Money, Banking, and International Financerm). How much would a one-liter of Coca-Cola costs in dollars if Coca-Cola costs 1.5 rm? Just
multiply the ringgit price by the ratio ($1 / 3 rm) in Equation 1, which equals $0.50.
0.50
3. 0
1
1. 5 =$
rm$
rm
( 1 )
Investors and bankers can calculate an exchange rate for currencies that investors rarely
trade. They calculate the cross rate to determine the exchange rate for these currencies. For
example, the Mexican peso to U.S. dollar exchange rate is well established, while the peso-euro
exchange rate is not. Since euros and U.S. dollars are widely traded, we can calculate the peso-
euro exchange rate. If the peso-U.S. dollar exchange rate equals 12.9 pesos per $1, and the euro-
U.S. dollar is € 0.77 per $1, subsequently, we calculate the peso-euro exchange rate in Equation
2 as 16.8 per €. We use a trick – we retain the currency units; thus, the correct calculation has
one of the currency units drop out, which is U.S. dollars in this case.
€
16.8p
€ 0. 77$1
$ 1
12.9p
=
(2)
Using another example, a cross rate is the exchange rate between the Myanmar kyat and
U.S. dollar. If one Malaysian ringgit equals 282.6 Myanmar kyats, then we use the U.S. dollar-
exchange rate to calculate the rarely traded exchanged rate. Consequently, we calculate the U.S.
dollar-kyat exchange rate in Equation 3 as 847.8 kyats per $1.
$1
847.8k
$ 13 rm
1282.6k
=
rm
(3)
Currency exchange rates are continually fluctuating, and a banker or investor can profit
from price differences, called intermarket arbitrage. For example, a trader at Citibank has
$100,000 and observes the following banks’ exchange rates. We denote the British pound by the
symbol £.
Citibank $1.54 / 1 £Credit Suisse € 1.6 / 1 £Deutsche Bank $0.97 / 1 €First, we calculate the cross rate between Citibank and Credit Suisse in Equation 4, which
equals $0.9625 per one euro. Then we compare this exchange rate to Deutsche Bank, equaling
$0.97 per one euro. Since the exchange rates differ, then arbitrage exists, and we can profit from