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3 Months
Forward 1.8983 1.9038 0.5268 0.5253
6 Months
Forward 1.8904 1.8959 0.5290 0.5275
3 Months
Forward 0.8043 0.8074 1.2433 1.2385
6 Months
Forward 0.8057 0.8088 1.2412 1.2364
Spot Rate Quotations
USD equiv USD equiv Currency per Currency per The indirect quote
Country Friday Thursday USD Friday USD Thursday for British pound
Argentina (Peso) 0.3309 0.3292 3.0221 3.0377 is:
Australia (Dollar) 0.7830 0.7836 1.2771 1.2762 £.5242 = $1
Brazil (Real) 0.3735 0.3791 2.6774 2.6378
Britain (Pound) 1.9077 1.9135 0.5242 0.5226
1 Month Forward 1.9044 1.9101 0.5251 0.5235
3 Months
Forward 1.8983 1.9038 0.5268 0.5253
6 Months
Forward 1.8904 1.8959 0.5290 0.5275
Canada (Dollar) 0.8037 0.8068 1.2442 1.2395
1 Month Forward 0.8037 0.8069 1.2442 1.2393
3 Months
Forward 0.8043 0.8074 1.2433 1.2385
6 Months
Spot Rate Quotations
USD equiv USD equiv Currency per Currency per Note that the
Country Friday Thursday USD Friday USD Thursday direct quote is the
Argentina (Peso) 0.3309 0.3292 3.0221 3.0377 reciprocal of the
Australia (Dollar) 0.7830 0.7836 1.2771 1.2762 indirect quote:
Brazil (Real) 0.3735 0.3791 2.6774 2.6378
Britain (Pound) 1.9077 1.9135 0.5242 0.5226
1 Month Forward 1.9044 1.9101 0.5251 0.5235
3 Months
Forward 1.8983 1.9038 0.5268 0.5253
1
6 Months
Forward 1.8904 1.8959 0.5290 0.5275 1.9077 =
Canada (Dollar) 0.8037 0.8068 1.2442 1.2395
.5242
1 Month Forward 0.8037 0.8069 1.2442 1.2393
3 Months
Forward 0.8043 0.8074 1.2433 1.2385
6 Months
The Bid-Ask Spread
• The bid price is the price a dealer is willing
to pay you for something.
• The ask price is the amount the dealer
wants you to pay for the thing.
• The bid-ask spread is the difference
between the bid and ask prices.
The Bid-Ask Spread
• A dealer could offer
– bid price of $1.25 per €
– ask price of $1.26 per €
– While there are a variety of ways to quote that,
• The bid-ask spread represents the
dealer’s expected profit.
The Bid-Ask Spread
Bid Ask
S($/£) 1.9072 1.9077
S(£/$) .5242 .5243
• A dealer would likely quote these prices as 72-
77.
• It is presumed that anyone trading $10m
already knows the “big figure”.
Cross Rates
• Suppose that S($/€) = 1.50
– i.e. $1.50 = €1.00
• and that S(¥/€) = 50
– i.e. €1.00 = ¥50
• What must the $/¥ cross rate be?
$1.50 €1.00 $1.50
× =
€1.00 ¥50 ¥50
$1.00 = ¥33.33
$0.0300 = ¥1
Triangular Arbitrage
Suppose we observe
these banks posting $
these exchange rates.
Barclays
Credit Lyonnais
S(¥/$)=120
S(£/$)=1.50
¥ Credit Agricole
First calculate any implied £
cross rate to see if an
arbitrage exists. S(¥/£)=85
¥ Credit Agricole
£
S(¥/£)=85
Triangular Arbitrage
Sell $100,000 for £ at S(£/$) = 1.50
receive £150,000
Sell our £150,000 for ¥ at S(¥/£) = 85
receive ¥12,750,000
Sell ¥12,750,000 for $ at S(¥/$) = 120
receive $106,250
profit per round trip = $106,250 – $100,000 = $6,250
Triangular Arbitrage
Here we have to go “clockwise” to
make money—but it doesn’t
matter where we start.
$
Barclays
Credit Lyonnais
S(¥/$)=120 2 3 S(£/$)=1.50
1
¥ Credit Agricole
£
S(¥/£)=85
If we went “counter clockwise” we would be the source of arbitrage profits, not the
recipient!
Triangular Arbitrage
• As a quick spot method for triangular arbitrage, write the three rates out with
a different denominator in each:
– 1.3285 CHF / USD
– 0.00851 USD / JPY
– 88.20 JPY / CHF
• If there is parity:
CHF USD JPY
=1
USD JPY CHF
$HPR = –0.0091
S180($/¥)
0
F180($/¥) = .009524
If you agree to sell anything in the future at a set
price and the spot price later rises then you lose.
0 F (¥/$) = 105 or
S180(¥/$)180
F180($/¥) = .009524.
F180(¥/$) = 105
-F180(¥/$)
loss
Payoff Profiles
profit
short position
S180(¥/$)
0
F180(¥/$) = 105
When the short entered into this forward
contract, he agreed to sell ¥ in 180 days at
-F180(¥/$)
loss F180(¥/$) = 105
Payoff Profiles
profit
short position
15¥
S180(¥/$)
0
120
F180(¥/$) = 105
If, in 180 days, S180(¥/$) = 120, the short will make
a profit by buying ¥ at S180(¥/$) = 120 and
-F180(¥/$)
loss delivering ¥ at F180(¥/$) = 105.
Payoff Profiles
profit Since this is a zero-sum game, the long position
F180(¥/$) payoff is the opposite of the short. short position
S180(¥/$)
0
F180(¥/$) = 105