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# Problem 5.

1 Isaac Díez

Isaac Díez Peris lives in Rio de Janeiro. While attending school in Spain he meets
Juan Carlos Cordero from Guatemala. Over the summer holiday Isaac decides to
visit Juan Carlos in Guatemala City for a couple of weeks. Isaac's parents give
him some spending money, R\$4,500. Isaac wants to exchange it to Guatemlan
quetzals (GTQ). He collects the following rates:

## Spot rate on the GTQ/€ cross rate GTQ 10.5799/€

Spot rate on the €/reais cross rate €0.4462/R\$

## a. What is the Brazilian reais/Guatemalan quetzal cross rate?

b. How many quetzals will Isaac get for his reais?

Assumptions Values
Amount of reais from parents 4,500.00
Spot rate (R\$/€) 10.5799
Spot rate (€/GTQ) 0.4462

## a. What is the R\$/GTQ cross rate?

Cross rate (R\$/GTQ) 4.72

## b. How many quetzals will he get for his reais?

Converting your reais into quetzals 21,243
Problem 5.2 Victoria Exports

A Canadian exporter, Victoria Exports, will be receiving six payments of €12,000, ranging from now to 12 months in the future.
Since the company keeps cash balances in both Canadian dollars and U.S. dollars, 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
Period Forward C\$/euro US\$/euro
spot 1.3360 1.3221
1 month 30 1.3368 1.3230
2 months 60 1.3376 1.3228
3 months 90 1.3382 1.3224
6 months 180 1.3406 1.3215
12 months 360 1.3462 1.3194

## Days Forward Premium C\$ Proceeds of Difference

Period Forward C\$/euro on the C\$/euro € 12,000.00 Over Spot
spot 1.3360 16,032.00 -
1 month 30 1.3368 0.722% 16,041.65 \$9.65
2 months 60 1.3376 0.705% 16,050.84 \$18.84
3 months 90 1.3382 0.659% 16,058.41 \$26.41
6 months 180 1.3406 0.693% 16,087.54 \$55.54
12 months 360 1.3462 0.765% 16,154.69 \$122.69

## Days Forward Premium US\$ Proceeds of Difference

Period Forward US\$/euro on the US\$/euro € 12,000.00 Over Spot
spot 1.3221 \$15,865.20 -
1 month 30 1.3230 0.817% \$15,876.00 \$10.80
2 months 60 1.3228 0.318% \$15,873.60 \$8.40
3 months 90 1.3224 0.091% \$15,868.80 \$3.60
6 months 180 1.3215 -0.091% \$15,858.00 (\$7.20)
12 months 360 1.3194 -0.204% \$15,832.80 (\$32.40)

The Canadian exporter will be receiving six payments of 12,000 euros, ranging from now to 12 months in the future. Since the
company keeps cash balances in both Canadian dollars and US dollars, it can choose which currency to change the euros to at the
end of the various periods. And since the company wishes to lock in the forward rate for each and every payment, it would appear
that the company should lock in forward rates in C\$ for all payments. Since the euro is selling forward at a greater premium against
the Canadian dollar than the U.S. dollar, the resulting dollar proceeds are higher.
Problem 5.3 Forward Premiums on the Japanese Yen

Use the following spot and forward bid-ask rates for the Japanese yen/U.S. dollar (¥/\$) exchange rate from October 1, 2014, to

¥/\$ ¥/\$
Period
spot 109.30 109.32
1 month 109.05 109.09
2 months 108.80 108.90
3 months 107.97 108.34
6 months 107.09 107.40
12 months 103.51 104.19
24 months 96.82 97.35

## a. What is the mid-rate for each maturity?

b. What is the annual forward premium for all maturities?
c. Which maturities have the smallest and largest forward premiums?

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
spot 109.30 109.32 109.31000
1 month 30 109.05 109.09 109.07000 2.6405%
2 months 60 108.80 108.90 108.85000 2.5356%
3 months 90 107.97 108.34 108.15500 4.2716%
6 months 180 107.09 107.40 107.24500 3.8510%
12 months 360 103.51 104.19 103.85000 5.2576%
24 months 720 96.82 97.35 97.08500 6.2960%

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 largest premium, while the 1 month forward possesses the smallest premium.
Problem 5.4 Credit Suissse Geneva

Andreas Broszio just started as an analyst for Credit Suisse in Geneva, Switzerland. He receives the following
quotes for Swiss francs against the dollar for spot, one-month forward, 3-months forward, and 6-months forward.

## Spot exchange rate:

Bid rate SF 1.2575/\$
One-month forward 10 to 15
3-months forward 14 to 22
6-months forward 20 to 30

a. Calculate outright quotes for bid and ask, and the number of points spread between each.
b. What do you notice about the spread as quotes evolve from spot toward six months?
c. What is the 6-month Swiss bill rate?

