INTERNATIONAL FINANCIAL MANAGEMENT/

INTERNATIONAL FINANCE
DFN3023/DFN3143

CHAPTER /TOPIC

ASSIGNMENT 1
: FOREIGN EXCHANGE MARKET

INSTRUCTION:
1. Please answer the entire question.
2. Mode: Individual
3. Date of Submission:
Group A: 27 July 2015
Group B: 29 July 2015
Group C: 28 July 2015
4. Cover colour : Group A: Monday and Friday cover GREEN.
Group B: Wednesday and Friday cover PURPLE
Group C: Tuesday and Thursday cover BLUE
PROGRAM OUTCOME(S):
PO1
Apply knowledge of Finance to well-defined financing procedures and practices;
PO2
Apply appropriate skills, resources, and analytical tools to Finance related
activities;
PO3
Demonstrate an awareness of and consideration for societal, legal and ethical
issues and their consequent responsibilities;
PO4
Demonstrate an understanding of professional ethics, responsibilities and norms of
Finance practices;
PO5
Communicate, lead and function effectively in a team in achieving desired goals;
PO6
Analyze problems associated with Finance with respect to operations and
regulations;
PO7
Recognize the need for professional development and to engage in independent
and lifelong learning; and
PO8
Demonstrate an awareness of management and utilize available resources in
accomplishing desired output.
COURSE OUTCOME(S):
CO1
Identify the objective of multinational firm in the international trade environment
CO2
Describe the international trade environment, particularly in the financial aspect.
QUESTIONS
1.

Hiroshi Nurmata, a foreign exchange arbitrage wants to invest USD800,000 in a

covered interest arbitrage between USD and JPY. He faces the following exchange
rate and interest rate quotes:
Spot exchange rate
180-day forward exchange rate
180-day USD interest rate
180-day JPY interest rate

JPY124/USD
JPY123/USD
3 percent per year
1 percent per year

Calculate the percentage profit Hiroshi Nurmata could make on 180-day covered
interest arbitrage.
(5.5 marks)
2.

Javier have SF10,000,000 and planning to make profit via triangular arbitrage. The bank
offers the following quotes:
Fuji Bank
Rushmore Bank
Blanc Bank

120.00/$
SF1.60000/$
80.00/SF

Calculate the amount of profit in Swiss Franc.

(5 marks)

INTERNATIONAL FINANCIAL MANAGEMENT/

INTERNATIONAL FINANCE
DFN3023/DFN3143

3.

Ruggerman bank expects that the Mexican peso will depreciate against US dollar
from it is spot rate of $0.43 to $0.42 in 60 days. The following interbank lending and
borrowing rates:
Currency
U.S Dollar
Mexican peso

Lending Rate
7.0%
22.0%

Borrowing Rate
7.2%
24.0%

Assume that Ruggerman has a borrowing capacity of MXP10 million in the interbank
market. Show the steps and calculate the profit could be generated from this strategy.
(10 marks)
4.

Hugglers is a trader from United States and he is planning to make profit on the differences of
interest rate in Europe. He has US$300,000 to invest. Following are the information he
collected from bank:

Spot rate for the euro ()

180-day forward rate of the euro ()

Bid
$1.08
$1.08

Ask
$1.10
$1.10

The 180-day interest in United States are 6 percent, while in Europe are 8 percent. Calculate
the profit earn by Hugglers by conduct covered interest arbitrage.
(4 marks)
5.

George receive CHF 5,000,000 form his grandma. He is planning to make profit of the
different prices quote by the bank. The bank offers the following quotes:
Swiss bank
British bank
German bank

CHF 1.75 / GBP

EUR 1.15 / GBP
CHF 1.55 / EUR

Calculate the yield (percentage return) on the triangular arbitrage.

(5 marks)
6.

Akira Numata, a foreign exchange trader at Credit Suisse (Tokyo), is exploring covered interest
arbitrage possibilities. He wants to invest $5,000,000, in a covered interest arbitrage in
Japanese yen. He faced the following exchange rate and interest rate quotes:
Current spot rate
180 day forward exchange rate
Annual interest rate on Dollars
Annual interest rate on Yen

118.60/$
117.80/$
4.8%
3.4%

Calculate the yield (percentage return) on the covered.

(5.5 marks)
7.

You have CHF 5,000,000 and planning to make profit of the different prices quote by the
bank. The bank offers the following quotes:
Swiss bank
British bank
German bank

CHF 1.75 / GBP

EUR 1.15 / GBP
CHF 1.55 / EUR

Compute the profit from the arbitrage.

(5 marks)

INTERNATIONAL FINANCIAL MANAGEMENT/

INTERNATIONAL FINANCE
DFN3023/DFN3143

8.

Jack Davidson just won a lottery for USD $10,000. He is planning to conduct triangular
arbitrage on Swiss Franc. National Bank quotes the following for the British pound and the
New Zealand dollar:

Value of a British pound () in $

Value of a New Zealand dollar (NZ$) in $
Value of a British pound in New Zealand
dollars

Quoted
Bid Price
$1.61
$0.55
NZ$2.95

Quoted Ask
Price
$1.62
$0.56
NZ$2.96

Calculate the profit Jack Davidson will receive by implementing this strategy.
(10 marks)