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TERMINOLOGY
A foreign exchange rate is the price of one currency
expressed in terms of another currency currency can be
viewed as an asset and exchange rate as asset price
A Quotation ( or quote) is a statement of willingness to
transact at an announced rate

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TERMINOLOGY
A pair of currencies in a quotation:
Commodity/Quote currency: the currency whose price
is being quoted
Base/Term currency: the currency used to quote the
commodity currency
USD/EUR = 1.2170
Or $1.2170/
Meaning: 1 EUR = 1.2170 USD
No. of unit of commodity currency is always 1 and that of
term currency is changing

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BID AND ASK RATES

Bid rate: is the price at which a dealer will buy the
foreign currency (or the commodity currency)
Ask rate: is the price at which a dealer will sell the
foreign currency (or the commodity currency)
Note: 1. bid for one currency is ask for the opposite
currency
USD/EUR = 1.2170/1.2178
Meaning: buying EUR at $1.2170 and selling EUR for
$1.2178
Buying EUR with USD is equivalent to selling USD for EUR
2. Ask price is always higher than bid, the dealers buy at
bid and then sell for a higher price and earn the difference.

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BID-ASK SPREAD
Bid-ask spread: the difference between bid and
ask prices
Measures
Bid - Ask Spread = Ask Bid
Midpoint price = (Ask + Bid)/2
Percent spread (%)
(Ask Bid)/Bid
(Ask Bid)/Ask
(Ask Bid)/Midpoint price
Understanding: This is before-tax profit for
dealer

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BID-ASK SPREAD
Dependent on
Order cost (+)
Inventory cost (+)
Competition (-)
Volume (-)
Frequency of trading (-)
Volatility (+)

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DIRECT AND INDIRECT QUOTATIONS

A direct quote is when the commodity currency is foreign
currency and base currency is domestic currency tell us
the price of a foreign currency in terms of domestic currency
Ex: In Hanoi, VND/USD = 20825/20865
An indirect quote is reverse tell us the price of domestic
currency in terms of foreign currency to know price of a
foreign currency, we have to take reciprocal of the quote
( i.e. take 1 divided by the quote)
Ex: In London, CAD/GBP = 2.2398/2.2392
Equivalent to GBP/CAD = 0.4465/0.4466 in direct quotation

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DIRECT AND INDIRECT QUOTATIONS

Whether it is direct or indirect quotations must be seen
from the perspective of the home country
VD: From the perspective of the US
Direct quotation

Indirect quotation

1.3023 1.3024 $/

0.7879 0.7878 /$

Note: In either ways, the bids are always for buying

foreign currency (ie. EUR) and the asks are for selling
EUR.
Agreed that: using direct quotation throughout this
course.
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AMERICAN EUROPEAN TERMS

European terms

American terms

Foreign currency price of one dollar Dollar price of one foreign

currency
SF1,6000/$

$0,6250/SF

90,5000/$

$0,01105/

0,7717/$

$1,2950/

Note:
1. Foreign vs Domestic currency is not concerned no home country
2. For practical reasons, EUR, GBP, Australian dollars (AUD), New
Zealand dollars (NZD), Special Drawing Rights (SDR) has always
been quoted in American terms.

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CROSS RATES
Many currency pairs are inactively traded their exchange rate is
determined through their relationship to a widely traded third currency.
Ex1 : Cross rate without bid-ask spread
USD/JPY = 82.04
USD/MXN = 12.2324
Ex2: Cross rate with bid-ask spread
USD/VND = 16350/16450.
USD/JPY = 109.55/111.05
At which rate will you sell JPY for VND?

