or
or
US $
US $
EURO
US $
US $
TL
EURO EURO TL
Interbank Quotations
US dollar is major worldwide currency involved in the most of the foreign exchange
transactions. This caused professionals dealers and brokers to state foreign exchange
quotations in different ways. There have been two ways of representing foreign exchange
rates worldwide for US $. Countries use any one of these two methods to announce foreign
exchange rates in the markets.
First, majority of the countries express foreign exchange prices for one US dollar which is
known as European terms. The following quote is an example to European terms:
105.00 / US $
or
1 US $ : 105.00
This quote shows the amount of Japanese Yen that can be purchased for one US $ which can
be also named as Japanese terms. Additionally, when for example, TL is expressed in terms of
US $, the quote is said to be in Turkish terms. European terms were adopted in 1978 to
facilitate worldwide trading through telecommunications.
Second, several countries express US dollar price for one unit of other currencies which is
known as American terms. The following quote is an example to American terms:
US $ 0.0095 /
or
1 : 0.0095 US $
The above quote shows the amount of US $ that can be purchased for one Japanese Yen which
can be calculated by taking the reciprocal of the rate presented in European terms. Therefore,
1
US$ 0.0095 / Yen
Yen 105.00 / US$
American terms of presenting quotes are used for the U.K. pound sterling, the euro, Australian
dollar, New Zealand dollar and Irish punt.
Direct and Indirect Quotas
Foreign exchange rates can be expressed in terms of currencies other than US$. There are two
common methods other than European and American terms: Direct quote and Indirect quote.
A direct quote is a quotation expressing home currency price in terms of a foreign currency
where an indirect quota is a quotations expressing foreign currency price in terms of a home
currency. Consider the following rates:
EURO 1.47 / GBP
or
This rate shows the amount of EURO that can be purchased for one British pound sterling. It
is a direct quote in EURO area showing the internal value of EURO for one unit of pound
sterling and is an indirect quote in U.K. showing the external value of British pound sterling
against EURO.
Taking the reciprocal of this quotation, we get:
GBP 0.68 / EURO
or
This quotation shows the amount of GBP that can be purchased for one EURO. It is this time
a direct quote in U.K. showing the internal value of GBP for one unit of EURO and is an
indirect quote in the EURO area showing the external value of EURO against GBP.
Method 1.
Method 2.
Method 3.
118.27 118.37
118.27 37
27 - 37
Quotes can be given in the first term (bid) as 118.27. In the second term (offer), they may be
given as 118.27 37 on a video screen. Or 27 to 37 assuming that leading digits (118.) are
already known. The last 2 digits are small figure frequently changing, while leading digits are
big figures seldom changing.
When quotations are converted from European terms into American terms, bid and offer
reverse. Reciprocal of bid becomes offer and reciprocal of offer becomes bid. To make a
profit, offer price should be greater than the bid price. Consider the following quotes in Table
XX:
Exhibit 2.2 Bid and Ask Quotations in European and American Terms
European Quote
American Quote
Bid
118.27 / $
$ 0.0084 /
Ask
118.37 / $
$ 0.0085 /
Spread
0.10 / $
$ 0.0001 /
Reciprocal of bid quotes in European terms becomes ask in American terms. Spread (profit) in
European terms is 0.10 / $ in European terms where it is $ 0.0001 / American terms.
Expressing Forward Quotations on a Points Basis
Traders usually quote forward rates in terms of points (swap rates). A point is the last digit of
a quotation. Currency prices for $ are usually expressed to 4 decimal points. A point = 0.0001
of most currencies. Japanese Yen and Italian Lira are quoted to 2 points. A forward quotation
expressed in points is not a foreign exchange rate as such. It is the difference between the
forward rate and the spot rate.
Traders follow an operational rule that indicates whether forward quote is at a premium or a
discount. More specifically, if bid in points is greater than offer in points, forward rate is said
to be at a discount and points should be subtracted from spot rate. On the other hand, if bid in
points is less than offer in points, forward rate is said to be at a premium and points should be
added to spot rate. A forward bid and offer quotation expressed in points is also called a swap
rate (Borrowing a short term loan of one currency at another currency's rate).
