Fin 4180: International Financial Management Spring 2017 Ass

Fin 4180 International Financial Managementspring 2017assignment 2

Perform calculations related to cross exchange rates based on dealer bid and ask quotes for various currencies. For each currency pair, determine implied cross rates by converting currency transactions into USD, then into the target currency, and finally compute bid and ask prices based on the given exchange rates and the direct quotes provided.

Paper For Above instruction

International foreign exchange markets facilitate currency conversions through a system of bid and ask prices quoted by dealers. Understanding the concept of cross rates—the exchange rate between two currencies obtained indirectly via a third currency—is essential for international financial management, especially for corporations and investors engaged in multi-currency transactions. This paper explores the process of calculating implied cross rates, bid and ask spreads, and how these rates can be determined from dealer quotes in the context of the Canadian dollar, British pound, euro, Brazilian real, Thai baht, Japanese yen, Swiss franc, Australian dollar, New Zealand dollar, Mexican peso, and South Korean won.

In the first part, the aim is to determine the number of British pounds a customer receives after exchanging euros for dollars and then dollars for pounds. Using the bid and ask quotes for EUR/USD and GBP/USD, the exchange transactions are analyzed to compute the implied cross rate. This involves converting euros to USD, then USD to GBP, and calculating the resulting GBP amount for a given euro transaction. The same methodology applies when reversing the transaction—selling pounds and buying euros—to ascertain the implied cross rate based on the bid and ask prices.

Similarly, the analysis extends to other currency pairs, such as the Brazilian real versus the Thai baht, Australian dollar versus Swiss franc, and the derivation of cross rates between these currencies. The calculations involve converting the currency amounts through USD and then back to the target currency, considering both bid and ask quotes, to derive the implied cross rates. The results then allow for the determination of the bid and ask prices expressed in terms of the base currencies.

Furthermore, the assignment requires the calculation of certain cross rates like GBP/CAD and AUD/NZD directly from the given quotes, and the appropriate quoting conventions are discussed. The calculation of the Mexican peso per Japanese yen currency pair is also undertaken, specifying whether the quote is MXN/JPY or JPY/MXN. These calculations demonstrate principles underlying cross currency pricing, bid-ask spreads, and the importance of market quotations in international finance.

Calculations of specific cross rates, implied rates, bid-ask spreads, and the interpretation of these rates are crucial for understanding the mechanics of currency markets and managing currency risk effectively. The comprehension of these concepts equips financial professionals with the tools necessary for accurate foreign exchange risk management and arbitrage opportunities.

References

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