MBF14e Chap05 FX Markets
MBF14e Chap05 FX Markets
MBF14e Chap05 FX Markets
1 Isaac Díez
Isaac Díez Peris lives in Rio de Janeiro. While attending school in Spain he meets
Juan Carlos Cordero from Guatemala. Over the summer holiday Isaac decides to
visit Juan Carlos in Guatemala City for a couple of weeks. Isaac's parents give
him some spending money, R$4,500. Isaac wants to exchange it to Guatemlan
quetzals (GTQ). He collects the following rates:
Assumptions Values
Amount of reais from parents 4,500.00
Spot rate (R$/€) 10.5799
Spot rate (€/GTQ) 0.4462
A Canadian exporter, Victoria Exports, will be receiving six payments of €12,000, ranging from now to 12 months in the future.
Since the company keeps cash balances in both Canadian dollars and U.S. dollars, it can choose which currency to change the euros
to at the end of the various periods. Which currency appears to offer the better rates in the forward market?
Days
Period Forward C$/euro US$/euro
spot 1.3360 1.3221
1 month 30 1.3368 1.3230
2 months 60 1.3376 1.3228
3 months 90 1.3382 1.3224
6 months 180 1.3406 1.3215
12 months 360 1.3462 1.3194
The Canadian exporter will be receiving six payments of 12,000 euros, ranging from now to 12 months in the future. Since the
company keeps cash balances in both Canadian dollars and US dollars, it can choose which currency to change the euros to at the
end of the various periods. And since the company wishes to lock in the forward rate for each and every payment, it would appear
that the company should lock in forward rates in C$ for all payments. Since the euro is selling forward at a greater premium against
the Canadian dollar than the U.S. dollar, the resulting dollar proceeds are higher.
Problem 5.3 Forward Premiums on the Japanese Yen
Use the following spot and forward bid-ask rates for the Japanese yen/U.S. dollar (¥/$) exchange rate from October 1, 2014, to
answer the following questions:
¥/$ ¥/$
Period
Bid Rate Ask Rate
spot 109.30 109.32
1 month 109.05 109.09
2 months 108.80 108.90
3 months 107.97 108.34
6 months 107.09 107.40
12 months 103.51 104.19
24 months 96.82 97.35
Since the exchange rate quotes are indirect quotes on the dollar (¥/$), the proper forward premium calculation is:
a. b.
¥/$ ¥/$ Calculated Forward
Period Days Forward Bid Rate Ask Rate Mid-Rate Premium
spot 109.30 109.32 109.31000
1 month 30 109.05 109.09 109.07000 2.6405%
2 months 60 108.80 108.90 108.85000 2.5356%
3 months 90 107.97 108.34 108.15500 4.2716%
6 months 180 107.09 107.40 107.24500 3.8510%
12 months 360 103.51 104.19 103.85000 5.2576%
24 months 720 96.82 97.35 97.08500 6.2960%
The forward rates progressively require fewer and fewer Japanese yen per dollar than the current spot rate. Therefore, the yen is
selling forward at a premium and the dollar is selling forward at a discount.
The 24 month forward rate has the largest premium, while the 1 month forward possesses the smallest premium.
Problem 5.4 Credit Suissse Geneva
Andreas Broszio just started as an analyst for Credit Suisse in Geneva, Switzerland. He receives the following
quotes for Swiss francs against the dollar for spot, one-month forward, 3-months forward, and 6-months forward.
a. Calculate outright quotes for bid and ask, and the number of points spread between each.
b. What do you notice about the spread as quotes evolve from spot toward six months?
c. What is the 6-month Swiss bill rate?
Assumptions Values
Spot exchange rate:
Bid rate (SF/$) 1.2575
Ask rate (SF/$) 1.2585
One-month forward 10 to 15
3-months forward 14 to 22
6-months forward 20 to 30
Assumptions Values
Beginning your trip with euros 15,000.00
Spot rate ($/€) 1.3214
Spot rate (Rubles/$) 30.96
After spending a week in London you get an email from your friend in Japan. He
can get you a very good deal on a plane ticket and wants you to meet him in
Osaka next week to continue your post-graduation celebratory trip. You have
GBP2,000 left in your purse. In preparation for the trip you want to exchange your
British pounds for Japanese yen, and you get the following quotes:
Assumptions Values
Beginning your trip with pounds 2,000.00
Spot rate (£/$) 0.62
Spot rate (¥/$) 109.31
The Asian financial crisis which began in July 1997 wreaked havoc throughout the currency markets of East Asia.
a. Which of the following currencies had the largest depreciations or devaluations during the July to November period?
b. Which seemingly survived the first five months of the crisis with the least impact on their currencies?
