Foreign Exchange Quiz
What is foreign exchange?
(Trading nations’ moneys.)
What is the exchange rate?
(The price of one nation’s money in
terms of another nation’s money.)
Foreign Exchange Quiz
What is the spot exchange rate?
(The price for “immediate” exchange)
What is the forward exchange rate?
(The price that will take place
sometime in the future.)
Currency Trading, Wall Street Journal
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Wednesday, November 7, 2001
EXCHANGE RATES
The New York foreign exchange mid-range rates below apply to trading
among banks in amounts of $1 million and more, as quoted at 4 p.m. Eastern
time by Reuters and other sources. Retail transactions provide fewer units of
foreign currency per dollar. Rates for the 12 Euro currency countries are
derived from the latest dollar-euro rate using the exchange ratios set 1/1/99.
U.S. S EQUIV. CURRENCY PER U,S, $
Country
Wed
Tue
Wed
Tea
Argentina (Peso)
i.0005
1.0017
.9995
.9983
Aestmlia (Dollar)
5153
.5136
1.9408
1.9472
China (Renminhi)
1208
.1208
8.2766
8,2767
Colombia (Peso)
'.0004334
.0004331
2307.50
2309.00
Czech. Rep. (Koruna) ....
Commercial rate
02687
.02575
37.223
37.384
Denmark (Krone)
1205
.1203
8,2973
8.3156
Ecuador (US Dollar)-e... 1.0000
1.0000
1.0000
1.0000
Finland (Markka)
1511
.1505
6.6203
6.6466
France (Franc)
1369
.1364
7.3038
7.3328
1-month forward
1367
.1362
73127
7.3425
3-months for~*ard
1364
.1359
7.3296
7.3583
6-months forward
1351
.1355
7.3493
7.3777
Germany (Mark)
4592
.4574
2.1777
2.1864
1-month forward
4586
,4568
2.1804
2.1893
3-months forward
4576
.4558
2.1854
2.1940
6-months fcnvard
4564
.4546
2.1913
2.1997
Greece (Drachma)
002536
.002625
379.37
380.92
Hang Kong (Dollar)
1282
.1282
7.7999
7.7998
.8769
.8804
Israel (Shekel)
2347
.2348
4.2610
4.2690
Italy (Lim) 0004638
.0004620
2155.96
2164.52
Japan (Yen) 008270
.008246
120.92
121.27
1-month forward
008285
.008261
120.70
121.05
3-months forward
008312
.008287
120.31
120.68
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U.S. $ EQUIV. CURRENCY PER U.S. $
Country
Wed
Tue
Kuwait (Dinar)
3.2744
.3056
Lebanon (Pound)
0006606
f5i~.50
Malaysia (Ringgit)-b
2632
3.~9e0
Malta (Lira) 2,2386
2,2326
Mexico (Peso) ................
Floating rate 1085
,1086
Netherlands (Guilder)
4075
2.4635
New Zealand (Dollar)
4196
2.3781
Norway (Krone)
1133
8.8785
Pakistan (Rupee)
01642
61J~0
Peru (new Sol)
2901
"3.4475
Philippines (Peso)
01928
51.960
Poland (Zlety)-d
2453
4.0910
Podugal (Escudo)
004480
224.11
Russia (Ruble)-a
03362
29.7~7
:1=8461
1-month forward
6114
1.64§1
3-months forward
6115
: .6459
6-months forward
6117
1,64~
Taiwaa (Dailar)
02899
34.500
Thailand (Baht)
02239
i114.6~5
Turkey (Lira)-f
00000064
1540090
United Arab (Dirham)
2723
3.6730
Uruguay (New Peso) .....
Financial
07123
.07123
Venezuela (Bolivar)
001345
743 50
SDR
1.2794
1.2760
Eurn
8981
,8946
Wed
3.2723
,Tun
.3054
.0006607
1513.75
.2632
3,8000
.4467
, .¢479
9.2155
.4059
9.2105
2.4537
.4205
2.3832
,1126
8.8270
.01635
60.900
2901
3.4468
.01925
51.875
2444
4,0760
.004462
223.23
.03364
29.747
.6075
1.6356
.6076
1.6354
.6078
1.6348
.02899
34.500
.02238
44.655
.00000065
1565000
.2723
3.6730
14.040
.001345
t4.040
743.50
.7816
1.1135
:'.2837
11.1178
Special Drawing Rights (SDR) are based on exchange rates for the U.S., German, British, French
, and Japanese c~rrerf-cies. Source= International Monetary Fund. a-Russian Central Bank rate.
b-Government rate. d-Floating rate; trading band suspended on 4/1 1/OO. e-Adopted U,.9. dollar
as of 9/1 i/OO. f-Floating rate, eft. Feb. 22. • , 1
Foreign Exchange, Banks and Demand
• Where does most foreign exchange
occur?
