The exchange rate R
R = units of domestic currency per unit of foreign currency
R rises = domestic currency depreciates
R falls = domestic currency appreciates
Every question in this course. Fix the direction once and every sign in chapters 9, 16 and 18 follows.
- R
- For example dollars per euro, or rupees per dollar: the domestic currency is on top
- Depreciation
- An increase in the domestic price of the foreign currency: imports dearer, exports cheaper
Cross exchange rate
R(A per B) = dollar value of B / dollar value of A
Chained form: R(Rs per EUR) = R(Rs per $) x R($ per EUR)
Given two quotes against a common currency, to find the third. Cancel the units to decide whether to divide or multiply; do not rely on memory.
- A
- The currency you are pricing in, the denominator
- B
- The currency being priced, the numerator
Arbitrage profit
Profit per unit = higher quote - lower quote
Units bought = sum committed / lower quote
Total profit = units bought x profit per unit
Two quotes for the same currency in two markets. Always cross-check by revaluing the whole position at the selling quote and subtracting the sum committed.
- Lower quote
- The market you buy in, and the divisor when converting the sum committed
- Higher quote
- The market you sell in
Percentage depreciation of the domestic currency
% depreciation = (R(new) - R(old)) / R(old) x 100
Comparing regimes, or sizing a currency move before applying the Marshall-Lerner arithmetic of chapter 9. Class case: 1.00 to 1.50 is 50 %, 1.00 to 1.25 is 25 %.
- R(old)
- The starting rate, always the denominator
- R(new)
- The new rate after the market moves or the authorities allow it to move