Beruflich Dokumente
Kultur Dokumente
Week 02
Introduction to class, &
Exchange Rate Calculation Basics
B&H: Chapter 02
Funny sometimes
Sick slides
Telling rude students to shut up during class (definitely worked and was very
entertaining to watch the kid almost literally swallow his words)
really really really really good tutorial slides omg - what is the point of a
lecture when I have these amazing tutorial slides?
A truly amazing feat of human hair growth aka The Petehawk, supplemented
by a healthy dose of arrogance, sarcasm, and inappropriate yet still financially
sensible examples which truly helped you to learn. Also his slides are
excellent. Almost as good as the mohawk. And the constantly putting people
down attitude.
ASSESSMENT
DATE
HOW MUCH
Tutorial Attendance,
Homework, &
Groupwork
Participation
Every week
10%
Midsemester
Examination
30%
Group Project
Weeks 11 + 12
25%
Final Exam
Exam Period
35%
LETS BEGIN
12
13
USD0.9054/AUD
You would read/interpret this exactly the same way as you would read
In FINS1612 (and the newspaper & on Google Finance), it would be written as:
AUD/USD0.9054
14
15
Thus, the dollar price of the pound is now lower after the appreciation of the
dollar.
i.e. each GBP is now able to buy less USD than before.
16
First,
can be inverted to
If the USD appreciates 25% against the AUD, how many AUD can one USD
purchase?
x (1 + 0.25) =
So what is the value if we convert back to the USD price of an AUD?
..which is the same as 1.00 DIVIDED by (1 + 0.25)
rather than multiplied by (1 - 0.25), which is incorrect
17
Q. The Mexican peso has weakened considerably relative to the dollar, and you
are trying to decide whether this is a good time to invest in Mexico. Suppose
the current exchange rate of the Mexican peso relative to the U.S. dollar is
MXN 9.5/USD. Your investment advisor at Goldman Sachs argues that the
peso will lose 15% of its value relative to the dollar over the next year. What
is Goldman Sachss forecast of the exchange rate in 1 year?
A. Although the Mexican peso is currently quoted as MXN 9.5/USD, this is the
equivalent of USD 0.10526/MXN when we take the reciprocal.
If the value of the MXN falls by 15%, it will be worth:
18
Q. Alumina Limited of Australia has called Mitsubishi UFJ Financial Group to get
its opinion about the Japanese yenAustralian dollar exchange rate.
The current rate is 67.72/A$, and Mitsubishi thinks the Australian dollar will
weaken by 5% over the next year. What is Mitsubishi UFJs forecast of the
future exchange rate?
A. If the Australian dollar weakens by 5% over the next year, it will take 5% fewer
Japanese yen to purchase the Australian dollar. Thus, the forecast is
67.72/A$ x (1 0.05) = 64.334/A$
Ask yourself if the value of the YEN appreciates by 25% against the AUD, by what % would the AUD
depreciate against the YEN? What about 100%? What about 100,000,000,000%
AUD
1
1
1
YEN
1
0
.
25
1 %
0.20 20%
1
1
1 1.00
1
1 0.99999999 99.999999%
1 1,000,000,000
0.50 50%
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20
Q. Mississippi Mud Pies, Inc. needs to buy 1,000,000 Swiss francs (CHF) to pay its
Swiss chocolate supplier. Its banker quotes bidask rates of CHF1.3990/USD
CHF1.4000/USD. What will be the dollar cost of the CHF1,000,000?
A. How to break this down:
The company wants to buy CHF, which means theyre selling USD.
If theyre selling USD, theyll have to do that at the lower CHF/USD price,
which is the banks bid of CHF1.3990/$.
Remember the bank must make a profit on each USD from their
bid/ask. The bank WONT be generous and let you sell each USD to
them for the higher CHF1.4000 price.
If the company is purchasing CHF 1,000,000 at a price of CHF1.3990/USD,
how many USD do they pay?
