) ) ) ) ) ) ) ) ) Presented by GROUP 8

) ) ) ) ) ) ) ) )

Transactions in the
Foreign Exchange
Market, Foreign
Exchange Rates and
Quotation
) ) ) ) ) ) ) ) )
) ) ) ) ) ) ) ) )

SPOT MARKET
Spot transactions occur when the
buyer and seller of different currencies
solve their payments within two
business days of the transaction. It is
the quickest method for exchanging
currencies. In this case, currencies are
exchanged over a two-day period,
meaning no contract is signed
between the countries.
TESORO
) ) ) ) ) ) ) ) )
SPOT RATE QUOTATIONS
) ) ) ) ) ) ) ) )

Spot rate currency quotations can be stated in direct or indirect

terms.

The quote is direct when the price of one unit of foreign currency is
expressed in terms of the domestic currency.

The quote is indirect when the price of one unit of domestic

currency is expressed in terms of Foreign currency.

GUARO
) ) ) ) ) ) ) ) )
SPOT RATE QUOTATIONS
) ) ) ) ) ) ) ) )

GUARO
) ) ) ) ) ) ) ) )
SPOT RATE QUOTATIONS
) ) ) ) ) ) ) ) )

Most currencies in the interbank market are quoted in European terms,

that is, the U.S. dollar is priced in terms of the foreign currency (an indirect
quote from the U.S. perspective).
By convention, however, it is standard practice to price certain currencies
in terms of the U.S. dollar, or in what is referred to as American terms (a
direct quote from the U.S. perspective). Prior to 1971, the British pound was a
nondecimal currency; that is, a pound was not naturally divisible into 10
subcurrency units. Thus, it was cumbersome to price decimal currencies in
terms of the pound.

GUARO
) ) ) ) ) ) ) ) )
) ) ) ) ) ) ) ) )
BID AND ASK

Bid price - price to buy

Ask price - price to sell
BID AND ASK
) ) ) ) ) ) ) ) )
) ) ) ) ) ) ) ) )
) ) ) ) ) ) ) ) )
) ) ) ) ) ) ) ) )
TOPICS TO BE DISCUSSED:

CROSS EXCHANGE RATE

TRIANGULAR ARBITRAGE
SPOT FOREIGN EXCHANGE MARKET
MICROSTRUCTURE
) ) ) ) ) ) ) ) )
) ) ) ) ) ) ) ) )
CROSS-EXCHANGE RATE

Is an exchange rate between a currency pair

where neither currency is the US Dollar.

The cross-exchange rate can be calculated

from the U.S. Dollar exchange rates for the
two currencies
) ) ) ) ) ) ) ) )
) ) ) ) ) ) ) ) )
CROSS-EXCHANGE RATE
•The RERB contains the official spot reference exchange rates
for the following currencies that are convertible to PHP with the
BSP: US Dollar, Japanese Yen, British Pound, Hong Kong Dollar,
Swiss Franc, Canadian Dollar, Singapore Dollar, Australian Dollar,
Bahraini Dinar, Kuwait Dinar, Saudi Riyal, Brunei Dollar,
Indonesian Rupiah, Thai Baht, United Arab Emirates Dirham,
Euro, Korean won and Chinese Yuan.
) ) ) ) ) ) ) ) )
) ) ) ) ) ) ) ) )

TRIANGULAR ARBITRAGE
• Triangular Arbitrage is the process of trading out of the U.S dollar
into a second currency, then trading it for a third currency, which is in
turn traded for U.S dollar.

• The purpose is to earn an arbitrage profit via trading from the

second to the third currency when the direct exchange rate between
the two is not in alignment with the cross-exchange rate

TESORO
) ) ) ) ) ) ) ) )
) ) ) ) ) ) ) ) )

SPOT FOREIGN EXCHANGE MICROSTRUCTURE

Market microstructure refers to the

basic mechanics of how a marketplace
operates.

TESORO
) ) ) ) ) ) ) ) )
) ) ) ) ) ) ) ) )

FIVE EMPIRICAL STUDIES ON FX MARKET

Huang and Masulis (1999)
• They concluded that dealer competition is a fundamental
determinant of the spot FX bid-ask spread.

Lyons (1998)
• He determined that the dealer's profits came primarily from
the dealer's role as an intermediary.

TESORO
) ) ) ) ) ) ) ) )
) ) ) ) ) ) ) ) )

FIVE EMPIRICAL STUDIES ON FX MARKET

Lyons & Melvin (1998)

• Their study provides evidence against the common view
that private information is irrelevant, since all market
participants are assumed to possess the same set of public
information.

TESORO
) ) ) ) ) ) ) ) )
) ) ) ) ) ) ) ) )

FIVE EMPIRICAL STUDIES ON FX MARKET

Cheung & Chinn (2001)

• The purpose of their survey was to elicit information about
several aspects of exchange rate dynamics not typically
observable in trading data.

