Lect09-International Financial Markets-VineyChptr15

say you observe the following spot exchange rates a 1

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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...
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This document was uploaded on 02/13/2014.

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