Post on 07-Apr-2018
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4Unit IVForeign Exchange
Markets
Dr. K. SrinivasanDepartment of Management Studies
Christ University, Bangalore.
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Introduction
The recent trends in LPG has given rise to internationaltrade and investment to grow tremendous pace in the lastdecades.
The flow of goods, services & capital goods across variousnational boundaries is possible only if there is a goodfunctioning monetary system.
FOREX market is the largest financial market in the world
by virtually any standard. In 2001, triennial central bank survey compiled by the BIS
places worldwide daily trading of spot & forward FOREXat $1.2 trillion dollars per day.
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Continued..
The survey conducted by BIS is equal to nearly $200 intransactions for every person on earth.
London remains the worlds largest FOREX trading centre.
According to the survey, the U.K & the U.S were theleading participants with 33% & 17%, respectively. Broadly defines Foreign Exchange encompasses theconversion of purchasing power from one currency into
another, bank deposits of foreign currency, the extension ofcredit denominated in a foreign currency, foreign tradefinancing, trading in foreign currency options, futurescontracts and currency swaps.
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Function & Structure ofFOREX MarketStructure of FOREX Market
The main players in FOREX market are Commercial Bank,FOREX Brokers, Large Corporations & RBI.
Normally, the RBI enter into the market to smoothen outfluctuations in the exchange rate.
The currency prevailing in FOREX market are numerous innature. So, it is very difficult for a player to keep all the
track of all quotes available in the market. In case of FOREX brokers, they wont buy or sell any
currency. But, they work for bringing buyers & sellers
together
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Continued.
Australia, Europe & North America are the major segments ofFOREX market. Australia includes the trading centers like Sydney, Tokyo, Hong
Kong, Singapore & Bahrain. Europe includes Zurich, Frankfurt, Paris, Amsterdam & London. North America includes New York, Montreal, Toronto, Chicago,
San Francisco & Los Angeles.
Most trading rooms operates over 9 to 12 hours working day,
although some banks experimented with operating three eight-hour shifts in order to trade the clock.
Therefore, the trading takes place when the trading hours of thethree centers overlap
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Function of FOREXMarketFunction of the FOREX Market
FX Market Participants Correspondent Banking Relationships
The Spot Market Spot Rate Quotations The Bid-Ask Spread
Spot FX Trading Cross Exchange Rate Quotations Triangular Arbitrage Spot Foreign Exchange Market Microstructure
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Continued.
The Forward Market Forward Rate Quotations
Long and Short Forward Positions
Forward Cross-Exchange Rates
Swap Transactions
Forward Premium
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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.There are FX brokers who match buy and sell
orders but do not carry inventory and FXspecialists.
Client Market (Retail)Market participants include international banks,
their bank customers, nonbank dealers, FOREXbrokers, and central banks.
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Continued.
International Banks: Make a Market & Willing tobuy or sell foreign currency for their own retailcustomers.
Bank Customers: Making investment in Internationally.Apart from this, MNCs, Money Managers & PrivateSpeculator.
Nonbank Dealers: Refers to NBFCs. Nonbank dealersrecords about 28% of interbank trading volume. Themain works are inventory position, Arbitrage &Speculative transactions with Market Psychology.
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FX Brokers: Match dealers for a fee, but do not takeposition. In recent years, their participation in market isvery less.
Central Bank: Intervening the value of one currencyagainst a trading partner may reduce Export & increaseImport. Central bank intervening in currency market
often lose bank reserves in attempting to achieve theirgoal. However, there is a little evidence that massiveintervention can materially affect exchange rates.
Continued.
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Correspondent BankingRelationships
Large commercial banks maintain demand deposit accountswith one another which facilitates the efficient functioningof the forex market.
International commercial banks communicate with oneanother with:
SWIFT: The Society for Worldwide Interbank FinancialTelecommunications. Private Nonprofit message transfersystem with headquarters in Brussels, with intercontinentalswitching centers in the Netherlands &Virginia.
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Continued.
CHIPS: Clearing House Interbank Payments System incooperation with U.S Federal Reserve Bank System, calledFedwire. Provides a clearinghouse for the interbank settlementof U.S$ payments between international bank.
ECHO: In August 1995, Exchange Clearing House Limited,the first global clearinghouse for settling interbank FOREXtransactions. ECHO was a multilateral netting system, where
the settlement date of clients payment & receipts arerecorded, this eliminates the risk & inefficiency of individualsettlement. In 1997, CLS Service Ltd merged with ECHO.Currently, operations of the system has been suspended.