Cost in USD
CHF 1,000,000
1,000,000
USD 714, 796
USD
CHF1.3990/USD
1.3990
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22
Q. If the Japanese yenU.S. dollar exchange rate is 104.30/$, and it takes 25.15
Thai bahts to purchase 1 dollar, what is the yen price of the baht?
A. To prevent triangular arbitrage, the direct quote of the yen price of the baht
(/THB) must equal the yen price of the dollar times the dollar price of the
baht (which is the reciprocal of the baht price of the dollar):
YEN104.30/USD YEN4.1471/THB
THB25.15/USD
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How to tell if there is a triangular arbitrage profit and how to make it:
When you arrange the quotes as follows, the cross multiplication should
equal one
CAD1.60 USD1.25 EUR0.5
i.e.
1
USD
EUR
CAD
CASE 1: If it is less than 1, sell the currencies in the numerator to buy the
currencies in the denominator of each quote.
e.g.
USD
EUR
CAD
0.8
i.e. 1
How to tell if there is a triangular arbitrage profit and how to make it:
When you arrange the quotes as follows, the cross multiplication should
equal one
CAD1.60 USD1.25 EUR0.5
i.e.
1
USD
EUR
CAD
USD
EUR
CAD
1.2
i.e. 1
Q. As a foreign exchange trader, you see the following quotes for Canadian
dollars (CAD), U.S. dollars (USD), and Mexican pesos (MXN):
USD0.7047/CAD
MXN6.4390/CAD
MXN8.7535/USD
Is there an arbitrage opportunity, and if so, how would you exploit it??
A. Flip the MXN/CAD quote and then arrange them to follow the rules
CAD
MXN
USD
As it is less than 1, sell the currencies in the numerator to buy the currencies in
the denominator.
Because our arbitrage test < 1,
I.
Sell USD 1.00 and buy CAD 1.4190.
our % profits here could be
calculated quickly by taking the
II. Sell CAD 1.419 and buy MXN 9.1372.
reciprocal as follows:
(1 / 0.9580) 1 = 0.0438
III. Sell MEX 9.1369 and buy USD 1.0438.
IV. You now have USD 0.0438 more than when you started.
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27
Q. Deutsche Bank quotes bidask rates of $1.3005/$1.3007/ and 104.30104.40/$. What would be Deutsche Banks direct asking price of yen per euro
(/)?
A. The direct asking price of yen per euro (/) is the price at which you the
customer will buy euros from (and sell yen to) the bank.
So first, identify the rates at which you can buy euros and sell yen against the
dollar.
These are $1.3007/ and 104.40/$ respectively
note that selling Yen is the same as buying $, hence the higher ask price per $
EUR
USD
EUR
YEN135.79
YEN135.79 / EUR
EUR
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29
Q. The following table contains the bid and ask rates for trading between the
Euro, the Japanese Yen, and the Australian Dollar:
BID
YEN 128.71/EUR
YEN 92.50/AUD
AUD 1.3912/EUR
ASK
YEN 128.74/EUR
YEN 92.52/AUD
AUD 1.3915/EUR
Is there an arbitrage profit available? How did you arrive at this conclusion?
A. Method 1: Manually try going each way around the triangle
Spend your YEN 128.71 to purchase AUD at YEN 92.52/AUD to get AUD 1.391159
Spend your AUD 1.391159 to purchase EUR at AUD 1.3915/EUR to get EUR 0.99975
Youve finished with LESS than the EUR 1.00 you started with. No arbitrage
30
Q. The following table contains the bid and ask rates for trading between the
Euro, the Japanese Yen, and the Australian Dollar:
BID
YEN 128.71/EUR
YEN 92.50/AUD
AUD 1.3912/EUR
ASK
YEN 128.74/EUR
YEN 92.52/AUD
AUD 1.3915/EUR
Is there an arbitrage profit available? How did you arrive at this conclusion?
A. Method 1: Manually try going each way around the triangle
Spend your YEN 128.686 to purchase EUR at YEN 128.74/EUR to get EUR 0.99958
Youve finished with LESS than the EUR 1.00 you started with. No arbitrage again
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A.
