International Finance Sessions 2 3 The FX

International Finance Sessions 2 & 3: The FX Market (cont. ) Dick Sweeney

Spot Quotations JPY: bid 111. 43, ask 111. 51 Dealer will buy USD 1 for JPY 111. 43, will sell USD 1 for JPY 111. 51 (dollars are being bought and sold) • You sell JPY, dealer sells USD for JPY, at JPY 111. 51 JPY 300 m buys USD 2. 6903417 m = JPY 300 m /(JPY 111. 51/USD) = $2, 690, 341. 7 • “American terms”: 1/111. 51 = 0. 0089678, 1/111. 43 =. 0089742 or 0. 89678, 0. 89742 per JPY 100 • Remember, bid always less than ask • 111. 51 is ask in JPY, 1/111. 51 is bid in USD • Delivery date? •

Forward Quotations • • • Dealer quotes JPY “ 111. 43 to 51, 52 to 48, 150 to 144, 337 to 205” for spot, 1 -month, 3 -months and 1 -year. You buy 400 m 3 -mth JPY. Spot: 111. 43 to 111. 51 (substitute into bid) Forward: 150 to 144 (subtract from spot) 109. 93 110. 07 (14 pip spread) Rule versus experiment Spread widens with maturity—thinness • Spread goes from 8 to 14 JPY 400 m / (JPY 109. 93/USD) = USD 3. 63868 m = $3, 638, 680—dimensions cancel (!) • Delivery date?

Forward Quotations Quotes for the Mexican Peso: Spot 9. 3850 -80 bid 9. 3850 ask 9. 3880 [spread 30 1 -mth 3 -mth 70 -80 210 -215 9. 3920 9. 4060 9. 3960 9. 4095 40 35 Add/subtract relative to spot 6 -mth 410 -440 9. 4260 9. 4320 60]

Premia and Discounts w w Spot and six month bid for MEP: 9. 3850 and 9. 4260. Find premium/discount from New York point of view If the foreign-currency price is used: pr. MEP, NY = [(S - F) / F] x 2 x 100 = [(9. 3850 9. 4260) / 9. 4260] x 200 = -0. 0043497 x 200 = 0. 8699342%/yr If the domestic-currency price is used: pr. MEP, NY = [(F - S) / S] x 200 = [(0. 1060895 0. 106553) / 0. 106553] x 200 -0. 0043497 x 200 = 0. 8699342. %/yr

Cross Rates: Mexican Peso, GBP Mex. peso GBP Spot 9. 3850 -80 1. 6320 -35 (use bid & ask) Buy USD 1 for GBP (1 / 1. 6320) = GBP 0. 6127451. Sell the USD 1 for MEP 9. 3850 / GBP 0. 6127451) = MEP 15. 31632 / GBP. Dealer’s bid price for MEP. Sell MEP 9. 3880 for USD 1. Sell the USD 1 for GBP (1 / 1. 6335). MEP 9. 3880 / GBP (1 / 1. 6335) = MEP 9. 3880 x 1. 6335 = 15. 335298 /GBP. Dealer’s ask price for MEP.