UNIVERSITY OF DHAKA

DEPARTMENT OF INTERNATIONAL BUSINESS

EMBA PROGRAM

FACULTY OF BUSINESS STUDIES

COURSE CODE : EIB 513

COURSE NAME : INTERNATIONAL FINANCIAL MANAGEMENT

TERM PAPER

ON

MONEY EXCHANGE

MARKET

PREPARED BY

NAME: SALEH RAFIQ CHOUDHURY

STUDENT ID: 801310016

SUPERVISOR

Prof. Abu Hena Reza Hasan

DATE OF SUBMISSION

MARCH 28, 2015

INTRODUCTION

The markets in which participants are able to buy, sell, exchange and speculate on

currencies are known as money exchange market or foreign exchange markets.

Foreign exchange markets are made up of banks, commercial companies, central

banks, investment management firms, hedge funds, and retail forex brokers and

investors. Exchange rate is the price of one nations currency in terms of another

nations currency. So in an exchange rate there are two components which are

domestic currency and foreign currency. This term paper is written on a theme

behind which is to analyze the bid/ask spread, bod/ask fluctuations and presence of

arbitrage.

DATA COLLECTION

For completing this term paper, I have collected data from two private banks and

two money exchange dealer.

The names of the two banks are:

BRAC Bank Limited

Standard Chartered Bank.

The names of the two money exchange dealer are:

SKAF Money Exchange from Kalabagan

B.K.B Money Exchange(Pvt.) Limited from Gulshan-2

I have collected these data consecutively for ten days except the holidays. All the

data collected by me for completing term paper, are attached with this term paper.

LIMITATIONS

Exchange rate collection is not that easy for everyone. Normally the private banks are

not willing to pay the entire currency rate while the money exchange brokers are also

gives limited data of some common currencies.

ANALYSIS

With all the collected data, I have to analyze bid/ask spread, bid/ask fluctuations and

presence of arbitrage. At first, I have calculated the percentage of bid/ask spread and

plotted the percentage rate on a chart. Then tried to analyze the bid/ask fluctuations

and finally tried to find the presence of arbitrage.

(1). BID/ASK SPREAD ANALYSIS

Normally the price by which someone buys the currency is the bid/buy price and the

price at which the someone sells it is the ask/sell price. The sell/ask price is normally

higher from the buy/bid price and because of this here comes the term spread. So

basically, spread is the difference between the ask/sell price and buy/bid price which

is normally shown in percentage. The formula that is used for calculating the bid/ask

spread is given below:

Percentage of Bid/Ask Spread = [{(Ask price Bid price) / Ask price} 100]

Spread as defined represents discount in the bid rate as percentage on the ask rate.

Spread is the key indication of the liquidity of the currency. Normally, the smaller the

spread the better the liquidity.

Percentage of Spread calculation of US Dollar

BRAC Bank Limited

Currency Buy/Bid Sale/Ask % of Spread

01.03.2015

US DOLLAR

77.0949 78.19 1.400562732

02.03.2015 77.0949 78.19 1.400562732

03.03.2015 77.045 78.14 1.401330944

04.03.2015 77.0949 78.19 1.400562732

05.03.2015 76.9951 78.09 1.402100141

08.03.2015 76.9951 78.09 1.402100141

09.03.2015 77.045 78.14 1.401330944

10.03.2015 77.0949 78.19 1.400562732

11.03.2015 76.9951 78.09 1.402100141

12.03.2015 76.9951 78.09 1.402100141

Standard Chartered Bank Currency Buy/Bid Sale/Ask % of Spread

01.03.2015

US DOLLAR

77.1 79.1 2.528445006

02.03.2015 77.1 79.1 2.528445006

03.03.2015 77.1 79 2.405063291

04.03.2015 77.1 79 2.405063291

05.03.2015 77 79 2.53164557

08.03.2015 77 79 2.53164557

09.03.2015 77 79 2.53164557

10.03.2015 76.9 79 2.658227848

11.03.2015 76.9 79 2.658227848

12.03.2015 76.9 79 2.658227848

B.K.B Money Exchange(Pvt.)

Ltd. Currency Buy/Bid Sale/Ask % of Spread

01.03.2015

US DOLLAR

78.9 79.2 0.378787879

02.03.2015 78.9 79.2 0.378787879

03.03.2015 78.65 78.85 0.253646164

04.03.2015 78.8 79.1 0.379266751

05.03.2015 78.6 78.9 0.380228137

08.03.2015 78.8 79.1 0.379266751

09.03.2015 78.8 79 0.253164557

10.03.2015 78.7 78.9 0.253485425

11.03.2015 78.7 78.9 0.253485425

12.03.2015 78.6 78.8 0.253807107

SKAF Money Exchange Currency Buy/Bid Sale/Ask % of Spread

01.03.2015

US DOLLAR

78.1 78.4 0.382653061

02.03.2015 78.5 78.8 0.38071066

03.03.2015 78.2 78.5 0.382165605

04.03.2015 77.9 78.3 0.510855683

05.03.2015 78.3 78.5 0.25477707

08.03.2015 78.5 78.8 0.38071066

09.03.2015 78.3 78.6 0.381679389

10.03.2015 78.5 78.8 0.38071066

11.03.2015 78.8 79.2 0.505050505

12.03.2015 78.5 78.8 0.38071066

From the above calculation, I can say that the percentage of spread changes every

day though the amount is very little.. So the market value of US Dollar against the

