Questions Test 1

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a. Calculate the Brazilian reais/GTQ cross rate, multiply the euro/reais cross rate times to the GTQ/euro cross rate; however, it is important to make sure when the two exchange rates are multiplied that the reais are in the numerator and the GTQ in the denominator so that the euros cancel out and the correct exchange rate will be found.

Therefore, the Brazilian reais/GTQ cross rate is R$0.2118/GTQ1.

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b. Multiply the number of Brazilian reais Isaac has at time of exchanging to the Brazilian reais/GTQ exchange cross rate, to obtain the amount in GTQ he would have after exchange.

Therefore, the amount he would have is GTQ 21,246.46.

#10

Step 1 of 2

To determine whether the triangular arbitrage can be used to make profit, first find the cross rate between the Swiss franc and the yen:

Therefore, the Japanese ¥/SF cross rate is ¥90.20/SF1.

Because there is a disparity between the cross-rate calculated and given cross rate, therefore, a profit can be made.


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To make the profit using triangular arbitrage, first exchange the SF 12,000,000 for U.S. dollars with the MR bank:

Next exchange the U.S. dollars for yen using the MF bank exchange rate:

Finally exchange the yen back to U.S. dollars using MB bank’s exchange rate:

Calculate the profit:

#12

Step 1 of 2

Given $1 million and the following quotes:

Bank C - $0.7551-61/€

Bank B - $0.7545-75/€

There are two different arbitrage strategies that can be attempted. The first is to buy euros from bank B, and then sell them to bank C:

Buy euros Bank B:

Sell euros Bank C:

The profit/loss can be calculated by subtracting the original starting amount of dollars by the post-arbitrage amount:


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The second strategy involves buy euros from bank C and selling them to bank B:

Buy euros Bank C:

$

Sell euros Bank B:

The profit/loss can be calculated by subtracting the original starting amount of dollars by the post-arbitrage amount:

In both instances a loss is made by the arbitrage. The arbitrager cannot make a profit using these quotes.

#13

Step 1 of 2

Details about Venezuelan Bolivar (Bs) which was floated officially is provided in order to determine whether it was a depreciation or devaluation and to determine the percentage change in the value.

a) Explain is this a devaluation or a depreciation:

In this case, the decrease in the currency value is because of the depreciation and not devaluation. From the given information, it is clear that the government of Venezuela has actually

changed its currency from the fixed rate determined by the government to floating rate. Floating rate means, the value of the currency is allowed to change according to the demand and supply for the currency in the market.

Due to the change in the valuation of currency from fixed to floating the value of the currency has decreased which clearly indicates that is depreciation and not devaluation.


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(b) Calculate the percentage change:

All variables are as per given information.

The give quote is an indirect quote. Thus, the percentage change is determined using the below formula.

The percentage change in the value is determined by subtracting the post float rate (ending rate) from the pre float rate (beginning rate) and then dividing the same by the post-float rate.

#15

Calculate the forward premium in terms of foreign currency, by the use of following equation:

Therefore, the forward premium is −2.8951%.

#16

Step 1 of 1

Calculate the forward premium in terms of home currency, use the following equation:

Therefore, the forward premium is −3.7975%.

#17

Step 1 of 1

Calculate the Mexican peso/euro cross rate, by multiplying the peso-dollar exchange rate to the euro-dollar exchange rate; however, it is important to make sure when the two exchange rates are multiplied that the pesos are in the numerator and the euros in the denominator so that the U.S. dollars cancel out and the correct exchange rate will be found:

Therefore, the Mexican peso-European cross rate is Ps16.49/€.

Chapter 8

1

Step 1 of 3

Details about the currency speculator who sells eight June future contracts for the 500,000 peso and closing price are provided for determining the value of the position.

Exhibit 8.1 consists of details about the closing price.

a)

Calculation of value of the total position at the time of maturity:


In this case, the investor will prefer to sell the peso futures.

Value of the total position at the time of maturity is determined by multiplying the negative notional amount with the difference between the spot and future exchange rate.

Number of contracts is given as 8.

Future exchange rate is as per Exhibit 8.1 June Settlement .


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b)






Future exchange rate is as per Exhibit 8.1 June Settlement $0.10773/Ps.


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c)






Future exchange rate is as per Exhibit 8.1 June Settlement $0.10773/Ps.

From the above calculations, it is clear that Amber purchases at the spot rate and sells at future exchange rate. If in case, the future exchange rate is greater than the given ending period spot exchange rate then the investor can be sure to generate profit and vice versa.

#2

Step 1 of 8

The formula for the profit of a put option writer (Peleh) is

if the spot rate is less than or equal to the strike price.

After six months, if the spot rate is greater than or equal to the strike price, the option expires and the Peleh will keep the premium.

For calculation purposes, the premium of per yen will be represented as


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An ending spot rate of ¥110/$ is equivalent to $0.009091/¥ (rounded to the nearest millionth of a dollar). This is greater than the strike price. In this case the buyer of the put would not exercise the option, and Peleh’s profit would be limited to the premium on this option.

