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Currencies and the FX Spot

Market

Week 2: Part I

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The Major Currencies of the World

United States Dollar (USD) $

Euro (EUR)

Japanese Yen (JPY) United Kingdom Sterling Pound (GBP)

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Other Major Currencies

Australian Dollar

Swiss Franc

New Zealand Dollar Canadian Dollar

Hong Kong Dollar

Singapore Dollar

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Currency TradingRANK Currency ISO Percent

1 United States:United States dollar USD ($) 87.00%

2 European Union:Euro EUR () 33.40%

3 Japan Japanese: yen JPY () 23.00%

4 United Kingdom:Pound sterling GBP () 11.80%

5 Australia:Australian dollar AUD ($) 8.60%

6 Switzerland:Swiss franc CHF (Fr) 5.20%

7 Canada:Canadian dollar CAD ($) 4.60%

8 Mexico:Mexican peso MXN ($) 2.50%

9 China:Chinese yuan or renminbi CNY/RMB () 2.20%

10 New Zealand:New Zealand dollar NZD ($) 2.00%

11 Sweden:Swedish krona SEK (kr) 1.80%

12 Russia:Russian ruble RUB 1.60%

13 Hong Kong:Hong Kong dollar HKD ($) 1.40%

14 Singapore:Singapore dollar SGD ($) 1.40%

15 Turkey:Turkish lira TRY 1.30%

Other 12.20%

Total 200%

*Multiple Sources

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Currency Pairs

The Majors

EUR/USD: The Fiber

USD/JPY: Yen or Ninja

GBP/USD: The Cable

AUD/USD: Aussie

USD/CHF: Swissy

USD/CAD: The Loonie

Other Major Currency Pairs

EUR/GBP: The Chunnel

EUR/JPY: The Yuppie

NZD/USD: The Kiwi

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Currency Pairs

www.finance.yahoo.com

http://www.finance.yahoo.com/http://www.finance.yahoo.com/

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Currency Pair Quotations

Base (or Reference Currency) / Counter

Currency

Example 1: EUR/USD

This Euro vs. the United States Dollar and NOT

Euro per USD!!!

Example 2: USD/JPY

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Currency Pair Quotations

Priority Ranking

Euro (EUR)

Pound (GBP)

Australian Dollar (AUD) New Zealand Dollar (NZD)

United States Dollar (USD)

Canadian Dollar (CAD) Swiss Franc (CHF)

Japanese Yen (JPY)

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Direct vs. Indirect Quotes

Direct vs. Indirect Quotes:

The direct quote is the local currency priceof one unit of foreign currency. e.g.

EUR/USD 1.3855

The indirect quote is the foreign currency

price of one unit of local currency. e.g.USD/EUR 0.7218

reciprocal of direct quote.

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Direct vs. Indirect Quote

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Cross Rates

What if you want to trade CHF for JPY?

Law of One Price

No Arbitrage

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Cross Rates

Example 1:

EUR/USD = 1.3000

USD/THB = 33.1000

What is EUR/THB?

Example 2:

USD/JPY = 100.0000

USD/PHP = 44.0000

What is JPY/PHP?

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The Spot Market and Risks

What you buy is what your counterparty sells

(and vice versa)

Settlement Risk

The Spot Transaction typically closes two days

after the trade

Deal could fall through

One side of the settlement could fail (HerstattRisk)

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Bid Ask Spreads

Bid Price: The Price a Market Maker is willing to BUY theBase Currency

Ask Price: The Price a Market Maker is willing to SELL theBase Currency

Buy Low / Sell High: The Market Maker is there to makemoney

Example (Stock Price) PG (Proctor and Gamble) Bid/Ask = 85.01 / 85.03

Example (Currency) EUR/USD = 1.3141 / 1.3143 Market Maker BUYS Euro cheap ($1.3141) and SELLS Euro at a

higher price ($1.3143)

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Bid Ask Spread

(AskBid) / Ask

Compute the Bid/Ask Spread for EUR/USD

EUR/USD 1.3141 / 1.3143

Pips: Instead of percentages, Bid/Ask Spreads

are often quoted as 1/100thof a cent

EUR/USD spread = 2 pips

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Putting It All Together

Suppose:

USD/CAD 1.4874 / 1.4879

USD/SGD 1.6782 / 1.6792

What is CAD/SGD?

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Appreciation / Depreciation

Currencies go up and down in valuebut byhow much?

Value Increase (Decrease) is calculated by:

(New PriceOld Price) / Old Price

Example: EUR/USD was 1.3400 today and1.4100 one month from today

How much did the Euro appreciate/depreciate? How much did the $US appreciate/depreciate?

What was the change in Pips?

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Calculating Profit and Loss (P&L)

How does a trader make a profit (buy low /

sell high)

Example: EUR/USD is 1.3500

You sell $10mil

EUR/USD is now 1.3800

What is your P&L? In USD? In EUR?

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Quiz For Next Time

Normally take home quiz, but not this time

Visit www.xe.com(or any other website with

FX quotes)

I will ask you three exchange rates from EUR,

JPY, AUD, NZD, CAD, GBP, CHF against the USD

http://www.xe.com/http://www.xe.com/