More on Euro Spread

1
More on Euro Spread

• International Finance
• Dick Sweeney

2
Outline

• Look at what we did in class
• Suppose it is right. Look at percentage spread.
• Look at alternative and the spread.
• Compare. Which makes sense?
• Look at currency quotes in FT.

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III. Forward rate quotes (cont.)

• Dealer quotes EUR 1.3000 to 10, 48 to 52, 144 to
  150, 205 to 337 for spot, 1-month, 3-months and
  1-year. Suppose you buy USD 50m 1-year.
• Spot 1.30000 to 1.30100 (substitute
  into bid)
• Forward 205 to 337 (add to
  spot)
  1.30205 1.30437 (235 pip
  spread)
• Add or subtract? Rule versus experiment
• Spread widens with maturitythinness, liquidity
• Spread goes from 10(0) to 235
• USD 50m / (USD 1.30205 / EUR)
• EUR (50m / 1.30205) EUR 38.401mdimensions
  cancel

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Spread for spot rates

• What is spread in percentage terms?
• Look at spot 1.3000, 1.3010.
• (1.3010 / 1.3000) - 1 x 100
• (1.0007692 - 1) x 100 0.0007692 x 100
• 0.0769231 1/13th of 1
• FT for Friday, Jan. 26, 2007
• 1.2903 to 1.2906 ? 0.0232504 or
• 1/43rd of 1
• Spread often very small for major currencies!

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Spread for forward rates

• One-year forward. Examine two possibilities
• Possibility (i), from class.
• 1.30205 versus 1.30437 ?
• (1.30437 / 1.30205) - 1 x 100
• (1.0017818 - 1) x 100 0.0017818 x 100
• 0.17818 ? 1/5th of 1

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Spread for forward rates

• Possibility (ii). 1.3205 versus 1.3437 ?
• (1.3437 / 1.3205) - 1 x 100
• (1.0175691 - 1) x 100 0.017818 x 100
• 1.7818 ? 2
• Which percentage spread makes sense?
• It is a bit like bid points of 20 and 33, but we
  add a little bit to make them bid of 20 ½ (205)
  and ask of 33 7/10th (337). Pretty clumsy
  forget about it.

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Better Euro example

• Dealer quotes EUR 1.2903 to 906 or 6, or 06,
  19 to 20, 52 to 54, 168 to 175 for spot,
  1-month, 3-months and 1-year. Suppose you buy USD
  50m 1-year.
• Spot 1.2903 to 1.2906 (substitute
  into bid)
• Forward 168 to 175 (add to
  spot)
  1.3071 1.3081 (10 pip
  spread)
• Add or subtract? Rule versus experiment
• Spread widens with maturitythinness, liquidity
• Spread goes from 3 to 10
• USD 50m / (USD 1.3071 / EUR)
• EUR (50m / 1.3071) EUR 38.25262mdimensions
  cancel
• Spread is 0.076505 of 1, or is about 1/13th of 1

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Premia and discounts (FT)

• Spot, 1-month bid prices
• 1.2903 versus 1.2922 ? (1.0014725 - 1) x 1200
  1.767/annum
• F / S - 1 ? Euro is at premium
• Do inverse S/ F 0.9985296. (0.9985296 - 1) x
  1200 -1.764/annum
• S / F - 1 ? USD is at a discount
• A little difference