Peleh makes $0.000080/¥, or a total profit of $1,000


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An ending spot rate of ¥115/$ is equivalent to $0.008698/¥ (rounded to the nearest millionth of a dollar). This is greater than the strike price. Again, the buyer of the put would not exercise the option, and Peleh would earn a total profit of $1,000.


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An ending spot rate of ¥120/$ is equivalent to $0.008333/¥ (rounded to the nearest millionth of a dollar). This is greater than the strike price. Again, the buyer of the put would not exercise the option, and Peleh would earn a total profit of $1,000.


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An ending spot rate of ¥125/$ is equivalent to $0.008000/¥ (rounded to the nearest millionth of a dollar). This is equal to the strike price. There is nothing to gain or lose by exercising the option, and Peleh would earn a total profit of $1,000.


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An ending spot rate of ¥130/$ is equivalent to $0.007692/¥ (rounded to the nearest millionth of a dollar). The buyer would exercise the option, and Peleh’s profit per yen sold would be shown below:

Peleh suffers a loss of $0.000228/¥, or a total loss of $2,850.


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An ending spot rate of ¥135/$ is equivalent to $0.007407/¥ (rounded to the nearest millionth of a dollar). The buyer would exercise the option, and Peleh’s profit per yen sold follows the above formula.

Peleh suffers a loss of $0.000513/¥, or a total loss of $6,412.50.


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Step 8 of 8

An ending spot rate of ¥140/$ is equivalent to $0.007143/¥ (rounded to the nearest millions of a dollar). The buyer would exercise the option, and Peleh’s profit per yen sold follows the above formula.

Peleh suffers a loss of $0.000777/¥, or a total loss of $9,712.50.

#3

Step 1 of 4

Given a contract of 62,500 pounds and the following information:

Maturity

Open High Low Settle Change High Open Interest

March 1.4246 1.4268 1.4214 1.4228 .0032 1.4700 25,605June 1.4164 1.4188 1.4146 1.4162 .0030 1.4550 809

a. Given 5 contracts bought in June with a spot rate of $1.3980/£, first subtract the spot minus the futures settle price:

Use the difference to calculate what 5 bought contracts would be worth in US$:


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b. Given 12 contracts sold in March with a spot rate of $1.4560/£, first subtract the spot minus the futures settle price:

Use the difference to calculate what 12 sold contracts would be worth in US$:


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c. Given 3 contracts bought in March with a spot rate of $1.4560/£, first subtract the spot minus the futures settle price:



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d. Given 12 contracts sold in June with a spot rate of $1.3980/£, first subtract the spot minus the futures settle price:


#4

Step 1 of 5

a. Given that Person S believes that the Singapore dollar is going to appreciate against the USD, the strike price for put/call is $0.65/S$ and the 90-day future is predicted to be $0.70/S$, she should buy a call on Singapore dollars. If she does this, they she will be able to purchase Singapore dollars for $0.065 each in the future and immediately resell them for $0.70/S$.


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b. Person S’s break-even price on the call she plans to purchase from part (a) is calculated by adding the price of a call plus the premium for purchasing a call:


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Therefore, break-even price is $ 0.65046.


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c. Given the spot rate at the end of 90 days is $0.7000/S$, Person S’s gross profit is calculated by subtracting the strike price from the spot rate:

Given the premium of $0.00046, Person’s net profit is calculated by subtracting the strike and premium price from the spot rate:

Therefore, net profit is $ 0.04954.


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d. Given the spot rate at the end of 90 days is $0.8000/S$, Person S’s gross profit is calculated by subtracting the strike price from the spot rate:

Therefore, gross profit is $ 0.1500.

Given the premium of $0.00046, Person S’s net profit is calculated by subtracting the strike and premium price from the spot rate:

Therefore, net profit is $ 0.14954.

#5

Step 1 of 2

Given information:

Initial Investment $10,000,000Current spot rate ($/€) $1.3358

30-day forward rate ($/€)

$1.3350

a. If the expected spot rate is $1.3600/€, Person CH should buy euros at the 30-day forward rate and at the end of the 30 days sell the euros for dollars in the market. The profit from this can be calculated by first converting the initial investment to euros using the 30-day forward rate:

Then convert the euros back to US$ at the expected spot rate:

The profit is calculated by subtracting the initial investment from the US proceeds:


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b. If the expected spot rate is $1.2800/€, Person CH should sell euros forward now at the higher rate, then in 30 days buy the euros on the market for $1.28 and immediately fill the forward

contract to sell the euros at $1.3350. The profit from this can be calculated by first calculating the euros bought in the market in 30 days, using the expected spot rate:

Then calculate US proceeds or the amount in US$ of euros sold forward into US$:

The profit is calculated by subtracting the initial investment from the US proceeds:

#6

Step 1 of 3

Given the following information:

Initial Investment $100,000Current spot-rate (US$/Swiss franc) $.58206-month forward rate (US$/Swiss franc) $.5640Expected spot rate in 6 months (US$/Swiss franc) $.6250


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a. Assuming a pure spot market speculation strategy, person CH’s profit can be calculated by

first converting the initial investment into using the spot exchange rate:

Then person CH would hold the Swiss Francs for 6 months and convert them back to US$ using the expected spot rate:

The expected profit can be determined by subtracting the initial investment from the ending dollar amount:

Therefore, expected profit is $7,388.32.


