Welcome to Scribd, the world's digital library. Read, publish, and share books and documents. See more
Download
Standard view
Full view
of .
Save to My Library
Look up keyword
Like this
1Activity
0 of .
Results for:
No results containing your search query
P. 1
FE Mechanism

FE Mechanism

Ratings: (0)|Views: 4 |Likes:

More info:

Published by: ✬ SHANZA MALIK ✬ on Oct 14, 2011
Copyright:Attribution Non-commercial

Availability:

Read on Scribd mobile: iPhone, iPad and Android.
download as DOC, PDF, TXT or read online from Scribd
See more
See less

08/04/2014

pdf

text

original

 
FOREIGN EXCHANGE MARKET MECHANISM
Objective1.Definition2.Quotation Systemsa)Direct vs. Indirect b)Spot Rate vs. Forward Ratec)Bid vs. Ask d)Outright vs. Pointe)Premium vs. Discountf)Cross Ratesg)Appreciation vs. Depreciation3.Potential Activitiesa)Arbitrage b)Hedgingc)Speculation4.Spot Arbitrage: Location vs. TriangleThe Foreign Exchange Market1.1Participants:a)Large Commercial Banks b)Foreign Exchange Brokersc)Commercial Customersd)Central Banks1.2Size1.3Exchange rate is defined as price or value of a currency expressed interms of units of another currency. e.g. FF 2.00/$2. Quotation Systems2a. Spot Quotation: Whole sale price of one currency in terms of another currency for immediate delivery.(Two working days).Forward Quotation: Whole sale price of one currency in terms of another currency for future delivery, normally after 1,3 or 6 months.
 
2b. Direct Quotation: What is the unit of account?Home Currency quoted for one unit of foreign currency. e.g. $7/DMIndirect---1/DirectIndirect Quotation: Foreign Currency quoted for one unit of homecurrency.2c. Bid: The Commercial Bank’s buying rate of a foreign currency.Ask: The Commercial Bank’s selling rate of a foreign currency.Always Ask rate > Bid rate2d. Point Quotation: Quoted on point basis.$0.3968/78 15/17 33/38 93/103 per SFOutright Quotation: Bid Ask Spot 0.3068 0.39780.0015 0.001730 Days 0.3983 0.399590 Days 0.4001 0.4016180 Days 0.4061 0.4081Swap Points: Difference between Spot and Forward rate.1)Ascending order: Forward Premium2)Descending order: Forward Discount2e. Convert above quotation into Indirect quotation $/SF in USUse reciprocal i.e. 1/bid=ask and 1/ask=bidBid Ask Spot 2.5138 2.520230 Days 2.5031 2.510760 Days 2.4900 2.4994180 Days 2.4504 2.46242f. Forward Premium vs. Forward Discount
It must be annual basis
If Forward rate > Spot rate => Forward Premium
If Forward rate < Spot rate => Forward Discount
 
Exchange Rate QuotationsDirect vs. IndirectDirect Quote: Units of local currency per foreign currency.Indirect Quote: Units of foreign currency per local currency.From a US perspective, a direct quote is expressed as dollars/unit of foreigncurrency.Examples:1.746 $/£ $1.746 = £ 10.6154 $/DM $0.6154= DM 1When expressed in this fashion, the exchange rate is the dollar price of aforeign currency, and is conceptually equivalent to a commodity price.To do virtually any exchange rate calculation (for exampleappreciation/depreciation) you must first express the exchange rate as adirect quote.Most currencies on the interbank market are quoted as units of foreigncurrency/dollar.For example:1.6250 DM/$ DM 1.6250 = $1133.25 ¥/$ ¥ 133.25 = $1From a US perspective, these quotes are indirect. To convert from indirectto direct use the formula:Direct = 1/Indirect

You're Reading a Free Preview

Download
/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->