IBUS 302:
International Finance
Topic 3-FX Quotations
Lawrence Schrenk, Instructor
.
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Learning Objectives
1.
2.
3.
Explain the structure and mechanisms of
the FX market.
Explain the spot market.
Convert FX rates between American and
European terms.▪
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An Additional Resources



The Basics of Foreign Trade and
Exchange (NY Fed)
Yahoo! Currency Converter
Abbreviations List (supplements)
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The Spot Market
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FX Rates

Foreign Exchange (FX or Forex)




How much one currency is worth in terms of
another?
Transfer of purchasing power
FX rates are volatile and uncertain
Foreign Exchange Risk is

The possibility that the value of an investment,
cash flow, return might change due to changes in
exchange rates for currencies.
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Current FX Rates
1.7769 dollars are worth one pound.
NOTE: Yen quotations are to 6 places, not 4.
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Currency Abbreviations

Every currency has a three letter abbreviation


Since ‘dollar’, ‘franc’ and ‘pound’ ambiguous
Abbreviations List (supplements)
AUD Australian Dollar (AU$)
CHF Swiss Franc (CHF)
GBP British Pound (£)
JPYJapanese Yen (¥)
CAD Canadian Dollar (C$)
EUR Euro (€)
HKD Hong Kong Dollar (HK$)
USD United States Dollar ($)
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FX Notation I–Technical

S(j/k) price of one unit of k in terms of j


Or the number of j needed to buy 1 k.
S($/¥) is 1 yen in terms of dollars

Or the number of dollars to buy 1 yen.
NOTE: In this notation either symbols (¥) or
abbreviations (JPY) can be used, e.g., S(¥/$) =
S(JPY/USD)
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FX Notation II
S($/AU$) =
S($
/
AU$)
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FX Notation II

S($/AU$) = .8363 means...




You need to pay 0. 8363 USD for AU$ 1.
Spot rate for Australian dollars is $0. 8363
An Australian dollar is worth $0. 8363.
AU$ 1 = $0.8363.
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‘Yours’ versus ‘Theirs’


Spot Rate: The immediate rate
Direct Quotation: From ‘your’ currency


If an American works for a firm in Germany, ‘your’
currency is the euro.
Indirect Quotation: From ‘their’ currency


If an American works for a firm in Germany, ‘their’
currencies are the yen, American dollar, Kuwaiti
dollar, etc.
What about an American working for a German
firm in Japan? ▪
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American Terms

FX Quotation in American Terms


Non-dollar currency priced in US dollars
S($/___) = number of US dollars to buy 1 ___.


In American terms, $ is before the ‘/’.
S($/C$) = number of US dollars to buy 1
Canadian dollar
 S($/C$) = $0.9422 (September 2008)
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European Terms

FX Quotation in European Terms


US dollars priced in a non-dollar currency
S(__/$) = number of ___ to buy 1 US dollar


In European terms, $ is after the ‘/’.
S(C$/$) = number of Canadian dollars to buy
1 US dollar
 S(C$/$) = C$1.0613 (September 2008)
NOTE: The non-dollar currency need not be
‘European’.
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Reading the FX Table I
European Terms
American Terms
Cross Rates ▪
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Reading the FX Table II
European Terms
It takes 108.3650 yen to buy one dollar. ▪
European Terms: How many non-dollar units does it take to buy one dollar?
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Reading the FX Table III
American Terms
It takes $1.4457 to buy one euro. ▪
American Terms: How many dollars does it take to buy one non-dollar unit?
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Reading the FX Table IV
Cross Rates
It takes C$1.8859 to buy one pound. ▪
Cross Rates: How many non-dollar units does it take to buy a different non-dollar
unit?
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Reading the FX Table V
Cross Rates: How many non-dollar units in the row does it take to buy a nondollar unit in the column? ▪
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Appreciation/Depreciation I

When there is more demand for the pound,




Pound appreciates relative to the U.S. dollar
S($/£) exchange rate increases
More dollars to buy one pound.
When there is less demand for the pound,



Pound depreciates relative to the U.S. dollar,
S($/£) exchange rate decreases
Less dollars to buy one pound. ▪
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Appreciation/Depreciation II

If S($/£) = 1.80



You need to spend more than $1 for a pound.
IMPORTANT: This does not mean the pound is
‘stronger’ or more in demand than the dollar.
‘Stronger’/’more in demand’ refers to change
over time



If yesterday S($/£) = 1.80, and now S($/£) = 1.70,
The dollar has become ‘stronger’ or more in demand
relative to the pound,
Because it takes fewer dollars to buy one pound.
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Appreciation/Depreciation III

Remember supply and demand curves
Dollar Demand and Supply of Pounds ▪
Supply of
Pounds
Demand for
Pounds
What Happened?▪
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Converting between American
and European Terms I

American and European terms are inverses (or
reciprocals), i.e.,
1
1
American =
or European =
European
American

If you convert $1.74



From dollars to pounds,
Then pounds to dollars
You still have $1.74
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Converting between American
and European Terms II

American Terms


S($/CHF) = 0.9049 ($0.9049 buys 1 Swiss franc)
European Terms

How many Swiss francs to buy 1 US dollar?
1
S($/CHF)
1
S(CHF/$) =
= 1.1051
0.9049
S(CHF/$) =

‘Reverse’ for European → American Terms ▪
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Converting between American and
European Terms: Examples


European → American
American → European
If S(£/$) = 0.5628
1
S($/£) =
S(£/$)
1
S($/£) =
= 1.7768
0.5628
If S($/¥) = 0.009228
1
S(¥/$) =
S($/¥)
1
S(¥/$) =
= 108.365
0.009228
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What if...


S(£/$) = 0.5628
S($/£) = 1.855
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General Rules of Thumb

Most currencies are worth less than the USD

If the FX rate between the US Dollar and another
currency is less than 1, the rate is probably in...


Exceptions



American Terms, i.e., S($/Non-Dollar)
GBP (£) and EUR (€)
A few other minor currencies
It takes a lot of yen to buy anything
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