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b. Assuming person CH buys or sells at a 6-month forward, first convert the initial

investment into using the 6-month forward rate. This will take place 6-months from now.

Then person CH exchange the SFr back for US$ at the expected spot rate:



Chapter 7

5

Step 1 of 3


Initial Investment $100,000Current spot-rate (US$/Swiss franc) $.58206-month forward rate (US$/Swiss franc) $.5640Expected spot rate in 6 months (US$/Swiss franc) $.6250


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a. Assuming a pure spot market speculation strategy, person CH’s profit can be calculated by

first converting the initial investment into using the spot exchange rate:

Then person CH would hold the Swiss Francs for 6 months and convert them back to US$ using the expected spot rate:




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b. Assuming person CH buys or sells at a 6-month forward, first convert the initial

investment into using the 6-month forward rate. This will take place 6-months from now.

Then person CH exchange the SFr back for US$ at the expected spot rate:



#7

Step 1 of 3

Given information

$5,000,000 and the following exchange rate quotes:

Spot Rate (¥/$) 118.60

180-day Forward rate (¥/$) 117.80180-day U.S. dollar interest rate 4.800%180-day Japanese yen interest rate 3.400%

Determine Person T can make a profit by covered interest arbitrage or not: First determine either the difference in interest rates is greater than or less than the forward premium/discount:

Change in exchange rates:

Forward premium/discount:


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Step 2 of 3

Because the difference in interest rates is lesser than the forward premium/discount, Person T will borrow yen and invest in the U.S. dollar interest rate (the higher interest rate) in order to create a profit:

Step 1: Borrow ¥593,000,000,000 (the equivalent of $5,000,000):

Step 2: Convert ¥593,000,000 for $ using the spot rate.

Step 3: Invest the $5,000,000 using U.S. dollar 180-day interest rate:


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Step 4: Convert dollars amount back to yen to repay loan using 180 forward rates.

Step 5: Calculate the amount owed on the Japanese loan by multiplying the original amount by the interest rate:

Step 6: Determine profit made by subtracting the amount owed on the loan (Step 5) from the amount of yen made from investing in US dollar (Step 4)

Person T can make profit of ¥55,000 by using covered interest rate arbitrage.

Step 1 of 3

Given $1,000,000 and the following information:

Spot Rate (SFr/$) 1.28103-month forward rate (SFr/$) 1.2740US-dollar 3- month interest rate 4.800%Swiss Franc 3- month interest rate 3.200%

Determine how Person C can make a profit off of covered interest arbitrage, by first determining if the difference in interest rates is greater than or less than the forward premium/discount:

Change in exchange rates:

Forward premium/discount:


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Step 2 of 3

Because the difference in interest rates is less than the forward premium/discount, Person C wants to borrow USD and invest in the Swiss Franc interest rate (the lower interest rate) in order to create a profit:

Step 1: Borrow $1,000,000

Step 2: Convert $1,000,000 using the spot rate

Step 3: Invest the SFr1,281,000 using Swiss franc 3-month interest rate:


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Step 3 of 3

Step 4: Convert Swiss Franc back to USD to repay loan using 90-day forward rate

Step 5: Calculate the amount owed on the USD loan by multiplying the original amount borrowed by the US effective interest rate:

Step 6: Determine profit made by subtracting the amount owed on the loan (Step 5) from the amount made from investing in kronor (Step 4).

Person C can make profit of $1,538.46 using covered interest rate arbitrage by making a CIA investment in the Swiss Franc.

#16

Step 1 of 2


Assumptions London New YorkSpot exchange rate ($/€) 1.3264 1.32641-year Treasury bill rate 3.900% 4.500%Expected inflation rate Unknown 1.250%

a. In order to determine what inflation will be for Europe in the coming year, use the Fisher effect, which states that real interest rates should be the same in New York and Europe. In addition the Fisher effect states:

Let x represent the real interest rate in New York, so that the equation will be as follows:

Because of the Fisher effect the real interest rate for New York is the real interest rate in London. Letting m represent the expected inflation for NY:

Therefore, the expected inflation rate in Europe is 0.669%.


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Step 2 of 2

b. Estimate the 1-year forward exchange rate between the dollar and euro, as follows:

Therefore, the 1-year forward exchange rate is $1.3343/€.

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Questions Test 1