BAFI1018 - Cross exchange rate notes PDF

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BAFI1018 - Cross exchange rate notes to better understand academic quotations needed to demonstrate in assignments.
It is a word document from Semester 1, 2021....

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CROSS EXCHANGE RATE Currency: x, y, z ( z is considered as the intermediate currency) The general formula to calculate the cross-exchange rate:

S(

x y

) = S(

x z

) x S(

z y

)

(1)

And the bid and ask rates can be calculated as follows:

Sb(

x y

)=

Bid x Sb( z

) x Sb(

z y

)

(1.1)

Sa(

x y

)=

Ask/Offer x Sa( z ) x

Sa(

(1.2)

Example: Tutorial 2- Question 17 You are given the following exchange rates:

EUR/USD 0.9395/0.9681 AUD/USD 1.7624/1.7864 JPY/AUD

65.91/67.71

Question: What is the cross OFFER/ASK rate for JPY/USD? Answer: The general formula is:

S(

JPY USD

) = S(

And the ASK rate is: :

Sa (

JPY USD

) = Sa (

= As

S(

z y

) = 1/ S(

z y

JPY AUD

) x S(

JPY AUD

67.71

AUD USD

) x Sa ( x

AUD USD

)

1.7864 = 120.9571

) the formula (1) can be rewrite as:

1

)

z y

)

S(

x y

) = S(

x z

) x (1/ S(

2

y z

)) =

x S( ) Z z S( ) y

(2)

If you apply the formula (2) to calculate the cross-exchange rates, the cross BID and ASK rates are calculated as follows: Bid

Sb(

x y

)=

x S b( ) z y Sa( ) z

Sa(

(2.1)

x y

)=

Ask/Offer x S a( ) z (2.2) y Sb( ) z

Example: Tutorial 2- Question 18 You are given the following exchange rates:

EUR/USD 0.9395/0.9681 AUD/USD 1.7624/1.7864 JPY/AUD

65.91/67.71

Question: What is the cross BID rate for EUR/AUD? Answer: The cross-rates for EUR/AUD could be calculated as follows:

S(

EUR EUR USD ) = S( ) x S( ) (1) AUD USD AUD

Or

S(

EUR EUR AUD ) = S( ) x (1/ S( )) = AUD USD USD

EUR ) USD AUD S( ) USD S(

(2)

We know the exchange rate for EUR/USD instead of USD/EUR. Thus, in this case, we should apply the formula (2) to find the cross rates for EUR/AUD. The cross BID rate for EUR/AUD is calculated by using formula (2.1)

Sb(

EUR AUD

EUR ) USD AUD Sa( ) USD Sb (

)=

=

0.9395 1.7864

3

= 0.5259...