Post on 02-Jan-2016
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What is Exchange rate?
• A pair of shoes
• USD JPY
1. $80 ¥81,000
2. $80 ¥79,000
Equilibrium:
$80 ¥80,000
What is Exchange rate?
The price of one country's currency expressed in another country's currency. In other words, the rate at which one currency can be exchanged for another.
How Does Exchange rate Influence our daily life?
Importing and exporting
Employment rate
Domestic price of commodities
Study and travel abroad
Hedge
Making an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract.
Forex Hedge
- Spot Contracts
- Foreign Currency Options
Triangular Arbitrage of Exchange Rates
the act of exploiting an arbitrage opportunity resulting from a pricing discrepancy among three different currencies in the foreign exchange market
Triangular Arbitrage of Exchange Rates Calculation
Step 1. Draw a triangle
Step 2. Identify the cross rate
Step 3. Find the Implied Cross Rate
Step4. Comparing the two Cross Rate
Step 5. Identify Arbitrage possibility
Step 6. Calculate Arbitrage Profit
Triangular Arbitrage of Exchange Rates
Example:
Bank A: ¥82/$
Bank B: $1.6/£
Bank C ¥128/£
Is there any arbitrage opportunity?
If yes, provide you ¥100,000,000 yen, how much arbitrage profit can you get?
Conclusion
Exchange rate the rate at which one currency can be exchanged for another
Hedge is making an investment to reduce the risk of adverse price movements in an asset
Triangle Arbitrage of Exchange Rates
Reference
http://www.yoube.com/watch?v=lKu2LAgEcpUut
http://www.xe.com/
http://www.investopedia.com/ask/answers/forex/forex-hedge-and-currency-hedging-strategy.asp
http://zhpan.com.cn/w/?l=cn&query=%CB%BF%CD%C8%CB%AE%BE%A7%D0%AC
http://blogs.swa-jkt.com/swa/anthonytrickey/tag/exchange-rate-calcualtions/
http://blogs.roanoke.com/shoptimist/2013/06/whats-your-favorite-dollar-store/