Unique Source of Forex

Covered Interest Arbitrage

i = one-year interest rate on (Eurocurrency ) deposits denominated i* = one-year interest rate on (Eurocurrency) deposits denominated in the foreign currencye = spot price of the home currency in terms of the foreign currencyf = one-year forward price of the home currency in terms of the foreign curre[...]

by Stock Specialist ~ Wednesday, November 18, 2009 0 comments

Historical Background

The Eurodollar market arose in the 1950s. The Soviet Union had large amounts of dollars from their oil sales. They did not want to hold them in the United States because of fears that the US would freeze them. They found European banks that would accept their dollars as deposits. It is said that one was a French bank with the cable[...]

by Stock Specialist ~ Tuesday, November 17, 2009 0 comments

Eurocurrency Markets

Eurocurrency refers to deposits in a commercial bank which are denominated in a currency other than the currency issued by the country the bank is resident in. For example, a bank deposit denominated in dollars in a bank located in London is a Eurodollar deposit. It does not matter whether the bank is Barclays or an American [...]

by Stock Specialist ~ Monday, November 16, 2009 0 comments

The Timing of the Contract

At time zero: All of the details of the contract were worked outAt time zero plus two months and two days: The exchange is carried o[...]

by Stock Specialist ~ Sunday, November 15, 2009 0 comments

Example of a Forward Contract

Frank Dollar, the foreign exchange manager at the Big American Automobile Company was informed that the BAAC is importing parts from Japan at a cost of 600 million yen, to be paid upon delivery in two months time. To protect the BAAC from exchange rate fluctuations, Frank Dollar arranged to purchase 600 million yen forward from[...]

by Stock Specialist ~ Saturday, November 14, 2009 0 comments

Types of Contracts

Spot contracts -- a price and quantity are agreed upon. The two currencies are typically exchanged two business days later.Forward contracts -- a fixed price contract made today for delivery of a certain amount of a currency at a specified future date. The specified date is the settlement date and the agreed price is the forward[...]

by Stock Specialist ~ Friday, November 13, 2009 0 comments

We can find cross rates with spreads

In European form: The Swiss franc is 1.5020 – 1.5088 and the Swedish krona is 10.0025 – 10.0075. Find the kronar/franc cross rates.The dealer will buy 1 Swiss franc for 1/1.5088 dollars. He will buy 1/1.5020 dollars for 10.0025/1.5088 = 6.6294 kronar. So, he will buy 1 Swiss franc for 6.6294 kronar.The dealer will sell one Swiss[...]

by Stock Specialist ~ Thursday, November 12, 2009 0 comments

The Spread

Foreign exchange dealers quote two rates: the rate at which they will buy the currency and the rate at which they will sell the currency.Example: A newspaper may report that the Swiss franc had a central rate of 1.5024 francs /$ and a bid/offer spread of 020 – 028. This means that the two exchange rates were 1.5020 and 1.5028. The[...]

by Stock Specialist ~ Wednesday, November 11, 2009 0 comments

Learn how to compute cross rates

Suppose you are given exchange rates for currencies A and B in terms of currency C and that you are told to find the price of currency B in terms of currency A (or equivalently, units of currency A / currency B).First, find the exchange rates for A and B in the form: units of A / units of C and units of B / units of C.Then: units[...]

by Stock Specialist ~ Tuesday, November 10, 2009 1 comments

Another example:

The Bhutan ngultrum is trading at 39.3020 Ngultrums per dollar.The Mauritania ouguiya is trading at 251.620.The cross rate is ngultrums / ouguiya = (ngultrums /$) / (ouguiya /$) = 39.3020/ 251.620 = .1561[...]

by Stock Specialist ~ Sunday, November 8, 2009 0 comments

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