Part a.
July 1997 November 1997 Percentage
Country Currency (per US$) (per US$ Change vs dollar
China yuan 8.40 ### 0.0%
Hong Kong dollar 7.75 7.73 0.3%
Indonesia rupiah 2,400 3,600 -33.3%
Korea won 900 1,100 -18.2%
Malaysia ringgit 2.50 3.50 -28.6%
Philippines peso 27 34 -20.6%
Singapore dollar 1.43 1.60 -10.6%
Taiwan dollar 27.80 32.70 -15.0%
Thailand baht 25.0 40.0 -37.5%
Part b.
The Chinese yuan's value against the US dollar, as a result of the Chinese government maintaining its peg to the dollar,
did not change at all during the crisis. The Thai baht, however, fell 37.5% in only five months, with the Indonesian
rupiah a close second with a loss of 33.3%.
Problem 5.8 Bloomberg Currency Cross Rates
Use the following cross rate table from Bloomberg to answer the following questions.
Quote Calculated
a. Japanese yen per US dollar? 83.735
b. US dollars per Japanese yen? 0.0119 0.0119
c. US dollars per euro? 1.3247
d. Euros per US dollar? 0.7549 0.7549
e. Japanese yen per euro? 110.9238
f. Euros per Japanese yen? 0.009 0.0090
g. Canadian dollars per US dollar? 1.0097
h. US dollars per Canadian dollar? 0.9904 0.9904
i. Australian dollars per US dollar? 1.015
j. US dollars per Australian dollar? 0.9852 0.9852
k. British pounds per US dollar? 0.6328
l. US dollars per British pound? 1.5804 1.5803
m. US dollars per Swiss franc? 1.0184
n. Swiss francs per US dollar? 0.9819 0.9819
Problem 5.9 Dollar/Euro Forwards
Use the following spot and forward bid-ask rates for the U.S. dollar/euro (US$/€) exchange rate from December 10, 2010, to
answer the following questions:
US$/€ US$/€
Period Bid Rate Ask Rate
spot 1.3231 1.3232
1 month 1.3230 1.3231
2 months 1.3228 1.3229
3 months 1.3224 1.3227
6 months 1.3215 1.3218
12 months 1.3194 1.3198
24 months 1.3147 1.3176
Since the exchange rate quotes are direct quotes on the dollar (US$/€), the proper forward premium calculation is:
a) b)
US$/€ US$/€ Calculated Forward
Period Days Forward Bid Rate Ask Rate Mid-Rate Premium
spot 1.3231 1.3232 1.32315
1 month 30 1.3230 1.3231 1.32305 -0.0907%
2 months 60 1.3228 1.3229 1.32285 -0.1360%
3 months 90 1.3224 1.3227 1.32255 -0.1814%
6 months 180 1.3215 1.3218 1.32165 -0.2267%
12 months 360 1.3194 1.3198 1.31960 -0.2683%
24 months 720 1.3147 1.3176 1.31615 -0.2645%
The forward rates progressively require less and less U.S. dollars per euro than the current spot rate. Therefore the dollar is
selling forward at a premium and the euro is selling forward at a discount.
The 1 month forward rate as the smallest premium, while the 12 month forward possesses the largest premium.
Problem 5.10 Swissie Triangular Arbitrage
The following exchange rates are available to you. (You can buy or sell at the stated rates.)
Assume you have an initial SF12,000,000. Can you make a profit via triangular arbitrage?
If so, show the steps and calculate the amount of profit in Swiss francs (Swissies).