Assumptions Values
Spot exchange rate:
Bid rate (SF/\$) 1.2575
One-month forward 10 to 15
3-months forward 14 to 22
6-months forward 20 to 30

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

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

## c. 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 5.5 Munich to Moscow

## On your post-graduation celebratory trip you decide to travel from Munich,

Germany to Moscow, Russia. You leave Munich with 15,000 euros in your
wallet. Wanting to exchange all of these for Russian rubles, you obtain the
following quotes:

## Spot rate on the dollar/euro cross rate \$1.3214/€

Spot rate on the ruble/dollar cross rate Rbl 30.96/\$

## a. What is the Russian ruble/euro cross rate?

b. How many rubles will you obtain for your euros?

Assumptions Values
Beginning your trip with euros 15,000.00
Spot rate (\$/€) 1.3214
Spot rate (Rubles/\$) 30.96

## a) What is the Russian ruble/euro cross rate?

Cross rate (Rubles/€) 40.91

## b) How many rubles will you obtain for your euros?

Converting your euros into Rubles 613,658
Problem 5.6 Jumping to Japan

After spending a week in London you get an email from your friend in Japan. He
can get you a very good deal on a plane ticket and wants you to meet him in
GBP2,000 left in your purse. In preparation for the trip you want to exchange your
British pounds for Japanese yen, and you get the following quotes:

## Spot rate on the pound sterling/dollar cross rate £0.6178/\$

Spot rate on the yen/dollar cross rate ¥109.31/\$

## a. What is the yen/pound cross rate?

b. How many yen will you obtain for your pound?

Assumptions Values
Beginning your trip with pounds 2,000.00
Spot rate (£/\$) 0.62
Spot rate (¥/\$) 109.31

## a) What is the Russian ruble/yen cross rate?

Cross rate (£/¥) 176.9343

## b) How many yen will you obtain for your pounds?

Converting your pounds into yen 353,869
Problem 5.7 Asian Pacific Crisis

The Asian financial crisis which began in July 1997 wreaked havoc throughout the currency markets of East Asia.

a. Which of the following currencies had the largest depreciations or devaluations during the July to November period?
b. 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 ### 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 5.8 Bloomberg Currency Cross Rates

Use the following cross rate table from Bloomberg to answer the following questions.

## Currency USD EUR JPY GBP CHF CAD AUD HKD

HKD 7.7736 10.2976 0.0928 12.2853 7.9165 7.6987 7.6584
AUD 1.015 1.3446 0.0121 1.6042 1.0337 1.0053 0.1306
CAD 1.0097 1.3376 0.0121 1.5958 1.0283 0.9948 0.1299
CHF 0.9819 1.3008 0.0117 1.5519 0.9725 0.9674 0.1263
GBP 0.6328 0.8382 0.0076 0.6444 0.6267 0.6234 0.0814
JPY 83.735 110.9238 132.3348 85.2751 82.9281 82.4949 10.7718
EUR 0.7549 0.009 1.193 0.7688 0.7476 0.7437 0.0971
USD 1.3247 0.0119 1.5804 1.0184 0.9904 0.9852 0.1286

Quote Calculated
a. Japanese yen per US dollar? 83.735
b. US dollars per Japanese yen? 0.0119 0.0119
c. US dollars per euro? 1.3247
d. Euros per US dollar? 0.7549 0.7549
e. Japanese yen per euro? 110.9238
f. Euros per Japanese yen? 0.009 0.0090
g. Canadian dollars per US dollar? 1.0097
h. US dollars per Canadian dollar? 0.9904 0.9904
i. Australian dollars per US dollar? 1.015
j. US dollars per Australian dollar? 0.9852 0.9852
k. British pounds per US dollar? 0.6328
l. US dollars per British pound? 1.5804 1.5803
m. US dollars per Swiss franc? 1.0184
n. Swiss francs per US dollar? 0.9819 0.9819
Problem 5.9 Dollar/Euro Forwards

Use the following spot and forward bid-ask rates for the U.S. dollar/euro (US\$/€) exchange rate from December 10, 2010, to

US\$/€ US\$/€
spot 1.3231 1.3232
1 month 1.3230 1.3231
2 months 1.3228 1.3229
3 months 1.3224 1.3227
6 months 1.3215 1.3218
12 months 1.3194 1.3198
24 months 1.3147 1.3176

## a. What is the mid-rate for each maturity?

b. What is the annual forward premium for all maturities?
c. Which maturities have the smallest and largest forward premiums?

