Illustrations in FX Rates Example 1 An Authorized

Illustrations in FX Rates Example #1 An Authorized Dealer (AD) quotes the following rates: Rs 45. 5000 -45. 5100 for the US$; Mexican Peso 50 -50. 50 for the US$. Determine the two way cross rate for INR against the Peso. Solution : a) Suppose there is a Indian company which is an exporter to Mexico and receives payment in pesos but would like to change it to INR. Step 1 : Company gives the Pesos to the AD and receives US$. The AD will quote the ask/offer rate Peso 50. 50 against the US$. Step 2 : Company will exchange the US$ for INR. The Ad will quote the bid rate of Rs 45. 5000 against the US$. Step 3 : INR/Peso = INR/US$ x US$/Peso = 45. 5000 x 1/50. 50 = INR 0. 9009 to the Peso

Illustrations in FX Rates b) Suppose there is a Indian company which imports from Mexico and has to make payment in Peso by giving INR. Step 1: Company gives INR and receives US$. The AD will quote the ask/offer rate INR 45. 5100 to the US$. Step 2: Company will exchange the US$ to get Peso. The AD will quote the bid rate of Peso 50 against the US$. Step 3: INR/Peso = INR/US$ x US$/Peso = 45. 5100 x 1/50 = INR 0. 9102 to the Peso Combining a) and b), we get the outright two way cross rate as INR 0. 9009 -0. 9102 to the Peso Example #2 An Indian importer has to make payment in Thai baht. AD gives quote as INR 45 -45. 55/US$; Baht 7 -7. 20/US$ Determine the INR/baht cross rate. Solution: Step 1: Convert INR into US$ by using the ask/offer rate. Step 2 : Convert the US$ into Thai baht by using the bid rate. Step 3 : INR/baht = INR/US$ x US$/baht = 45. 55 x 1/7 = INR 6. 507 to the baht

Illustrations in FX Rates Example #3 (Two point arbitrage) Dealer A quotes GBP/US$: 1. 4550/1. 4560 Dealer B quotes GBP/US$: 1. 4538/1. 4548 Is there an arbitrage opportunity? If so, what profit can be made? Solution: Step 1: Suppose one sells GBP 1 to Dealer A, the dealer will bid US$ 1. 4550. Step 2 : Then one gets the GBP 1 back by selling the US$ to Dealer B which asks for US$1. 4548 Result : One gets back the GBP 1 plus US$ 0. 0002 (1. 4550 – 1. 4548 ) profit. Example #4 A New York bank is offering US$/JPY : 110. 25/111. 10; US$/AUD : 1. 6520/1. 6530 At the same time a bank in Sydney is quoting AUD/JPY : 68. 30/69. 00 Is there an arbitrage opportunity? Solution: Step 1: Sell JPY to get US$; suppose we sell 100 million yen, we get US$ 100/111. 10 Step 2: Sell US$ to get AUD; we will get AUD 100/111. 10 x 1. 6520 Step 3 : Sell the AUD in Sydney for which we will get JPY 100/111. 10 x 1. 6520 x 68. 30 = 101. 56 Profit = JPY 101. 56 – 100. 00 = JPY 1. 56 million