Problem 6.1 Paris to St.

Petersburg

On your post-graduation celebratory trip you are leaving Paris for St. Petersburg,
Russia. You leave Paris with 10,000 euros in your money pouch. Wanting to
exchange all of these for Russian rubles, you obtain the following quotes.

Assumptions Values
Beginning your trip with euros 10,000.00
Spot rate ($/€) 1.4260
Spot rate (Rubles/$) 24.75

a) Calculate the cross rate

Cross rate (Rubles/€) 35.29

Rubles/€ = Rubles/$ x $/€

b) What would be the proceeds in Rubles?

Converting your euros into Rubles 352,935
Problem 6.2 Basel Trading

You receive the following quotes for Swiss francs against the dollar for spot, one-month forward,
3-months forward, and 6 months forward.

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

a) Calculate outright quotes Bid Ask Spread

One-month forward 1.2585 1.2600 0.0015
3-months forward 1.2589 1.2607 0.0018
6-months forward 1.2595 1.2615 0.0020

b) What do you notice about the spread?

It widens, most likely a result of thinner and thinner trading volume.

Added/optional question: What is the 6-month Swiss bill rate?

Spot rate, midrate (SF/$) 1.2580
Six-month forward rate, midrate (SF/$) 1.2605
Maturity (days) 180
6-month US dollar treasury rate (yield) 4.200%
Solving for implied SF interest rate 6.450%
Check calculation: the six-month forward 1.2719
Problem 6.3 Asian Financial Crisis

The Asian financial crisis which began in July 1997 wreaked havoc throughout the currency markets of East Asia.
Which of the following currencies had the largest depreciations or devaluations during the July to November period?
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 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 6.4 Forward Premiums on the Japanese Yen/Dollar (¥/$)

Use the following spot and forward bid-ask rates for the Japanese yen/U.S. dollar (¥/$) exchange rate to answer the following
questions:

a) What is the mid-rate from the bid-ask rate quotes?

b) What is the forward premium on the different maturities using the mid-rates from part (a)?

Since the exchange rate quotes are indirect quotes on the dollar (¥/$), the proper forward premium calculation is:

Forward premium = ( Spot - Forward ) / (Forward) x (360 / days)

a) b)
¥/$ ¥/$ Calculated Forward
Period Days Forward Bid Rate Ask Rate Mid-Rate Premium
spot 114.23 114.27 114.25000
1 month 30 113.82 113.87 113.84500 4.2690%
2 months 60 113.49 113.52 113.50500 3.9382%
3 months 90 113.05 113.11 113.08000 4.1387%
6 months 180 112.05 112.11 112.08000 3.8722%
12 months 360 110.20 110.27 110.23500 3.6422%
24 months 720 106.83 106.98 106.90500 3.4353%

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.

c) Which maturities have the smallest and largest forward premiums?

The 24 month forward rate has the smallest premium, while the 1 month forward possesses the largest premium.
Problem 6.5 Bloomberg Currency Cross Rates

Use the following cross rate table from Bloomberg to answer the following questions. If you are not familiar with all of the 3-letter currency
codes, refer to the table inside the back cover of this text.

Currency USD EUR JPY GBP CHF CAD AUD HKD

HKD 7.7508 11.1496 0.0679 15.9061 6.6564 8.052 7.1088
AUD 1.0903 1.5684 0.0096 2.2375 0.9364 1.1327 0.1407
CAD 0.9626 1.3847 0.0084 1.9754 0.8267 0.8829 0.1242
CHF 1.1644 1.675 0.0102 2.3896 1.2097 1.068 0.1502
GBP 0.4873 0.701 0.0043 0.4185 0.5062 0.4469 0.0629
JPY 114.156 164.2134 234.2687 98.0368 118.5913 104.7005 14.7282
EUR 0.6952 0.0061 1.4266 0.597 0.7222 0.6376 0.0897
USD 1.4385 0.0088 2.0522 0.8588 1.0389 0.9172 0.129

http://www.bloomberg.com/markets/currencies/fxc.html. Accessed October 26, 2007.

Quote Calculated
a. Japanese yen per US dollar? 114.156
b. US dollars per Japanese yen? 0.0088 0.0088
c. US dollars per euro? 1.4385
d. Euros per US dollar? 0.6952 0.6952
e. Japanese yen per euro? 164.2134
f. Euros per Japanese yen? 0.0061 0.0061
g. Canadian dollars per US dollar? 0.9626
h. US dollars per Canadian dollar? 1.0389 1.0389
i. Australian dollars per US dollar? 1.0903
j. US dollars per Australian dollar? 0.9172 0.9172
k. British pounds per US dollar? 0.4873
l. US dollars per British pound? 2.0522 2.0521
m. US dollars per Swiss franc? 0.8588
n. Swiss francs per US dollar? 1.1644 1.1644
Problem 6.6 Forward Premiums on the Dollar/Euro ($/€)

Use the following spot and forward bid-ask rates for the U.S. dollar/euro (US$/€) exchange rate to answer the following
questions

a) What is the mid-rate for each maturity?

b) What is the annual forward premium for each maturity using the mid-rates from part (a)?

