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Using commodity currency to count cross

Type 1: CROSS EXCHANGE RATE exchange rate

1.1 Using commodity currency to count cross exchange In the market: - X/Y = a/b Count: - Y/Z
- X/Z = c/d - Z/Y
rate
1 c
1.2 Using term currency to count cross exchange rate Sbid Y /Z = SbidY /X * Sbid X/Z = *Sbid X/Z =
Sask X/Y b
1.3 Using a currency working as both a commodity 1 d
Sask Y /Z = SaskY
/ /X* Sask X/Z= *SaskX/Z =
currency and a term currency to count cross Sbid X/Y a
exchange rate c a
Y/Z = b => Z / Y = d
d b
a c

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1.1 Using commodity currency to count cross 1.1Using commodity currency to count cross
exchange rate exchange rate
Inverse exchange rate
■ Example 1:
X/Y = a-b => Y/X = ?
- SbidX/Y=a means that a bank wants to buy 1 unit X so they need to sell 1 unit Y. In the market
Therefore, the bank sells 1 unit Y so they can buy 1/a unit X => SaskY/X = 1/a
USD/CHF = 1,1807/74
- SaskX/Y=b means that when a bank sells 1 unit X, they can buy b unit Y. Therefore,
the bank wants to buy 1 unit Y so they have to sell 1/b unit X => SbidY/X = 1/b USD/HKD = 7,7515/85
So if X/Y = a-b, the inverse exchange rate will be Y/X which is equal to 1/b-1/a Count CHF/HKD; HKD/CHF

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1.1 Using commodity currency to count cross 1.1 Using commodity currency to count cross
exchange rate exchange rate

In the market: Sbid CHF/HKD = Sbid CHF/USD* Sbid USD/HKD

= Sbid CHF/USD*Sbid USD/HKD

X/Y = a/b
= (1/1,1874)*7,7515=6,5281
X/Z = c/d Sask CHF/HKD = Sask CHF/USD*Sask USD/HKD

Count the cross exchange rate: Y/Z và Z/Y = (1/1,1807)*7,7585= 6,5711

CHF/HKD = 6,5281-6,5711

HKD/CHF = 1/6,5711-1/6,5281 = 0,1521-0,1531

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Practice Practice

In the market: CHF/USD = 1,1807/74 ; HKD/USD = 7,7515/85 In the market GBP/USD = 2,0345/15; EUR/USD= 1,4052/40

Sbid CHF / HKD = Sbid CHF / USD * Sbid USD / HKD Sbid GBP / EUR = Sbid GBP / USD * Sbid USD / EUR
1 7 , 7515 = Sbid GBP / USD * 1 = 2 , 0345 = 1 , 4388
= * Sbid USD / HKD = = 6 , 5281 Sask EUR/ USD 1 , 4140
Sask USD / CHF 1 ,1874

Sask CHF/ HKD = Sask CHF/ USD * Sask USD/ HKD Sask GBP / EUR = Sask GBP/ USD * Sask USD / EUR
1 7 , 7585 1 2 , 0415
= * Sask USD/ HKD = = 6 , 571 = Sask GBP/ USD * = = 1 , 4528
Sbid USD/ CHF 1 ,1807 Sbid EUR / USD 1 , 4052
1
=> CHF / HKD = 6 , 5281 / 6 , 571 => GBP / USD = 1 , 4388 / 1 , 4528
1 1 1
=> HKD / CHF = 6 , 571 = 0 ,1521 / 0 ,1531 => USD / GBP = 1 , 4528 = 0 , 6883 / 0 , 6950
1 1 1
6 , 5281 1 , 4388

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1.3 Using a currency working as both a

1.2 Using term currency to count cross commodity currency and a term currency to
exchange rate count cross exchange rate

In the market X/Y = a/b

In the market: X/Z = a/b
Y/Z = c/d
Y/Z = c/d
Count the cross exchange rate X/Z; Z/X
Count the cross exchange rate: X/Y; Y/X

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1.3 Using a currency working as both a

1.2 Using term currency to count cross exchange commodity currency and a term currency to
rate count cross exchange rate
X/Z = a/b X/Y = a/b
Y/Z = c/d Y/Z = c/d
1 a
Sbid X /Y = Sbid X /Z * Sbid Z/Y = Sbid X /Z * =
Sask Y/Z d Sbid X/ Z = Sbid X/ Y * Sbid Y / Z = a * c

1 b
Sask X/Y = Sask X /Z * SaskZ /Y = SaskX /Z * = SaskX/Z = SaskX /Y * SaskY/Z = b * d
Sbid Y /Z c
1
a c X / Z = a / bd => Z / X = bd 1
X /Y = d => Y / X = b c
b d a
c a c

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1.3 Using a currency working as both a

commodity currency and a term currency to
Type 2: ARBITRAGES
count cross exchange rate

■ Example 3: ■ Introduction about Arbitrages

■ Finding opportunities and doing arbitrages
In the market:
■ Applying arbitrages in payment: How does value
EUR/USD = 1,4052/40 in a company’s account change after doing
USD/HKD = 7,7515/85 transactions?

