currencies and the fx spot market
TRANSCRIPT
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Currencies and the FX Spot
Market
Week 2: Part I
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The Major Currencies of the World
United States Dollar (USD) $
Euro (EUR)
Japanese Yen (JPY) United Kingdom Sterling Pound (GBP)
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Other Major Currencies
Australian Dollar
Swiss Franc
New Zealand Dollar Canadian Dollar
Hong Kong Dollar
Singapore Dollar
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Currency TradingRANK Currency ISO Percent
1 United States:United States dollar USD ($) 87.00%
2 European Union:Euro EUR () 33.40%
3 Japan Japanese: yen JPY () 23.00%
4 United Kingdom:Pound sterling GBP () 11.80%
5 Australia:Australian dollar AUD ($) 8.60%
6 Switzerland:Swiss franc CHF (Fr) 5.20%
7 Canada:Canadian dollar CAD ($) 4.60%
8 Mexico:Mexican peso MXN ($) 2.50%
9 China:Chinese yuan or renminbi CNY/RMB () 2.20%
10 New Zealand:New Zealand dollar NZD ($) 2.00%
11 Sweden:Swedish krona SEK (kr) 1.80%
12 Russia:Russian ruble RUB 1.60%
13 Hong Kong:Hong Kong dollar HKD ($) 1.40%
14 Singapore:Singapore dollar SGD ($) 1.40%
15 Turkey:Turkish lira TRY 1.30%
Other 12.20%
Total 200%
*Multiple Sources
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Currency Pairs
The Majors
EUR/USD: The Fiber
USD/JPY: Yen or Ninja
GBP/USD: The Cable
AUD/USD: Aussie
USD/CHF: Swissy
USD/CAD: The Loonie
Other Major Currency Pairs
EUR/GBP: The Chunnel
EUR/JPY: The Yuppie
NZD/USD: The Kiwi
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Currency Pairs
www.finance.yahoo.com
http://www.finance.yahoo.com/http://www.finance.yahoo.com/ -
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Currency Pair Quotations
Base (or Reference Currency) / Counter
Currency
Example 1: EUR/USD
This Euro vs. the United States Dollar and NOT
Euro per USD!!!
Example 2: USD/JPY
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Currency Pair Quotations
Priority Ranking
Euro (EUR)
Pound (GBP)
Australian Dollar (AUD) New Zealand Dollar (NZD)
United States Dollar (USD)
Canadian Dollar (CAD) Swiss Franc (CHF)
Japanese Yen (JPY)
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Direct vs. Indirect Quotes
Direct vs. Indirect Quotes:
The direct quote is the local currency priceof one unit of foreign currency. e.g.
EUR/USD 1.3855
The indirect quote is the foreign currency
price of one unit of local currency. e.g.USD/EUR 0.7218
reciprocal of direct quote.
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Direct vs. Indirect Quote
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Cross Rates
What if you want to trade CHF for JPY?
Law of One Price
No Arbitrage
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Cross Rates
Example 1:
EUR/USD = 1.3000
USD/THB = 33.1000
What is EUR/THB?
Example 2:
USD/JPY = 100.0000
USD/PHP = 44.0000
What is JPY/PHP?
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The Spot Market and Risks
What you buy is what your counterparty sells
(and vice versa)
Settlement Risk
The Spot Transaction typically closes two days
after the trade
Deal could fall through
One side of the settlement could fail (HerstattRisk)
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Bid Ask Spreads
Bid Price: The Price a Market Maker is willing to BUY theBase Currency
Ask Price: The Price a Market Maker is willing to SELL theBase Currency
Buy Low / Sell High: The Market Maker is there to makemoney
Example (Stock Price) PG (Proctor and Gamble) Bid/Ask = 85.01 / 85.03
Example (Currency) EUR/USD = 1.3141 / 1.3143 Market Maker BUYS Euro cheap ($1.3141) and SELLS Euro at a
higher price ($1.3143)
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Bid Ask Spread
(AskBid) / Ask
Compute the Bid/Ask Spread for EUR/USD
EUR/USD 1.3141 / 1.3143
Pips: Instead of percentages, Bid/Ask Spreads
are often quoted as 1/100thof a cent
EUR/USD spread = 2 pips
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Putting It All Together
Suppose:
USD/CAD 1.4874 / 1.4879
USD/SGD 1.6782 / 1.6792
What is CAD/SGD?
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Appreciation / Depreciation
Currencies go up and down in valuebut byhow much?
Value Increase (Decrease) is calculated by:
(New PriceOld Price) / Old Price
Example: EUR/USD was 1.3400 today and1.4100 one month from today
How much did the Euro appreciate/depreciate? How much did the $US appreciate/depreciate?
What was the change in Pips?
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Calculating Profit and Loss (P&L)
How does a trader make a profit (buy low /
sell high)
Example: EUR/USD is 1.3500
You sell $10mil
EUR/USD is now 1.3800
What is your P&L? In USD? In EUR?
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Quiz For Next Time
Normally take home quiz, but not this time
Visit www.xe.com(or any other website with
FX quotes)
I will ask you three exchange rates from EUR,
JPY, AUD, NZD, CAD, GBP, CHF against the USD
http://www.xe.com/http://www.xe.com/