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The Spot Market
In case of USD & Non North American currency, thetransaction of cash settlement will be made in two days.But, the settlement for regular spot trades between the USD
& the Mexican Peso or Canadian Dollar will takes only onebusiness days.1. Spot Rate Quotations2. The Bid-Ask Spread
3. Spot FX trading4. Cross Exchange Rate Quotations5. Triangular Arbitrage6. Spot Foreign Exchange Market Microstructure
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Spot Rate Quotations
Direct Quotation:The U.S. dollar equivalent
Ex:A Japanese Yen is worth about a pennyIndirect Quotation:The price of a U.S. dollar in the foreign
currency
Ex: You get 100 yen to the dollar.
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The New Y ork foreign exchange sel ling rates belo w apply totrading among banks in amounts of $1 milli on and more, as quotedat 4 p.m. Eas tern time by Dow Jones T elerate Inc. and other sources.Retail transactions provide fewer units of foreign currency perdollar.
Special Drawing Rights (SDR) are based on exchange rates forthe U.S., German, British, French, and Japanese currencies. Source:International Monetary Fund.
European Currency Unit (ECU) is based on a basket of communitycurrencies.
a-fixing, Moscow Interbank Currency Exchange.
EXCHANGE RAT ES
CountryArgentina (Peso)Australia (Dollar)Austria (Schilling)Bahrain (Dinar)
Belgium (Franc)Brazil (Real)Britain (Pound)
30-Day Forward90-Day Forward180-Day Forward
Canada (Dollar)30-Day Forward90-Day Forward180-Day Forward
Chile (Peso)China (Renminbi)Colombia (Peso)Czech. Rep (Krouna)
Commercial rateDenmark (Krone)Ecuador (Sucre)
Floating rateFinland (Markka)France (Franc)
30-Day Forward
90-Day Forward180-Day Forward
Germany (Mark)30-Day Forward90-Day Forward180-Day Forward
Greece (Drachma)Hong Kong (Dollar)Hungary (Forint)India (Rupee)Indonesia (Rupiah)Ireland (Punt)Israel (Shekel)Italy (Lira)
Wed.1.0012
.7805.090432.6525
.03080.96071.68801.68691.68431.6802
.7399
.7414
.7442
.7479.002352
.1201.0009985
.....03662
.1663....
.0002766.2121.1879.1882
.1889
.1901
.6352
.6364
.6389
.6430.004049
.1292.006139.02787
.00042331.6664
.3079.0006483
Tues.1.0012
.7902.091012.6525
.03105.96151.69461.69351.69101.6867
.7370
.7386
.7413
.7450.002356
.1201.0009985
.....03677
.1677....
.0002787.2135.1893.1896
.1903
.1914
.6394
.6407
.6432
.6472.004068
.1292.006164
.02786.0004233
1.6714.3085
.0006510
Wed..9988
1.281211.058.3770
32.4701.0409.5924.5928.5937.5952
1.35161.34881.34371.3370425.258.3272
1001.50....
27.3076.0118
....3615.00
4.71505.32205.3126
5.29355.26171.57441.57141.56521.5552246.987.7390162.8935.875
2362.15.6001
3.24741542.50
Tues..9988
1.265510.988
.3770
32.2051.0401.5901.5905.5914.5929
1.35681.35391.34891.3422424.408.3276
1001.50....
27.1945.9633
....3587.504.68415.28385.2741
5.25585.22431.56391.56071.55471.5450245.807.7390162.2335.890
2362.63.5983
3.24121536.00
U.S. $ equiv. per U.S. $Currency
CountryJapan (Yen)
30-Day Forward90-Day Forward180-Day Forward
Jordan (Dinar)Kuwait (Dinar)Lebanon (Pound)Malaysia (Ringgit)Malta (Lira)Mexico (Peso)
Floating rateNetherland (Guilder)New Zealand (Dollar)Norway (Krone)Pakistan (Rupee)Peru (new Sol)Philippines (Peso)Poland (Zloty)Portugal (Escudo)Russia (Ruble) (a)Saudi Arabia (Riyal)Singapore (Dollar)Slovak Rep. (Koruna)South Africa (Rand)South Korea (Won)Spain (Peseta)Sweden (Krona)Switzerland (Franc)
30-Day Forward90-Day Forward180-Day Forward
Taiwan (Dollar)Thailand (Baht)Turkey (Lira)
United Arab (Dirham)Uruguay (New Peso)Financial
Venezuela (Bolivar)
SDRECU
Wed..008639.008676.008750.0088651.40753.3367
.0006445.4018
2.7624....
