Assignment 1

CHAPTER 4

THE MARKET FOR FOREIGN EXCHANGE

(5 marks)

PROBLEMS

1. Using the American term quotes from Exhibit 4.4, calculate a cross-rate matrix for the euro, Swiss franc, Japanese yen, and the British pound so that the resulting triangular matrix is similar to the portion above the diagonal in Exhibit 4.6.

2. Using the American term quotes from Exhibit 4.4, calculate the one-, three-, and six-month forward cross-exchange rates between the Canadian dollar and the Swiss franc. State the forward cross-rates in Canadian terms.

3. A foreign exchange trader with a U.S. bank took a short position of 5,000,000 when the $/ exchange rate was 1.55. Subsequently, the exchange rate has changed to 1.61. 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 banks liability changed because of the change in the exchange rate?

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

Spot 1.2543-1.2546

One-Month 1.2545-1.2550

Three-Month 1.2551-1.2558

Six-Month 1.2560-1.2570

5. Using the spot and outright forward quotes in problem 4, determine the corresponding bid-ask spreads in points.

6. Using Exhibit 4.4, 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?

7. Using Exhibit 4.4, calculate the one-, three-, and six-month forward premium or discount for the U.S. dollar versus the British pound using European term quotations. For simplicity, assume each month has 30 days. What is the interpretation of your results?

8. A bank is quoting the following exchange rates against the dollar for the Swiss franc and the Australian dollar:

SFr/$ = 1.5960--70

A$/$ = 1.7225--35

An Australian firm asks the bank for an A$/SFr quote. What cross-rate would the bank quote?

9. 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 .7265 .7272 1.3751 1.3765

Singapore dollar .6135 .6140 1.6287 1.6300

10. Doug Bernard specializes in cross-rate arbitrage. He notices the following quotes:

Swiss franc/dollar = SFr1.5971?$

Australian dollar/U.S. dollar = A$1.8215/$

Australian dollar/Swiss franc = A$1.1440/SFr

Ignoring transaction costs, does Doug Bernard have an arbitrage opportunity based on these quotes? If there is an arbitrage opportunity, what steps would he take to make an arbitrage profit, and how would he profit if he has $1,000,000 available for this purpose.