Consider Table XX below:
Exhibit 2.3 Spot and Forward Quotations for the EURO and Japanese Yen
Euro: Spot and Forward ($/)
Cash
Rates
Term
Mid-Rate
Bid
Ask
Spot
1 Week
1 month
2 month
3 month
4 month
5 month
6 month
1 year
Mid-Rate
Bid
Ask
1.0899
1.0897
1.0901
118.32
118.27
118.37
1.0903
1.0917
1.0934
1.0953
1.0973
1.0992
1.1012
1.1143
3
17
35
53
72
90
112
242
4
19
36
54
76
95
113
245
118.23
117.82
117.38
116.91
116.40
115.94
115.45
112.50
-10
-51
-95
-143
-195
-240
-288
-584
-9
-50
-93
-140
-190
-237
-287
-581
Source: Bloomberg, March 22, 1999. Mid-Rate is the numerical average of Bid and Ask.
Spot rates for $/ and /$ quotations are given in Table XX. Point quotations of forward rates
are given for 1 week, 1-6 months and 1 year periods. Positive cash rates for the forward
market indicate that ask prices are higher than bid prices therefore they should be added to the
spot rates. Negative cash rates indicate that bid prices are higher than ask prices and they
should be subtracted from the spot rates. For example, 6 month forward rate for $/ quotation
can be calculated as follow:
Spot
Plus 6 month cash rate
6 month forward rate:
Bid
1.0897
+ 112
1.1009
Ask
1.0901
+ 113
1.1014
Here, for example, cash rate for bid price can be assumed as 0.0112 and added to the spot rate
and ask price as 0.0113. The mid rate would be average of 1.1009 and 1.1014 equaling
1.10115 which is rounded to 1.1012 in Table XX.
Forward Quotations in Percentage Terms
Forward quotations can be represented as percentage terms per annum which simply show a
deviation from the spot rates per annum. This method facilitates comparing premiums or
discounts in the forward market. The percent premium or discount depends on which currency
is the home, or base, currency. Consider the following table:
Exhibit 2.4 Spot and Forward Quotations as Percentage Terms
Quotation Given as
Foreign Currency/
Home Currency/
Home Currency
Foreign Currency
Spot Rate
$ 1.0897 /
0.9177 / $
3-month forward rate
$ 1.1009 /
0.9083 / $
Here EURO currency is assumed as home currency where U.S. dollar is assumed as foreign
currency. Then, percentage terms take the following forms:
Indirect Quotations (In terms of Home Currency, $/ )
When indirect quotation is used, percentage change per annum is calculated as following:
The formula for percent premium or discount (f) =
100
forward
n
where n represents the number of days in this case. But when for example numerator is 12, n
might be also the number of months.
The percentage change here will be:
f =
For three months forward, the sign is negative indicating that the forward dollar is selling at a
1.02% per annum at a discount over EURO.
100
For three months forward, the sign is again negative indicating that the forward dollar is
selling at a 2.32% discount per annum over the EURO. The result is the same with the
previous answer.
Percentage Changes Over a Particular Period: Calculation of Devaluation / Revaluation
If the number of periods and n is eliminated from the formulas in the previous section, then
percentage terms regarding the particular period but not per annum.
Assuming the following exchange rate for TL / $:
January 2004
January - 2005
1 $ : 1,400,000 TL
1 $ : 2,950,000 TL
In this period, TL has depreciated against US $. And US $ has appreciated against TL.
Degree of percentage change is then =
x1 x 0
2,950,000 1,400,000
100
100 110 .7%
x0
1,400,000
Here we see that during two months period, US $ has appreciated against TL by 110.7 %. At
a first look, we can also say that TL has also depreciated against US $ by 110.7 % in our
everyday life. But in reality, in terms of purchasing power parity, this is not true.
Because, in terms of PPP, no currency unit can loose its value 100% or higher. Otherwise, TL
should be withdrawn from the market, meaning zero PP.
So;
Degree of devaluation/depreciation =
1
1
x1 x 0
x x1
1,400,000 2,950,000
100 0
100
100 52.5%
1
x1
2,950,000
x0
So, we can now say that TL has depreciated by 52.5% against US $. May be well buy only a
bread by 1 billion TL in USA but it never reaches 99% depreciation.
Another explanation to this theory is that according to $ terms, TL depreciated by 52.5%
while $ appreciated by 110.7% according to TL terms.
