Exchange Rates
The price of one countrys currency
expressed in terms of another countrys
currency.
Most currency is quoted in terms of dollars.
Consider the following quote:
Euro
$1.3170/
0.7593/$
The first number (1.3170) is how many U.S.
dollars it takes to buy 1 Euro
The second number (0.7593) is how many
Euros it takes to buy $1
The two numbers are reciprocals of each
other (1/1.3170 = 0.7593)
Exchange Rates
Example
Example
Example
ANSWER
Cross Rates
Cross Rates
Suppose we observe the following for
the euro () and the Swiss franc (SF):
$1 /
$0.5 / SF
(assume $ is home currency)
Then the value of 1 SF in euro is:
value of SF in $ / value of in $
= 0.5 / 1 = 0.5/SF1
Cross Rates
Exercise 1
Answer
Triangular Arbitrage
Suppose we observe the following for
the euro () and the Swiss franc (SF):
$1 /
$0.50 / SF
Suppose you have $100 and the cross
rate is quoted as per SF = 0.40.
What would you do?
Triangular Arbitrage
Triangular Arbitrage
Triangular Arbitrage
Assume you have $100
Buy 100 euros for $100
Use the 100 euros to buy Swiss francs:
The exchange rate is 0.40 / SF
100 / 0.40 = SF250
3. Use the SF250 to buy dollars:
The exchange rate is $0.50 / SF
SF250 x 0.50 = $125
2.
3.
Exercise 2
Suppose:
$1.67 /
$0.50 / SF
and the cross rate is quoted as SF3 / .
Explain how to go about making some
money.
Assume you have $100.
Answer
Exercise 3
Answer
$100 or 100?
Answer
SF100 or 100?
Exercise 4
Suppose the Japanese yen exchange
rate is 1 = $0.009, and the British
pound exchange rate is 1 = $1.65.
What is the cross-rate in terms of yen
per pound?
2. Suppose the cross-rate is 185 = 1.
Is there an arbitrage opportunity here?
If there is, explain how to take
advantage of
the mispricing.
Answer 1
1.
Cross rate ( / ) :
Answer 2
Exercise 5
Value of Canadian dollar in U.S. dollar is
$0.90
Value of New Zealand dollar in U.S. dollar
is $0.30.
Value of Canadian dollar in New Zealand
dollar is NZ$3.02
Question:
Is triangle arbitrage possible? Assume you
have $1 million, explain your strategy.
Answer
Exercise 6
Today you notice the following exchange
rate quotations:
$1 is equal to 3.00 Argentine pesos
1 Argentine peso = 0.50 Canadian
dollars
You need to purchase 100,000 Canadian
dollars with U.S. dollars.
How many U.S. dollars will you need for
your purchase?
Answer
Exercise 7
ANSWER