Foreign Exchange Rates and Quotations
Foreign Exchange Rates and Quotations (2 of 10) • Exchange Rate Quotes
– Every currency exchange involves two currencies: the base or unit currency (CUR1), and the price or quote currency (CUR2):
CUR1/CUR2 – The quotation indicates the number of units of CUR2
required in exchange for receiving one unit of CUR1 – Example:
EUR/USD1.2174 – Designates the euro (EUR) as the base currency, the dollar
(USD) as the price currency § The exchange rate is USD 1.2174 = EUR 1.00
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Exhibit 5.9 Foreign Currency Quotations
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Foreign Exchange Rates and Quotations (3 of 10) • Market Conventions
– European Terms § Quoting of the quantity of a specific currency per one U.S. dollar § Market practice for most of the past 60 years or more
– American Terms § Quoting the quantity of U.S. dollars per one unit of a specific currency § Exceptions that use American Terms
– Euro – U.K. pound sterling – Australian dollar – New Zealand dollar
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Foreign Exchange Rates and Quotations (4 of 10) • Market Conventions
– Currency Nicknames § Cable
– Exchange rate between U.S. dollars and U.K. pounds sterlin § Loonie
– Canadian dollar § Kiwi
– New Zealand dollar § Aussie
– Australian dollar § Swissie
– Swiss francs § Sing dollar
– Singapore dollar
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Foreign Exchange Rates and Quotations (5 of 10) • Market Conventions
– Direct and Indirect Quotations § Direct Quote
– Price of a foreign currency in domestic (home) currency units • In Paris, a direct quote might be EUR 0.8214/USD 1.00
• The euro is the home currency • In New York, the same “quote” would be USD 1.2174/EUR
1.00 • The dollar is the home currency
§ Indirect Quote – Price of the domestic currency in foreign currency units
• In New York, the indirect quote would be EUR 0.8214/USD 1.00
• In Paris, the indirect quote would be USD 1.2174/EUR 1.00
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Foreign Exchange Rates and Quotations (6 of 10)
• Market Conventions – Direct and Indirect Quotations
§ The two quotes are equivalent, one being the reciprocal of the other
= 1 USD1.2174
EUR 0.8214/USD EUR
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Foreign Exchange Rates and Quotations (7 of 10)
• Market Conventions – Bid and Ask Rates
§ Bid – The price in one currency at which a dealer will
buy another currency § Ask
– The price in one currency at which a dealer will sell the other currency
§ Bid-Ask Spread – Ask price is slightly higher than bid price
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Exhibit 5.10 Bid, Ask, and Mid-Point Quotation
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Exhibit 5.11 Exchange Rates: New York Closing Snapshot (1 of 2)
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Exhibit 5.11 Exchange Rates: New York Closing Snapshot (2 of 2)
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Foreign Exchange Rates and Quotations (8 of 10) • Market Conventions
– Cross Rates § Many currency pairs are only inactively traded, so their exchange rate
is determined through their relationship to a widely traded third currency
– Example: The JPY/MXN exchange rate may not be directly observable, but both are actively quoted versus the U.S. dollar
Currency per USD
Japanese yen USD/JPY 101.29 Mexican Peso USD/MXN 18.2692
– Cross-Rate Calculation
= JPY101.29/USD JPY5.5443/Ps Ps18.2692/USD
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Foreign Exchange Rates and Quotations (9 of 10) • Intermarket Arbitrage
– Cross rates can be used to check on opportunities for intermarket arbitrage § Example
Citibank quotes U.S. dollars per euro USD1.3297 = 1 EUR Barclays Bank quotes U.S. dollars per pound sterling USD1.5585 = 1 GBP
Dresdner Bank quotes euros per pound sterling EUR1.1722 = 1 GBP
– Cross rate Calculation
= USD1.5585/GBR EUR5.5443/GBP USD1.3297/EUR
– The calculated cross rate of EUR 1.1721/GBP is not the same as Dresdner Bank’s quotation, so triangular arbitrage opportunity exists