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
spot 1.3231 1.3232 1.32315
1 month 30 1.3230 1.3231 1.32305 -0.0907%
2 months 60 1.3228 1.3229 1.32285 -0.1360%
3 months 90 1.3224 1.3227 1.32255 -0.1814%
6 months 180 1.3215 1.3218 1.32165 -0.2267%
12 months 360 1.3194 1.3198 1.31960 -0.2683%
24 months 720 1.3147 1.3176 1.31615 -0.2645%

The forward rates progressively require less and less U.S. dollars per euro than the current spot rate. Therefore the dollar is
selling forward at a premium and the euro is selling forward at a discount.

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

The 1 month forward rate as the smallest premium, while the 12 month forward possesses the largest premium.
Problem 5.10 Swissie Triangular Arbitrage

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

## Mt. Fuji Bank ¥92.00/\$

Mt. Rushmore Bank SF1.02/\$
Mt Blanc Bank ¥90.00/SF

Assume you have an initial SF12,000,000. Can you make a profit via triangular arbitrage?
If so, show the steps and calculate the amount of profit in Swiss francs (Swissies).

Assumptions Values
Beginning funds in Swiss francs (SF) 12,000,000.00
Mt. Fuji Bank (yen/\$) 92.00
Mt. Rushmore Bank (SF/\$) 1.0200
Matterhorn Bank (yen/SF) 90.00

Step 1: SF to \$ 11,764,705.88
Step 2: \$ to yen 1,082,352,941.18
Step 3: yen to SF 12,026,143.79
Profit? 26,143.79
A profit.

Step 1: SF to yen 1,080,000,000.00
Step 2: yen to \$ 11,739,130.43
Step 3: \$ to SF 11,973,913.04
Profit? (26,086.96)
A loss.
Problem 5.11 Aussie Dollar Forward

Use the following spot and forward bid-ask rates for the U.S. dollar/Australian dollar (US\$=A\$1.00) exchange rate from
December 10, 2010, to answer the following questions

US\$/A\$ US\$/A\$
spot 0.98510 0.98540
1 month 0.98131 0.98165
2 months 0.97745 0.97786
3 months 0.97397 0.97441
6 months 0.96241 0.96295
12 months 0.93960 0.94045
24 months 0.89770 0.89900

## a. What is the mid-rate for each maturity?

b. What is the annual forward premium for all maturities?
c. Which maturities have the smallest and largest forward premiums?

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
spot 0.98510 0.98540 0.98525
1 month 30 0.98131 0.98165 0.98148 -4.5917%
2 months 60 0.97745 0.97786 0.97766 -4.6252%
3 months 90 0.97397 0.97441 0.97419 -4.4902%
6 months 180 0.96241 0.96295 0.96268 -4.5816%
12 months 360 0.93960 0.94045 0.94003 -4.5902%
24 months 720 0.89770 0.89900 0.89835 -4.4100%

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 2 month forward possesses the smallest premium.
Problem 5.12 Transatlantic Arbitrage

## A corporate treasury working out of Vienna with operations in New York

simultaneously calls Citibank in New York City and Barclays in London. The banks
give the following quotes on the euro simultaneously.

## Citibank NYC Barclays London

\$1.2624–25/€ \$1.2622–23/€

Using \$1 million or its euro equivalent, determine whether the corporate treasury
could make geographic arbitrage profit with the two different exchange rate quotes.

Assumptions Values
Beginning funds \$ 1,000,000.00

## Citibank NYC quotes:

Bid (\$/€) 1.2624
Barclays London quotes:
Bid (\$/€) 1.2622

Arbitrage Strategy #1
Initial investment \$ 1,000,000.00
Sell euros to Citibank (at the bid rate) \$ 1,000,079.22
Arbitrage profit (loss) \$ 79.22

Arbitrage Strategy #2
Initial investment \$ 1,000,000.00
Sell euros to Barclays (at the bid rate) \$ 999,762.38
Arbitrage profit (loss) \$ (237.62)

## The arbitrager can make a \$ 79.22 profit using these quotes.

Problem 5.13 Venezuelan Bolivar (A)

The Venezuelan government officially floated the Venezuelan bolivar (Bs) in February of 2002.
Within weeks, its value had moved from the pre-float fix of BS778/\$ to Bs1025/\$.

## a. Is this a devaluation or depreciation?

b. By what percentage did its value change?

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 5.14 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.

## a. What was the percentage change in January?

b. Forecast value for June 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%

## b) Forecast value for June 2003?

We are actually solving the equation for S2 (Bs/\$)

## S2 = (S1)/(1+%chg) = (1950)/(1-.40) 3,250

Problem 5.15 Indirect on the Dollar

Calculate the forward premium on the dollar (the dollar is the home currency) if the spot rate is €1.3300/\$ and the 3-month
forward rate is €1.3400/\$.