1. Balance Of Payments and Exchange Rates
A nations economic performance is best viewed in BOP data. It is a statistical statement that
systematically summarizes, for a specified time period, the economic transactions of an
economy with the rest of the world. Economic transactions include exports, imports, income
flows, capital flows, gifts and similar one-sided transfer payments. The net of all of these
transactions is matched by a change in the countrys international monetary reserves. BOP are
important to business managers, investors, consumers, and government officials because the
data influence and are influenced by other key macroeconomic variables such as GDP,
employment, price levels, etc.. Monetary and fiscal policy must take BOP into account at the
national level. BOP helps to forecast a countrys market potential, especially in the short run.
A country experiencing a serious BOP deficit is not likely to expand imports. BOP is an
indicator of pressure for a countrys foreign exchange and for a firm for foreign exchange
gains or losses.
1.1 Measuring a Nations Performance: Deficits and Surpluses in BOP
BOP measures, summarizes and states all the financial and economic transactions between
residents of one country and residents of the rest of the world. If a nation receives less than
what it spends, then it incurs a deficit. If a nation receives from abroad more than it spends,
then it incurs a surplus.
Credits: Foreign Exchange Earned
Transactions that earn foreign exchange are recorded in BOP as a credit with a (+) sign.
Credits are obtained by selling to non-residents either real or financial assets or services. Ex.
Borrowing, Exports and foreign students university fees, etc..
Debits: Foreign Exchange Expended
Transactions that expend foreign exchange are recorded as debits and are marked as (-)
sign. Ex. Imports, purchasing foreign services (insurance), lending, host country student fees
for foreign schools, etc
The basic aim of countries is to arrive at a zero balance in their BOP. But having a zero
balance in BOP is almost impossible for countries. It is not so easy to balance foreign-based
expenditures with foreign-based receipts. Imbalances in BOP will affect the whole economy
of countries and their relationships with the world.
There are various policies that countries may follow in case of imbalances (surpluses or
deficits) in BOP. If there are temporary deficits in BOP, these deficits could be financed by
reserves or to apply a repairing policy. But if deficits are chronic or continuous, then financing
through reserves might not be possible; because the international reserves of countries are not
unlimited. One of the ways to put a pressure on BOP deficits is to limit foreign trade and
exchange rate transactions through custom tariffs, quotas, and limiting foreign exchange
transactions. The aim in this case is to narrow import volume and to prevent capital outflows.
However, this strategy even does not stop deficits but put a pressure on these deficits. And this
type of strategies is against liberalization trends and policies in a globalized world. And it is
against the policies of World Trade Organization (WTO) and IMF.
So there are some other alternatives repairing policies to be applied during BOP Imbalances:
1.2.1 Exchange Rate Adjustments and Elasticity Approach
Exchange rate determination takes place through supply and demand forces of free markets in
floating exchange rate systems. There is little or no government intervention in markets to
rule the rates. When there is a deficit in BOP, then excess supply of domestic currency will
appear in the markets and exchange rates will tend to increase (domestic currencies
depreciate). Then foreign goods and services will be more expensive and import volume will
tend to decrease. And exports will tend to increase since domestic production will be cheaper
in foreign markets. And foreign exchange receipts will increase. This mechanism will work
until there is equilibrium in the market. In case of a surplus in BOP, then the mechanism will
work in reverse direction. This mechanism is most commonly related with current account
balance of BOP.
There is no application with pure floating system in real life in which there is no government
intervention. So some countries have adopted fixed exchange rate system and/or fixed and
free floating system combinely in which they peg their currencies to a single foreign currency
or a basket of foreign currencies (SDR or others). Since the governments of these countries
allow a limited floating around other currencies, this system is commonly known as
managed float system (like in Turkey). Again exchange rate adjustment is one of the
important tools to be applied by those countries. When there is a deficit in BOP, the monetary
authorities will tend to devalue their currency against foreign currencies. Consequently,
exports will tend to increase and imports will tend to decrease in those countries.
Elasticity Approach
BOP effects of exchange rate fluctuations are generally explained by Elasticity Approach.
When there is a devaluation (in fixed rate systems) or depreciation (in floating rate systems)
in domestic currency, then exports are likely to increase and imports are likely to decrease.
