BANK 2006 international Currency & Banking Markets SP5, 2011 Assignment 1 Topics 1-3 To be completed individually and

d submitted via AssignIT by 12 noon Monday 29th August 2011

INSTRUCTIONS
1. Each student is required to complete and submit their own assignment answers in a typewritten document. All assignments will be checked and any evidence of plagiarism (copying the answers of other students) will constitute academic misconduct and be subject to the significant penalties specified by university policies. 2. To be able to obtain marks for your working even if your answer is not correct, you must document the calculations used to obtain your answer. 3. Even though your assignment comprises calculations, you have utilised the published work of others (e.g. textbook) and therefore you should provide at least one reference at the end of your assignment answers. You are not required to provide in text reference citations within your assignment answers unless you provide a direct quotation from a published work. 4. Extensions beyond the due date will only be granted in exceptional circumstances and must be requested by email and approved in advance of the due date by the course coordinator. 5. Before submitting your assignment via AssignIT ensure you a. b. complete your personal details on the assignment cover sheet that accompanies your assignment answers. insert your name and student ID number in the footer of each page of your answer document before saving and submitting.

Question 1 [4 marks]
You have just started work in the foreign exchange department of a major bank and have been given responsibility for dealing the New Zealand dollar (NZD) and Thai Baht (THB). The following rates (expressed in Moosa textbook format) are currently applying in the market. NZD/USD 1.3231/1.3926 USD/THB 0.0298/0.0326

(a) If you execute the following trades as a price maker calculate the amount of: (i) NZD you will receive in exchange for USD 500,000 (ii) THB you will receive in exchange for USD 500,000 (iii) USD you will receive in exchange for NZD 1,000,000 (iv) USD you will receive in exchange for THB 1,000,000 (b) If you execute the following trades as a price taker calculate the amount of: (i) NZD you will receive in exchange for USD 500,000 (ii) THB you will receive in exchange for USD 500,000 (iii) USD you will receive in exchange for NZD 1,000,000 (iv) USD you will receive in exchange for THB 1,000,000

Question 2 [2 marks]
The following are current spot exchange rates quotations for Pound Sterling (GBP) and Swiss Franc (CHF) (expressed in Moosa textbook format): GBP/USD 0.6105-0.6250 USD/CHF 1.1279/1.1435

Calculate the CHF/GBP cross rate (i.e. CHF price of one unit of the GBP commodity currency) implied by these spot rates.

Question 3 [4 marks]
In 1999 The Economist magazine reported the creation of a Big Mac type index or standard for the evaluation of the value of currencies in Africa. The same quantity of a similar style of beer, rather than the Big Mac hamburger, was used as the product for comparison because McDonalds had not penetrated the African continent beyond South Africa and beer met most of the same product and market characteristics required for the construction of a currency index equivalent to the Big Mac Index. Use the data in the following table to calculate the: (i) (ii) (iii) price that each countrys popular beer would be in Rand (ZAR) PPP exchange rate (local/ZAR) implied by the beer prices in the country and South Africa. Identify which local currency relative to the Rand is currently undervalued or overvalued. An undervalued currency has a spot exchange rate that gives the currency less purchasing power relative to the other currency than implied by PPP and an overvalued currency has a spot exchange rate that gives more purchasing power than implied by PPP. Briefly explain why you identified the Botswana Pula as undervalued or overvalued. Current Official Spot Rate Local/ZAR ZAR BWP 0.97 GHS 454.55 KES 13.02 MWK 22.28 MUR 4.04 NAD 1.00 ZMK 710.71 ZWD 53.74 Popular Beer Beer Price in Local currency Rand 5.75 Castle Star Tusker Carisberg Phoenix Windhoek Castle Castle Pula 5.50 Cedi 3,000 Shilling 105 Kwacha 106.25 Rupee 27.50 N$6.25 Kwacha 4,000 Z$169.50 in ZAR (i) Implied PPP Rate Local/ZAR (ii) Local Under or Overvalued (iii)

(iv) Country

South Africa Botswana Ghana Kenya Malawi Mauritius Namibia Zambia Zimbabwe

Castle

TOTAL 10 MARKS (10% of course assessment)

BANK 2006 International Currency & Banking Markets SP5 2011: Assignment 1