Post on 03-Apr-2018
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d)Crossrates
Mostexchangeratequota3onsexpresscurrenciesrela3vetoUSD,GBPorEuro.
Forcurrencypairswhicharelesstraded,theirexchangerateisdeterminedthroughtheir
rela3onshiptoawidelytradedthirdcurrencycrossrates
Crossratesarenormallydisplayedinamatrix.
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1.2.1.Exchangeratequotations(contd)
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E.g.:MexicanimporterhastopayYentoJapaneseexporter.BothPeso&Yenarenormallyquoted
againstUSD(110.7/$;Ps11.4456/$)
CrossratePs/=
2
Peso/dollar
Yen /dollar=
Ps11.4456 / $
110.73/$= Ps0.1034 /
1.2.1.Exchangeratequotations(contd)
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E.g.ofBloombergcrossrate
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USD EUR JPY GBP CHF CAD AUD HKD
USD 1.2830 0.0106 1.5207 1.0540 0.9843 1.0418 0.1288
EUR 0.7794 0.0083 1.1853 0.8215 0.7673 0.8122 0.1004
JPY 94.0700 120.7100 143.0500 99.1280 92.5870 98.0190 12.1166
GBP 0.6576 0.8437 0.0070 0.6930 0.6472 0.6850 0.0847
CHF 0.9488 1.2172 0.0101 1.4430 0.9341 0.9886 0.1222
CAD 1.0160 1.3033 0.0108 1.5451 1.0709 1.0584 0.1309
AUD 0.9599 1.2312
0.0102
1.4597 1.0117 0.9447
0.1236
HKD 7.7636 9.9593 0.0825 11.8062 8.1819 7.6410 8.0882
!
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Crossratescheckarbitrageopportuni3esE.g.:
Ci3bank:$1.222/
Barclays:$1.8410/
Deutsche:1.5100/CrossratebetweenCi3bank&Barclays:1.5062/
Trianglearbitrage
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1.2.1.Exchangeratequotations(contd)
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E.g.ofTrianglearbitrage
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Problem-solving:simpletrianglearbitrage
Thefollowingexchangeratesareavailabletoyou:FujiBank:120.00/$
Rushmore:SF1.600/$
Blanc:80.00/SF
Assumeyouhaveini3alSF10,000,000.Canyoumakeaprofitviaarbitrage?Ifyes,how?
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a) Spot&forward:
Spotexchangerateisthecurrentexchangerateoftwocurrency.Itisthequota3onbetweentwo
currenciesforimmediatedelivery(2-daylagin
prac3ce)
Forwardexchangerate:exchangeratethateconomicagentsagreetodaytoexchange
currenciesatsomespecified3meinfuture(0-day,
90-day,180-day,270-dayor60-day)
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1.2.2.Exchangerateclassification(contd)
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Europeanquote:
f=
Americanquote:
f=
Iff>0:forwardpremium
Iff
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b)Nominal,real&effec@veexchangerates
Nominalexchangerate:theexchangeratequotedatagivendatethepriceofonecurrencyinterms
ofanotherwithnoreferencemadetowhatthis
meansintermsofpurchasingpower
Realexchangerate:isthenominalexchangerateadjustedforrela3vepricesbetweenthecountries
inconsidera3on.
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1.2.2.Exchangerateclassification(contd)
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Realexchangerateisnormallyexpressedinindexform:Sr=S*P/P
WithSristheindexofrealexchangerate,Sisthenominalexchangerate(inindexform),P/P:indexofdomes3c/foreignpricelevel
Effec3veexchangerate:ameasureofwhetherornotthecurrencyisapprecia3ngordeprecia3ngagainstaweightedbasketofforeigncurrencies.
ReadmoreinPilbeam,p.9-15
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1.2.2.Exchangerateclassification(contd)
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1.2.3.Measuringachangeinspotrate
E.g.:Yesterdayspotrate:SF1.651/$
Today:SFstrengthens,spotrate:SF1.500/$
Whatsthepercentincreaseinthedollarvalueofthe
SF?
Europeanterms:%=
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Beginning rate ! ending rate
ending rate"100
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Exercise
1. YoureceivethefollowingquotesforSwissfrancsagainstthedollarforspot,one-monthforward,-
monthsforward,and6monthsforward.
1.275to1.285,10to15,14to22,22to0
Calculatetheforwardquotesforbid&ask,andthe
spread
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2.Usethefollowingspotandforwardbid-askratesforthe
U.S.dollar/euro(US$/)exchangeratetoanswerthe
followingques3ons
a)
Whatisthemid-rate(numericalaveragesofbid&ask)foreachmaturity?
b) Whatistheannualforwardpremiumforeachmaturityusingthemid-ratesfrompart(a)?
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Period $/Bidrate $/Askrate
Spot
1month
months
6months
12months
1.489
1.4440
1.440
1.4407
1.4408
1.440
1.4410
1.4418
1.4418
1.446
Exercise(contd)
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.Whichofthebelowcurrencieshadthelargest
deprecia3ons/devalua3oninAsianFinancialCrisis?
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Country Currency July1997(per$) Nov1997(per$)
Indonesia
Korea
Malaysia
Philippines
SingaporeTaiwan
Thailand
Rupiah
Won
Ringgit
Peso
DollarDollar
baht
2400
900
2.5
27
1.427.8
25
600
1100
.5
4
1.62.7
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Exercise(contd)
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1.3.1.PurchasingPowerParity
AbsolutePPP:comparingthepricesofiden3calproductsdenominatedindifferentcurrencies
determinestherealorPPPexchangeratethatshouldexistifmarketswereefficient.
Spotexchangerateisdeterminedbytherela3vepricesofsimilarbasketsofgoods
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LessextremecomparedwithBigMacIndex:inrela3velyefficientmarkets,priceofabasketof
goodswouldbethesameineachmarket.
Spotexchangerate/$=PI/PI$WithPIisthepriceindexineachcountry
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1.3.1.PurchasingPowerParity(contd)
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Rela3vePPP:rela3vechangeinpricesbetween2countriesdeterminesthechangeintheexchange
rate %changeintheexchangerateisapproximately
equaltothedifferen3alininfla3onratesbetween
thetwocountriesbutinoppositedirec3on
E.g.:Iftheexchangeratestartsinequilibrium,thenifinfla3oninJapanis4%lessthanthatofinUSthe
Yenwould..perannumagainstthedollar
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1.3.1.PurchasingPowerParity(contd)
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EmpiricaltestofPPP: Holdbeerincountrieswithhighinfla3on&
underdevelopedcapitalmarkets
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1.3.1.PurchasingPowerParity(contd)