Since the exchange rate quotes are direct quotes on the dollar (US$/€), the proper forward premium calculation is:

Forward premium = ( Forward - Spot ) / (Spot) x (360 / days)

a) b)
US$/€ US$/€ Calculated Forward
Period Days Forward Bid Rate Ask Rate Mid-Rate Premium
spot 1.4389 1.4403 1.43960
1 month 30 1.4440 1.4410 1.44250 2.4173%
2 months 60 1.4400 1.4415 1.44075 0.4793%
3 months 90 1.4403 1.4418 1.44105 0.4029%
6 months 180 1.4407 1.4422 1.44145 0.2570%
12 months 360 1.4408 1.4424 1.44160 0.1389%
24 months 720 1.4417 1.4436 1.44265 0.1059%

The forward rates progressively require more and more US dollars per euro than the current spot rate -- after the 1 month
forward. Therefore the euro is selling forward at a premium and the dollar is selling forward at a discount.

c) Which maturities have the smallest and largest forward premiums?

The 12 month forward rate as the smallest premium, while the 1 month forward possesses the largest premium.
Problem 6.7 Riskless Profit on the Franc

The following exchange rates are available to you. (You can buy or sell at the stated
rates.)

Assumptions Values
Beginning funds in Swiss francs (SF) 10,000,000.00
Mt. Fuji Bank (yen/$) 120.00
Mt. Rushmore Bank (SF/$) 1.6000
Matterhorn Bank (yen/SF) 80.00

Try Number 1: Start with SF to $

Step 1: SF to $ 6,250,000.00
Step 2: $ to yen 750,000,000.00
Step 3: yen to SF 9,375,000.00
Profit? (625,000.00)
A loss.

Try Number 2: Start with SF to yen

Step 1: SF to yen 800,000,000.00
Step 2: yen to $ 6,666,666.67
Step 3: $ to SF 10,666,666.67
Profit? 666,666.67
A profit.
Problem 6.8 Forward Premiums on the Australian Dollar

Use the following spot and forward bid-ask rates for the U.S. dollar/Australian dollar (US$/A$) exchange rate to answer the
following questions

a) What are the mid-rates from the bid-ask rate quotations?

b) What is the forward premium for each maturity using the mid-rates from part (a)?

Since the exchange rate quotes are direct quotes on the dollar (US$/A$), the proper forward premium calculation is:

Forward premium = ( Forward - Spot ) / (Spot) x (360 / days)

a) b)
US$/A$ US$/A$ Calculated Forward
Period Days Forward Bid Rate Ask Rate Mid-Rate Premium
spot 0.91630 0.91700 0.91665
1 month 30 0.91477 0.91551 0.91514 -1.9768%
2 months 60 0.91313 0.91388 0.91351 -2.0586%
3 months 90 0.91156 0.91233 0.91195 -2.0531%
6 months 180 0.90542 0.90621 0.90582 -2.3640%
12 months 360 0.89155 0.89242 0.89199 -2.6908%
24 months 720 0.86488 0.86602 0.86545 -2.7928%

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.

c) Which maturities have the smallest and largest forward premiums?

The 24 month forward rate has the largest premium, while the 1 month forward possesses the smallest premium.
Problem 6.9 Trans Atlantic Arbitrage

A corporate treasury with operations in New York simultaneously calls Citibank in

mid-town (New York City) and Barclays in London. The two banks give the
following quotes at the same time on the euro.

Assumptions Values
Beginning funds $ 1,000,000.00

Citibank NYC quotes:

Bid ($/€) 0.9650
Ask ($/€) 0.9670
Barclays London quotes:
Bid ($/€) 0.9640
Ask ($/€) 0.9660

Arbitrage Strategy #1
Initial investment $ 1,000,000.00
Buy euros from Barclays (at the ask rate) € 1,035,196.69
Sell euros to Citibank (at the bid rate) $ 998,964.80
Arbitrage profit (loss) $ (1,035.20)

Arbitrage Strategy #2
Initial investment $ 1,000,000.00
Buy euros from Citibank (at the ask rate) € 1,034,126.16
Sell euros to Barclays (at the bid rate) $ 996,897.62
Arbitrage profit (loss) $ (3,102.38)

The arbitrager cannot make a profit using these quotes.

