1
Appreciation and Depreciation of the foreign currency.
“the dollar was mixed in trading”
FOREX Market Participants
• The FOREX market is a two-tiered market:
– Interbank Market (Wholesale)
• About 700 banks worldwide stand ready to make a
market in Foreign exchange.
• Nonbank dealers account for about 20% of the market.
• There are FX brokers who match buy and sell orders
but do not carry inventory and FX specialists.
– Client Market (Retail)
• Market participants include international
banks, their customers, nonbank dealers,
FOREX brokers, and central banks.
Correspondent Banking
Relationships
• Large commercial banks maintain demand
deposit accounts with one another which
facilitates the efficient functioning of the forex
market.
• International commercial banks communicate
with one another with:
– SWIFT: The Society for Worldwide Interbank Financial
Telecommunications.
– CHIPS: Clearing House Interbank Payments System
– ECHO Exchange Clearing House Limited, the first
global clearinghouse for settling interbank FOREX
transactions.
Spot FX trading
• In the interbank market, the standard size
trade is about U.S. $10 million.
• A bank trading room is a noisy, active
place.
• The stakes are high.
• The “long term” is about 10 minutes.
The Bid-Ask Spread
• The bid price is the price a dealer is willing
to pay you for something.
• The ask price is the amount the dealer
wants you to pay for the thing.
• The bid-ask spread is the difference
between the bid and ask prices.
Monday, September 21, 10.45 a.m.
BANK A: "Bank A calling. USD-CHF 25 please.
(Bank A dealer is asking for a Swiss franc versus US dollar
quote. She specifies the size of the deal, viz. 25 million
dollars since this is more than the "market lot" of 10 million.)
BANK B: "Forty-Fifty-two"
(Bank B is specifying a two-way price-the price at which it
will buy a US dollar against Swiss franc and the price at
which it is willing to sell a US dollar. Knowing that the caller
is also a forex dealer, the dealer in Bank B quotes only the
last two decimals of the full quotation. For instance the full
quotation might be 1.4540/1.4552. Bank B will pay CHF
1.4540, its "bid rate", when it buys a dollar and will want to
be paid CHF 1.4552, its "ask rate" when it sells a dollar.
BANK A: "Mine"
(Bank A dealer finds bank B's price acceptable and wishes
to buy USD 25 million. She conveys this by saying "mine",
that is, "I buy the specified quantity at your specified
price". If she wished to sell, she might have said "Yours".)
BANK B: OK. I sell you USD 25 million against CHF at
1.4552 value 23 September. UBS Geneva for my CHF.
(Bank B confirms the quantity, price and settlement date. It
also specifies where it would like its CHF to be transferred.)
BANK A: CITIBANK NYK for my dollars.
Bank B has been "hit on its ask side", that is, the caller,
bank A wished to buy dollars
EXCHANGE RATE EQUILIBRIUM
An exchange rate at a given point in time represents a price
of a currency.
Price is determined by the demand for that currency relative to
supply.
The point where the demand and supply equal represent the
equilibrium exchange rate.
Demand for a currency
$1.6
Quantity of £
US corporations would be encourage to purchase more British goods when the
pound was worthless.
Supply of the currency for sale
British demand for US dollars
is the British supply of
pounds for sale.
Quantity of £
Equilibrium exchange rate determination
FACTORS INFLUENCE EXCHANGE RATES
Relative inflation rates
Relative interest rates
Relative income levels
Government controls
Expectations
Effect of relative inflation rates
If U.S inflation suddenly increased substantially while British inflation remained the
same?
There is a sudden &
substantial increase
in British inflation
Effect of relative interest rates
U.S interest rates rise while British interest rates remain constant
Effect of relative income levels
U.S. income level substantially rises while the British income level remains unchanged
Types of transactions and settlement dates
Settlement date or value date
Settlement location
Dealing locations
Settlements can be take place only on a day which
both banks are open
A London bank can sell Swiss Francs against US
Dollars to a Paris bank. Settlement locations may be
New York & Geneva, while dealing locations are
London & Paris.
In spot transaction the settlement date is two business days ahead. (For
European currencies or Yen traded against USD)
London bank sells JPY against USD to a Paris bank on Monday. The value date
is…
Deals done on a Friday, the settlement date is ……
Value date for forward transactions (one month -30 days – forward contract)
First find the value date for a spot transaction, then add one calendar month to
arrive at the value date.