The positive effects of devaluation depends on price elasticity of export demand. The higher
the price elasticity of foreign demand for exports and domestic demand for imports, the more
the effects of devaluation will be. This theoretical relationship was previously explained by
Marshall-Lerner by the following formula:
Ex + Em 1
Where Ex represents the foreign demand elasticity for exported goods/services and E m
represents domestic demand elasticity for imported goods/services. According to this
approach, in the case of lower elasticities for exported and imported goods/services
devaluation will not be effective. It may even affect BOP negatively. However, the new
studies have shown that these elasticity coefficients are enough high to have the positive
effects of devaluation.
3.2 National Income Approach
National income balance can be represented by the following Keynesian equation:
Y = C + I + G + (X M)
So when there is an increase in consumption (C), investment (I), government expenditures (G)
and net exports (exports imports), national income will increase. Governments usually
consider I and G at national level and as a national policy to affect national income. Another
important assumption of the Keynesian theory is that M depends on Y. When Y increases, M
will also increase. This positive relationship between Y and M is named as import function: M
= m (Y) where m is marginal propensity to import.
The first policy to be adopted is related with fiscal policy. For example, when there is a deficit
in BOP, by fiscal policy, government will tend to reduce the expenditure side of the equation,
taxes will tend to increase, and Y will decrease so that M will also decrease. Consequently, net
exports will also be decreasing.
The second type of policy to be adopted is related with monetary policy. In case of a deficit in
BOP, government will apply a restrictive monetary policy to reduce money supply and
increase interest rates so to reduce I, Y and M. However, monetary policy is commonly
related with not trade balance of BOP but with capital account balance of BOP. An important
disadvantage of restrictive fiscal and monetary policies is unemployment problem. When Y
decreases, this will speed up unemployment.
3.3 Foreign Trade Balance and Total Consumption (Absorption) Approach
Absorption approach is adopted version of national income model into foreign economic
relationships. The most important contribution of this approach is that of explaining foreign
trade according to the general working of the economy. When there is a deficit in BOP, then
total expenditures of the country exceeds its production capacity according to this approach,
meaning it produces less than it consumes.
Y = C + I + G + (X-M)
We can re-write the above equation as below:
Y = A + (X-M)
Y A= X M
So, if Y > A, then total domestic production will be greater than total domestic expenditures
and this excess production will be exported to outside and will be a surplus in foreign trade
balance. If Y < A, then there will be a deficit in foreign trade balance. As a result, if Y
increases, the difference between Y and A will be decreased and foreign trade balance will be
obtained.
On the other hand, when economy is underemployed and Y rises, A will also be rising but if
Y > A (and MPS is positive), then devaluation will be beneficial. When economy is fully
employed, then devaluation will not be beneficial, there is no idle capacity in the economy
and excess demand will be partially met by import and prices will tend to increase. If
devaluation is applied in a full employed economy, inflation will further rise.
3.4 Monetary Approach For Foreign Balance
Elasticity and absorption approaches consider only foreign trade in foreign balancing
disregarding capital movements. There have been important developments in financial
markets and international capital movements in our new world. In order to consider the effects
of capital movements on foreign balancing, monetary approach has been developed in 1970s.
Monetary approach relates deficits/surpluses in BOP into monetary imbalances. Monetary
imbalances occur because of the differences in the money to be kept by public and money
supplied by central bank. If money supply is greater than demand for money, public will use
this excess in domestic and foreign expenditures. But if money supply is less than the demand
for money, then this deficit will be compensated by foreign monetary flows.
Among the critical assumptions of the theory is that demand for money in every economy is
the real demand derived by some factors. One of these factors is the income level of people.
There is a direct relationship between real income and real demand for money. The second
type of factor is that demand for money depends on interest rates among which there is an
indirect relationship. Because when interest rates increase, savings will increase and this will
reduce the demand for money.
Real Demand for money: Md / P
So the relationship between the demand for money and income and interest rates is:
Md / P = f (y, i)
Although demand for money is due to the public, money supply is determined by the central
bank.
Money supply is: MS = A ( D + R)
Where A is the money multiplier, D is the emission made by the central bank for internal
economic and financial purposes, and R is the domestic currency driven to the market by the
use of foreign reserves. (D+R) is the monetary base of the country.
When international reserves increase, then (to prevent appreciation of domestic currency) the
more domestic currency will be driven to the market. If international reserves decrease, then
(to prevent depreciation), the domestic currency will be drawn from the market. In fixed
exchange rate systems, this mechanism gains more importance since the central bank
intervenes into the market to stabilize the economy. However, in floating rate systems, there is
no need for intervention and R loses its importance.
