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Currency Exchange Rates: Presenter's Name Presenter's Title DD Month Yyyy
Currency Exchange Rates: Presenter's Name Presenter's Title DD Month Yyyy
Important note : There are many different conventions that are used around
the world, but this presentation is using the conventions displayed by the
authors in the chapters’ examples.
FX options and
other, 4%
Spot, 36%
Actual Ratio
FX Rate Quote Name
(Price currency/Base
Convention Convention
currency)
EUR euro USD/EUR
JPY dollar–yen JPY/USD
GBP sterling USD/GBP
• Dealers will quote a bid (at which the dealer will buy) and an offer price (at
which the dealer will sell). [Note: bid < offer]
Example:
Suppose we have the spot exchange rate of the CAD/USD of 1.2923. If the
one-year T-bill interest rate in the United States is 0.55% and the Canadian
one-year Treasury rate is 0.95%, what is the one-year forward rate?
𝑖𝑓 − 𝑖𝑑
𝐹𝑓Τ𝑑 = 𝑆𝑓Τ𝑑 + 𝑆𝑓Τ𝑑 τ
1 + 𝑖𝑑 τ
0.0095 − 0.0055
𝐹𝑓Τ𝑑 = 1.2923 + 1.2923 1 = 1.2923 + 0.0051 = 1.2974
1 + 0.0055 x 1
The estimated forward rate is 1.2974, representing a forward rate premium of
1.2974 – 1.2923 = 51 pips.
Independently
Fixed Exchange
Pegged System Floating Rate
Rate Regime
Regime