Session2 - Notes - Session 2

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Unformatted text preview: Notes - Session 2 >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> >>>>>>> More Information on Exchange Rates Chapter 3: International Financial Markets Chapter 4: Exchange Rate Determination >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> >>>>>>> Lecture 2 begins by expanding upon some of the basic principles of exchange rates. This is followed by a discussion of the key points in Chapters 3 and 4, along with some exercises and problems, with solutions provided. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> >>>>>> BID/ASK SPREAD Foreign exchange traders charge fees for conducting foreign exchange transactions. Since traders want to buy low and sell high, at any given time, the bid (buy) quote for a foreign currency will be less than the ask (sell) quote. The bid/ask spread, representing the difference between the bid and ask quotes, is usually expressed as a percentage of the ask quote. More specifically: Bid/Ask spread = (Ask rate Bid rate) / Ask rate. Lets look at some examples. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> >>>>>>> Utah Banks bid price for Canadian dollars is $.7938 and its ask price is $.81. What is the bid/ask percentage spread? Answer: Bid/Ask spread = (Ask rate Bid rate) / Ask rate. ($.81 $.7938)/$.81 = .02 or 2% >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> >>>>>>> Compute the bid/ask percentage spread for Mexican peso retail transactions in which the ask rate is $.11 and the bid rate is $.10. Answer: Bid/Ask spread = (Ask rate Bid rate) / Ask rate. [($.11 $.10)/$.11] = .091, or 9.1%. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> >>>>>> DIRECT VERSUS INDIRECT QUOTATIONS Exchange rate quotations for currencies reflect the ask prices of the currency. Since currencies are continually fluctuating, the quotations normally vary throughout the day. Quotations that represent the number of units of foreign currency that one dollar can purchase are termed indirect quotations . We are accustomed to see exchange rates quoted in this manner, so, for example, we customarily say things such as a dollar equals 108 yen or a dollar equals 8.33 Mexican pesos. However, globally, it is more common to use direct quotations. Quotations that represent the value of a foreign currency in number of dollars per unit of foreign currency are referred to as direct quotations. For example, a direct quotation would indicate that one yen equals .00926 cents (a little less than one cent) or one Mexican peso equals $.12. The indirect quotation is the reciprocal of the corresponding direct quotation. So if you see, one yean equals .009 cents, you an convert it to an indirect quotation by dividing it into the number one....
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Session2 - Notes - Session 2

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