FX PROBLEMS

Problems $1-6$ below are based on the following foreign exchange quotations as they might appear in

the financial pages of a newspaper.

Britain Canada Japan Switzerland Eurozone

$$/$ C$$/$US$ $/$$ SFR$/$$ EUR$/$$

Spot $1\mathrm{.}68901\mathrm{.}2365134\mathrm{.}951\mathrm{.}63451\mathrm{.}8662$

$30-$day fwd$.1\mathrm{.}68391\mathrm{.}2379134\mathrm{.}511\mathrm{.}63001\mathrm{.}8606$

$90-$day fwd$.1\mathrm{.}67491\mathrm{.}2412133\mathrm{.}661\mathrm{.}62551\mathrm{.}8507$

$180-$day fwd$.1\mathrm{.}66481\mathrm{.}2458132\mathrm{.}301\mathrm{.}61901\mathrm{.}8350$

$1.$ What is the direct spot quote in the United States for each of the spot rates given above?

$2.$ Is the three$-$month forward Canadian dollar at a premium or discount relative to the U$.$S$.$

dollar? By what annual percentage?

$3.$ Express the one$-,$ three$-,$ and six$-$month forward Swiss franc quotes of the US dollar on a

points basis. Indicate the "premium" $(+)$ or "discount" $(-)$ for the quotations.

$4.$ What is the spot exchange rate between the Japanese yen and the Euro? Between the Euro

and the British pound?

$5.$ You read in the financial press that the British pound has fallen $22$ percent over the last

decade. What was the spot quote a decade ago?

$6.$ The U$.$S$.$ three$-$month Treasury bill rate is $8$ percent per annum. Estimate the U$.$K$.$

three$-$month Treasury bill rate.

$7.$ Exchange rates are: SFR$1\mathrm{.}8622/$$ spot

SFR$1\mathrm{.}8000/$$ one$-$year forward

Interest rates are: $6$ percent per annum in Switzerland

$9$ percent per annum in the United States

You have no money, but your credit is good for a loan of $$10,000$ or its equivalent in

Swiss francs. You can borrow or invest dollars for one year at $9$ percent, and you can borrow or

invest francs for one year at $6$ percent. You notice that U$.$S$.$ interest rates are above Swiss rates,

and you would like to earn excess profits with no risk. What can you do$,$ and how much can you

earn?

$8.$ Maria Cadiz, a foreign exchange trader in Madrid, sees that the $180-$day forward rate for

the Japanese yen against the dollar is $130/$$$.$ She believes that the spot yen in six months will

be stronger, at $125/$$$.$ What would be her expected profit on a $180-$day forward speculation

with $$1$ million? What would be her risks?

$9.$ Laura Wong would like to speculate that the U$.$S$.$ dollar is going to weaken compared to

the Swiss franc $($SFR$).$ She intends to use foreign currency options.

She finds an options contract for the SFR$62,500($she can only afford to speculate on one

contract$).$ The most recent spot rate is $$0\mathrm{.}6400/$SFR$.$ The three$-$month forward rate is

$$0\mathrm{.}6500/$SFR$.$ The premium for a put option on SFR for three months with a strike price of

$$0\mathrm{.}6400/$SFR $($at the money$)$ is $1\mathrm{.}0$ cent per SFR$.$ The premium for a three$-$month call option

on SFR is $2\mathrm{.}0$ cents per SFR for the same strike price.

Laura believes that the most likely range for the spot SFR in three months will be a low

of $$0\mathrm{.}6000/$SFR and a high of $$0\mathrm{.}6800/$SFR$.$ The most likely value, in her opinion, will be

$$0\mathrm{.}6700/$SFR$.$ Ignore brokerage costs.

a$.$ Diagram the profit and loss position from Laura Wong$$s perspective for both the

put and the call options.

b$.$ Calculate what she would gain or lose at her expected range of future spot prices

and her most likely estimate of $$0\mathrm{.}6700/$SFR$.$

c$.$ Calculate and show on the diagram the breakeven future spot rate for the SFR$.$

d$.$ Which strategy is most likely to lead to a speculative profit for Laura?