Count the cross exchange rate EUR/HKD;

HKD/EUR

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2- Arbitrages
Practice:

Cho biết: EUR/USD = 1,4052/40; USD/HKD = 7,7515/85 2.1 Finding opportunities and doing arbitrages

Sbid EUR / HKD = Sbid EUR/ USD * Sbid USD / HKD

2.1.1 Simple arbitrages
= 1 , 4052 * 7 , 7515 = 10 , 8924
2.1.2 Complicated arbitrages
Sask EUR/ HKD = Sask EUR / USD * Sask USD/ HKD
= 1 , 4140 * 7 , 7585 = 10 , 9705

=> EUR / HKD = 10 , 8924 / 10 , 9705

1
=> HKD / EUR = 10 , 9705 = 0 , 091 / 18
1
10 , 8924 1

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Homework: Count the cross exchange rate 2- Arbitrages

■ In the market:
GBP/USD = 2,0345/15 2.1.1 Finding opportunities and doing simple arbitrages
USD/SEK = 6,4205/6,5678
Step 1: : quoting the same kind of exchange rate in two
USD/NOK = 5,3833/5,4889
USD/DKK = 5,2367/10 markets
EUR/USD = 1,4052/40
Step 2: Determining the way arbitrageur could do
USD/CHF = 1,1807/74
USD/HKD = 7,7515/85 transaction to gain profit
Count the cross exchange rate:
■
if Sask (market X)< Sbid ( market Y), arbitrageur could
GBP/NOK; GBP/EUR; EUR/HKD; HKD/SEK; HKD/CHF
gain profit from Acbit.

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2- Arbitrages 2- Arbitrages

2.1.1 Finding opportunities and doing simple arbitrages(continuous) 2.1.1 Complicated Arbitrages - example:
- Example 1:
■ Market 1: EUR/USD = 1,4052/40
■ Market A: GBP/USD = 2.0315/55
■ Market 2: USD/CHF = 1,1807/74
GBP/EUR = 1.4388/28
■ Market 3: EUR/CHF = 1,6375/49
■ Market B: USD/GBP = 0.4870/10
Mr X has an amount of 150.000 EUR. Do Arbitrage and evaluate
USD/EUR = 0.7072/16
the profit from arbitrage with the assumption that there is no fees.
Find opportunity to gain profit from doing arbitrage: GBP/USD

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2- Arbitrages 2- Arbitrages

2.1.1 Finding opportunities and doing simple arbitrages - Answer: 2.1.1 Complicated Arbitrages – Answer:

Market A: ■ Way 1:
- GBP / USD = 2,0315 / 55
Sell EUR/USD (market 1) -> Sell USD/CHF (market 2) ->Sell
1 CHF/EUR (market 3)
Market B:
- GBP / USD = 0,4910 = 2,0366 / 2,0533
1 ■ Way 2:
0, 4870
Sell EUR/CHF (market 1) -> Sell CHF/USD (market 2) ->Sell
Sask GBP / USD (A ) = 2,0355 < Sbid GBP/ USD (B = 2,0366) :=> Gain profit USD/EUR (market 3)

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2- Arbitrages 2- Arbitrages

2.1.1 Complicated arbitrages 2.1.1 Complicated Arbitrages – Answer:

Way 1
■ With an amount of capital in a certain currency, based on
■ Sell EUR/USD with Sbid = 1,4052
information about exchange rate in more than two markets, =>the amount of USD bought is: 150.000 * 1,4052 = 210.780 USD

arbitrageur would sell and buy different currencies listed on
markets to gain profit. That is profit from arbitrage.
■ Step 1: Choosing the way of arbitrage: Finding opportunity
■ Step 2: Buying and selling different currencies to gain profit from
■ Sell USD/CHF with Sbid = 1,1807
=>The amount of CHF bought is: 210.780 * 1,1807 = 248.867,946 CHF
■ Sell CHF/EUR with Sbid CHF/EUR = 1 /1,6449 = 0,6079
=> The amount of EUR bought is 248.867,946 * 0.6079 = 151.286,8244 EUR
■ The profit from Arbitrages is:
151.286,8244 – 150.000 = 1.286,8244 (EUR)

arbitrage

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2- Arbitrages Type 3:FORWARDS

3.2 Forwards - Example:
2.1.1 Complicated Arbitrages – Answer:
In the market:
Way 2
Spot: USD/CHF = 1,5642/42. 1,5742
■ Sell EUR/CHF (market 3) with Sbid = 1,6375 Sforward-3 months
=>The amount of CHF is bought:150.000 * 1,6375 = 245.625 CHF
USD/CHF = 1,5856/87
■ Sell CHF/USD with Sbid= CHF/USD = 1/1,1874 = 0,8421
Interest rate forward 3 months(yearly quoted).
=>The amount of USD is bought: 245.625 * 0,8422 = 206.859,525 USD
USD:41/8 ( 4,125%) – 41/2 (4.5%) CHF: 7 – 71/2
■ Sell USD/EUR with Sbid USD/EUR = 1/Db (EUR/USD) = 1 /1,4140 = 0,7072
=> The amount of EUR is bought 206.859,525 * 0,7072 = 146.293,865 EUR fees: ±1/8 (0.125%)
Mr X has the amount of 1.500.000 CHF, how to do forward transaction?
■ Profit from Arbitrages is:
146.293,865 – 150.000= - 3706,135 (EUR) => loss from Arbitrage=> do not do arbitrage