.1278
.5655
.7072
.1540.02529
.3814.03800
.3460.006307
.0001787.2666.7116
.03259.2141
.001184
.007546.1431.7334.7357.7401.7470
.03638
.03902.00000911
.2723....
.1145.002098
- - -1.43151.2308
Tues..008681.008718.008791.008907
1.40753.3389
.0006445.4002
2.7701....
.1277
.5699
.7106
.1548.02529.3840
.03802.3475
.006369.0001788
.2667
.7124.03259.2142
.001184
.007603.1435.7387.7411.7454.7523
.03637
.03906.00000915
.2723....
.1145.002096
1.43261.2404
Wed.115.75115.26114.28112.80
.7105
.29971551.502.4885
.3620....
7.82201.76851.41406.492639.5402.621826.3182.8900158.55
5595.003.75031.405330.6884.6705844.75132.526.98651.36351.35931.35111.338627.48925.625
109755.00
3.6720....8.7300476.70
.6986..........
Tues.115.20114.71113.76112.28
.7105
.29951551.502.4990
.3610....
7.83301.75471.40736.459939.5402.603926.3002.8780157.02
5594.003.75021.403730.6884.6690844.65131.536.96971.35371.34941.34161.329327.49325.605
109235.00
3.6720....8.7300477.12
.6980...........
U.S. $ equiv.Currencyper U.S. $Wednes day, January 8, 1997
Spot Rate Quotations(Direct)
The DirectQuote forBritish Pound
is:
1 = $1.688
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The New Y ork foreign exchange sel ling rates belo w apply totrading among banks in amounts of $1 milli on and more, as quotedat 4 p.m. Eas tern time by Dow Jones T elerate Inc. and other sources.Retail transactions provide fewer units of foreign currency perdollar.
Special Drawing Rights (SDR) are based on exchange rates forthe U.S., German, British, French, and Japanese currencies. Source:International Monetary Fund.
European Currency Unit (ECU) is based on a basket of communitycurrencies.
a-fixing, Moscow Interbank Currency Exchange.
EXCHANGE RAT ES
CountryArgentina (Peso)Australia (Dollar)Austria (Schilling)Bahrain (Dinar)
Belgium (Franc)Brazil (Real)Britain (Pound)
30-Day Forward90-Day Forward180-Day Forward
Canada (Dollar)30-Day Forward90-Day Forward180-Day Forward
Chile (Peso)China (Renminbi)Colombia (Peso)Czech. Rep (Krouna)
Commercial rateDenmark (Krone)Ecuador (Sucre)
Floating rateFinland (Markka)France (Franc)
30-Day Forward
90-Day Forward180-Day Forward
Germany (Mark)30-Day Forward90-Day Forward180-Day Forward
Greece (Drachma)Hong Kong (Dollar)Hungary (Forint)India (Rupee)Indonesia (Rupiah)Ireland (Punt)Israel (Shekel)Italy (Lira)
Wed.1.0012
.7805.090432.6525
.03080.96071.68801.68691.68431.6802
.7399
.7414
.7442
.7479.002352
.1201.0009985
.....03662
.1663....
.0002766.2121.1879.1882
.1889
.1901
.6352
.6364
.6389
.6430.004049
.1292.006139.02787
.00042331.6664
.3079.0006483
Tues.1.0012
.7902.091012.6525
.03105.96151.69461.69351.69101.6867
.7370
.7386
.7413
.7450.002356
.1201.0009985
.....03677
.1677....
.0002787.2135.1893.1896
.1903
.1914
.6394
.6407
.6432
.6472.004068
.1292.006164
.02786.0004233
1.6714.3085
.0006510
Wed..9988
1.281211.058.3770
32.4701.0409.5924.5928.5937.5952
1.35161.34881.34371.3370425.258.3272
1001.50....
27.3076.0118
....3615.00
4.71505.32205.3126
5.29355.26171.57441.57141.56521.5552246.987.7390162.8935.875
2362.15.6001
3.24741542.50
Tues..9988
1.265510.988
.3770
32.2051.0401.5901.5905.5914.5929
1.35681.35391.34891.3422424.408.3276
1001.50....
