FINS5512 Chap.7 Foreign Exchange Markets
Foreign Exchange Markets
Foreign-exchange problems become manageable when the quote is read from the customer's side. This chapter identifies base and terms currencies, applies dealer bid and offer correctly, transposes two-way quotations, builds cross-rates through unit cancellation and adjusts spot quotations with forward points. Its round-trip example makes the spread visible as a cash loss even when the market quote itself does not move.
Write currency units on every intermediate amount so quote orientation stays auditable.
Make currency units do the reasoning. Write every quote as terms currency per unit of base currency, then state what the customer gives and receives. A customer buying base pays the dealer offer; a customer selling base receives the dealer bid. An unchanged round trip therefore loses the spread.
For transposition, one divided by the old offer becomes the new bid and one divided by the old bid becomes the new offer. Reversing after reciprocation keeps bid below offer. For a cross-rate, arrange fractions so the vehicle currency cancels and the requested units remain. If it does not cancel, invert a quote before calculating.
Two-way cross-rates need a transaction path through the relevant bid and offer sides rather than convenient midpoints. Forward points add another orientation check. Under the materials available hered convention, rising points are added and falling points are subtracted, with bid points applied to bid and offer points to offer.
Keep precision until the final currency amount because reciprocal rounding can become material on a large principal. Context such as participant type or exchange-rate regime does not replace transaction direction: dealers, firms, investors and official institutions can buy or sell depending on the actual cash flow. A forward fixes a rate for later delivery, so name the base currency when describing a premium or discount.
On a two-way forward quote, confirm that the adjusted bid remains below the adjusted offer. Close every numerical answer by confirming units match the requested quote, transaction sides fit the customer action and the economic direction is plausible.
What this chapter covers
- 01
FX participants and exchange-rate regimes
- 02
Base and terms currencies
- 03
Dealer bid and offer quotations
- 04
Reciprocal quote transposition
- 05
Cross-rates through unit cancellation
- 06
Spot and forward points
Worked example · free
Complete an unchanged FX round trip
- +1The customer buys AUD at the dealer's 0.6520 offer.
- +1USD 65,200 divided by 0.6520 gives AUD 100,000.
- +1The customer sells AUD at the 0.6500 bid.
- +1AUD 100,000 returns USD 65,000, so the spread costs USD 200.
Key terms
- Bid
- The rate at which a dealer buys the base currency from a customer.
- Offer
- The rate at which a dealer sells the base currency to a customer.
- Forward points
- Quoted point adjustments added to or subtracted from a spot rate for forward delivery.
Foreign Exchange Markets FAQ
Why does the customer buy at the offer?
The offer is the dealer's selling price for the base currency. A customer who wants the base currency buys it from the dealer and therefore pays that higher side. The dealer's bid applies when the customer sells the base currency.
How is a two-way quote transposed?
Reciprocate both sides and reverse their order. The new bid is one divided by the old offer, while the new offer is one divided by the old bid. The reversal keeps bid below offer after inversion.
How do forward points change a spot quote?
Under the materials available hered course convention, rising points are added and falling points are subtracted. Apply bid points to the spot bid and offer points to the spot offer, then confirm the resulting bid remains below the offer.
Exam move
Write every quote as terms currency per one unit of base currency. Put the customer's action beside it: buying base means paying the offer; selling base means receiving the bid. For a transposition, write one over the old offer first and one over the old bid second, then check the new bid is lower. For a cross-rate, carry currency units through multiplication or division until only the requested quote remains.
Avoid multiplying midpoints when a two-way transaction path is required. On forward points, identify whether the points rise or fall before adding or subtracting, and keep bid and offer adjustments on their own sides. Rework the round-trip example until you can explain why an unchanged market still creates a loss.
The Week 7 workshop file in the course materials available here labels itself an earlier term, so use its question shapes only as corroboration; current offering facts come from the Term Planner and current lecture page.
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