UNIVERSITY OF DHAKA

DEPARTMENT OF INTERNATIONAL BUSINESS

COURSE CODE : EIB 513

COURSE NAME : INTERNATIONAL FINANCIAL MANAGEMENT

TERM PAPER
ON

FOREIGN EXCHANGE
MARKET
PREPARED BY
NAME: A.K.M Asraful Amin

STUDENT ID: 801311088

SUPERVISOR

Prof. Abu Hena Reza Hasan

DATE OF SUBMISSION
MARCH 28, 2015

INTRODUCTION
Exchange rate is the price of a nations currency in terms of another currency. So in an
exchange rate there are two components which are domestic currency and foreign currency.
The main theme behind this term paper is to analyze the bid/ask spread, bid/ask fluctuations
and the presence of any kind of arbitrage.

DATA COLLECTION
For this term paper I have collected data from two private banks and two money exchange
dealer. The names of the two banks are Mercentile Bank Limited and Jamuna Bank
Limited. The names of the two money exchange dealer are SKAF Money Exchange from
Kalabagan and Lords Money Exchanger from Gulshan-1. I have collected these data
consecutively for ten days except the holidays. All the data collected by me, are attached with
this term paper.

LIMITATIONS
Collecting data from any bank and money exchange dealer is not an easy job to do. Most of
the time they are not willing to pay all currency exchange rates. They just gave some of the
common exchange rates. I have to visit those places regularly to collect these data. There is
no particular chart of these data. As a result I have to believe what they have given to me.

ANALYSIS
With the data that I have collected, at first I have calculated the Bod/Ask spread. Then I have
tried to find out the Bid/Ask fluctuations. And finally I have tried to find out the possibility of
any kind of arbitrage.

(1) SPREAD ANALYSIS

The bid/ask spread is simply the differences between the price at which a dealer will buy a
currency and the price at which the dealer will sell the currency. The bid/ask spread is usually

given as percentage. The formula that is used for calculating the bid/ask spread is given
below:
Percentage of Bid/Ask Spread = [{(Ask price Bid price) / Ask price} 100]
Normally the spread as defined represents discount in the bid rate as percentage on the ask
rate. Spread is the key indication of the liquidity of the currency. Normally, the smaller the
spread the better the liquidity. Here, I have took four common currencys bid/ask price from
four different organizations and calculated the percentage of spread.

Spread calculation of British Pound from Mercentile Bank Limited

Mercantile Bank Ltd.
01.03.2015
02.03.2015
03.03.2015
04.03.2015
05.03.2015
08.03.2015
09.03.2015
10.03.2015
11.03.2015
12.03.2015

Currency Buy/Bid Sale/Ask

British
Pound

117.45
117.18
117
116.82
116.08
114.43
114.5
114.8
115.2
115.5

122.81
122.53
122.34
122.15
121.39
119.67
119.7
119.9
120.28
120.5

% of Spread
4.364465434
4.366277646
4.364884747
4.363487515
4.37433067
4.378708114
4.344193818
4.253544621
4.22347855
4.149377593

From the above calculation, I can say that the percentage of spread changes every day though
the amount is very little. Considering the change on the percentage of spread, it can be said
that what actually is going to the pockets of bank or money exchange dealer. So the market
value of British Pound against the Bangladeshi taka changes every day but on a very short
margin.

Spread calculation of EURO from Jamuna Bank Limited

Next I have calculate the bid/ask spread of the EURO currency against Taka.

Jamuna Bank Ltd.

01.03.2015
02.03.2015
03.03.2015
04.03.2015
05.03.2015
08.03.2015
09.03.2015
10.03.2015
11.03.2015
12.03.2015

Currency Buy/Bid Sale/Ask

EURO

85.51
85.38
85.49
85.36
84.52
82.82
82.85
83.72
85.22
85.32

88.67
88.54
88.65
88.52
87.68
85.94
85.72
86.02
88.02
88.43

% of Spread
3.563775798
3.569008358
3.564579808
3.569814731
3.604014599
3.630439842
3.348110126
2.673796791
3.181095206
3.516906027

From the bid/ask spread calculation of EURO, it can be said that the amount of percentage
change in spread is not that much which means the discount on the bid rate as percentage of
ask rate in between 3% in most cases.

Spread calculation of US Dollar from SKAF Money Exchange (Kalabagan)

SKAF Money
Currency Buy/Bid Sale/Ask
Exchange (Kalabagan)
01.03.2015
78.1
78.4
78.5
78.8
02.03.2015
78.2
78.5
03.03.2015
77.9
78.3
04.03.2015
78.3
78.5
05.03.2015
American
Dollar
78.5
78.8
08.03.2015
78.3
78.6
09.03.2015
78.5
78.8
10.03.2015
78.8
79.2
11.03.2015
78.5
78.8
12.03.2015

% of Spread
0.382653061
0.38071066
0.382165605
0.510855683
0.25477707
0.38071066
0.381679389
0.38071066
0.505050505
0.38071066

As American Dollar is the most used currency not only in our country but also in most
country it can noticed easily that the percentage of bid/ask spread is very low which means
the liquidity of American Dollar is better in our currency market.

