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 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

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 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.

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 bank.

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 out
At time zero plus two months and two days: The exchange is carried out.

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 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.

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 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

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 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.

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 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.

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

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 = .156196.

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