FXMarkets Part2
FXMarkets Part2
CROSS RATE
1
Cross Rate
Cross Rates
2
Direct quote
Indirect quote
3
Exercise 1
4
Cross Rate
• USD/VND= 22.1305 - 15
• VND/USD = ??
• Market inform
– X/Y = a - b
– X/Z = c - d
– -> Calculation cross rate Y/Z , Z/Y
10
5
Spot Market Quotations (cont.)
USD/EUR0.7650–55
USD/JPY105.40–50
11
USD/JPY 105.40–50
GBP/USD 1.9170–75
12
6
Spot Market Quotations (cont.)
• Calculating cross-rates (cont.)
AUD/USD0.7862–69
GBP/USD1.9170–75
13
Exercise 2
14
7
How we can profit from FX market
15
Example
16
8
ARBITRAGE
17
Arbitrage
18
9
Geographic Arbitrage
19
Arbitrage Profit
20
10
Cross Rates and Triangular Arbitrage
21
22
11
Exercise 3 Triangular Arbitrage
23
24
12
Triangular Arbitrage
Citibank
End with €1,014,533 Start with EUR1,000,000
(3) Sell GBP626,255 at EUR1.62 get €1,014,533 (2) Sell $904,500 to Barclays
at $1.4443/£ get £626,255
25
New York
$1.060/ €
$1.5500/ £ € 1.5000/ £
26
13
Exercise 4 Triangular Arbitrage
27
Triangular Arbitrage
New York
Net Profit:EUR25,806
USD/EUR 1.060
1-Buy USD 1,060,000@ 1.06
3-Sell GBP683,871 @1.50 (USD1.060=1 Euro)
(Sell Euro 1,000,000 )
Get EUR 1,025,806
HK London
EUR/GBP1.5000 USD/GBP1.5500
28
14
Transaction Chain
29
Transaction Chain
30
15
Calculating Cross Rates With Bid and Ask Rates
31
Algorithm
• Can you get the cross rate by dividing one currency pair into the
other one? If “no” proceed to the next bullet point. If yes, then:
– Cross Bid Rate=Bid of the nominator pair/Offer of the
denominator pair
– Cross Offer Rate= Offer of the nominator pair/Bid of the
denominator pair
• Can you get the cross rate by multiplying one currency pair with the
other? If yes then
– Cross Bid Rate=Bid of the First Pair x Bid of the Second Pair
– Cross Offer Rate=Offer of the first pair x Offer of the second
pair
• End.
32
16
Example: CAD/JPY Cross Rate
• Use the following USD based quotes to calculate CAD/JPY Cross Rate:
– USD/JPY 105.50-106.10
– USD/CAD 1.2840-1.2850
• Solution: To get CAD/JPY rate we need to divide USD/JPY rate to
USD/CAD rate. In other words CAD/JPY= (USD/JPY)/(USD/CAD)
• If we check the algorithm the answer to first statement in the algorithm is
“YES”. Then follow the rule.
– Bid Rate of CAD/JPY is= Bid of the nominator (USD/JPY) / Offer of
the denominator (USD/CAD)= 105.50/1.2850=82.10
– Offer Rate= Offer of the nominator (USD/JPY) / Bid of the
denominator (USD/CAD)=106.10/1.2840=82.63
• Cross Rate: CAD/JPY 82.10-82.63
33
An intuitive explanation
34
17
Offer Side
35
Example-2
• Given the following rates, calculate EUR/CAD Cross rate:
– EUR/USD 1.2310-1.2315
– USD/CAD 1.2840-1.2850
18
Exercise 5: A more realistic Triangular Arbitrage
• Assume that following rates appear in your screen:
– EUR/USD 1.3520 -1.3525
– USD/TRY 1.5890-1.5940
– EUR/TRY 2.1390-2.1433
37
38
19
– Bid Rate=1.3520 x 1.5890=2.1483
– Offer Rate=1.3535 x 1.5940=2.1559
39
40
20
THE END
41
21