From: Chris Tham
Subj: Currency Two-way Pricing
Date: 25 Nov 91
HP-48SX Foreign Currency Bid/Offer Pricing/Conversions
Copyright (C) 1991 Chris Tham
Introduction
-----------The HP-48SX FX Application performs bid/offer quotations, pricing, and
cross currency rate calculations for use by professional Foreign
Exchange market makers. It allows the user to define a set of
currencies and set two-way prices (quotes) for each currency against
the reference currency (the US Dollar denoted by the three character
code `USD'). Both direct and indirect methods of quoting currencies
are supported by the application. Each currency can then be priced on
both the bid and offer sides against any other currency defined and the
application will automatically perform the necessary cross rate
calculation, taking the appropriate side of the two-way quotes.
Background
---------Foreign Exchange currency conversions/pricing are different from
scientific unit conversions normally performed by the HP-48SX Units
Application because there are two, instead of one, conversion factors
associated with each currency.
In the foreign exchange market, dealers buy and sell one currency in
exchange for another currency. Basically, the price or value of money
in one country is traded against money in another country. A foreign
exchange transaction always involve two currencies, one of which can be
considered the currency bought or sold (the `base' or `commodity'
currency) and the other currency can be considered the measure of value
for effecting the transaction (the `terms' currency).
All transactions require two counterparties, each of which will both buy
and sell currency. The exchange rate is the price at which one currency
can be exchange for another. Currency names are abbreviated using
standard codes developed for computer input (the United States Dollar is
designated by `USD', the Australian Dollar `AUD', the Japanese Yen `JPY',
the German Deutschmark `DEM', the Great Britain Pound Sterling `GBP'
and so on).
For example, one counterparty may purchase 1 million AUD (value is
Australian Dollars $1,000,000) against the US Dollar at an exchange rate
of AUD 1 = USD 0.7800 (or, in standard market quotation, AUD/USD 0.7800).
This means that the counterparty has to pay (or sell) $780,000 US
Dollars for the Australian Dollars bought. The transaction can also be
viewed as the counterparty exchanging USD for AUD, paying USD 0.7800 for
every AUD 1 received. The other counterparty is performing the reverse
action, exchanging AUD for USD, and receiving USD 0.7800 for every AUD 1
sold.
The exchange rate between any two currencies is normally quoted as the
number of terms currency units required to purchase or sell one base
currency unit. The exchange rate is expressed by the commodity currency
code, followed by a slash, followed by the terms currency code and then
the exchange rate in terms currency units. In the above example, the
exchange rate is quoted with AUD being the base currency and USD being
the terms currency, hence AUD/USD 0.7800. In foreign exchange trading,
the commodity currency is usually the focus of trading and dealers buy
and sell multiples of the commodity currency.
Instead of quoting each currency against every other currency, all
currencies are normally quoted against the US Dollar. The exchange rate
between any two currency can then be determined by referencing against
the exchange rate for each currency against the US Dollar. Most
currencies are quoted against the US Dollar with the US Dollar as the
base
(or commodity) currency. This is also called direct quotation. Some
currencies, however, notably those belonging to the so called
`Commonwealth' countries including Great Britain and Australia, are
quoted with the US Dollar as the terms currency. This method of quoting
is referred to as indirect quoting. An example of a direct quotation is
USD/DEM 1.8200 (note USD is the base currency and appears on the left
hand side of the slash). An example of an indirect quotation is
GBP/USD 1.6293 (USD is now the terms currency and appears on the right
hand side of the slash).
There is no `standard' or `reference' exchange rate for any country
against the US Dollar (except when countries fix currency exchange
rates with respect to other currencies). Instead, each dealer is free
to set the exchange rate for the currency that the dealer is prepared to
trade. By convention, dealers set two exchange rates, a rate in which
they are prepared to buy the commodity currency (the bid rate) and a
rate in which they are prepared to sell the commodity currency (the
offer rate). This is called two-way pricing or quotation. By
convention,
the bid rate is quoted before the offer rate. Hence, a typical two-way
quote for AUD would be AUD/USD 0.7800/05. This means that the bid rate
for AUD/USD is 0.7800 and the offer rate is 0.7805, i.e. the dealer is
prepared to buy AUD for USD 0.7800 and sell AUD for USD 0.7805. The
difference between the offer and bid quotes, i.e. USD 0.0005 or
5 `points', is called the `spread' and represents the dealer's profit
from buying and selling the commodity currency.
How to use the FX application
----------------------------The FX application is normally stored in a subdirectory on the HP-48SX
called `FX'. To use the application, simply enter the directory and
either type the `GO' command or press the [VAR] menu key and then press
the soft key marked [GO] (this should be the left most soft key if you
have not created any variables in this directory). The screen' soft
menu labels should now change to something like the following
[MKC] [RMC] [USD] [AUD] [DEM]
The soft keys [MKC] and [RMC] are used to define and undefine a new
currency unit. The remaining soft key labels denote currency codes.
