Covered Interest Arbitrage

i = one-year interest rate on (Eurocurrency ) deposits denominated
i* = one-year interest rate on (Eurocurrency) deposits denominated in the foreign currency
e = spot price of the home currency in terms of the foreign currency
f = one-year forward price of the home currency in terms of the foreign currency

~ 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 address eurobank, hence the name. Thus, there arose a large pool of dollars outside the United States and outside the control of US authorities.
In 1958 the British government introduced a restrictions on capital flows. British banks tried to get around these regulations by issuing loans dollar loans.
Euro markets were particularly attractive because they had far fewer regulations and offered higher yields. From the late 1980s onwards, US companies began to borrow and hold money offshore. British banks found it attractive to make loans in dollars.
London is the most important centre.

~ 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 bank.

~ Monday, November 16, 2009 0 comments

The Timing of the Contract

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

~ 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 Mega Bank. The two-month forward price was 120.00 yen/dollar. In two months and two days, Dollar paid 5 million dollars and received 600 million yen.

~ 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 rate. More precisely, the two currencies are exchanged on an agreed upon date which is a certain number of days or months after the spot date. Thus, a three-month forward contract is conventionally settled in three months plus two days. Typically, no money changes hands at the time the contract is written

~ 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 franc for 1/1.5020 dollars. He will sell 1/1.5020 dollars for 10.0075/1.5020 =6.6628 kronar.
The kronar/franc cross rates are 6.6294 – 6.6628.

~ 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 dealer would buy dollars (sell Swiss francs) for 1.5020 Swiss francs per dollar. He would sell dollars (buy Swiss francs) for 1.5028 Swiss francs per dollar.
When expressed as units of currency per dollar, the smaller rate is the bid rate: the rate at which the dealer will buy (bid for) dollars. The higher rate is the offer rate: the rate at which the dealer will sell (offer) dollars.

~ 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 of A / units B = (units of A/units of C) / (units of B/units of C)

~ 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 = .156196.

~ 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 dollar
Then, euros / pound = (euros /dollar) / (pounds/dollar) = 1.3000/.5000 = 2.6000

~ 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 dollar
Suppose that the pound is quoted at 2.5000 euros per pound
Trade 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 profit.

~ 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 currency to buy the first.

~ 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 currency

Indirect quote: the number of units of foreign currency necessary to buy one unit of home currency - the foreign currency price of home currency

In terms of the dollar we have

American terms: dollars per other currency unit

European terms: other currency units per dollar

For example, suppose that the pound is trading at 2.0000 dollars per pound. We could also express the exchange rate at .5000 pounds per dollar.

Direct quote: the number of units of home currency necessary to buy one unit of foreign currency - the home currency price of foreign currency : .5000

Indirect quote: the number of units of foreign currency necessary to buy one unit of home currency - the foreign currency price of home currency: 2.0000

In terms of the dollar we have

American terms: dollars per other currency unit: 2.0000

European terms: other currency units per dollar: .5000

~ 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 pesos, he will probably trade the francs for dollars and the dollars for pesos.

~ 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 manage their foreign exchange reserves.

~ 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 between the selling and buying rates.

~ Sunday, November 1, 2009 0 comments

" Privacy Policy "

Privacy Policy - www.stock-xchanging.blogspot.com

Privacy Policy for www.stock-xchanging.blogspot.com

If you require any more information or have any questions about our privacy policy, please feel free to contact us by email at adsgugl@gmail.com.

At www.stock-xchanging.blogspot.com, the privacy of our visitors is of extreme importance to us. This privacy policy document outlines the types of personal information is received and collected by www.stock-xchanging.blogspot.com and how it is used.

Log Files
Like many other Web sites, www.stock-xchanging.blogspot.com makes use of log files. The information inside the log files includes internet protocol ( IP ) addresses, type of browser, Internet Service Provider ( ISP ), date/time stamp, referring/exit pages, and number of clicks to analyze trends, administer the site, track user’s movement around the site, and gather demographic information. IP addresses, and other such information are not linked to any information that is personally identifiable.

Cookies and Web Beacons
www.stock-xchanging.blogspot.com does use cookies to store information about visitors preferences, record user-specific information on which pages the user access or visit, customize Web page content based on visitors browser type or other information that the visitor sends via their browser.

DoubleClick DART Cookie

.:: Google, as a third party vendor, uses cookies to serve ads on www.stock-xchanging.blogspot.com.
.:: Google's use of the DART cookie enables it to serve ads to your users based on their visit to www.stock-xchanging.blogspot.com and other sites on the Internet.
.:: Users may opt out of the use of the DART cookie by visiting the Google ad and content network privacy policy at the following URL - http://www.google.com/privacy_ads.html

Some of our advertising partners may use cookies and web beacons on our site. Our advertising partners include .......
Google Adsense









These third-party ad servers or ad networks use technology to the advertisements and links that appear on www.stock-xchanging.blogspot.com send directly to your browsers. They automatically receive your IP address when this occurs. Other technologies ( such as cookies, JavaScript, or Web Beacons ) may also be used by the third-party ad networks to measure the effectiveness of their advertisements and / or to personalize the advertising content that you see.

www.stock-xchanging.blogspot.com has no access to or control over these cookies that are used by third-party advertisers.

You should consult the respective privacy policies of these third-party ad servers for more detailed information on their practices as well as for instructions about how to opt-out of certain practices. www.stock-xchanging.blogspot.com's privacy policy does not apply to, and we cannot control the activities of, such other advertisers or web sites.

If you wish to disable cookies, you may do so through your individual browser options. More detailed information about cookie management with specific web browsers can be found at the browsers' respective websites.