One month forward transaction entered on June 20, find the value date.
If the value date agreed on became a bank holiday, then follow the same as
spot.
Three month forward deal is done on November 26, the value date is ……
Rolling forward must not take in to the next calendar month, in such case u
must shift it backward.
Exchange rate quotations
An exchange rate between two currencies A and B, can be
stated
As units of B per unit of A
As units of A for unit of B
Quotations in European terms
Quotes given as number of units of a currency per USD
EUR 1.0275 per USD
CHF 1.4500 per USD
LKR 103 per USD
Quotations in American terms
Quotes given as number of USD per unit of a currency
USD 0.4575 per CHF
USD 1.3542 per GBP
Direct quotes and indirect quotes
A currency pair is denoted by 3 letter SWIFT codes and two currencies
separated by an oblique or hyphen
USD/CHF : US Dollar – Swiss Franc
GBP/JPY :
USD/LKR :
The first currency in the pair is the base currency, second is the quoted
currency
A quotation consists of two prices
Bid (left of the oblique)
Ask (right of the oblique) –offer price
Bid – the amount of quoted currency the dealer will give in return for one unit
of the base currency.
Ask – the price at which the dealer is willing to sell (offering) one unit of the
base currency
Arbitrage in spot markets
Eg- 01
Bank
GBP/USD
A
1.4550/1.4560
B
1.4538/1.4548
Pounds can be bought from B at $1.4548 and sold for a net
profit of $0.0002 per Pound
Eg- 02
Bank
GBP/USD
A
1.4550/1.4560
There is no arbitrage, as in Eg. 01
B
1.4545/1.4555
Inverse quotations and two-point arbitrage
Quotation from a bank in Zurich
USD/CHF 1.4955/1.4962
Quotation from a bank in New York
CHF/USD 0.6695/0.6699
Having a arbitrage
Implied (CHF/USD)bid
Implied (CHF/USD)ask
=
=
1/(USD/CHF)ask
1/(USD/CHF)bid
Cross-rates and three-point arbitrage
A bank in New York offer following quotes
USD/JPY
USD/AUD
: 110.25/111.10
: 1.6520/1.6530
At the same time a bank in Sydney offer following quotes
AUD/JPY
: 68.30/69.00
Is there an arbitrage opportunity ?
Step 01
Sell JPY, buy USD and then sell USD and buy AUD. Both these
transactions in New York.
Step 02
Sell AUD for JPY in Sydney
1 JPY sold in New York gets USD [1/(USD/JPY)ask(N)] = USD(1/111.10)
USD [1/(USD/JPY)ask(N)] sold against AUD gets
AUD {[1/(USD/JPY)ask(N)] (USD/AUD)bid(N)}
=
AUD (1/111.10)(1.6520)
Finally the amount of JPY obtained by selling AUD
JPY {[1/(USD/JPY)ask(N)] (USD/AUD)bid(N) (AUD/JPY)bid(S)
JPY (1/111.10)(1.6520)(68.30) = JPY 1.0156
A risk less profit of JPY 0.0156 per JPY
No arbitrage condition requires
1/(USD/JPY)ask(N) X (USD/AUD)bid(N) X (AUD/JPY)bid(S) < 1
Spot Rate Quotations
Wednes day , J anuary 8, 1997
EXC H A N GE R A T ES
The New York foreign ex c hange s elling rates below apply to
trading among bank s in amounts of $1 million and more , as quoted
at 4 p.m. Eas tern time by Dow J ones Telerate Inc . and other s ourc es .
Retail trans ac tions prov ide fewer units of foreign c urrenc y per
dollar.
C urrency
per U .S. $
U .S. $ equiv.
Country
Wed.
Tues.
Wed.
Tues.
