Self-Test 22.1 Use the exchange rates in Table 22-1. How many euros can you buy for 1 dolla indirect quote)? How many dollars can you buy for 1 yen (a direct quote)? pol rate of exchange xchange rate for an nmediate transaction. The exchange rates in the first column of figures in Table 22-1 are the pr currency for immediate delivery. These are known as spot rates of exchan example, the spot rate of exchange for Mexican pesos is pesos 10.9143/S. I words, it costs 10.9143 Mexican pesos to buy 1 dollar. Exchange rates are generally quoted against the dollar. For example, Tab shows that $1 can buy either 1.1322 Swiss francs or 111.715 Japanese ye implies that 1.1322 Swiss francs are equivalent to 111.715 Japanese yen and fore, that I Swiss franc is equivalent to 111.715/1.1322 = 98.671 yen. An e rate between two currencies other than the U.S. dollar is known as a cross-rata ween the Swiss franc and the yen is per Swiss franc. If the exchange rate between Japanese yen and Swiss francs were oth 98.671 per Swiss franc, you could make a risk-free profit. For example, that a bank is quoting a rate of Y120 per Swiss franc. Here is what you do: Si and exchange it for 1.1322 Swiss francs, which you then use to buy Shri (120/SFr) = 135.864. This 135.864 in tum buys you 130.00+ $1.2 111.715/ You have just taken advantage of a misalignment of prices to make a sure-fi Such activity is known as arbitrage. Your arbitrage between the three currer ted you a 22% risk-free profit.! LE 22-1 Spoland d exchange roles for mber Jl, 2007 Quotation Spot Rate 1 Month 3 Months 1 Year Europe EMU (euro) Direct 1.4621 1.4629 1.4631 1.4576 Sweden (krona) Indirect 6.4532 6.4612 6 .4800 6.4842 Switzerland (trane) Indirect 1.1322 1.1299 1.1264 1.1179 United Kingdom (pounds Direct 19908 19888 1.9857 1.9652 Americas Canada (dollar) Indirect 9870 9866 Mexico (peso) Indirect 10.9143 10.9376 10.9856 11.3118 Pacific/Africa Hong Kong (dolar) Indirect 7.7974 7.7878 7.7716 7.7309 Japan fysn) Indirect 111.715 111.332 110.626 108.173 South Africa (rand) Indirect 6.83446.87296.9514 73535 South Korea (wan) Indirect 986.050 933.750 931.150 927.850 Direct or number of dollars per unit for indirect quotation s of foreign currency pet Source Franc e January 2 2008, available at www.ft.com Self-Test 22.1 Use the exchange rates in Table 22-1. How many euros can you buy for 1 dolla indirect quote)? How many dollars can you buy for 1 yen (a direct quote)? pol rate of exchange xchange rate for an nmediate transaction. The exchange rates in the first column of figures in Table 22-1 are the pr currency for immediate delivery. These are known as spot rates of exchan example, the spot rate of exchange for Mexican pesos is pesos 10.9143/S. I words, it costs 10.9143 Mexican pesos to buy 1 dollar. Exchange rates are generally quoted against the dollar. For example, Tab shows that $1 can buy either 1.1322 Swiss francs or 111.715 Japanese ye implies that 1.1322 Swiss francs are equivalent to 111.715 Japanese yen and fore, that I Swiss franc is equivalent to 111.715/1.1322 = 98.671 yen. An e rate between two currencies other than the U.S. dollar is known as a cross-rata ween the Swiss franc and the yen is per Swiss franc. If the exchange rate between Japanese yen and Swiss francs were oth 98.671 per Swiss franc, you could make a risk-free profit. For example, that a bank is quoting a rate of Y120 per Swiss franc. Here is what you do: Si and exchange it for 1.1322 Swiss francs, which you then use to buy Shri (120/SFr) = 135.864. This 135.864 in tum buys you 130.00+ $1.2 111.715/ You have just taken advantage of a misalignment of prices to make a sure-fi Such activity is known as arbitrage. Your arbitrage between the three currer ted you a 22% risk-free profit.! LE 22-1 Spoland d exchange roles for mber Jl, 2007 Quotation Spot Rate 1 Month 3 Months 1 Year Europe EMU (euro) Direct 1.4621 1.4629 1.4631 1.4576 Sweden (krona) Indirect 6.4532 6.4612 6 .4800 6.4842 Switzerland (trane) Indirect 1.1322 1.1299 1.1264 1.1179 United Kingdom (pounds Direct 19908 19888 1.9857 1.9652 Americas Canada (dollar) Indirect 9870 9866 Mexico (peso) Indirect 10.9143 10.9376 10.9856 11.3118 Pacific/Africa Hong Kong (dolar) Indirect 7.7974 7.7878 7.7716 7.7309 Japan fysn) Indirect 111.715 111.332 110.626 108.173 South Africa (rand) Indirect 6.83446.87296.9514 73535 South Korea (wan) Indirect 986.050 933.750 931.150 927.850 Direct or number of dollars per unit for indirect quotation s of foreign currency pet Source Franc e January 2 2008, available at www.ft.com