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

To find what the cross rate must be:

Suppose the pound is quoted at 2.0000 dollars per pound.Suppose that the euro is quoted at 1.3000 euros per dollarThen, euros / pound = (euros /dollar) / (pounds/dollar) = 1.3000/.5000 = 2.6[...]

by Stock Specialist ~ Saturday, November 7, 2009 0 comments

Example of Triangular Arbitrage

Suppose the pound is quoted at 2.0000 dollars per pound.Suppose that the euro is quoted at 1.3000 euros per dollarSuppose that the pound is quoted at 2.5000 euros per poundTrade 1 dollar for 1.3 euros. Trade 1.3 euros for 1.3/2.5 = .52 pounds. Trade for more than 1 dollar and make a prof[...]

by Stock Specialist ~ Friday, November 6, 2009 0 comments

Triangular Arbitrage

Opportunities for triangular arbitrage arise when direct quotations (exchange rates in terms of the dollar - this is another sense of this word) and cross-rate quotations (two other currencies against each other) allow for profit making. This entails using one currency to buy a second, a second currency to buy a third, and a third[...]

by Stock Specialist ~ Thursday, November 5, 2009 0 comments

Def. An exchange rate is the price of one currency in terms of another.

A complication is that there are two ways to express any exchange rate.Direct quote: the number of units of home currency necessary to buy one unit of foreign currency - the home currency price of foreign currencyIndirect quote: the number of units of foreign currency necessary to buy one unit of home currency - the foreign currency[...]

by Stock Specialist ~ Wednesday, November 4, 2009 0 comments

The dollar is the most important currency

Many central banks hold the bulk of their reserves in the form of dollars; many central banks conduct much of their intervention in dollars; many international transactions are done using dollars; many contracts are invoiced in dollars.The dollar is the major “vehicle” currency: if a dealer wants to trade Swiss francs for Mexican[...]

by Stock Specialist ~ Tuesday, November 3, 2009 0 comments

Central Banks

Central Banks intervene in the foreign exchange market to influence the value of their currency.Many central banks serve as the primary banker for their government and for other public enterprises.Some central banks (for example, the Federal Reserve Bank of New York) act as agent for other central banks.Some central banks actively[...]

by Stock Specialist ~ Monday, November 2, 2009 0 comments

Market Makers

A market maker for a currency is a dealer who regularly quotes the rates at which he is willing to buy and to sell that currency.During normal hours, he creates a two-sided market for its customers. He is willing (within reason) to both buy and sell at the rates he quotes.He makes a profit from the spread; that is the difference[...]

by Stock Specialist ~ Sunday, November 1, 2009 0 comments

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