32
YEN 92.52/AUD
YEN 92.50/AUD
QUOTED MARKET RATES
BID
YEN 92.4973/AUD
ASK
YEN 92.5388/AUD
CALCULATED CROSS-RATES
BID
ASK
Even though we are buying AUD via the cheapest method and selling it at
the highest price we can, were still paying more YEN per AUD than were
selling it for. Therefore, there are no arbitrage profits.
33
In order for there to be an arbitrage possible, youd need a situation like the above
where there is an ASK price that you can buy a currency for SMALLER than a BID
price that you can sell that same currency for.
YEN 92.50/AUD
BID
QUOTED
MARKET
RATES
YEN 92.52/AUD
YEN 92.5250/AUD
ASK
BID
YEN 92.54/AUD
CALCULATED
CROSS RATES
ASK
i.e. In order for triangular arbitrage to be present when dealing with bid/ask
spreads, the two bid/ask spreads cannot overlap at all.
34
44
45
Instead of the bank selling the denominator currency to you (the customer)
at the Ask as per normal with direct quotations, with indirect quotations
the bank is selling the numerator currency at the Ask.
The bank sells EUR 0.7661 to you for every one AUD it collects from you at the Ask
46
Q. Convert the above rate to both direct and indirect quotation from the other
countrys perspective.
Alternatively, a direct quote from the Australian perspective would be:
AUD 1.2025/EUR AUD 1.3053/EUR
Changing it to a direct quote from the Eurozone perspective, we get:
EUR 0.7661/AUD EUR 0.8316/AUD
And so thus an indirect quote from the Eurozone perspective would give
AUD 1.3053/EUR AUD 1.2025/EUR
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DIRECT
INDIRECT
AUSTRALIAN perspective
EUROZONE perspective
DIRECT
INDIRECT
Always remember to FIRST look at whether the Bid is less than the Ask:
If Bid < Ask, its a Direct quote so the perspective currency is in the numerator.
If Bid > Ask, its an Indirect quote so the perspective currency is in the denominator.
48
When the goal of a problem isnt to identify direct or indirect quotations, but
rather to use and apply those exchange rates to some other purpose (such as
triangular arbitrage, etc.), I personally never think about exchange rates in
terms of direct vs. indirect or bid vs. ask or buying vs. selling in order to
decide which rates to use at a given step of a calculation.
The bank ALWAYS is quoting you a spread from which THEY make a profit on
a round-trip transaction.
This is why I feel that the words bid and ask are unnecessary.
And they are probably a hindrance to you developing true intuitive learning of
the topic.
On the following slide note that I dont use the words buy or sell at all.
I personally identify the correct rate in terms of giving and getting.
The bank or dealer always gets more and gives less. Like a bad lover.
And you, the customer, always give more and get less. Like a chump.
49
If Ive got a bunch of AUD in my account and want to convert to HKD, at which rate will I be
able to do that?
i.
Will the bank give me 5.1235 HKD for each AUD that I give them?
ii.
Or will the bank give me 5.0338 HKD for each AUD that I give them?
B.
If Ive got a bunch of HKD in my account and want to convert to AUD, at which rate will I be
able to do that?
i.
Will the bank require me to give them 5.1235 HKD for each AUD that I get from
them?
ii.
Or will the bank require me to give them 5.0338 HKD for each AUD that I get from
them?
C.
If Ive got a bunch of YEN in my account and want to convert to AUD, at which rate will I be
able to do that?
i.
Will the bank require me to give them 86.24 YEN for each AUD that I get from them?
ii.
Or will the bank require me to give them 84.71 YEN for each AUD that I get from
them?
D.
If Ive got a bunch of AUD in my account and want to convert to YEN, at which rate will I be
able to do that?
i.
Will the bank give me 86.24 YEN for each AUD that I give them?
ii.
Or will the bank give me 84.71 YEN for each AUD that I give them?
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FINS3616 Peter Kjeld Andersen (2016-S1)
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The HKD../YEN rate at which we could sell HKD to the bank to buy YEN.
