Chapter 5

Price gap to get a gain, buy low sell high

1.20 euros - bid (buy) price

1.30 euros - ask (sell) price from broker perspective

Ask price is greater than the bid

Bid/ask spread = ask rate-bid rate/ask rate

Increase spread for a buffer to protect margin

Spot exchange market - exchange two currencies right away

• spot exchange rate - transaction time

• spot price: -143 = -1.43 relative to ask price forward price is less than 1.43

Foreign exchange market - exchange to currencies in the future

• forward exchange rate - transaction timing

Understand common ways to quote exchange rates

o European terms and American terms

American terms - dollar on top/foreign currency on bottom

European terms - switched and foreign on the top

o Direct and indirect quote

Direct - $ to yen

Indirect - yen to $

• Measuring exchange rate movement

o Depreciation vs. appreciation

• Calculate % change in exchange rate in the value of the bottom currency

• positive - appreciation

• negative - depreciation of bottom target currency

• Compute cross exchange rate

• 3 different currencies and then determine the exchange rate

Understand the condition in which there is a triangular arbitrage opportunity and compute

the amount of arbitrage