27.1945.9633
....3587.504.68415.28385.2741
5.25585.22431.56391.56071.55471.5450245.807.7390162.2335.890
2362.63.5983
3.24121536.00
U.S. $ equiv. per U.S. $Currency
CountryJapan (Yen)
30-Day Forward90-Day Forward180-Day Forward
Jordan (Dinar)Kuwait (Dinar)Lebanon (Pound)Malaysia (Ringgit)Malta (Lira)Mexico (Peso)
Floating rateNetherland (Guilder)New Zealand (Dollar)Norway (Krone)Pakistan (Rupee)Peru (new Sol)Philippines (Peso)Poland (Zloty)Portugal (Escudo)Russia (Ruble) (a)Saudi Arabia (Riyal)Singapore (Dollar)Slovak Rep. (Koruna)South Africa (Rand)South Korea (Won)Spain (Peseta)Sweden (Krona)Switzerland (Franc)
30-Day Forward90-Day Forward180-Day Forward
Taiwan (Dollar)Thailand (Baht)Turkey (Lira)
United Arab (Dirham)Uruguay (New Peso)Financial
Venezuela (Bolivar)
SDRECU
Wed..008639.008676.008750.0088651.40753.3367
.0006445.4018
2.7624....
.1278
.5655
.7072
.1540.02529
.3814.03800
.3460.006307
.0001787.2666.7116
.03259.2141
.001184
.007546.1431.7334.7357.7401.7470
.03638
.03902.00000911
.2723....
.1145.002098
- - -1.43151.2308
Tues..008681.008718.008791.008907
1.40753.3389
.0006445.4002
2.7701....
.1277
.5699
.7106
.1548.02529.3840
.03802.3475
.006369.0001788
.2667
.7124.03259.2142
.001184
.007603.1435.7387.7411.7454.7523
.03637
.03906.00000915
.2723....
.1145.002096
1.43261.2404
Wed.115.75115.26114.28112.80
.7105
.29971551.502.4885
.3620....
7.82201.76851.41406.492639.5402.621826.3182.8900158.55
5595.003.75031.405330.6884.6705844.75132.526.98651.36351.35931.35111.338627.48925.625
109755.00
3.6720....8.7300476.70
.6986..........
Tues.115.20114.71113.76112.28
.7105
.29951551.502.4990
.3610....
7.83301.75471.40736.459939.5402.603926.3002.8780157.02
5594.003.75021.403730.6884.6690844.65131.536.96971.35371.34941.34161.329327.49325.605
109235.00
3.6720....8.7300477.12
.6980...........
U.S. $ equiv.Currencyper U.S. $Wednes day, January 8, 1997
Spot Rate Quotations(Indirect)
The IndirectQuote forBritish Pound
is:
.5924 = $1
8/4/2019 GBF Unit - IV
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The New Y ork foreign exchange sel ling rates belo w apply totrading among banks in amounts of $1 milli on and more, as quotedat 4 p.m. Eas tern time by Dow Jones T elerate Inc. and other sources.Retail transactions provide fewer units of foreign currency perdollar.
Special Drawing Rights (SDR) are based on exchange rates forthe U.S., German, British, French, and Japanese currencies. Source:International Monetary Fund.
European Currency Unit (ECU) is based on a basket of communitycurrencies.
a-fixing, Moscow Interbank Currency Exchange.
EXCHANGE RAT ES
CountryArgentina (Peso)Australia (Dollar)Austria (Schilling)Bahrain (Dinar)Belgium (Franc)Brazil (Real)Britain (Pound)
30-Day Forward90-Day Forward180-Day Forward
Canada (Dollar)30-Day Forward90-Day Forward180-Day Forward
Chile (Peso)China (Renminbi)Colombia (Peso)Czech. Rep (Krouna)
Commercial rateDenmark (Krone)Ecuador (Sucre)
Floating rateFinland (Markka)France (Franc)
30-Day Forward90-Day Forward
180-Day ForwardGermany (Mark)
30-Day Forward90-Day Forward180-Day Forward
Greece (Drachma)Hong Kong (Dollar)Hungary (Forint)India (Rupee)Indonesia (Rupiah)Ireland (Punt)Israel (Shekel)Italy (Lira)
Wed.1.0012
.7805.090432.6525.03080
.96071.68801.68691.68431.6802
.7399
.7414
.7442
.7479.002352
.1201.0009985
.....03662
.1663....
.0002766.2121.1879.1882.1889
.1901
.6352
.6364
.6389
.6430.004049
.1292.006139.02787
.00042331.6664
.3079.0006483
Tues.1.0012
.7902.091012.6525.03105
.96151.69461.69351.69101.6867
.7370
.7386
.7413
.7450.002356
.1201.0009985
.....03677
.1677....
.0002787.2135.1893.1896.1903
.1914
.6394
.6407
.6432
.6472.004068
.1292.006164
.02786.0004233
1.6714.3085
.0006510
Wed..9988
1.281211.058.3770
32.4701.0409.5924.5928.5937.5952
1.35161.34881.34371.3370425.258.3272
1001.50....