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Trader

Dealer

Quotes

JPY
(sell)

USD
(sell)

1 USD=111.05JPY

USD
(sell)

USD
(buy)

1 USD=16350VND
111.05 JPY = 16350 VND
JPY/VND =16350/111.05
1 JPY = 147.23 VND

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CROSS RATES
Case 1: Cross rate of 2 currencies at the base positions
VND/USD = 16350/16450.
JPY/USD = 109,55/111,05

VND/JPY =

147,23/
150,16

Case 2: Cross rate of 2 currencies at the commodity positions

VND/USD = 16350/16450
VND/EUR = 24250/24830

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CROSS RATES
Case 3: Cross rate of 2 currencies at the opposite positions
In Singapore :

VND/USD = 16350/16450

USD/GBP = 1,8932/1,9337

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CROSS RATE
1. Your company borrowed 500.000HKD from the bank. After paying for
a 1.000.000 JPY contract, your company decided to invest the remaining
into a French mutual fund at 2000EUR per a certificate. How many
certificates can your company buy? Given the following quotations:
JPY/USD = 105.40/108.40
HKD/USD = 7.7860/90
USD/EUR = 1.6120/40
2. You observed the following quotes:
Vietinbank JPY/USD = 80.600 80.660
Vietcombank:
VND/USD = 20,570 20,750
Eximbank: VND/JPY = 251 259
What would you do to make a profit?

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A
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LCH S H THNG TIN

T QUC T
1. T gi c nh:
1.1. Ch t gi khng dng ng bn a (no separate
legal tender)
1.2. Ch t gi Neo cng theo mt ng tin mnh
(currency board)
1.3. Ch Neo c nh (Conventional fixed peg
arangements)

Gold standard
N V VNG

BrettonWOODS
woods
BRETTON

Gii thiu

BRETTON WOODS

The establishment of the so-called 3 financial

and economic
pillars of the world: IMF, World
BRETTON
WOODS
Bank and WTO

On 15/8/1971, President Nixon abandoned the

BRETTON
WOODS
gold-dollar
linkage. The US no longer sells gold
for dollars

http://www.youtube.com/watch?v=iRzr1QU6K1o

HIN
NAYexchange rate
Today
system under IMF
classficiations

SIMPLE CLASSIFICATIONS
Fixed: the value of currency is fixed to a reference foreign
currency or a basket of currency with or without margin of
fluctuations and central rate adjustment.
Managed floating: the monetary authorities influences the
movements of exchange rate through active intervention in the
forex market without specifying or committing to a preannounced
path.
Freely Floating: the exchange rate is market-determined with
any intervention aimed at moderating the rate of change or
preventing undue fluctuation rather than establishing a level for
it.

Where is Vietnam standing?

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APPRECIATION VS. DEPRECIATION

Depreciation of a currency refers to a fall in the value of a
floating currency which requires more units of that currency
to buy 1 unit of foreign currency
Increased exchange rate under direct quotation and
decreased exchange rate under indirect quotation
Appreciation of a currency refers to a rise in the value of a
floating currency which requires less units of that currency
to buy 1 unit of foreign currency
Decreased exchange rate under direct quotation and
increased exchange rate under indirect quotation

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APPRECIATION VS. DEPRECIATION

Price in US

Rate

Price in Vietnam

$499/ Iphone 5
16GB
$499/ Iphone 5
16GB
(home country)

21000VND/$ 10.479.000 VND

21500VND/$ 10.728.500 VND

$714.3
21000VND/$ 15.000.000 VND/MT of rice
$697.7
21500VND/$ 15.000.000 VND/MT of rice
(home
country)
USD appreciate relative to VND American
products
become more
expensive in Vietnam
VND depreciate relative to USD Vietnamese products become cheaper
When a country currency depreciates, goods and
in US

services from that country become cheaper in foreign

markets and foreign goods and services become more
expensive in that country

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DEVALUATION VS. REVALUATION

Under a fixed exchange rate system, devaluation
and revaluation are official downward and upward
changes in the value of a country's currency relative
to other currencies. This is done by monetary
authorities formally setting a new fixed rate with
respect to foreign reference currency.

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MEASURING A CHANGE IN THE SPOT RATE

Measuring a change in the foreign currency for quotations
expressed in home currency terms (direct):

Quotations expressed in foreign currency terms (indirect):

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MEASURING A CHANGE IN THE SPOT RATE

The Australian dollar was quoted at A$1.8445/US$ on
Aug 19, 2002, while on March 2, 2004 it was quoted at
A$1.335/US$.
What is the appreciation/depreciation of the US$ ?

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