Argentina (Pes o)
1.0012
1.0012
.9988
.9988
Australia (Dollar)
.7805
.7902
1.2812
1.2655
Austria (Sc hilling)
.09043
.09101
11.058 10.988
Bahrain (Dinar)
2.6525
2.6525
.3770
.3770
Belgium (Franc )
.03080
.03105
32.470
32.205
Braz il (Real)
.9607
.9615
1.0409
1.0401
Britain (Pound)
1.6880
1.6946
.5924
.5901
30-Day Forward
1.6869
1.6935
.5928
.5905
90-Day Forward
1.6843
1.6910
.5937
.5914
180-Day Forward
1.6802
1.6867
.5952
.5929
Canada (Dollar)
.7399
.7370
1.3516
1.3568
30-Day Forward
.7414
.7386
1.3488
1.3539
90-Day Forward
.7442
.7413
1.3437
1.3489
.7479
.7450
1.3370
1.3422
180-Day Forward
Chile (Pes o)
.002352
.002356
425.25
424.40
China (Renminbi)
.1201
.1201
8.3272
8.3276
Colombia (Pes o)
.0009985 .0009985 1001.50 1001.50
Cz ech. Rep (Krouna)
....
....
....
....
Commerc ial rate
.03662
.03677
27.307
27.194
Denmark (Krone)
.1663
.1677
6.0118
5.9633
Ecuador (Suc re)
....
....
....
....
Floating r ate
.0002766 .0002787 3615.00 3587.50
Finland (Mark k a)
.2121
.2135
4.7150
4.6841
France (Franc )
.1879
.1893
5.3220
5.2838
30-Day Forward
.1882
.1896
5.3126
5.2741
90-Day Forward
.1889
.1903
5.2935
5.2558
.1901
.1914
5.2617
5.2243
180-Day Forward
Germany (Mark )
.6352
.6394
1.5744
1.5639
30-Day Forward
.6364
.6407
1.5714
1.5607
90-Day Forward
.6389
.6432
1.5652
1.5547
180-Day Forward
.6430
.6472
1.5552
1.5450
Greece (Drac hma)
.004049
.004068
246.98
245.80
Hong Kong (Dollar)
.1292
.1292
7.7390
7.7390
Hungary (Forint)
.006139
.006164
162.89
162.23
India (Rupee)
.02787
.02786
35.875
35.890
Indonesia (Rupiah)
.0004233 .0004233 2362.15 2362.63
Ireland (Punt)
1.6664
1.6714
.6001
.5983
Israel (Shek el)
.3079
.3085
3.2474
3.2412
Italy (Lira)
.0006483 .0006510 1542.50 1536.00
C urrency
U .S. $ equiv.
per U .S. $
Country
Wed.
Tues.
Wed.
Tues.
Japan (Yen)
.008639
.008681
115.75
115.20
30-Day Forward
.008676
.008718
115.26
114.71
90-Day Forward
.008750
.008791
114.28
113.76
180-Day Forward
.008865
.008907
112.80
112.28
Jordan (Dinar)
1.4075
1.4075
.7105
.7105
Kuwait (Dinar)
3.3367
3.3389
.2997
.2995
Lebanon (Pound)
.0006445 .0006445 1551.50 1551.50
Malaysia (Ringgit)
.4018
.4002
2.4885
2.4990
Malta (Lira)
2.7624
2.7701
.3620
.3610
Mexico (Pes o)
....
....
....
....
Floating r ate
.1278
.1277
7.8220
7.8330
Netherland (Guilder)
.5655
.5699
1.7685
1.7547
New Zealand (Dollar)
.7072
.7106
1.4140
1.4073
Norway (Krone)
.1540
.1548
6.4926
6.4599
Pakistan (Rupee)
.02529
.02529
39.540
39.540
Peru (new Sol)
.3814
.3840
2.6218
2.6039
Philippines (Pes o)
.03800
.03802
26.318
26.300
Poland (Zloty )
.3460
.3475
2.8900
2.8780
Portugal (Es c udo)
.006307
.006369
158.55
157.02
Russia (Ruble) (a)
.0001787 .0001788 5595.00 5594.00
Saudi Arabia (Riy al)
.2666
.2667
3.7503
3.7502
Singapore (Dollar)
.7116
.7124
1.4053
1.4037
Slovak Rep. (Koruna)
.03259
.03259
30.688
30.688
South Africa (Rand)
.2141
.2142
4.6705
4.6690
South Korea (Won)
.001184
.001184
844.75
844.65
Spain (Pes eta)
.007546
.007603
132.52
131.53
Sweden (Krona)
.1431
.1435
6.9865
6.9697
Switz erland (Franc )
.7334
.7387
1.3635
1.3537
30-Day Forward
.7357
.7411
1.3593
1.3494
90-Day Forward
.7401
.7454
1.3511
1.3416
180-Day Forward
.7470
.7523
1.3386
1.3293
Taiwan (Dollar)
.03638
.03637
27.489
27.493
Thailand (Baht)
.03902
.03906
25.625
25.605
Turkey (Lira)
.00000911 .00000915109755.00109235.00
United Arab (Dirham)
.2723
.2723
3.6720
3.6720
Uruguay (New Pes o)
....
