FX Market Exchange rate Flashcards
Why are Exchange Rates Important?
Exchange rates feed into:
a) Outlook for domestic and global economy
b) Stock market
c) Industrial competitiveness (firm/industry.
Increased globalisation
a) Internationalisation of business
b) Relativity of world trade to domestic demand
c) Economic integration (e.g. Europe)
d) Technological advances in money transfer
What is bid rate and offer rate?
Bid rate for currency A in terms of currency B is rate at which dealers buy currency A (sell currency B). Offer rate (or ask rate) is rate at which dealer sells currency A (buys currency B). Bid/offer spread is gap between offer and bid rates.
Bilateral vs Trade Weighted Exchange Rates
A bilateral exchange rate is an exchange rate between two countries.
Whereas
A cross-exchange rate is an exchange rate between two currencies, A and B, neither of which is €. It can be calculated as the ratio of exchange rate of A to the €, divided by exchange rate of B to the €.
If we look at cross-rates and see that € has depreciated against $ but appreciated against £, is the net effect a rise or fall in the value of €?
No straightforward answer
If prices of some goods are rising while prices of others are falling, the overall change in prices is calculated using index
Effective or trade-weighted exchange rate of currency A is a weighted average of its exchange rates against currencies B, C, D, E, etc. The weights used are usually the proportion of country A’s trade which involves B, C, D, E, etc. respectively.
Effective exchange rate is multilateral, rather than bilateral
Absolute value of index has no meaning - depends on base year (same as CPI).
E.g. if effective exchange rate of € is 105 today, it means that it is 5% above its average level in base year.
Bid Offer
EUR/GBP 0.6642 0.6645
EUR/CHF 1.5745 1.5748
What is GBP/CHF?
GBP/CHF bid = EUR/CHF bid ÷ EUR/GBP offer = 2.3695
GBP/CHF offer = EUR/CHF offer ÷ EUR/GBP bid = 2.3708
Bid Offer
GBP/USD 1.6523 1.6528
USD/SGD 1.7585 1.7600
What is GBP/SGD?
GBP/SGD bid = GBP/USD bid x USD/SGD bid = 2.9056
GBP/SGD offer = GBP/USD offer x USD/SGD offer = 2.9089
Bid Offer
AUD/USD 0.7504 0.7509
NZD/USD 0.6809 0.6814
What is AUD/NZD?
AUD/NZD bid = AUD/USD bid ÷ NZD/USD offer = 1.1013
AUD/NZD offer = AUD/USD offer ÷ NZD/USD bid = 1.1028
Why would use a popular currency when using triangulation bid/offer qoute?
Because they are more liquid
