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TE R M I N O LO G Y
A foreign exchange rate is the price of one currency expressed in terms of
another currency currency can be viewed as an asset and exchange
rate as asset price
A Quotation ( or quote) is a statement of willingness to transact at an
announced rate
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TE R M I N O LO G Y
A pair of currencies in a quotation:
Commodity/Quote currency: the currency whose price is being quoted
Base/Term currency: the currency used to quote the commodity
currency
USD/EUR =1.2170
Or $1.2170/
Meaning: 1 EUR =1.2170 USD
No. of unit of commodity currency is always 1 and that of term currency
is changing

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B I D AN D AS K R ATE S
Bid rate: is the price at which a dealer will buy the foreign currency
(or the commodity currency)
Ask rate: is the price at which a dealer will sell the foreign currency
(or the commodity currency)
Note: 1. bid for one currency is ask for the opposite currency
USD/EUR =1.2170/1.2178
Meaning: buying EUR at $1.2170 and selling EUR for $1.2178
Buying EUR with USD is equivalent to selling USD for EUR
2. Ask price is always higher than bid, the dealers buy at bid and then sell
for a higher price and earn the difference.
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B I D -AS K S P R E AD
Bid-ask spread: the difference between bid and ask prices
Measures
Bid - Ask Spread =Ask Bid
Midpoint price =(Ask +Bid)/2
Percent spread (%)
(Ask Bid)/Bid
(Ask Bid)/Ask
(Ask Bid)/Midpoint price
Understanding: This is before-tax profit for dealer



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B I D -AS K S P R E AD
Dependent on
Order cost (+)
Inventory cost (+)
Competition (-)
Volume (-)
Frequency of trading (-)
Volatility (+)

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D I R E C T AN D I N D I R E C T Q U O TATI O N S
A direct quote is when the commodity currency is foreign currency
and base currency is domestic currency tell us the price of a
foreign currency in terms of domestic currency
Ex: In Hanoi, VND/USD =20825/20865
An indirect quote is reverse tell us the price of domestic
currency in terms of foreign currency to know price of a foreign
currency, we have to take reciprocal of the quote ( i.e. take 1
divided by the quote)
Ex: In London, CAD/GBP =2.2398/2.2392
Equivalent to GBP/CAD =0.4465/0.4466 in direct quotation


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D I R E C T AN D I N D I R E C T Q U O TATI O N S
Whether it is direct or indirect quotations must be seen from the
perspective of the home country
VD: From the perspective of the US




Note: In either ways, the bids are always for buying foreign currency (ie.
EUR) and the asks are for selling EUR.
Agreed that: using direct quotation throughout this course.
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Direct quotation Indirect quotation
1.3023 1.3024 $/ 0.7879 0.7878 /$
AM E R I C AN E U R O P E AN TE R M S
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European terms American terms
Foreign currency price of one dollar Dollar price of one foreign currency
SF1,6000/$ $0,6250/SF
90,5000/$ $0,01105/
0,7717/$ $1,2950/
Note:
1. Foreign vs Domestic currency is not concerned no home country
2. For practical reasons, EUR, GBP, Australian dollars (AUD), New Zealand dollars
(NZD), Special Drawing Rights (SDR) has always been quoted in American terms.
C R O S S R ATE S
Many currency pairs are inactively traded their exchange rate is determined through
their relationship to a widely traded third currency.
Ex1 : Cross rate without bid-ask spread
USD/JPY =82.04
USD/MXN =12.2324

Ex2: Cross rate with bid-ask spread
USD/VND =16350/16450.
USD/JPY =109.55/111.05
At which rate will you sell JPY for VND?


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Trader
Dealer
Quotes
JPY
(sell)
USD
(sell)
1 USD=111.05JPY
USD
(sell)
USD
(buy)
1 USD=16350VND
111.05 JPY = 16350 VND
JPY/VND =16350/111.05
1 JPY = 147.23 VND

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C R O S S R ATE S
Case 1: Cross rate of 2 currencies at the base positions
VND/USD =16350/16450.