Bangladeshi taka changes every day but on a very short margin and it can be said

that the market is stable. After plotting in a chart it can be understand very easily.

0

0.5

1

1.5

2

2.5

3

% O

f Sp

read

% of Spread(BRAC) % of Spread(SCB) % of Spread(BKB) % of Spread(SKAF)

From the plot it is clear that in Standard Chartered Bank the bid/ask spread

percentage is high than the others. Though there are no major fluctuations in the

percentage of spread but considering the BKB money exchangers spread on dollar it

can be said that they are maintaining a very stable market for US Dollar. So the

liquidity of currency is in a better position of this money exchanger. Among the

others BRAC bank is containing a very non-fluctuate percentage of spread. There is

no major up and down in their bid/buy price and ask/sell price. And SKAF money

exchangers percentage of bid/ask spread is also on the lower side.

(2). BID/ASK FLUCTUATIONS ANALYSIS

Fluctuations mean any kind of irregular increase or decrease. Bid/Ask fluctuations

means any kind of irregular increase or decrease in the price range of currency. It

could occur in a daily basis or consecutive days.

US Dollar Bid/Ask Fluctuations for ten days:

76.5

77

77.5

78

78.5

79

79.5

80

Bu

y/B

id

Sale

/Ask

Bu

y/B

id

Sale

/Ask

Bu

y/B

id

Sale

/Ask

Bu

y/B

id

Sale

/Ask

Bu

y/B

id

Sale

/Ask

Bu

y/B

id

Sale

/Ask

Bu

y/B

id

Sale

/Ask

Bu

y/B

id

Sale

/Ask

Bu

y/B

id

Sale

/Ask

Bu

y/B

id

Sale

/Ask

1.03 2.03 3.03 4.03 5.03 8.03 9.03 10.03 11.03 12.03

SCB Brac Bank SKAF Money Exchange B.K.B Money Exchange(Pvt.) Ltd.

In the above chart, it is clear that though the fluctuations are not that big but there

are fluctuations available. The highest fluctuations are shown is Standard Chartered

Bank. Their buy/bid price close to $77 and ask/sell price is more than $79.

Moreover I have tried to find out the fluctuations in British Pound bid/ask price. For

this again I have plotted a chart. Again Standard Chartered tops the chart I case of

fluctuations. Though BRAC bank have a lower spread but their fluctuation rate is

high.

British Pound Bid/Ask Fluctuations for ten days:

Considering the two chart it can be easily said that the currency fluctuations rate is

not very high but it occurs every day and sometimes in a single day it can fluctuate

many times. As the rate of fluctuate is not that high so it can be said that the money

market is stable.

110

112

114

116

118

120

122

124

126

Bu

y/B

id

Sale

/Ask

Bu

y/B

id

Sale

/Ask

Bu

y/B

id

Sale

/Ask

Bu

y/B

id

Sale

/Ask

Bu

y/B

id

Sale

/Ask

Bu

y/B

id

Sale

/Ask

Bu

y/B

id

Sale

/Ask

Bu

y/B

id

Sale

/Ask

Bu

y/B

id

Sale

/Ask

Bu

y/B

id

Sale

/Ask

1.03 2.03 3.03 4.03 5.03 8.03 9.03 10.03 11.03 12.03

SCB BRAC SKAF BKB

(3). ARBITRAGE ANALYSIS

Generally arbitrage is system by which one can buy a currency from one place and

sell it to another place immediately. With this immediate action there is profit which

is generated. This profit is known as Locational arbitrage. Considering the data that I

have collected, it will not be hard to say that, there will arbitrage available as there is

a presence of spread and the bid/ask price fluctuate every day. So one can earn

profit from locational arbitrage.

Another arbitrage process is known as triangular arbitrage in which total three

currencies is used. Among them the currency from which the exchange started, in the

end one will convert he currency to gain profit. In this process, one has to be aware

of cross exchange rates. To gain profit one has to move for the highest cross

exchange rates available in the market.

So to have arbitrage, I can easily buy currency from any bank and sell them to any

money broker house as they offer more considering the banks.

CONCLUSION

Money exchange market is the biggest market in the world. It performs 365*7*24

basis means it is always open. Having proper knowledge, one can performs well in

this market.