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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

3

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?

17

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)