27.3076.0118
....3615.00
4.71505.32205.31265.2935
5.26171.57441.57141.56521.5552246.987.7390162.8935.875
2362.15.6001
3.24741542.50
Tues..9988
1.265510.988
.377032.2051.0401
.5901
.5905
.5914
.59291.35681.35391.34891.3422424.408.3276
1001.50....
27.1945.9633
....3587.504.68415.28385.27415.2558
5.22431.56391.56071.55471.5450245.807.7390162.2335.890
2362.63.5983
3.24121536.00
U.S. $ equiv. per U.S. $Currency
CountryJapan (Yen)
30-Day Forward90-Day Forward180-Day Forward
Jordan (Dinar)Kuwait (Dinar)Lebanon (Pound)Malaysia (Ringgit)Malta (Lira)Mexico (Peso)
Floating rateNetherland (Guilder)New Zealand (Dollar)Norway (Krone)Pakistan (Rupee)
Peru (new Sol)Philippines (Peso)Poland (Zloty)Portugal (Escudo)Russia (Ruble) (a)Saudi Arabia (Riyal)Singapore (Dollar)Slovak Rep. (Koruna)South Africa (Rand)South Korea (Won)Spain (Peseta)Sweden (Krona)Switzerland (Franc)
30-Day Forward90-Day Forward180-Day Forward
Taiwan (Dollar)Thailand (Baht)Turkey (Lira)United Arab (Dirham)
Uruguay (New Peso)FinancialVenezuela (Bolivar)
SDRECU
Wed..008639.008676.008750.0088651.40753.3367
.0006445.4018
2.7624....
.1278
.5655
.7072
.1540.02529
.3814.03800
.3460.006307
.0001787.2666.7116
.03259.2141
.001184
.007546.1431.7334.7357.7401.7470
.03638
.03902.00000911
.2723
.....1145.002098
- - -1.43151.2308
Tues..008681.008718.008791.008907
1.40753.3389
.0006445.4002
2.7701....
.1277
.5699
.7106
.1548.02529
.3840.03802.3475
.006369.0001788
.2667
.7124.03259.2142
.001184
.007603.1435.7387.7411.7454.7523
.03637
.03906.00000915
.2723
.....1145.002096
1.43261.2404
Wed.115.75115.26114.28112.80
.7105
.29971551.502.4885
.3620....
7.82201.76851.41406.492639.540
2.621826.3182.8900158.55
5595.003.75031.405330.6884.6705844.75132.526.98651.36351.35931.35111.338627.48925.625
109755.003.6720
....8.7300476.70
.6986..........
Tues.115.20114.71113.76112.28
.7105
.29951551.502.4990
.3610....
7.83301.75471.40736.459939.540
2.603926.3002.8780157.02
5594.003.75021.403730.6884.6690844.65131.536.96971.35371.34941.34161.329327.49325.605
109235.003.6720
....8.7300477.12
.6980...........
U.S. $ equiv.Currencyper U.S. $Wednes day, January 8, 1997
Quoted Spot Rate
Note that theDirect Quote
is thereciprocal ofthe indirect
quote:
5924.
1688.1
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The Bid-Ask Spread
FX traders buy currency for inventory at the bidprice and sell from inventory at the higher offer or askprice
The bid price is the price a dealer is willing to pay youfor 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.
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Spot FX Trading
In interbank transaction, the standard amount from one bank toanother will be based on major currencies (i.e.) U.S. $10 million.
Dealers quote both the bid and the ask, willing to either buy or
sell the quoted value. Spot quote are good for only few seconds& traders should respond immediately
Interbank trading rooms are typically organized with individualtraders dealing in particular currency. So, the trading room is a
noisy, active place. Currency traders are capable of interpreting new information
quickly & making high stakes decisions. Particularly, the longterm is about 10 minutes.
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Cross Rates
Cross exchange rate is an exchange rate between a currencypair where neither currency is the U.S dollar. Moreover, thecross-exchange rate can be calculated from the U.S Dollarexchange rates for the two currencies, using either European orAmerican term quotations.Ex: and Cross-rate can be calculated from American termquotations as follows
Suppose $(/
) = ($/
)/($/)100$1or.01)/($
100
1$
50
1
2
1$
,
$
$since
SDM
DM
DM
DM
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Triangular Arbitrage
$
Credit Lyonnais
S(/$)=1.50
Credit Agricole
S(/)=85
Barclays
S(/$)=120
Suppose weobserve these
banks posting theseexchange rates.