The HKD../YEN rate at which we could sell YEN to the bank to buy HKD.
As the AUD is in the denominator, its easier to think of what you (a customer) is doing with the AUD.
i.e. we buy AUD from the bank at the high price, and sell AUD to them at the low price.
To find the sell HKD / buy YEN rate, use the rates for doing those things against the AUD:
If Im selling HKD, Im simultaneously buying AUD.
And when I buy AUD from the bank, I pay the higher price: HKD 5.1235/AUD
If Im buying YEN, Im simultaneously selling AUD.
When I sell AUD to the bank, I receive the lower price: YEN 84.71/AUD
So the sell HKD / buy YEN rate is HKD 5.1235 / YEN 84.71 = HKD 0.0604/YEN
52
The HKD../YEN rate at which we could sell HKD to the bank to buy YEN.
The HKD../YEN rate at which we could sell YEN to the bank to buy HKD.
As the AUD is in the denominator, its easier to think of what you (a customer) is doing with the AUD.
i.e. we buy AUD from the bank at the high price, and sell AUD to them at the low price.
To find the buy HKD / sell YEN rate, use the rates for doing those things against the AUD:
If Im buying HKD, Im simultaneously selling AUD.
And when I sell AUD to the bank, I receive the lower price: HKD 5.0338/AUD
If Im selling YEN, Im simultaneously buying AUD.
When I buy AUD from the bank, I pay the higher price: YEN 86.24/AUD
So the buy HKD / sell YEN rate is HKD 5.0338 / YEN 86.24 = HKD 0.0584/YEN
53
54
BID
HKD 0.0584/YEN
BID
ASK
Calculated Cross
Rates
HKD 0.0604/YEN
HKD 0.0582/YEN
ASK
HKD 0.061/YEN
The two buying (i.e. ask) prices for the YEN are both higher than the
prices at which you could sell the YEN (i.e. bids).
Therefore, no arbitrage is possible.
55
Calculated Cross
Rates
ASK
HKD 0.0604/YEN
BID
HKD 0.0620/YEN
ASK
HKD 0.0650/YEN
Purchase YEN with HKD via the AUD using the calculated cross rate of HKD
0.0604/YEN.
Then sell YEN for HKD using the quoted cross rate of HKD 0.0620/YEN.
56
57
Q.
a)
commercial banks
b)
corporations
c)
government agencies
d)
governments
e)
individual investors
The answer is a)
Q.
Which one of the following features is not part of the interbank foreign
exchange market?
a)
b)
c)
d)
non-strategic loans
e)
The answer is d)
Q.
a)
Rand0.886/$
b)
Rand1.129/$
c)
Rand3.226/$
d)
Rand3.459/$
e)
Rand9.217/$
The answer is e)
SUSD/ZAR SUSD/ARS SARS/ZAR
USD 0.35 ARS 0.31 USD 0.1085
ARS
ZAR
ZAR
SZAR/USD
1
SUSD/ZAR
1
ZAR 9.2166/USD
USD 0.1085/ZAR
Q.
a)
b)
solvency
c)
stability
d)
liquidity
e)
collateral
The answer is d)
Q.
Which one of the following firms dominates the foreign exchange markets?
a)
b)
Deutsche Bank
c)
UBS
d)
Citigroup
e)
Rio Tinto
The answer is a)
Q.
The foreign exchange desks of commercial banks typically make their profits
through ____.
a)
arbitrage
b)
government subsidies
c)
investment banking
d)
market making
e)
speculation
The answer is d)
Q.
The spot rate is $1.00/ and the one-year spot rate is $1.10/. What is
percentage change in the dollar?
a)
10%
b)
9.1%
c)
0%
d)
-9.1%
e)
-10%
The answer is d)
Start of Year: S$/0 $1.00/
S0/$ 1.00/$
S1/$ 0.9091/$
S1/$
s /$ 1
S0
$
0.9091/$
1
1.00 /$
-0.0909091 9.01%
FINS3616 Peter Kjeld Andersen (2016-S1)
THE END
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