JPY/USD =109,55/111,05

VND/JPY =

Case 2: Cross rate of 2 currencies at the commodity positions
VND/USD =16350/16450

VND/EUR =24250/24830

USD/EUR =

147,23/ 150,16
1,4742/ 1,5187
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C R O S S R ATE S
Case 3: Cross rate of 2 currencies at the opposite positions
In Singapore : VND/USD =16350/16450

USD/GBP =1,8932/1,9337

VND/GBP =

30954/
31809
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C R O S S R ATE
1. Your company borrowed 500.000HKD from the bank. After paying for a
1.000.000 JPY contract, your company decided to invest the remaining into a
French mutual fund at 2000EUR per a certificate. How many certificates can your
company buy? Given the following quotations:
JPY/USD =105.40/108.40
HKD/USD =7.7860/90
USD/EUR =1.6120/40

2. You observed the following quotes:
Vietinbank JPY/USD =80.600 80.660
Vietcombank: VND/USD =20,570 20,750
Eximbank: VND/JPY = 251 259
What would you do to make a profit?

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LC H S H TH N G TI N T
Q U C T
1. T gi c nh:
1.1. Ch t gi khng dng ng bn a (no separate legal tender)

1.2. Ch t gi Neo cng theo mt ng tin mnh (currency board)
1.3. Ch Neo c nh (Conventional fixed peg arangements)

N V VNG
Gold standard
BRETTON WOODS
Bretton woods
Gii thiu
BRETTON WOODS
BRETTON WOODS
The establishment of the so-called 3 financial and economic
pillars of the world: IMF, World Bank and WTO
BRETTON WOODS
On 15/8/1971, President Nixon abandoned the gold-dollar
linkage. The US no longer sells gold for dollars








http://www.youtube.com/watch?v=iRzr1QU6K1o
H I N N AY
Today exchange rate
system under IMF
classficiations
S I M P LE C LAS S I FI C ATI O N S
Fixed: the value of currency is fixed to a reference foreign currency or a
basket of currency with or without margin of fluctuations and central rate
adjustment.
Managed floating: the monetary authorities influences the movements of
exchange rate through active intervention in the forex market without
specifying or committing to a preannounced path.
Freely Floating: the exchange rate is market-determined with any
intervention aimed at moderating the rate of change or preventing undue
fluctuation rather than establishing a level for it.

Where is Vietnam standing?
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AP P R E C I ATI O N VS . D E P R E C I ATI O N
Depreciation of a currency refers to a fall in the value of a floating
currency which requires more units of that currency to buy 1 unit of
foreign currency
Increased exchange rate under direct quotation and decreased
exchange rate under indirect quotation
Appreciation of a currency refers to a rise in the value of a floating
currency which requires less units of that currency to buy 1 unit of foreign
currency
Decreased exchange rate under direct quotation and increased
exchange rate under indirect quotation

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AP P R E C I ATI O N VS . D E P R E C I ATI O N







USD appreciate relative to VND American products become more expensive in Vietnam
VND depreciate relative to USD Vietnamese products become cheaper in US


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Price in US Rate Price in Vietnam
$499/ Iphone 5 16GB
$499/ Iphone 5 16GB
(home country)
21000VND/$
21500VND/$
10.479.000 VND
10.728.500 VND
$714.3
$697.7
21000VND/$
21500VND/$

15.000.000 VND/MT of rice
15.000.000 VND/MT of rice
(home country)
When a country currency depreciates, goods and services from that
country become cheaper in foreign markets and foreign goods and
services become more expensive in that country
D E VALU ATI O N VS . R E VALU ATI O N
Under a fixed exchange rate system, devaluation and revaluation
are official downward and upward changes in the value of a
country's currency relative to other currencies. This is done by
monetary authorities formally setting a new fixed rate with respect
to foreign reference currency.
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M E AS U R I N G A C H AN G E I N TH E S P O T R ATE
Measuring a change in the foreign currency for quotations expressed in home
currency terms (direct):



Quotations expressed in foreign currency terms (indirect):

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M E AS U R I N G A C H AN G E I N TH E S P O T R ATE
The Australian dollar was quoted at A$1.8445/US$ on Aug 19, 2002,
while on March 2, 2004 it was quoted at A$1.335/US$.

What is the appreciation/depreciation of the US$ ?

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