International Finance Chapter 5

The current spot exchange rate is $1.55/€ and the three-month forward rate is $1.50/€. You enter into a short position on €1,000. At maturity, the spot exchange rate is $1.60/€. How much have you made or lost?

Lost $100 (1.5 × 1,000) = $1,500 and (1.6 × 1,000) = $1,600. $1,600 - $1,500 = $100.

You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro exchange rate is quoted as $1.20 = €1.00 and the dollar-pound exchange rate is quoted at $1.80 = £1.00. If a bank quotes you a cross rate of £1.00 = €1.50, how much money can an astute trader make?

No arbitrage is possible

The current spot exchange rate is $1.45/€ and the three-month forward rate is $1.55/€. Based upon your economic forecast, you are pretty confident that the spot exchange rate will be $1.50/€ in three months. Assume that you would like to buy or sell €100,000. What actions would you take to speculate in the forward market? How much will you make if your prediction is correct?

Take a short position in a forward contract on euro. If you're right you will make $5,000. (1.55 × 100,000) = €155,000 and (1.5 × 100,000) = €150,000. The profit is found by €155,000 - €150,000 = €5,000.

Consider the following spot and forward rate quotations for the Swiss franc. S($/SFr) = 0.85 F1($/SFr) = 0.86 F2($/SFr) = 0.87 F3($/SFr) =0.88 Which of the following is true?

The Swiss franc is trading at a forward premium.

Most foreign exchange transactions are for

interbank trades between international banks or nonbank dealers.

A dealer in pounds who thinks that the exchange rate is about to increase in volatility

may want to widen his bid-ask spread.

The SF/$ spot exchange rate is SF1.25/$ and the 180 day forward exchange rate is SF1.30/$. The forward premium (discount) is

the dollar trading at an 8% premium to the Swiss franc for delivery in 180 days. The formula for calculating the forward premium/discount is [(F(SF/j) - S(SF/j)) / S(SF/j)] × 360/days. Plugging into that formula, you should get the following: (1.30 - 1.25) / 1.25 = 0.04 × (360/180) = 0.08.

Suppose you observe the following exchange rates: €1 = $1.25; £1 = $2.00. Calculate the euro-pound crossrate.

£1 = €1.60 S(€/£) = S($/£) / S($/€) = (2/1) / (1/1.25), or (2/1) × (1.25/1) = €1.60

Swis - Bid: 0.7648. Ask: 0.7652 Euro - Bid: 1.4000. Ask: 1.4200 What is the BID cross-exchange rate for Swiss Francs priced in euro? Hint: Find the price that a currency dealer will pay in euro to buy Swiss francs.

€0.5386/CHF 0.7648 / 1.42 = €0.5386

Suppose that the current exchange rate is €1.00 = $1.60. The indirect quote, from the U.S. perspective is

€0.6250 = $1.00. 1/1.6 = 0.625