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Type 3:FORWARDS Type 3:FORWARDS

3.1 FORWARD EXCHANGE RATE – quotation 3.2 forward – answer:
Forward point:
Sforward = Sspot ± forward point ■ Step 1: Buy USD/CHF with Sask=1,5742
- POINT ask ≥ POINT bid: =>the amount of USD bought is: 1.500.000/1,5742=952.864,9473
Sforward = Sspot + forward point
- POINT ask<POINT bid: ■ Step 2: have USD deposit in 3 months with the interest ratet:

Sforward = Sspot – forward point 41/8 - 1/8=4 (%/year)

=>The total amount of USD ( interest included) is:
952.864,9473*(1+90*4/36000)=962.393,5968

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Type 3:FORWARDS Type 3:FORWARDS

3.1 Forward exchange rate 3.2 forward – answer:
■ Step 3: Sign the forward contract to sell USD/CHF 3 months with Sforward bid
Sask * ( T 2 ask −T 1 bid) * N
Sfask = Sask + =1,5856
36 . 000 + T 1 bid*N ■ After 3 months, the amount of CHF received is:
962.393,5968*1,5856=1.525.971,287 CHF
Sbid * ( T 2 bid − T 1ask)* N
Sfbid = Sbid + ■ If have CHF deposit in a bank with the interest rate (7-0.125 = 6,875), the
36 . 000 + T 1 ask*N amount of CHF received after 3 months will be:
Sbid, Sask: spot exchange rate 1.500.000*(1+6,875*90/36.000)=1.525.781,2500
N: the number of days for forward transaction
■ Profit: 1.525.971,287 – 1.525.781,2500 = 190,0371 CHF
T2bid: the deposit interest of currency 2
T1ask: the lending interest of currency 1

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Buying/selling selling options- Example

Type 4: OPTIONS
■ An USA exporting company has to receive an amount of 100.000 GBP in 1 month.

4.1 Introduction about options The company signs an selling contract GBP/USD in 1 month with the information
below:

4.2 Buying/selling buying options - Exercise price1,60 USD

- Option fees 0,04 USD
4.3 Buying/selling selling options Take an assumption: after 1 month, the spot exchange rate would be in 3 cases:
1. GBP/USD = 1,58
4.4 Practice 2. GBP/USD = 1,60
3. GBP/USD = 1,64
In which case would the company exercise the contract? And how much USD would
be bought in each case?

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Buying/selling buying options- Example Buying/selling selling options- Answers

■ A Canadian importing company has to pay 1 million USD in 1 month. The company
■ Option fees = 100.000*0,04=4.000 USD
decided to buy buying option USD/CAD 1 month with some information in the
■ If the company exercises the contract, the amount of USD bought (fees included) will be:
contract below:
100.000*1,60 - 4.000=156.000 USD
- Exercise price 1,2345 CAD
Case1: GBP/USD=1,58,when the company does not exercises the contract, the amount of
- Option fees 0,02 CAD
USD bought (fees included) will be 100.000*1,58 - 4.000=154.000 USD<156.000
Take an assumption: after 1 month, the spot exchange rate would be in 3 cases:
=> In this case, the company exercises the contract, the amount of USD bought (fees
1. USD/CAD = 1,2821 included) will be 156.000
2. USD/CAD = 1,2345 ■ TH2: GBP/USD=1,60= exercise price, so the company could choose either to exercise the
3. USD/CAD = 1,1904 contract or not and the amount of USD bought will be 156.000USD
In which case would the company exercise the contract? And how much CAD would ■ TH3: GBP/USD=1,64, the amount of USD bought (fees included) will be 100.000*1,64 -
be sold in each case? 4.000=160.000 USD>156.000
=>In this case the company will not exercise the contract, the amount of USD bought will be

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Buying/selling buying options- Answer

■ Option fees = 1.000.000*0,02=20.000 CAD
If the company exercises the contract, the amount of CAD paid (fees included) will be :
1.000.000*1,2345+20.000=1.254.500 CAD
■ case1: USD/CAD=1,2821, the company does not exercise the contract, the amount of CAD paid
(fees included) is:
1.000.000*1,2821+20.000=1.302.100 CAD>1.254.500
=>the company will exercise the contract, the amount of CAD paid will be :1.254.500
■ Case2: USD/CAD = 1,2345= exercise price, so the company could choose either to exercise the
contract or not and the amount of CAD paid will be 1.254.500 CAD
■ TH3: USD/CAD=1,1904, the amount of CAD paid (fees included) will be :
1.000.000*1,1904+20.000=1.210.400 CAD <1.254.500
=> the company will not exercise the contract, the amount of CAD paid will be 1.210.400

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