$1.$ Using the American term quotes from Exhibit $5\mathrm{.}7,$ calculate the one$-,$ three$-,$ and six$-$month forward cross$-$exchange rates between the Australian dollar and the Swiss franc. State the forward cross$-$rates in $$Australian$$ terms.

Solution: The formulas we want to use are:

FN$($AUD$/$SFr$)=$ FN$($$$/$SFr$)/$FN$($$$/$AUD$)$

or

FN$($AUD$/$SFr$)=$ FN$($AUD$/$$$)/$FN$($SFr$/$$$).$

We will use the top formula that uses American term forward exchange rates.

a$.$ F$1($AUD$/$SFr$)=$

b$.$ F$3($AUD$/$SFr$)$

c$.$ F$6($AUD$/$SFr$)$

$2.$ A foreign exchange trader with a U$.$S$.$ bank took a short position of $3,000,000$ when the $$/$ exchange rate was $1\mathrm{.}24.$ Subsequently, the exchange rate has changed to $1\mathrm{.}35.$ Is this movement in the exchange rate good from the point of view of the position taken by the trader? By how much has the bank$$s liability changed because of the change in the exchange rate?

$.3.$ Restate the following one$-,$ three$-,$ and six$-$month outright forward European term bid$-$ask quotes in forward points.

Spot$1\mathrm{.}3431-1\mathrm{.}3436$

One$-$Month$1\mathrm{.}3432-1\mathrm{.}3442$

Three$-$Month$1\mathrm{.}3448-1\mathrm{.}3463$

Six$-$Month$1\mathrm{.}3488-1\mathrm{.}3508$

$4.$ Using Exhibit $5\mathrm{.}7,$ calculate the one$-,$ three$-,$ and six$-$month forward premium or discount for the Japanese yen versus the U$.$S$.$ dollar using American term quotations. For simplicity, assume each month has $30$ days. What is the interpretation of your results?

Solution: The formula we want to use is:

fN$,$JPY $=[($FN$($$$/)-$ S$($$$/)/$S$($$$/)]$ x $360/$N

a$.$ f$1,$

b$.$ f$3,$JPY

c$.$ f$6,$JPY

The pattern of forward premiums indicates that the Japanese yen is trading at a premium versus the U$.$S$.$ dollar. That is$,$ it becomes more expensive to buy a Japanese yen forward for U$.$S$.$ dollars $($in absolute and percentage terms$)$ the further into the future one contracts.

$5.$ Given the following information, what are the NZD$/$SGD currency against currency bid$-$ask quotations?

$$American Terms$$European Terms

$$Bank Quotations$$Bid$$Ask$$Bid$$Ask

New Zealand dollar$\mathrm{.}7265\mathrm{.}72721\mathrm{.}37511\mathrm{.}3765$

Singapore dollar $\mathrm{.}6135\mathrm{.}61401\mathrm{.}62871\mathrm{.}6300$

Solution: Equation $5\mathrm{.}12$ from the text implies

Sb$($NZD$/$SGD$)=$ Sb$($$$/$SGD$)$ x Sb$($NZD$/$$$)$

The reciprocal, $1/$Sb$($NZD$/$SGD$)=$ Sa$($SGD$/$NZD

Analogously, it is implied that Sa$($NZD$/$SGD$)=$ Sa$($$$/$SGD$)$ x Sa$($NZD$/$$$)$

The reciprocal, $1/$Sa$($NZD$/$SGD$)=$ Sb$($SGD$/$NZD$)$