....
....
....
Financ ial
.1145
.1145
8.7300
8.7300
Venez uela (Boliv ar)
.002098
.002096
476.70
477.12
--SDR
1.4315
1.4326
.6986
.6980
ECU
1.2308
1.2404
.......... ...........
Spec ial Dr awing Rights (SDR) are bas ed on ex c hange rates for
the U.S., German, Britis h, Frenc h, and J apanes e c urrenc ies. Sourc e:
International Monetar y Fund.
European Currenc y Unit (ECU) is bas ed on a bas k et of c ommunity
c urrenc ies .
a-fix ing, Mos c ow Interbank Currenc y Ex c hange.
The direct
quote for
British
pound is:
£1 = $1.688
Spot Rate Quotations
Wednes day , J anuary 8, 1997
EXC H A N GE R A T ES
The New York foreign ex c hange s elling rates below apply to
trading among bank s in amounts of $1 million and more , as quoted
at 4 p.m. Eas tern time by Dow J ones Telerate Inc . and other s ourc es .
Retail trans ac tions prov ide fewer units of foreign c urrenc y per
dollar.
C urrency
per U .S. $
U .S. $ equiv.
Country
Wed.
Tues.
Wed.
Tues.
Argentina (Pes o)
1.0012
1.0012
.9988
.9988
Australia (Dollar)
.7805
.7902
1.2812
1.2655
Austria (Sc hilling)
.09043
.09101
11.058 10.988
Bahrain (Dinar)
2.6525
2.6525
.3770
.3770
Belgium (Franc )
.03080
.03105
32.470
32.205
Braz il (Real)
.9607
.9615
1.0409
1.0401
Britain (Pound)
1.6880
1.6946
.5924
.5901
30-Day Forward
1.6869
1.6935
.5928
.5905
90-Day Forward
1.6843
1.6910
.5937
.5914
180-Day Forward
1.6802
1.6867
.5952
.5929
Canada (Dollar)
.7399
.7370
1.3516
1.3568
30-Day Forward
.7414
.7386
1.3488
1.3539
90-Day Forward
.7442
.7413
1.3437
1.3489
.7479
.7450
1.3370
1.3422
180-Day Forward
Chile (Pes o)
.002352
.002356
425.25
424.40
China (Renminbi)
.1201
.1201
8.3272
8.3276
Colombia (Pes o)
.0009985 .0009985 1001.50 1001.50
Cz ech. Rep (Krouna)
....
....
....
....
Commerc ial rate
.03662
.03677
27.307
27.194
Denmark (Krone)
.1663
.1677
6.0118
5.9633
Ecuador (Suc re)
....
....
....
....
Floating r ate
.0002766 .0002787 3615.00 3587.50
Finland (Mark k a)
.2121
.2135
4.7150
4.6841
France (Franc )
.1879
.1893
5.3220
5.2838
30-Day Forward
.1882
.1896
5.3126
5.2741
90-Day Forward
.1889
.1903
5.2935
5.2558
.1901
.1914
5.2617
5.2243
180-Day Forward
Germany (Mark )
.6352
.6394
1.5744
1.5639
30-Day Forward
.6364
.6407
1.5714
1.5607
90-Day Forward
.6389
.6432
1.5652
1.5547
180-Day Forward
.6430
.6472
1.5552
1.5450
Greece (Drac hma)
.004049
.004068
246.98
245.80
Hong Kong (Dollar)
.1292
.1292
7.7390
7.7390
Hungary (Forint)
.006139
.006164
162.89
162.23
India (Rupee)
.02787
.02786
35.875
35.890
Indonesia (Rupiah)
.0004233 .0004233 2362.15 2362.63
Ireland (Punt)
1.6664
1.6714
.6001
.5983
Israel (Shek el)
.3079
.3085
3.2474
3.2412
Italy (Lira)
.0006483 .0006510 1542.50 1536.00
C urrency
U .S. $ equiv.
per U .S. $
Country
Wed.