(In banks located in London, New York
and Tokyo.)
• Who trades most of the money on
international exchanges?
(Banks again.)
Foreign Exchange, Banks and Demand
• Whence comes the demand for foreign
exchange?
(From people, institutions and firms who
want to make purchases abroad.)
Foreign Exchange, Banks and Demand
• What do the following flows produce a
demand for?
U.S. exports of goods and services
(demand for dollars)
U.S. capital outflows
(demand for foreign currencies)
U.S. capital inflows
(a supply of foreign currency and a
demand for dollars.)
Foreign Exchange: The Rate
• What determines the exchange
rate then?
(Supply and demand for foreign
exchange.)
Foreign Exchange: The Rate
• What kind of market type do we
have here?
(Competitive, because of the
immediate market response to price.
No product differentiation in foreign
exchange markets.)
Foreign Exchange: The Rate
• What is a floating exchange rate
system?
(One where markets, rather than
bank interventions, determine prices of
foreign exchange.)
Traders and Arbitrage
• How do foreign exchange traders
function?
(They are wheelers and dealers by phone
and computer, watching for price
differentials.)
What is arbitrage?
(Making two markets, by buying and
selling between them, a single market.)
Arbitrage
An arbitrager, usually a large bank, may
notice that in N.Y. 1 £ = $2.42 and in
London, 1 £ = $2.40.
An agent will buy pounds in London (for
$2.4 billion) and sell them in N.Y. (for
$2.42 billion), earning a quick $20 million.
The increased demand in London pulls the
price up, and the increased supply in New
York pushes the price down, equalizing
the pound/dollar price.
Arbitrage
Sell in this market (high)
S1
S2
Buy in this market (low)
S
D2
D
D1
Interbank Foreign Exchange
Trading
About 90% of foreign
exchange trading is in
the Interbank part of
the market.
Interbank Foreign Exchange
Trading
Provides continuous
information on the
foreign exchange
market—
• Talking with traders at other
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banks.
Observing prices (exchange
rates) being quoted.
Exchange Rate and Risk
• What is exchange rate risk exposure?
(Earning a lot less than you expected, or
paying a lot more than you expected when
payment is made in the future at different
exchange rates than originally prevailed.)
• What is hedging?
(Reducing or eliminating a net asset or
net liability position in foreign currency.)
Exchange Rate and Risk
• What is speculation?
Taking a net asset or “long” position
(holding net assets in a foreign currency in
excess of one’s anticipated transactions
needs), or
taking a net liability or “short” position in a
currency (owing more in a currency than one
owns or holds).
Exchange Rate and Risk
If the forward rate of a currency, (the French
franc) is lower than the spot rate (4;1, say,
rather than 5:1), the market expects the
value of the franc to rise against the dollar.
There is a premium on forward (usually 90
days) francs and a discount on 90-day
forward dollars.
Foreign Exchange and Forward
Contracts
• What is a forward
foreign exchange
contract?
(An agreement to
exchange one currency
for another on some
date in the future at a
price set now [the
forward exchange rate]).
Foreign Exchange and Forward
Contracts
• How can the bank afford
to do that?
(Question of balance
and offsetting contracts.)
Exchange Contracts under Risk
Currency Futures:
-- Traded on organized exchanges
-- The contract locks in the price.
-- The buyer must put up a margin,
which grows if rates keep changing
adversely for the seller.
-- Profits and Losses Accrue Daily
(marking to market)
Exchange Contracts under Risk
Currency Options:
-- Buyer has right, seller has obligation to
a future price set today, the “exercise”
or “strike” price.
-- The buyer pays a fee (“premium“) to
exercise the option.
-- Size of any loss is limited to premium
Exchange Contracts under Risk
Currency Swap
--A contract to exchange flows during a
time period.
-- Foreign currency earnings traded for
domestic currency.
--A set of spot and forward exchange
rates in one contract.