First calculate the
implied cross ratesto see if an
Arbitrage exists.
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Continued.
$
Credit Lyonnais
S(/$)=1.50
Credit Agricole
S(/)=85
Barclays
S(/$)=120
80
1
120
1$
1$
50.1
The implied S(/) crossrate is S(/) = 80
Credit Agricole hasposted a quote of
S(/)=85 so there is an
arbitrage opportunity.
So, how can we make money?
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$
Credit Lyonnais
S(/$)=1.50
Credit Agricole
S(/)=85
Barclays
S(/$)=120
80
1
120
1$
1$
50.1
As easy as 123:
1. Sell our $ for ,
2. Sell our for ,
3. Sell those for $.
Continued.
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Sell $100,000 for at S(/$) = 1.50
receive 150,000
Sell 150,000 for at S(/) = 85receive 12,750,000
Sell 12,750,000 for $ at S(/$) = 120
receive $106,250
Profit per round trip = $ 106,250- $100,000 = $6,250
Continued.
S t F i E h
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Spot Foreign ExchangeMicrostructure
Market Microstructure refers to the basic mechanics ofhow a marketplace operates.
Bid-Ask spread in the spot FX market increase with FXexchange rate volatility and decrease with dealercompetition.
Dealers competition is a fundamental determinant of
the spot FX bid-ask spread. Private information is an important determinant of
spot exchange rates.
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The Forward Market
A forward contract is an agreement to buy or sell anasset in the future at prices agreed upon today.
Forward exchange rates are quoted on most major
currencies for a variety of maturities. Bank Quotes for maturities of 1, 3, 6, 9 & 12 months
are readily available.
Quotations on nonstandard or Broken term maturitiesare also available Maturities extending beyond one year are becoming
more frequent and good for the bank customers
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Continued
Forward Rate Quotations
Forward Cross Exchange Rates
Forward Premium
Long and Short Forward Positions
Swap Transactions
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Forward Rate Quotations
Forward Rate Quotes are either direct or indirectDirect Quotes:S ($/SF) = .6653
F1($/SF) = .6660F2($/SF) = .6670F3($/SF) = .6684Indirect Quotes:S (SF/$) = 1.5030F1(SF/$) = 1.5016F2(SF/$) = 1.4993F3(SF/$) = 1.4961
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The New Y ork foreign exchange sel ling rates belo w apply totrading among banks in amounts of $1 milli on and more, as quotedat 4 p.m. Eas tern time by Dow Jones T elerate Inc. and other sources.Retail transactions provide fewer units of foreign currency perdollar.
Special Drawing Rights (SDR) are based on exchange rates forthe U.S., German, British, French, and Japanese currencies. Source:International Monetary Fund.
European Currency Unit (ECU) is based on a basket of communitycurrencies.
a-fixing, Moscow Interbank Currency Exchange.
EXCHANGE RAT ES
CountryArgentina (Peso)Australia (Dollar)Austria (Schilling)Bahrain (Dinar)Belgium (Franc)Brazil (Real)
Britain (Pound)30-Day Forward90-Day Forward180-Day Forward
Canada (Dollar)30-Day Forward90-Day Forward180-Day Forward
Chile (Peso)China (Renminbi)Colombia (Peso)Czech. Rep (Krouna)
Commercial rateDenmark (Krone)Ecuador (Sucre)
Floating rateFinland (Markka)France (Franc)
30-Day Forward90-Day Forward180-Day Forward
Germany (Mark)30-Day Forward90-Day Forward180-Day Forward
Greece (Drachma)Hong Kong (Dollar)Hungary (Forint)India (Rupee)Indonesia (Rupiah)Ireland (Punt)Israel (Shekel)Italy (Lira)
Wed.1.0012
.7805.090432.6525.03080
.9607
1.68801.68691.68431.6802
.7399
.7414
.7442
.7479.002352
.1201.0009985
.....03662
.1663....
.0002766.2121.1879.1882.1889.1901.6352.6364.6389.6430
.004049.1292
.006139.02787
.00042331.6664
.3079.0006483
Tues.1.0012
.7902.091012.6525.03105
.9615
1.69461.69351.69101.6867
.7370
.7386
.7413
.7450.002356
.1201.0009985
.....03677
.1677....
.0002787.2135.1893.1896.1903.1914.6394.6407.6432.6472
.004068.1292
.006164.02786
.00042331.6714
.3085.0006510
Wed..9988
1.281211.058.3770
32.4701.0409
.5924.5928
.5937.5952
1.35161.34881.34371.3370425.258.3272
1001.50....