Problem 6.10 Victoria Exports

A Canadian exporter, Victoria Exports, will be receiving six payments of €10,000, ranging from now to 12 months in the future.
Since the company keeps cash balances in both Canadian dollars (C$) and U.S. dollars (US$), 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 Forward Premium C$ Proceeds of Difference

Period Forward C$/euro on the C$/euro € 10,000.00 Over Spot
spot 1.38390 13,839.00 -
1 month 30 1.38439 0.425% 13,843.90 $4.90
2 months 60 1.38444 0.234% 13,844.40 $5.40
3 months 90 1.38590 0.578% 13,859.00 $20.00
6 months 180 1.38750 0.520% 13,875.00 $36.00
12 months 360 1.39189 0.577% 13,918.90 $79.90
Sum of Differences $146.20

Days Forward Premium US$ Proceeds of Difference

Period Forward US$/euro on the US$/euro € 10,000.00 Over Spot
spot 1.1914 $11,914.00 -
1 month 30 1.1926 1.209% $11,926.00 $12.00
2 months 60 1.1941 1.360% $11,941.00 $27.00
3 months 90 1.1956 1.410% $11,956.00 $42.00
6 months 180 1.2013 1.662% $12,013.00 $99.00
12 months 360 1.2130 1.813% $12,130.00 $216.00
Sum of Differences $396.00

The sum of the differences is greater for the US$/euro series of forward rates.
Problem 6.11 Venezuelan Bolivar (A)

The Venezuelan government officially floated the Venezuelan bolivar (Bs) in February 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

a) Is this a devaluation or depreciation?

Devaluation
then
This is a case in which a government has changed its currency from a
governmentally determined fixed rate, to a regime in which the currency Depreciation
is allowed to change in value based on supply and demand forces in the
market. As a result of the move, the currency's value in this case was a
"depreciation" against the U.S. dollar.

b) By what percentage did its value change?

Percentage devaluation is: -24.10%
% Chg = (S1 - S2) / (S2)
Problem 6.12 Venezuelan Bolivar (B)

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%

a) What was the percentage change in January?

% chg = (S1 - S2)/(S2) -28.21%

b) Forecast value for June 2003?

We are actually solving the equation for S2 (Bs/$) 3,250

S2 = (S1)/(1+%chg) = (1950)/(1-.40)
Problem 6.13 Indirect Quotation on the Dollar

Calculate the forward premium on the dollar (the dollar is the home currency) if the spot rate is €1.0200/$ and the three-
month forward rate is €1.0300/$.

Quoted 90-day Percent premium

Assumptions Spot rate Forward rate or discount on euro
Days forward 90
European euro (€/$) € 1.0200 € 1.0300

Calculation formula for the indirect quote on the dollar:

Percent premium = (S-F)/(F) x (360/90) -3.8835%

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.

European euro ($/€) $0.9804 $0.9709

Percent discount = (F-S)/(S) x (360/90) -3.8835%

Problem 6.14 Direct Quotation on the Dollar

Calculate the forward discount on the dollar (the dollar is the home currency) if the spot rate is spot rate is $1.5500/£ and
the six-month forward rate is $1.5600/£

Quoted 180-day Percent premium

Assumptions Spot rate Forward rate or discount
Days forward 180
Exchange rate, US$/£ $ 1.5500 $ 1.5600

Calculation formula for the direct quote on the dollar:

Percent premium = ( Forward - Spot ) / ( Spot ) x ( 360 / 180 ) 1.2903%

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$) £0.6452 £0.6410

Percent forward premium = ( Spot - Forward ) / ( Forward ) x ( 360 / 180 ) 1.2903%

Problem 6.15 Mexican Peso - European Euro Cross Rates

Calculate the cross rate between the Mexican peso (Ps) and the euro (€ ) from the
following two spot rates: Ps11.43/$; € 0.6944/$.

Assumptions Exchange rate

Mexican peso, pesos/dollar (Ps/$) 11.43
European euro, euros/dollar (€/$) 0.6944

Calculated cross rate, Ps/€ 16.4603

pesos/euro = (Ps/$) / (€/$)

or equivalently, euros/peso (€/Ps) 0.0608

Problem 6.16 Around the Horn

Assuming the following quotes, calculate how a market trader at Citibank with $1,000,000
can make an inter-market arbitrage profit.:

Assumptions Exchange rate

Citibank quote: US$/pound ($/£) 1.5400
National Westminster quote: euros/pound (€/£) 1.6000
Deutschebank quote: US$/euro ($/€) 0.9700
Initial investment $ 1,000,000.00

Path #1: US$ to euros to pounds to US$

Start with US$ $ 1,000,000.00
Convert to euros at Deutschebank quote € 1,030,927.84
Convert euros to pounds at NatWest quote £644,329.90
Convert pounds to US$ at Citibank quote $ 992,268.04
Arbitrage gain (loss) $ (7,731.96)

Path #2: US$ to pounds to euros to US$

Start with US$ $ 1,000,000.00
Convert to pounds at Citibank quote £649,350.65
Convert pounds to euros at NatWest quote € 1,038,961.04
Convert euros to US$ at Deutschebank quote $ 1,007,792.21
Arbitrage gain (loss) $ 7,792.21

Triangular arbitrage path #2 yields a positive profit.