Tues.
Wed.
Tues.
Japan (Yen)
.008639
.008681
115.75
115.20
30-Day Forward
.008676
.008718
115.26
114.71
90-Day Forward
.008750
.008791
114.28
113.76
180-Day Forward
.008865
.008907
112.80
112.28
Jordan (Dinar)
1.4075
1.4075
.7105
.7105
Kuwait (Dinar)
3.3367
3.3389
.2997
.2995
Lebanon (Pound)
.0006445 .0006445 1551.50 1551.50
Malaysia (Ringgit)
.4018
.4002
2.4885
2.4990
Malta (Lira)
2.7624
2.7701
.3620
.3610
Mexico (Pes o)
....
....
....
....
Floating r ate
.1278
.1277
7.8220
7.8330
Netherland (Guilder)
.5655
.5699
1.7685
1.7547
New Zealand (Dollar)
.7072
.7106
1.4140
1.4073
Norway (Krone)
.1540
.1548
6.4926
6.4599
Pakistan (Rupee)
.02529
.02529
39.540
39.540
Peru (new Sol)
.3814
.3840
2.6218
2.6039
Philippines (Pes o)
.03800
.03802
26.318
26.300
Poland (Zloty )
.3460
.3475
2.8900
2.8780
Portugal (Es c udo)
.006307
.006369
158.55
157.02
Russia (Ruble) (a)
.0001787 .0001788 5595.00 5594.00
Saudi Arabia (Riy al)
.2666
.2667
3.7503
3.7502
Singapore (Dollar)
.7116
.7124
1.4053
1.4037
Slovak Rep. (Koruna)
.03259
.03259
30.688
30.688
South Africa (Rand)
.2141
.2142
4.6705
4.6690
South Korea (Won)
.001184
.001184
844.75
844.65
Spain (Pes eta)
.007546
.007603
132.52
131.53
Sweden (Krona)
.1431
.1435
6.9865
6.9697
Switz erland (Franc )
.7334
.7387
1.3635
1.3537
30-Day Forward
.7357
.7411
1.3593
1.3494
90-Day Forward
.7401
.7454
1.3511
1.3416
180-Day Forward
.7470
.7523
1.3386
1.3293
Taiwan (Dollar)
.03638
.03637
27.489
27.493
Thailand (Baht)
.03902
.03906
25.625
25.605
Turkey (Lira)
.00000911 .00000915109755.00109235.00
United Arab (Dirham)
.2723
.2723
3.6720
3.6720
Uruguay (New Pes o)
....
....
....
....
Financ ial
.1145
.1145
8.7300
8.7300
Venez uela (Boliv ar)
.002098
.002096
476.70
477.12
--SDR
1.4315
1.4326
.6986
.6980
ECU
1.2308
1.2404
.......... ...........
Spec ial Dr awing Rights (SDR) are bas ed on ex c hange rates for
the U.S., German, Britis h, Frenc h, and J apanes e c urrenc ies. Sourc e:
International Monetar y Fund.
European Currenc y Unit (ECU) is bas ed on a bas k et of c ommunity
c urrenc ies .
a-fix ing, Mos c ow Interbank Currenc y Ex c hange.
The indirect
quote for
British
pound is:
£.5924 = $1
Spot Rate Quotations
Wednes day , J anuary 8, 1997
EXC H A N GE R A T ES
The New York foreign ex c hange s elling rates below apply to
trading among bank s in amounts of $1 million and more , as quoted
at 4 p.m. Eas tern time by Dow J ones Telerate Inc . and other s ourc es .
Retail trans ac tions prov ide fewer units of foreign c urrenc y per
dollar.
C urrency
per U .S. $
U .S. $ equiv.
Country
Wed.
Tues.
Wed.
Tues.