Lets assume that D is driven to the market by the central bank at the beginning so that
demand for money is still constant. What will happen?
1.
2.
3.
4.
5.
6.
In fixed rate systems, the domestic currency tends to depreciate. To prevent this, the central
bank will buy domestic currency by selling foreign currency into the market, so R and by
multiplier effect MS will decrease. When money supply decreases, it will not be enough to
meet the demand for money. The difference, this time, will be tried to be compensated by
export revenues. So foreign exchange inflows will be fasten and deficit will be compensated.
4. MANAGERIAL SIGNIFICANCE OF BOP IMBALANCES
4.1 Exchange Rate Impacts
Current Account Balance + Capital Account Balance + Financial Account Balance + Reserves
Balance = BOP
The effect of an imbalance in BOP works differently whether the country has fixed, floating
or managed exchange rates.
4.1.1 Fixed Exchange Rate Countries
The government bears to assure a BOP (the sum of current, capital and financial accounts)
near zero. Otherwise it will intervene in the foreign exchange market by buying or selling
official foreign exchange reserves.
P
If BOP > 0, then TL
a surplus demand for domestic currency will occur, and exchange rate
TL system government will intervene
(domestic currency depreciates) and to preserve fixed Srate
and sell domestic currency (so that domestic currency will appreciate, and exports , and
imports ) to bring BOP back to zero.
E
PE
Excess
Demand
P1
DTL
QS1
QE
QD1
QTL
IF BOP < 0, excess supply of the currency will occur, the government will intervene and buy
domestic currency with its reserves of foreign currencies or gold.
If foreign exchange reserves , then government cannot intervene and will have to make
devaluation.
PTL
STL
P1
Excess
Supply
E
PE
DTL
QD1
QE
QS1
QTL
Parity conditions are very important out of the consideration of the reasons behind
exchange rate movements.
Parity conditions well explain the relations among exchange rate movements, inflation,
and interest rates.
So in order to make a forecast about future rates, we have to understand parity conditions
better.
If the identical product or service can be sold in two different markets, and no restrictions
(tariffs) exist on the sale or transportation costs, the product's price should be the same in
both markets. This concept is called the law of one price.
A primary principle of competitive markets ==> to equalize prices across markets if no
restrictions on the sales and costs
If two markets are two different countries, the product's price may be stated in different
currency terms, but the price of the product should remain the same.
Ex.
P = P$ S
Where;
P = price of the product in Japan (Japanese Yen)
P$ = price of the product in USA (US $)
S = spot exchange rate
And;
PY
P$
PPP is an applied version of the law of one price theory, saying that any good would
be priced the same in different markets or in different countries in all over the world, if
there were no tariffs, restrictions on sales and costs.
This theory was firstly stated by a Swedish, Gustav Cassel in 1918.
He explained this theory after World War I to create the framework of new official
exchange rates while returning back to Gold Standard again.
When rates were imbalanced in later periods in the fixed rate system, it was used also
by the central banks to create the balanced rates.
We can use the same formulation of P = P$ S to find PPP between two currency.
The PPP exchange rate between two currencies could be stated by:
PI Y
PI $
where PIY is the price index in Japan
PI$ is the price index in USA in their local currencies
S
In Japan = Y1000
In USA = $10
This is the absolute version of the theory of PPP, stating that the spot exchange rate is
determined by the relative prices of similar basket of goods.
where;
E0 = exchange rate in the base year
E1 = exchange rate after the base year
Pd = inflation rate in domestic country
Pf = inflation rate in foreign country
For example, if inflation in Turkey is 50%, and in USA 10%, then we expect TL to depreciate
against $ by 40% to equlalize the price of any good in both countries.
Relating exchange rate movements to rates of inflation, we do not deal with the real values of
E, Pd, and Pf, but deals with their percentage change.
Exhibit 5.2 r in Japan is 4% lower than USA, then Yen must appreciate by 4%. US $ will
be depreciated or devalued.
See Halil Seyidoglus example ..
If r in Turkey is 30% higher than USA, $ will appreciate by 30% against TL.
Point A is equilibrium point, in Point B; r in Turkey is 30% higher than r in USA, but $
appreciated only 20%. This is disequilibrium point.
Empirical Tests of PPP
Extensive tests have been done for the validity of PPP. Most of them did not prove PPP.
