2.3 Exchange Rate Regimes
Countries following different exchange-rate regimes. These regimes range from fixed (pegged), semi-fixed to floating exchange-rate systems. The subsections following consider these regimes. A. Fixed exchange rateA fixed or pegged system is characterised by a country making the decision to keep its exchange rate constant against the value of another currency (the country of which is referred […]
2.4 ISO Codes and SWIFT
Countries following different exchange-rate regimes. These regimes range from fixed (pegged), semi-fixed to floating exchange-rate systems. The subsections following consider these regimes. A. Fixed exchange rateA fixed or pegged system is characterised by a country making the decision to keep its exchange rate constant against the value of another currency (the country of which is referred […]
2.5 Percentage in Point
In the forex market, the term “pip” is commonly used, which stands for percentage in point (also called points) and is the smallest price increment in forex trading. For the ZAR, one pip is equivalent to the fourth decimal point, which is 1/10 000 or 0,0001 of a rand (or 1/100th of a cent). If, […]
2.6 Direct and Indirect Quotations
It is convention internationally to quote the USD as the base currency and the other as the variable currency, as we did above in the case of the ZAR. However, this is not the only way in which exchange rates are quoted; they are also quoted where the USD is the variable currency and the […]
2.7 Bids and Offers
In the foreign exchange market, exchange rates are quoted by dealers as two prices: a bid and offer price. The bid is the first rate quoted in a two-way price and is the price at which the bank is prepared to buy the base currency in exchange for a certain amount of the term currency. […]
2.8 Converting Base and Variable Currency Amounts
When converting from a given base currency amount to the equivalent term currency amount, the rule is to multiply by the appropriate side of the exchange rate. ExampleA dealer quotes USD / ZAR 7,1980 / 7,11985. A client wishes to buy USD 10 million and sell ZAR. How many ZAR must he pay? Since the […]
4.8 Foreign Currency Denominated Investment Assets
One could also see foreign currency denominated equities, bonds, cash and property as alternative asset classes that could be considered (including in a portfolio) from a diversification standpoint when advising retail and institutional clients. Foreign currency denominated equities, bonds and property will have a similar risk profile dynamic in relation to each other as asset […]
4.7 Currency Swap
A currency swap in its simplest form involves the exchange of principal and interest payments in one currency for principal and interest payments in another currency. The amounts involved are usually of equal magnitude and they are exchanged with interest at the beginning and the end of the life of the swap. Currency swaps are […]
4.9 Foreign Currency Deposit Account
A foreign currency deposit account is a locally held account that can be used to invest funds in a range of foreign currencies. The main currencies are the United States Dollar (USD), the British Pound (GBP) and the Euro (EUR). This type of investment is used by investors who want to save in order to […]
4.6 Options
A call option gives the buyer of the option the right to buy a certain amount of currency at a specified exchange rate on or before a designated date. A put option gives the buyer of the option the right to sell a certain amount of currency at a specified exchange rate on or before […]