Argentina (Pes o)
1.0012
1.0012
.9988
.9988
Australia (Dollar)
.7805
.7902
1.2812
1.2655
Austria (Sc hilling)
.09043
.09101
11.058 10.988
Bahrain (Dinar)
2.6525
2.6525
.3770
.3770
Belgium (Franc )
.03080
.03105
32.470
32.205
Braz il (Real)
.9607
.9615
1.0409
1.0401
Britain (Pound)
1.6880
1.6946
.5924
.5901
30-Day Forward
1.6869
1.6935
.5928
.5905
90-Day Forward
1.6843
1.6910
.5937
.5914
180-Day Forward
1.6802
1.6867
.5952
.5929
Canada (Dollar)
.7399
.7370
1.3516
1.3568
30-Day Forward
.7414
.7386
1.3488
1.3539
90-Day Forward
.7442
.7413
1.3437
1.3489
.7479
.7450
1.3370
1.3422
180-Day Forward
Chile (Pes o)
.002352
.002356
425.25
424.40
China (Renminbi)
.1201
.1201
8.3272
8.3276
Colombia (Pes o)
.0009985 .0009985 1001.50 1001.50
Cz ech. Rep (Krouna)
....
....
....
....
Commerc ial rate
.03662
.03677
27.307
27.194
Denmark (Krone)
.1663
.1677
6.0118
5.9633
Ecuador (Suc re)
....
....
....
....
Floating r ate
.0002766 .0002787 3615.00 3587.50
Finland (Mark k a)
.2121
.2135
4.7150
4.6841
France (Franc )
.1879
.1893
5.3220
5.2838
30-Day Forward
.1882
.1896
5.3126
5.2741
90-Day Forward
.1889
.1903
5.2935
5.2558
.1901
.1914
5.2617
5.2243
180-Day Forward
Germany (Mark )
.6352
.6394
1.5744
1.5639
30-Day Forward
.6364
.6407
1.5714
1.5607
90-Day Forward
.6389
.6432
1.5652
1.5547
180-Day Forward
.6430
.6472
1.5552
1.5450
Greece (Drac hma)
.004049
.004068
246.98
245.80
Hong Kong (Dollar)
.1292
.1292
7.7390
7.7390
Hungary (Forint)
.006139
.006164
162.89
162.23
India (Rupee)
.02787
.02786
35.875
35.890
Indonesia (Rupiah)
.0004233 .0004233 2362.15 2362.63
Ireland (Punt)
1.6664
1.6714
.6001
.5983
Israel (Shek el)
.3079
.3085
3.2474
3.2412
Italy (Lira)
.0006483 .0006510 1542.50 1536.00
C urrency
U .S. $ equiv.
per U .S. $
Country
Wed.
Tues.
Wed.
Tues.
Japan (Yen)
.008639
.008681
115.75
115.20
30-Day Forward
.008676
.008718
115.26
114.71
90-Day Forward
.008750
.008791
114.28
113.76
180-Day Forward
.008865
.008907
112.80
112.28
Jordan (Dinar)
1.4075
1.4075
.7105
.7105
Kuwait (Dinar)
3.3367
3.3389
.2997
.2995
Lebanon (Pound)
.0006445 .0006445 1551.50 1551.50
Malaysia (Ringgit)
.4018
.4002
2.4885
2.4990
Malta (Lira)
2.7624
2.7701
.3620
.3610
Mexico (Pes o)
....
....
....
....
Floating r ate
.1278
.1277
7.8220
7.8330
Netherland (Guilder)
.5655
.5699
1.7685
1.7547
New Zealand (Dollar)
.7072
.7106
1.4140
1.4073
Norway (Krone)
.1540
.1548
6.4926
6.4599
Pakistan (Rupee)
.02529
.02529
39.540
39.540
Peru (new Sol)
.3814
.3840
2.6218
2.6039
Philippines (Pes o)
.03800
.03802
26.318
26.300
Poland (Zloty )
.3460
.3475
2.8900
2.8780
Portugal (Es c udo)
.006307
.006369
158.55
157.02
Russia (Ruble) (a)
.0001787 .0001788 5595.00 5594.00
Saudi Arabia (Riy al)
.2666
.2667
3.7503
3.7502
Singapore (Dollar)
.7116
.7124
1.4053
1.4037
Slovak Rep. (Koruna)
.03259
.03259
30.688
30.688
South Africa (Rand)
.2141
.2142
4.6705
4.6690
South Korea (Won)
.001184
.001184
844.75
844.65
Spain (Pes eta)
.007546
.007603
132.52
131.53
Sweden (Krona)
.1431
.1435
6.9865
6.9697
Switz erland (Franc )
.7334
.7387
1.3635
1.3537
30-Day Forward
.7357
.7411
1.3593
1.3494
90-Day Forward
.7401
.7454
1.3511
1.3416
180-Day Forward
.7470
.7523
1.3386
1.3293
Taiwan (Dollar)
.03638
.03637
27.489
27.493
Thailand (Baht)
.03902
.03906
25.625
25.605
Turkey (Lira)
.00000911 .00000915109755.00109235.00
United Arab (Dirham)
.2723
.2723
3.6720
3.6720
Uruguay (New Pes o)
....
