INTERNATIONAL FINANCE EUN & RESNICK COMPLETE FORMULA

SHEET
Chapter 5:

Cross exchange rates

Where: C = common currency for which S(C/j) and S(C/k) are known:
S (C /k)
S( j/k )=
S(C / j )
Where: C = common currency for which S(j/C) and S(k/C) are known:
S( j/C)
S( j/k )=
S (k /C)

Where: C = common currency for which S(C/j) and S(k/C) are known:
S ( j/k )=S( C /k )xS ( j/C )

Bid-ask spread exchange rates

Where: Where Sa = spot ask rate and C = common currency for which Sa(C/j), Sb(C/j), Sa(C/k) and
Sb(C/k) are known:
S a (C /k )
Sa ( j/ k )=
Sb (C/ j)
Where: Where Sb = spot bid rate and C = common currency for which Sa(C/j), Sb(C/j), Sa(C/k) and
Sb(C/k) are known:

b
b S (C /k)
S ( j /k )= a
S (C / j)

Where: Where Sa = spot ask rate and C = common currency for which Sa(j/C), Sb(j/C), Sa(k/C) and
Sb(k/C) are known:

a
S ( j /C )
S a ( j/k )=
S b ( k /C )

Where: Where Sb = spot bid rate and C = common currency for which Sa(j/C), Sb(j/C), Sa(k/C) and
Sb(k/C) are known:

b
b S ( j /C )
S ( j/k )= a
S ( k /C )

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Where: Sa = spot ask rate and C = common currency for which Sa(C/j) and Sa(k/C) are known:
1
a a a
S a ( j/k )=
S (k / j )=S (C / j) xS (k /C ) or S b (C / j )xS b (k /C )

Where: Sb = spot bid rate and C = common currency for which Sb(C/j) and Sb(k/C) are known for
example: Sb ¿£/€) = Sb ( $ / € ) x S b ( £ /$)

b 1
Then: Sb ( k / j )=Sb (C / j)x S b (k /C ) or S ( j/k )= a a
S (C / j) x S ( k /C)

Forward cross exchange rates

Where: C = common currency for which Fn(j/C) and Fn(k/C) are known:
F N ( j /C )
F N ( j/ k )=
F N ( k /C )
Where: C = common currency for which Fn(C/k) and Fn(C/j) are known:
F N (C / j )
F N (k / j)=
F N (C /k )

Forward premium and discount

In American terms (direct quote):

F n ( $ / j )−S($ / j) 360 100

∫ N , j= S ( $/ j )
x x
days 1

In European terms (indirect quote):

F n ( j/$ )−S ( j/$) 360 100

∫ N , $= S ( j/ $ )
x x
days 1

Chapter 6:
Forward rate based on IRP

F ¿ Simple interest rate based on nominal annual interest rates. For example nominal annual
interest rate = 12% on currency j. Three month forward interest for currency j = (1 + 0.12/4).

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F ¿ Compound (effective) forward rate. Used only in situations in this unit where the period of time
of the forward contract exceed the period of compounding of the interest rate. For example nominal
annual interest rate = 12% on currency j. Two year forward interest rate calculation for currency j = ¿

Cash flows from an arbitrage opportunity:

Transactions CF0 CF1

Borrow in Currency J J Spot -Spot(1+ij)
Lend in currency K -J Spot Spot1(1+ik)
Sell the receivable currency K 0 (1+ik)(Forward - Spot1)
forward
Net cash flow 0 (1+ik) –(1+ij)Spot

How to determine whether IRP is holding under current conditions

An arbitrage opportunity exists for borrowing currency j and lending currency k when:

F
S
( 1+i k ) > ( 1+ i j )

An arbitrage opportunity exists for borrowing currency k and lending currency j when:

F
S
( 1+i k ) < ( 1+ i j )

No arbitrage opportunity exists when:

F
S
( 1+i k ) =( 1+i j )

The absolute version of purchasing power parity (PPP)

American terms: S = P$/POther currency

European terms: S = POther currency /P$

The relative version of PPP

e = $ - £

(1+ π H )
American terms direct quote: Forward rate=S1 x
(1+ π F )

(1+ π F )
European terms indirect quote: Forward rate=S1 x
(1+ π H )

The international Fisher effect

E(e) = i$ - i£

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 (1+i H )
American terms (direct quote): Forward rate=S1 x
(1+i F )

Where H = home currency and F = foreign currency

(1+i F )
European terms (indirect quote): Forward rate=S1 x
(1+i H )

Where H = home currency and F = foreign currency

Chapter 8:
Calculating present values – simple interest rate

i
PV =FV /(1+ ) simple interest rate calculation when discounting is for shorter period of
m
stipulated interest rate for example nominal interest rate (i) = 12% per annum and FV is discounted
for three months.

Calculating present values – compound (effective) interest rate

PV =FV /¿ compound interest rate calculation when discounting is done for a longer period than
the period of stipulated interest rate. For example nominal interest rate (i) = 12% per annum and FV
is discounted for two years.

Calculating future values – simple interest rate

i
FV =PV (1+ ) simple interest rate calculation when FV is calculated for shorter period than the
m
nominal interest rate applies to. For example nominal interest rate (i) = 12% per annum and FV is
calculated for three months from now.

Calculating future values – compound (effective) interest rate

F V =P V ¿ compound simple interest rate calculation when FV is calculated for longer period than
the nominal interest rate applies to. For example nominal interest rate (i) = 12% per annum and FV is
calculated for two years from now.

Value of a forward position with effective interest rate calculation

St F (0,T )
V t ( 0 ,T )= −
( 1+ r f )( T −t ) (1+ r )(T −t )
Where rf = foreign currency interest rate; T-t = period of time e.g 30days/365 days where T = total
period of forward and t = time of period already passed.

No-arbitrage price for a forward applying effective interest rate calculation when the value of a
forward position is to be calculated

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 F ( 0 , T )=¿
or

F(0 , T )=Sx {[(1+r )T ]/[ 1 x (1+r f )T ]}

Where rf = foreign currency interest rate; T = period of time e.g. 30days/365 days

Chapter 11:
Absolute value of FRA

days
Notional amount x ( SR− AR ) x
360
days
1+(SR x )
360
Where SR = Settlement rate; AR = agreement rate

Chapter 20:
Principle 360 days = banker’s year. Bond equivalent rates are based on actual year days of 365. See
formulas below.

Discounted value of Banker’s acceptance:

days
[ (
BA amount x 1− (BA rate+ acceptance commision rate) x
360 )]
Bond equivalent yield of importer’s bank:

( Discounted valueBAof amount

BA received by exporter
−1) x
365
days
Bond equivalent rate that exporter receives when discounting BA:

( PayoutDiscounted
of BA at maturity net of acceptance commission
value of BA received by exporter
−1) x
365
days

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