Assumptions Values
Beginning funds in Swiss francs (SF) 12,000,000.00
Mt. Fuji Bank (yen/$) 92.00
Mt. Rushmore Bank (SF/$) 1.0200
Matterhorn Bank (yen/SF) 90.00
Use the following spot and forward bid-ask rates for the U.S. dollar/Australian dollar (US$=A$1.00) exchange rate from
December 10, 2010, to answer the following questions
US$/A$ US$/A$
Period Bid Rate Ask Rate
spot 0.98510 0.98540
1 month 0.98131 0.98165
2 months 0.97745 0.97786
3 months 0.97397 0.97441
6 months 0.96241 0.96295
12 months 0.93960 0.94045
24 months 0.89770 0.89900
Since the exchange rate quotes are direct quotes on the dollar (US$/A$), the proper forward premium calculation is:
The forward rates progressively require fewer and fewer US dollars per Australian dollar than the current spot rate. Therefore
the US dollar is selling forward at a premium and the Australian dollar is selling forward at a discount.
The 24 month forward rate has the largest premium, while the 2 month forward possesses the smallest premium.
Problem 5.12 Transatlantic Arbitrage
Using $1 million or its euro equivalent, determine whether the corporate treasury
could make geographic arbitrage profit with the two different exchange rate quotes.
Assumptions Values
Beginning funds $ 1,000,000.00
Arbitrage Strategy #1
Initial investment $ 1,000,000.00
Buy euros from Barclays (at the ask rate) € 792,204.71
Sell euros to Citibank (at the bid rate) $ 1,000,079.22
Arbitrage profit (loss) $ 79.22
Arbitrage Strategy #2
Initial investment $ 1,000,000.00
Buy euros from Citibank (at the ask rate) € 792,079.21
Sell euros to Barclays (at the bid rate) $ 999,762.38
Arbitrage profit (loss) $ (237.62)
The Venezuelan government officially floated the Venezuelan bolivar (Bs) in February of 2002.
Within weeks, its value had moved from the pre-float fix of BS778/$ to Bs1025/$.
Assumptions Values
Fixed rate of exchange, Bs/$ 778
New freely floating rate (2 weeks later), Bs/$ 1,025
The Venezuelan political and economic crisis deepened in late 2002 and early 2003. On
January 1st, 2003, the bolivar was trading at Bs1400/$. By February 1st, its value had
fallen to Bs1950/$. Many currency analysts and forecasters were predicting that the
bolivar would fall an additional 40% from its February 1st value by early summer 2003.
Assumptions Values
Exchange rate, January 1, 2003 (Bs/$) 1,400
Exchange rate, February 1, 2003 (Bs/$) 1,950
Forecast fall in value from Feb 1 to early summer, 2003 -40.0%
Calculate the forward premium on the dollar (the dollar is the home currency) if the spot rate is €1.3300/$ and the 3-month
forward rate is €1.3400/$.
The euro would be selling forward at a premium against the dollar, or equivalently, the dollar selling
forward against the euro at a discount.
In a way, the terminology is a bit tricky. One might say that the "forward premium is a premium."
Check calculation
One way to check percentage change calculations is to invert each of the currency
quotes (1/(€/$)), and recalculate the quote using the direct quotation formula.
Calculate the forward discount on the dollar (the dollar is the home currency) if the spot rate is spot rate is $1.5800/£ and
the 6-month forward rate is $1.5550/£
The forward rate requires fewer US dollars in exchange for pounds than the current spot rate. The dollar is therefore
selling forward at a premium against the pound (and the pound is simultaneously selling forward at a discount versus the
US dollar).
Check calculation
Inverting the quotes (£/US$) £0.6329 £0.6431
Assuming the following quotes, calculate how a market trader at Citibank with
$1,000,000 can make an intermarket arbitrage profit.
Assumptions Values
Funds available USD 1,000,000
Assume the following bid-ask quotes and calculate how the market trader can now
make an intermarket arbitrage profit.
Assumptions Values
Funds available USD 1,000,000.00
Bid Ask
Citibank quote for USD/GBP 1.6192 1.6196
National Westminster quote for EUR/GBP 1.2833 1.2835
Deutschebank quote for USD/EUR 1.2614 1.2616
Around the horn. Assuming the following quotes, calculate how a market trader at Citibank
with $1,000,000 can make an intermarket arbitrage profit.:
Inspired by his recent trip to the Great Pyramids, Citibank trader Ruminder Dhillon wonders if he
can make an intermarket arbitrage profit using Libyan dinars and Saudi riyals. He has
$1,000,000 to work with so he gathers the following quotes: