GLOBAL FINANCE Section: Foreign Exchange and Derivative Market Problems
Question 1. The $/€ exchange rate is €1 = $0.95, and the €/SFr exchange rate is SFr 1 = €0.71. What is the SFr/$ exchange rate?
Question 2. Suppose the direct quote for sterling in New York is 1.1110 –5.
a. How much would £500,000 cost in New York?
b. What is the direct quote for dollars in London?
Question 3: Suppose the euro is quoted at 0.6064– 80 in London and the pound sterling is quoted at 1.6244– 59 in Frankfurt.
a. Is there a profitable arbitrage situation? Describe it.
b. Compute the percentage bid-ask spreads on the pound and euro.
Question 4: As a foreign exchange trader at Sumitomo Bank, one of your customers would like spot and thirty-day forward yen quotes on Australian dollars. Current market rates are
Spot 30-day
¥101.37–85/U.S.$1 15–13
A$1.2924–44/U.S.$1 20–26
a. What bid and ask yen cross rates would you quote on spot Australian dollars?
b. What outright yen cross rates would you quote on thirty -day forward Australian dollars?
c. What is the forward premium or discount on buying thirty -day Australian dollars against yen delivery?
Question 5: In 1995, one dollar bought ¥80. In 2000, it bought about ¥110.
a. What was the dollar value of the yen in 1995? What was the yen’s dollar value in 2000?
b. By what percent has the yen fallen in value between 1995 and 2000?
c. By what percent has the dollar risen in value between 1995 and 2000?
Question 6: On Monday morning, an investor takes a long position in a pound futures contract that matures on Wednesday afternoon. The agreed-upon price is $1.78 for £62,500. At the close of trading on Monday, the futures price has risen to $1.79. At Tuesday close, the price rises further to $1.80. At Wednesday close, the price falls to $1.785, and the contract matures. The investor takes delivery of the pounds at the prevailing price of $1.785. Detail the daily settlement process. What will be the investor’s profit (loss)?
Question 7: Suppose that DEC buys a Swiss franc futures contract (contract size is SFr 125,000) at a price of $0.83. If the spot rate for the Swiss franc at the date of settlement is SFr 1 = $0.8250, what is DEC’s gain or loss on this contract?
Question 8: On January 10, Volkswagen agrees to import auto parts worth $7 million from the United States. The parts will be delivered on March 4 and are payable immediately in dollars. VW decides to hedge its dollar position by entering into IMM futures contracts. The spot rate is $0.8947/€, and the March futures price is $0.9002/€.
a. Calculate the number of futures contracts that VW must buy to offset its dollar exchange risk on the parts contract.
b. On March 4, the spot rate turns out to be $0.8952/€, while the March futures price is $0.8968/€. Calculate VW’s net euro gain or loss on its futures position. Compare this figure with VW’s gain or loss on its unhedged position.
Question 9: Suppose that three-month interest rates (annualized) in Japan and the United States are 7 percent and 9 percent, respectively. If the spot rate is ¥142:$1 and the ninety-day forward rate is ¥139:$1:
a. Where would you invest?
b. Where would you borrow?
c. What arbitrage opportunity do these figures present?
d. Assuming no transaction costs, what would be your arbitrage profit per dollar or dollar-equivalent borrowed?