CASES ON FX QUOTE

NIHAR DALAL
BE MBA(FIN) MS(FIN) CFA
1. The Market for Currencies

• Using the following vocabulary, complete the following text: forward;

market maker or broker; shopping around; spot; arbitrage; retail;
wholesale. ”When trading on the foreign exchange markets, the Bank of
India deals with a (a) on the (b) tier while an individual uses the (c) tier.
If the bank must immediately deliver ITL 2 million to a customer, it
purchases them on the (d) market. However, if the customer needs the
ITL in three months, the bank buys them on the (e) market. In order to
purchase the ITL as cheaply as possible, the bank will look at all quotes
it is offered to see if there is an opportunity for (f). If the bank finds
that the quotes of two market makers are completely incompatible, it
can also make a risk-free profit using (g).”
2. Interpreting FX Quotes

• What do the following quotes imply

(a) CAD/GBP 2.31; GBP/CAD 0.43
(b) USD/CAD 0.84; CAD/USD 1.18
(c) CAD/EUR 1.54; EUR/CAD 0.65
Solution

• The USD is usually the base currency ie every other currency is

quoted in terms of number of units of that currency for 1USD. This
convention is called the indirect quote. The exceptions are the
EUR and GBP. So a quote of 1.18 USD/EUR would mean 1.18 USD
for 1EUR
• Newspapers publish quotes using the readers home currency as the
base currency. This is called the direct quote
Cross Quotes

• A bank quotes the following rates.

• Compute the EUR/JPY bid cross-rate (that is, the bank’s rate for
buying JPY). Bid Ask EUR/CAD 0.64- 0.645 CAD/JPY 0.01-0.012
Solution

• Synthetic [EUR/JPY]bid = [EUR/CAD]bid × [CAD/JPY]bid = 0.64 ×

0.01 = 0.0064
Transacting in FX

• Suppose that an umbrella costs USD 20 in Atlanta, and the

USD/CAD exchange is 0.84. How many CAD do you need to buy the
umbrella in Atlanta?
Solution

• CAD/USD × USD/umbrella = 20/ 0.84 = CAD23.81.

Interpreting bid-ask quotes

• Given the bid-ask quotes for jpy/gbp 220-240, at what rate will
YOU
(a) purchase gbp?
(b) sell gbp?
(c) purchase jpy?
(d) sell jpy?
Solution

The quote of JPY/GBP of 220-240 implies that the bank will buy JPY
from you at 220 and sell JPY to you at 240
(a) jpy/gbp 240
(b) jpy/gbp 220
(c) jpy/gbp 220
(d) jpy/gbp 240.