Spread calculation of Malaysian Ringgit from Lords Money Changer (Gulshan-1)

Lords Money Changer
Currency Buy/Bid Sale/Ask
(Gulshan-1)
01.03.2015
18.68
21.61
18.58
21.51
02.03.2015
18.61
21.54
03.03.2015
18.57
21.5
04.03.2015
18.61
21.54
05.03.2015
Malaysian
Ringgit
18.43
21.36
08.03.2015
18.23
21.16
09.03.2015
18.19
21.12
10.03.2015
18.08
21.00
11.03.2015
18.2
21.12
12.03.2015

% of Spread
13.55853771
13.62157136
13.60259981
13.62790698
13.60259981
13.71722846
13.84688091
13.87310606
13.9047619
13.82575758

From the above calculation, it is clear that the liquidity of Malaysian Ringgit in our country is
not that in a better place as the spread percentage is on the higher side.

(2) BID/ASK FLUCTUATIONS ANALYSIS

Fluctuations mean an irregular rising and falling in number or amount. When I considered the
data for the consecutively ten days, I found the bid or ask fluctuations on the different
currencies. At first I have tried to find the fluctuations on bid price of British pound on four
different organizations.

Date

01.03.2015
02.03.2015
03.03.2015
04.03.2015
05.03.2015
08.03.2015
09.03.2015
10.03.2015
11.03.2015
12.03.2015

Mercantile Bank

Jamuna Bank

SKAF Money
Exchange

Lords Money
Changer

Buy/Bid

Buy/Bid

Buy/Bid

Buy/Bid

117.45
117.18
117
116.82
116.08
114.43
114.5
114.8
115.2
115.5

118.32
118.02
117.8
117.69
116.89
115.26
116.24
116.42
117.82
118.32

117.5
117
117.5
118
118.5
117.5
117.5
118.5
118
118.5

116.56
116.25
116.1
115.91
114.1
113.53
113.66
113.83
113.72
112.65

Currency

British
Pound

It could be understand more easily when I plotted these data on a chart.

119
118
117
116
Mercantile Bank Buy/Bid

115
114

Jamuna Bank Buy/Bid

113

SKAF Money Exchange

Buy/Bid

112

Lords Money Changer

Buy/Bid

111
110
109

From the above chart it is clear that how the buy price of British pound changes among these
ten days in various organizations. Now moving on to the sale price.

Date

01.03.2015
02.03.2015
03.03.2015
04.03.2015
05.03.2015
08.03.2015
09.03.2015
10.03.2015
11.03.2015
12.03.2015

Mercantile
Bank

Jamuna Bank

SKAF Money
Exchange

Lords Money
Changer

Sale/Ask

Sale/Ask

Sale/Ask

Sale/Ask

122.81
122.53
122.34
122.15
121.39
119.67
119.7
119.9
120.28
120.5

121.93
121.62
121.4
121.29
120.48
118.84
119.234
119.27
121.25
121.95

118.5
118
118.5
119
119.5
119
119.5
120
119
120

122.78
122.46
122.29
122.12
121.91
119.7
119.82
120
119.89
118.79

Currency

British
Pound

Plotting on the chart we can understand the fluctuations.

124
123
122
121
120
119
118
117
116

Mercantile Bank Sale/Ask

Jamuna Bank Sale/Ask
SKAF Money Exchange
Sale/Ask
Lords Money Changer
Sale/Ask

115

Considering the two chart it can be easily said that the currency fluctuations rate is not very
high but it occurs every day and sometimes in a single day it can fluctuate. As the rate of
fluctuate is not that high so it can be said that the money market is stable.

(3) ARBITRAGE ANALYSIS

Arbitrage is basically buying in one market and simultaneously selling in another, profiting
from a temporary difference. This is considered riskless profit for the investor/trader. When a
bid/ask spread is available in the currency, there is also arbitrage available.
Arbitrage can be found in three ways and the ways are location arbitrage, triangular arbitrage
and covered interest arbitrage. As I have already found that there is spread available in
currency pairs so there will also be arbitrage available.
In locational arbitrage one just has to buy from a place and sell that currency to other place
and in this way he will gain profit.
In triangular arbitrage, cross exchange rate is another important thing. Among the cross
exchange rate available one has to choose the highest available rate in the market to gain
profit. In this there is another two currency used along with the common currency from which
I have started with and ended up.

CONCLUSION
Considering all the analysis I can say that money exchange market plays a very important
role in the countrys economy. So one who deal with this market should have sound
knowledge about bid/ask spread, bid/ask rate fluctuations and arbitrage availability.