Real exchange rates are rates calculated according to a base period, which are
excluded from inflationary effects.
On the other hands, nominal effective exchange rate index calculates, on a weighted
average basis, the value of the subject currency at different points in time, according to
trade with the countrys major trading partners. It does not indicate true value of the
currency.
Real effective exchange rate index indicates how the weighted average PP of the
currency has change relative to selected base period.
Exhibit 5.3: IMF index published frequently.
A countrys real effective exchange rate index is an important tool for predicting upward or
downward pressure on its BOP and exchange rate.
Exchange Rate Pass Through
Incomplete exchange rate pass-through is one reason that a countrys real effective exchange
rate index can deviate for lengthy periods from its PPP equilibrium level of 100.
The degree to which the prices of imported and exported goods change as a result of exchange
rate changes is termed Pass Through, which is the measure of response of imported and
exported product prices to exchange rate changes.
Example:
Assume that BMW produces automobile in Germany; when exporting the auto to USA, the
price of BMW in USA should be;
$
DM
PBMW
PBMW
1
S
Assume:
PDMBMW = DM59,500
S1 = DM1.70/$
P$BMW = $35,000
The concept of price elasticity of demand is useful when determining the desired level of Pass
Through.
EP
% inQD
% in P
When BMW is Price Inelastic, meaning that QdBMW is relatively unresponsive to Price
Changes, may often demonstrate a high degree of pass-thorugh. When P , then little effect on
Q, so TR will .
When BMW is Price Elastic, then effects will be on opposite direction. If S DM/$ and P$DM
increase by 10%, then US consumers would reduce the number of BMWs purchased so TR
will .
Interest Rates And Exchange Rates
S1 S 2
100 i$ i
S2
Fisher open states that % in spot rates should be equal to interest rate
differentials.
Example:
$ based investor buys a 10-year Yen bond earning 4%, compared with 6% interest
available on $.
Investor expects Yen to appreciate against $ by at least 2% per year during 10 years.
If not, $ based investor will be better off.
If Yen appreciates by 3% during 10 years, $ based investor would earn 1% higher return
of bonus.
1 i$ S SF / $ 1 i SF
1
F
SF / $
1
1.4655
Ignoring transaction costs, if both sides are equal to each other, S and F rates are
considered to be at IRP.
Any difference in interest rates must be offset by the difference between S and F.
F 1 iSF
SF1.4655 / $ 1.01
0.99 1.00
1 i$ SF1.4800 / $ 1.02
S
FS
S
When i$ iSF
FS
, then funds will move from USA to Switzerland, otherwise to USA.
S
Example:
i$ = 10%
iTL = 70%
0.70 0.10
F 430,000
430,000
S = 1$: 430,000 TL
F = 1$: 688,000 TL
550,000 430,000
430,000
0.60 0.28
This time, funds will move from USA to Turkey. There will be arbitraging profit called
Covered Interest Arbitrage (CIA).
For example,
1. Purchase of Yen in the spot market and sale of Yen in the forward market narrows the
premium on the forward Yen. The spot yen strengthens from the extra demand and the
forward Yen weakens because of extra sales. A narrower premium on the forward Yen
reduces the foreign exchange gains previously captured by investing in Yen.
2. The demand for Yen denominated securities causes Yen interest rates to fall, while the
higher level of borrowing in the US causes $ interest rates to rise. The net result is a
wider interest differential in favor of investing in the $.
CIA continues until IRP is established again.
Example:
Profit on $: $1,040,000
i$ i
F S
F
8% - 4%
Funds will flow from USA ($) toward Japan (Yen) until IRP is established.
The net result of the disequilibrium is that fund flows will narrow the gap in interest rates
and/or decrease the premium on the forward Yen.
The interest rate parity line (p.126) shows the equilibrium state, but transaction costs cause
the line to be a band rather than a thin line.
Transaction costs arise from foreign exchange and investment brokerage costs on buying and
selling securities. Typical transaction costs in recent years have been in the range of 0.18% to
0.25% on an annual basis.
Point X shows one possible equilibrium position where a 4% interest differential on Yen
securities would be offset by a 4% premium on the forward Yen. Point U is the disequilibrium
position where Yen premium is 4.83%.
Y 106.00 / $ Y 103.50 / $ 360 days
100 4.83%
Y 103.50 / $
180 days
1 iY 360
Fn Y / $
n
1 i$ 360