WHen you first install the application, the application comes
preconfigured with three currencies, USD, AUD and DEM. You are allowed
to create or delete any currencies that you wish, including the
predefined AUD and DEM currencies. However, USD is a special currency
that cannot be created or deleted at will due to its special status as
the currency against which all other currencies are valued against.
Let's use the predefined currencies first. Later, we will try creating
and deleting currencies and see the effect on the soft menu. Suppose
you are a market maker dealing in both AUD and DEM and you are currently
quoting
AUD/USD 0.7790/95
USD/DEM 1.8155/60
Your bids and offers may be entered into the application by typing in a
complex number with the real part equal to the bid rate and the imaginary
part equal to the offer rate, then pressing [Right Shift] followed by
the currency soft menu key. In this instance, you will type in
[Left SHift] [ () ] 0.7790 [SPC] 0.7795 [ENTER] [Right Shift] [AUD]
[Left SHift] [ () ] 1.8155 [SPC] 1.8160 [ENTER] [Right Shift] [DEM]
Note that the application `knows' that AUD is normally quoted in
indirect terms and DEM is normally quoted in direct terms so you can
just enter the quotes into the application and it will figure out which
currency is the base currency and which is the terms currency.
Now if you buy AUD 15 million how much USD should you be selling? The
sign convention is positive if you are buying and negative if you are
selling. Type in the following
15 [EEX] 6 [AUD]
and level 1 of the stack will now show something like
15000000.0000_bAUD
My calculator is currently on FIX 4 mode. Your calculator may show a
slightly different format depending on your current numeric display
mode. Note that the amount 15,000,000 is suffixed by the string "_bAUD"
indicating that the amount is in AUD and you are buying that currency
and hence `bidding' for it. To convert that amount to USD, simply press
the [Left Shift] [USD] key and level 1 of the stack will change to
-11685000.0000_oUSD
Hence, to buy AUD 15 million, you need to sell USD 11.685 million.
What if you were to sell AUD 15 million?
They following keystrokes will
reveal the answer:
15 [] [EEX] 6 [AUD] [Left Shift] [USD]
The stack should show
11692500.0000_bUSD
which means you will receive USD 11.6925 million.
Here are some more examples and their answers
1. Buying DEM 6 million (6000000.0000_bDEM), pay
-3303964.7577_oUSD
{Keystrokes: 6 [EEX] 6 [DEM] [Left Shift] [USD]}
2. Selling AUD 7 million (-7000000.0000_oAUD), receive
9909004.0000_bDEM
{Keystrokes: 7 [] [EEX] 6 [AUD] [Left Shift] [DEM]}
3. Buying USD 2 million (2000000.0000_bUSD), pay
-2565747.2739_oAUD
{Keystrokes: 2 [EEX] 6 [USD] [Left Shift] [AUD]}
To create a new currency, you need to know
* the three letter currency code
* bid/offer rates of that currency against the US dollar
* whether the currency is normally quoted in direct or indirect form
As an example, suppose you want to create a new currency called GBP
(Great Britain Pound Sterling). You will be quoting GBP/USD 1.6930/35
(i.e., indirectly).
Enter the following keystrokes:
[Right Shift] [" "] [Alpha] [Alpha] G B P [ENTER]
[Left Shift] [ () ] 1.6930 [SPC] 1.6935 [ENTER]
0 [ENTER]
The stack should show:
3:
2:
1:
"GBP"
(1.6930,1.6935)
0.0000
Level 3 contains the three character currency code, i.e., GBP, level 2
contains the quoted exchange rate of GBP against USD, level 1 is 0 for
an indirect quote (and 1 for a direct quote).
Now press the [MKC] (Make Currency) soft key. You should now notice a
new softkey labelled [GBP] on the soft menu. You can now perform
currency conversions using GBP:
How much do you receive in GBP if you sell DEM 44,000?
Keystrokes:
44 [] [EEX] 3 [DEM] [Left Shift] [GBP]
Answer:
14315.2674_bGBP
How do you create a new currency called "SFR" (Swiss Francs) to be
quoted as USD/SFR 1.5520/25 (direct quotation)?
Keystrokes:
[Right Shift] [" "] [Alpha] [Alpha] S F R [ENTER]
[Left Shift] [ () ] 1.5520 [SPC] 1.5525 [ENTER]
1 [ENTER]
[MKC]
To remove a currency, simply create a string containing the currency
code of the currency to be removed, then press the [RMC] (Remove
Currency) soft key. For example, to remove the SFR currency just
created, press
[Right Shift] [" "] [Alpha] [Alpha] S F R [ENTER] [RMC]
The soft menu should automatically reflect the removal of the currency.
Exiting the FX application
-------------------------Just press any menu key.