27.3076.0118
....3615.00
4.71505.32205.31265.29355.26171.57441.57141.56521.5552246.987.7390162.8935.875
2362.15.6001
3.24741542.50
Tues..9988
1.265510.988
.377032.2051.0401
.5901.5905
.5914
.59291.35681.35391.34891.3422424.408.3276
1001.50....
27.1945.9633
....3587.504.68415.28385.27415.25585.22431.56391.56071.55471.5450245.807.7390162.2335.890
2362.63.5983
3.24121536.00
U.S. $ equiv. per U.S. $Currency
CountryJapan (Yen)
30-Day Forward90-Day Forward180-Day Forward
Jordan (Dinar)Kuwait (Dinar)Lebanon (Pound)Malaysia (Ringgit)Malta (Lira)Mexico (Peso)
Floating rateNetherland (Guilder)New Zealand (Dollar)Norway (Krone)Pakistan (Rupee)
Peru (new Sol)Philippines (Peso)Poland (Zloty)Portugal (Escudo)Russia (Ruble) (a)Saudi Arabia (Riyal)Singapore (Dollar)Slovak Rep. (Koruna)South Africa (Rand)South Korea (Won)Spain (Peseta)Sweden (Krona)Switzerland (Franc)
30-Day Forward90-Day Forward180-Day Forward
Taiwan (Dollar)Thailand (Baht)Turkey (Lira)United Arab (Dirham)Uruguay (New Peso)
FinancialVenezuela (Bolivar)
SDRECU
Wed..008639.008676.008750.0088651.40753.3367
.0006445.4018
2.7624....
.1278
.5655
.7072
.1540.02529
.3814.03800
.3460.006307
.0001787.2666.7116
.03259.2141
.001184
.007546.1431.7334.7357.7401.7470
.03638
.03902.00000911
.2723....
.1145.002098
- - -1.43151.2308
Tues..008681.008718.008791.008907
1.40753.3389
.0006445.4002
2.7701....
.1277
.5699
.7106
.1548.02529
.3840.03802
.3475.006369
.0001788.2667.7124
.03259.2142
.001184
.007603.1435.7387.7411.7454.7523
.03637
.03906.00000915
.2723....
.1145.002096
1.43261.2404
Wed.115.75115.26114.28112.80
.7105
.29971551.502.4885
.3620....
7.82201.76851.41406.492639.540
2.621826.3182.8900158.55
5595.003.75031.405330.6884.6705844.75132.526.98651.36351.35931.35111.338627.48925.625
109755.003.6720
....
8.7300476.70
.6986..........
Tues.115.20114.71113.76112.28
.7105
.29951551.502.4990
.3610....
7.83301.75471.40736.459939.540
2.603926.3002.8780157.02
5594.003.75021.403730.6884.6690844.65131.536.96971.35371.34941.34161.329327.49325.605
109235.003.6720
....
8.7300477.12
.6980...........
U.S. $ equiv.Currencyper U.S. $Wednes day, January 8, 1997
Spot Rate Quotations
Clearly themarket
participants
expect thatthe yen willbe worth
MORE in
dollars in sixmonths.
F d C E h
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Forward Cross ExchangeRates
Forward cross - exchange rate quotations arecalculated in an analogous manner to spot cross - rates.Its just an delayed example of the spot cross rate
discussed above. In generic terms
($ / )( / )
($ / )
and
($ / )( / )
($ / )
NN
N
NN
N
F JapanF German Japan
F German
F GermanF Japan German
F Japan
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Forward Premium
The interest rate differential implied by forwardexchange is termed as premium or discount.
Apart from this, the comparison is useful for interest
rate differential between two countries. The forward premium can be expressed in American or
European terms
01375.5235.
5235.5307.
180
360
)/($
)/($)/($180$,180
DMS
DMSDMFf
DMv
Long and Short Forward
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Long and Short ForwardPositions
If you have agreed to Sell anything (spot orforward), you are Short.
If you have agreed to Buy anything (forward orspot), you are Long. If you have agreed to Sell forex forward, you are
Short. If you have agreed to Buy forex forward, you areLong.
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Payoff Profiles
0S180($/)
F180($/) = .009524
Short PositionLoss
ProfitIf you agree to sell anythingin the
future at a set price and the spot pricelater falls then you Gain.
If you agree to sell anythingin thefuture at a set price and the spot price
later rises then you Lose.
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Payoff Profiles
Loss
0 S180(/$)
F180
(/$) = 105
-F180(/$)
Profit
The payoff profile slopes up or
down depends upon whether youuse the Direct or Indirect quote:
F180(/$) = 105 or F180($/) =.009524.
