%%FX IV – math

Q: Suppose you converted home currency (USD) into GBP and JPY. Avarege rate is computed as net short position in home currency (say 17,982,000 USD) divided by net long position in a foreign currency (say 10m GBP), in a single account. Same for JPY average rate, but in another account. But what if you did some cross trades between GBP and JPY? How would you compute your GBP average rate?
%%A: I would need to work out how much nett GBP was converted to JPY

IV < — Q: if a cross pair AAA/BBB can be priced using EUR, and also can be priced using USD, then what’s the algorithm to choose the correct pricing? Choose USD if it has tighter spread?
%%A: I feel it’s possible to go with EUR and publish a quote with a tri-arb loophole in it. I feel the bid quote on the cross must be the safest bid, and the offer quote on the cross must be the safest offer.

Note ECN’s don’t generate cross rates. Only market-makers (dealers) do that. Its their responsibility to check for triangular-arb loopholes.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s