ppt (foreign exchange market-part2).pdf

8/19/2019 PPT (Foreign Exchange Market-Part2).pdf

1/10

International Finance

Foreign Exchange Market (Part 2)


2/10

Bid-Ask Cross Rate Calculations

Example 1: Calculating the Direct Quote forthe British Pound in Zurich

£ : US$ 1.4419-36SFr : US$ 0.6250-67

What is the direct quote for the pound in Zurich?

What is the direct quote for the Swiss franc in

London?


3/10


Example 2: Calculating $/£ and £/$ Bid-AskCross Rates

£ : € 1.5473-80

$ : € 1.0164-67What is the $/£ bid-ask cross exchange rates?

What is the £/$ bid-ask cross exchange rates?


4/10


Example 3: Direct Quote for the pound inZurich

£ : £ 1.5473-80/US$

SFr : SFr 1.5957-00/US$What is the SFr/£ bid-ask cross exchange rates?

What is the £/SFr bid-ask cross exchange rates?


5/10

Forex Arbitrage

Arbitrage Defined:

Simultaneously buying and selling currenciesin two different forex markets to profit from the

misalignment of currency values Types:

Bilateral/Spatial Arbitrage

Triangular Arbitrage (using midpoints)

Triangular Arbitrage (using bid-ask spreads)


6/10

Forex Forward Market

Forward Market

Forward contract: contract between a bankand its client calling for delivery, at a fixed

future date, a specified amount of onecurrency against another, with the exchangerate fixed at the time the contract is enteredinto


7/10

Forward Market

Forward Market

Forward rates can be expressed as:

Outright rate – actual price quoted to bank clients

Swap rate – forward rate quoted as discount orpremium on spot rate

Forward Premium/Discount


8/10

Forex Swap Rates

Swap rates in the forex market do not carry positiveor negative signs. A way to determine whether aforward rate is at a premium or discount is to use thefollowing rule: When the forward bid in points is smaller than the ask rate in

points, the forward rate (i.e. foreign currency) is at apremium and the points should be added to the spot rate tocompute the outright quote. Conversely, if the bid in pointsexceeds the ask in points, the forward rate is at a discount

and the points must be subtracted from the spot price.


9/10

Forex Swap Rates

Spot Rate 30-day 90-day 180-day

£: $2.0015-30 19-17 26-22 42-35

SFr:$0.6963-68 4-6 9-14 25-38

In this example, the pound is at a forward discount vis-à-vis thedollar while the Swiss francs is at a premium


10/10

Forex Risk

Exchange Risk

Spreads in the forward market are a functionof both the breadth of the market (volume of

transactions) in a given currency and the riskassociated with forward contracts. Risk, inturn, are based on the variability of future spotrates. Such uncertainty will get reflected in the

forward market. Uncertainty will increase withlengthening maturities of forwards contracts.

ppt (foreign exchange market-part2).pdf

Documents