Short Position
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Payoff Profiles
Loss
0S180(/$)
F180
(/$) = 105
-F180(/$)
When the short entered into this forward contract, heagreed to sell in 180 days at F180(/$) = 105
ProfitShort Position
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Payoff Profiles
Loss
0S180(/$)
F180
(/$) = 105
-F180(/$)
120
If, in 180 days, S180(/$) = 120, the short will make aprofit by buying at S180(/$) = 120 and delivering
at F180(/$) = 105.
15
ProfitShort Position
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Payoff Profiles
Loss
0S180(/$)
F180
(/$) = 105
Long position-F180(/$)
F180(/$)Short Position
ProfitSince this is a zero-sum game, the
long position payoff is the oppositeof the short.
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Payoff Profiles
Loss
0S180(/$)
F180
(/$) = 105
Long Position
-F180(/$)
Profit The long in this forward contract agreed to BUY in180 days at F180(/$) = 105
If, in 180 days, S180(/$) = 120, the long will
loseby having to buy at S180(/$) = 120 anddelivering at F180(/$) = 105.
120
15
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SWAPS
A swap is an agreement to provide a counterpartywith something he wants in exchange for something
that you want. Swap transactions account for approximately 51
percent of interbank FX trading, whereas outright
trades are less than 9 percent. A swap can be viewed as a portfolio of spot and
forward positions.
Comparative Advantage on
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Comparative Advantage onSwaps
Consider two firms A and B: Firm A is a U.S Basedmultinational and firm B is a U.K Based multinational.
Both firms wish to finance a project in each others
country of the same size. Their borrowingopportunities are given in the table below.
$
Company A 8.0% 11.6%
Company B 10.0% 12.0%
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A is the more credit-worthy of the two firms.
A pays 2% less to borrow in dollars than B and A pays.4% less to borrow in pounds than B:
Continued
$
Company A 8.0% 11.6%
Company B 10.0% 12.0%
A has a comparative advantage in borrowing in dollars
B has a comparative advantage in borrowing in pounds.
F ibl S
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Feasible Swap
Company
A
Swap
Bank
$8% 12%
$8%
11.6%12%
$10.0%
$
Company A 8.0% 11.6%
Company B 10.0% 12.0%
Company
B
C i d
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$8% 12%
$8%
11.6%12%
$10.0%
As net position is to
borrow at 11.6%
Continued
$
Company A 8.0% 11.6%
Company B 10.0% 12.0%
Company
A
Swap
Bank
Company
B
C i d
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$8% 12%
$8%
11.6%12%
$10.0%
Bs net position is to
borrow at $10.0%
Continued
$
Company A 8.0% 11.6%
Company B 10.0% 12.0%
Company
A
Swap
Bank
Company
B
C ti d
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$8% 12%
$8%
11.6%12%
$10.0%
Continued
$
Company A 8.0% 11.6%
Company B 10.0% 12.0%
Company
A
Swap
Bank
Company
B
A saves 1.6%
C ti d
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$8% 12%
$8%
11.6%12%
$10.0%
B saves $4.0%$
Company A 8.0% 11.6%
Company B 10.0% 12.0%
Continued
Company
A
Swap
Bank
Company
B
A saves 1.6%
C ti d
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$8% 12%
$8%
11.6%12%
$10.0%
B saves $4.0%
Continued
$
Company A 8.0% 11.6%
Company B 10.0% 12.0%
Company
A
Swap
Bank
Company
B
A saves 1.6%
The Swap Bank
makes money too.
P bl
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Problem: 1
Determine the spread in the two currencies and and determine which currency is the better currency.Currency Bid Rate Ask Rate
$ 1.55 1.60
$0.0070 0.0075
Problem: 2
The following are the quotes given by SBI Bank in Delhi.Find out the bid rate, Ask (Offer) rate, spread and spread in %a) INR/$ 48.7048.90b) INR/GBP 78.8078.90
P bl 3
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Problem: 3
Given the following forward rate is 1.030 1$ and thespot rate is 1.0200 1$. Find the forward premium or discount for3 months.
Problem: 4
The USD is quoted at GBP 1.1125/1.2225 and the INR
is quoted at GBP 0.5225/0.5325. What is the direct quotebetween USD and INR?
Problem: 5
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Assume the following spot exchange rate exists.
$0.60/DM
$0.15/FFrFFr 4/DMAssuming no transaction costs, based on these
exchange rates, can triangular is used to earn profitExplain.
Problem: 5