Dominguez
• Confirmed their findings.

TESORO
) ) ) ) ) ) ) ) )
) ) ) ) ) ) ) ) )

THE FORWARD MARKET

The forward market involves contracting today for the future
purchase or sale of foreign exchange.

TESORO
) ) ) ) ) ) ) ) )
) ) ) ) ) ) ) ) )

THE FORWARD PRICE

The forward price may be the same as the

spot price, but usually it is higher (at a
premium) or lower (at a discount) than the
spot price

TESORO
) ) ) ) ) ) ) ) )
) ) ) ) ) ) ) ) )
THE FORWARD MATURITY

• Bank quotes for maturities of 1, 3, 6, 9, and 12 months are

readily available.
• Quotations on nonstandard, or broken-term, maturities
are also available.
• Maturities extending beyond one year are becoming
more frequent, for good bank customers, a maturity
extending out to 5, and even as long as 10 years, is
possible.
TESORO
) ) ) ) ) ) ) ) )
) ) ) ) ) ) ) ) )
THE FORWARD RATE QUOTATIONS
Forward Rate quotations appear directly under the spot rate
quotations for five major currencies for one-, three-, and
six-month maturities. Today is Wednesday,
Example: October 4, 2023.
Spot Settlement is October 6
The settlement date of a three-
Forward settlement date
month forward transaction is
would be January 8, 2024
three calendar months from the (since January 6 falls on
spot settlement date for the Saturday)
currency.
GUARO
) ) ) ) ) ) ) ) )
) ) ) ) ) ) ) ) )
THE FORWARD RATE QUOTATIONS
Forward quotes are either direct or indirect, one being
the reciprocal of the other. From the U.S. perspective, a
direct forward quote is in American terms. As an example,
let’s consider the American term Swiss franc forward
quotations in relationship to the spot rate quotation for
Wednesday, June 5, 2013. We see that:

GUARO
) ) ) ) ) ) ) ) )
) ) ) ) ) ) ) ) )
THE FORWARD RATE QUOTATIONS

European term forward quotations are the reciprocal of

the American term quotes. In European terms, the
corresponding Swiss franc forward quotes to those stated
above are:

GUARO
) ) ) ) ) ) ) ) )
) ) ) ) ) ) ) ) )
LONG AND SHORT FORWARD POSITIONS

• One can buy (take a long position) or sell (take a short

position) foreign exchange forward.
• Bank customers can contract with their international
bank to buy or sell a specific sum of freely traded FX for
delivery on a certain date.
• Likewise, interbank traders can establish a long or short
position by dealing with a trader from a competing bank.

TESORO
) ) ) ) ) ) ) ) )
) ) ) ) ) ) ) ) )

If one uses the forward contract, he has

"locked in" the forward price for forward
purchase or sale of foreign exchange

TESORO
) ) ) ) ) ) ) ) )
) ) ) ) ) ) ) ) )
FORWARDS CROSS-EXCHANGE RATE

•forward exchange rates is a prediction of what

the exchange rate between the two currencies
will be at a future date.
•It involves contracting today for the future
purchase or sale of foreign exchange.
•Agree to make a transaction in the future
) ) ) ) ) ) ) ) )
) ) ) ) ) ) ) ) )
NON- DELIVERABLE FORWARD CONTRACTS

• The NDF contract is cash-settled, mostly in US Dollars,

on the due date (maturity)
• The settlement happens to depend upon the spot rate
on maturity and the agreed forward rate
• And the settlement will result in either a net receipt or a
net payment between the parties to the contract
) ) ) ) ) ) ) ) )
) ) ) ) ) ) ) ) )
FORWARD PREMIUM

•Forward premium refers to the difference

between the spot exchange rate and the forward
exchange rate of two currencies.
•It represents the cost or benefit of buying or
selling a currency forward, compared to buying
or selling it in the spot market.
) ) ) ) ) ) ) ) )
) ) ) ) ) ) ) ) )
OUTRIGHT FORWARD TRANSACTION

A type of transaction where two parties

agree to buy or sell a given amount of
currency at a predetermined rate at some
point in the future.
) ) ) ) ) ) ) ) )
) ) ) ) ) ) ) ) )
SWAP TRANSACTION

The simultaneous sale (or purchase) of spot

foreign exchange against a forward purchase (or
sale) of approximately an equal amount of the
foreign currency.
) ) ) ) ) ) ) ) )
) ) ) ) ) ) ) ) )
EXCHANGE TRADED FUND (ETF)

An exchange-traded fund (ETF) is a portfolio

of financial assets in which shares
representing fractional ownership of the fund
trade on an organized exchange.
) ) ) ) ) ) ) ) )
) ) ) ) ) ) ) ) )

Thank You
Group 8
PATRICK DIMALANTA
ERICA GUARO
SOFIA TESORO