....
....
....
Financ ial
.1145
.1145
8.7300
8.7300
Venez uela (Boliv ar)
.002098
.002096
476.70
477.12
--SDR
1.4315
1.4326
.6986
.6980
ECU
1.2308
1.2404
.......... ...........
Spec ial Dr awing Rights (SDR) are bas ed on ex c hange rates for
the U.S., German, Britis h, Frenc h, and J apanes e c urrenc ies. Sourc e:
International Monetar y Fund.
European Currenc y Unit (ECU) is bas ed on a bas k et of c ommunity
c urrenc ies .
a-fix ing, Mos c ow Interbank Currenc y Ex c hange.
Note that
the direct
quote is the
reciprocal
of the
indirect
quote: 1
1.688 
.5924
Cross Rates
A Mexican importer needs Japanese Yen to pay for
purchases in Tokyo. Both the Mexican Peso (Ps) and the
Japanese Yen (¥) are commonly quoted against the U.S
Dollar.
Japanese Yen
Mexican Peso
¥121.13/$
Ps9.1900/$
(¥/USD) / (Ps/USD) = (¥/USD) * (USD/Ps) = ¥13.1806/Ps
Cross in reciprocal
Cross Rates in Intermarket Arbitrage
• Following exchange rates are quoted
Citibank quotes U.S Dollar per Euro
Barclays bank quotes USD per Pound Sterling
Dresdner bank quotes Euros per Pound Sterling
Go for the cross between Barclays & Citibank
$0.9045/€
$1.4443/£
€1.6200/£
The Forward Market
•
•
•
•
•
Forward Rate Quotations
Long and Short Forward Positions
Forward Cross Exchange Rates
Swap Transactions
Forward Premium
The Forward Market
• A forward contract is an agreement to buy
or sell an asset in the future at prices
agreed upon today.
• If you have ever had to order an out-ofstock textbook, then you have entered into
a forward contract.
Forward Rate Quotations
• The forward market for FOREX involves
agreements to buy and sell foreign
currencies in the future at prices agreed
upon today.
• Bank quotes for 1, 3, 6, 9, and 12 month
maturities are readily available for forward
contracts.
• Longer-term swaps are available.
Forward Rate Quotations
Can be made on two ways.
Outright rate
Points of premium or discount
Eg.
(FFr/USD)
Spot
1 M.
5.2321/2340 25/20
3 M.
40/32
Express these quotes in outright terms.
6 M.
20/26
Forward Rate Quotations
Eg. Quotations for the USD against INR
Spot
INR,32.1010/1100
Spread .0090
1 M.
225/275
.0050
3 M.
300/350
.0050
Premium or Discount
[(Fwd rate – Spot rate)/ Spot rate] * (12/n) * 100
If FR > SR, it implies premium
< SR, it implies discount
6 M.
375/455
.0080
Arbitrage in Forward Market (CIA)
Arbitrage operates on the differential of interest rates & the
premium or discount on exchange rates.
Rule
If the interest differential is greater than the premium or
discount , place the money in the currency that has higher rate
of interest.
Arbitrage in Forward Market (CIA)
Eg.
Exchange rate:
Can$ 1.317 per USD (spot)
Can$ 1.2950 per USD (6 M. Forward)
6 M interest rate:
USD 10%
Can$ 6%
Work out the possibilities of arbitrage gain
Arbitrage in Forward Market (CIA)
Eg.
Exchange rate:
Can$ 0.665 per DM (spot)
Can$ 0.670 per DM (3 months)
Interest rate:
DM 7%
Can$ 9%
Calculate the arbitrage gain possibilities from the above data
Long and Short Forward
Positions
• If you have agreed to sell anything (spot or
forward), you are “short”.
• If you have agreed to buy anything
(forward or spot), you are “long”.
• If you have agreed to sell forex forward,
you are short.
• If you have agreed to buy forex forward,
you are long.