{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Lect09-International Financial Markets-VineyChptr15

# say you observe the following spot exchange rates a 1

This preview shows page 1. Sign up to view the full content.

This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: his indirectly calculated exchange rate is an example of a cross rate. • So more generally, a cross rate is the exchange rate between two currencies derived from the exchange rates between those two currencies and a third currency (typically the home currency, but often the US\$). 19 • Example 1: Cross rate between US\$ and NZ\$ . . . Say you observe the following spot exchange rates: A\$ 1 = US\$ 0.6725 (or, AUD/US\$ = 0.6725) A\$ A\$ 1 = NZ\$ 1.1497 (or AUD/NZ = 1.1497) A\$ So if you had US\$ 1 and wished to convert into NZ\$, then: • Sell US\$ 1 @ 0.6725 so you receive (buy) A\$ 1.4870. • Then sell the A\$ 1.4870 @ NZ\$ 1.1497 each so you receive Then (buy) NZ\$1.7096 . . . (buy) 1.4870 US\$ 1 ?= A\$1.4870 1.1497 1.7096 NZ\$ 1.7096 20 In summary, Recap: US\$ 1 NZ\$ 1.7096 US\$ 1 buys 1 / 0.6725 = A\$ 1.4870 each A\$ of which, in turn, buys NZ\$ 1.1497. So US\$ 1 buys 1.4870 x 1.1497 = NZ\$ 1.7096 The single exchange rate that achieves this conversion is . . . NZ\$ / US\$ rate = 1 / 0.6725 x 1.1497 (Quotation here a bit confus...
View Full Document

{[ snackBarMessage ]}

Ask a homework question - tutors are online