1.1. Convention 1.

• ‘home’ country is the UK:

 domestic currency = pound sterling

• ‘foreign’ country is the USA

 foreign currency = US dollar
 Spot versus forward rates

• ER studied: ‘on the spot’ :

• delivery of currency: immediately
• when deal is done.

• Spot rates

• Future date: forward / futures ER

Convention 1.3.

All exchange rates are spot rates, unless otherwise specified.

 Buying versus selling rates

• Intermediaries

• Fee or commission

• Profit: gap between:

• the price at which they buy a currency and
• the price at which they are able to sell it.

• Definition

The bid rate for currency A in terms of currency B = rate at which dealers buy currency A (sell currency B).

The offer (or ask) rate = rate at which dealers sell currency A (buy currency B).

The (bid/ask) spread = gap between the offer and bid rates
 Financial Times
quotations:
Rate for the pound

1)‘Closing mid-point’

2) 𝐶ℎ𝑎𝑛𝑔𝑒 𝑜𝑛 𝑑𝑎𝑦 =
=today’s closing rate – yesterday’s closing rate
𝐼𝑓 𝑐ℎ𝑎𝑛𝑔𝑒 𝑜𝑛 𝑑𝑎𝑦 < 0
⟹today’s closing rate< yesterday’s closing rate
£1 = 𝑀𝑋𝑁22.3449
Fall: -0.1076
⟹yesterday’s closing rate
=22.3449+0.1076=22.4525
•

•
•
•

•
 Financial Times
quotations:
Rate for the pound

‘Bid-offer’ column
£1=MXN 22.3449
‘bid-offer’=‘391-507’
Bid : £1=MXN 22.3391
Offer (ask) : £1=MXN 22.3507

Convention 1.4.
Unless specified otherwise, all ER
= mid-market rates (averages of bid and
offered rates).
 Financial Times
quotations:
Rate for the pound

2 columns labelled ‘Day’s mid’

RUB 51.3062
RUB 50.8866
Volatile is the ER over a day
 Financial Times
quotations:
Forward ER

%PA’ column, computed as:

−1 × 12

𝑠𝑝𝑜𝑡 − 𝑓𝑜𝑟𝑤𝑎𝑟𝑑
× 12
𝑓𝑜𝑟𝑤𝑎𝑟𝑑

One month:
50.9867
− 1 × 12 = −0.0032
51.0006
= −0.32% for the monthly rate
 Financial Times
quotations:
Forward ER

Three months:
.
.
− 1 × 4 = −0.0022 =
− 0.22% for the three-month rate

.
Annual: − 1 = −0.0029 =
.
− 0.3% for the annual rate.
 1.2 The market for foreign currency (market for USD)

Figure 1.1. Supply and demand in the market for foreign currency (£ 𝑝𝑒𝑟 $ ⟷ $1 = £𝑥) = price of the USD
 1.2 The market for foreign currency
Figure 1.1. Supply and demand in the
market for foreign currency
What is the motivation behind the demand and supply
curves in Figure 1.1.(b)?
What kind of agent supply & demand foreign currency?
3 categories
1) Exporters/importers
Exporters supply goods to foreign buyers (foreign currency
/sterling) ⟹ supply of foreign exchange = dollars (if exports
sold in USA)
Importers buy goods from foreign suppliers ⟹ demand of
foreign exchange = dollars