Assumptions Spot rate Forward rate or discount on euro
Days forward 90
European euro (€ per \$) € 1.3300 € 1.3400

## Percent premium = (S-F)/(F) x (360/90) -2.9851%

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.

## Percent discount = (F-S)/(S) x (360/90) -2.9851%

Problem 5.16 Direct on the Dollar

Calculate the forward discount on the dollar (the dollar is the home currency) if the spot rate is spot rate is \$1.5800/£ and
the 6-month forward rate is \$1.5550/£

Assumptions Spot rate Forward rate or discount
Days forward 180
Exchange rate, US\$/£ \$ 1.5800 \$ 1.5550

## Percent premium = ( Forward - Spot ) / ( Spot ) x ( 360 / 180 ) -3.1646%

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\$) £0.6329 £0.6431

## Percent forward premium = ( Spot - Forward ) / ( Forward ) x ( 360 / 180 ) -3.1646%

Problem 5.17 Around the Horn (A)

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

## Banks Spot Rate

Citibank \$1.6194/£
National Westminster €1.2834/£
Deutschebank \$1.2615/€

Assumptions Values
Funds available USD 1,000,000

## Citibank quote for USD/GBP 1.6194

National Westminster quote for EUR/GBP 1.2834
Deutschebank quote for USD/EUR 1.2615

## Path #1: USD to EUR to GBP to USD

Convert USD to EUR at Deutschebank ask quote EUR 792,707.09
Convert EUR to GBP at NatWest ask quote GBP 617,661.75
Convert GBP to USD at Citibank bid quote USD 1,000,241
Arbitrage gain / loss USD 241.44

## Path #2: USD to GBP to EUR to USD

Convert USD to GBP at Citibank ask quote GBP 617,512.66
Convert GBP to EUR at NatWest bid quote EUR 792,515.75
Convert EUR to USD at Deutschebank bid quote USD 999,758.61
Arbitrage gain / loss -USD 241.39

## Triangular arbitrage path #1 yields a positive profit.

Problem 5.18 Around The Horn (B)

Assume the following bid-ask quotes and calculate how the market trader can now
make an intermarket arbitrage profit.

## Banks Spot Rate

Citibank \$1.6192–96/£
National Westminster €1.2833–35/£
Deutschebank \$1.2614–16/€

Assumptions Values
Funds available USD 1,000,000.00

Citibank quote for USD/GBP 1.6192 1.6196
National Westminster quote for EUR/GBP 1.2833 1.2835
Deutschebank quote for USD/EUR 1.2614 1.2616

## Path #1: USD to EUR to GBP to USD

Convert USD to EUR at Deutschebank ask quote EUR 792,644.26
Convert EUR to GBP at NatWest ask quote GBP 617,564.68
Convert GBP to USD at Citibank bid quote USD 999,960.72
Arbitrage gain / loss -USD 39.28

## Path #2: USD to GBP to EUR to USD

Convert USD to GBP at Citibank ask quote GBP 617,436.40
Convert GBP to EUR at NatWest bid quote EUR 792,356.14
Convert EUR to USD at Deutschebank bid quote USD 999,478.03
Arbitrage gain / loss -USD 521.97

## Triangular arbitrage does not yield positive profit.

Problem 5.19 Around the Horn

Around the horn. Assuming the following quotes, calculate how a market trader at Citibank
with \$1,000,000 can make an intermarket arbitrage profit.:

## Citibank quotes U.S. dollar per pound: \$1.5900/£

National Westminster quotes euros per pound: €1.2000/£
Deutschebank quotes U.S. dollar per euro: \$0.7550/€

## Assumptions Exchange rate

Citibank quote: US\$/pound (\$/£) 1.5900
National Westminster quote: euros/pound (€/£) 1.2000
Deutschebank quote: US\$/euro (\$/€) 0.7550
Initial investment \$ 1,000,000.00

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

Convert to euros at Deutschebank quote € 1,324,503.31
Convert euros to pounds at NatWest quote £1,103,752.76
Convert pounds to US\$ at Citibank quote \$ 1,754,966.89
Arbitrage gain (loss) \$ 754,966.89

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

Convert to pounds at Citibank quote £628,930.82
Convert pounds to euros at NatWest quote € 754,716.98
Convert euros to US\$ at Deutschebank quote \$ 569,811.32
Arbitrage gain (loss) \$ (430,188.68)

## Triangular arbitrage path #1 yields a positive profit.

Problem 5.20 Great Pyramids

Inspired by his recent trip to the Great Pyramids, Citibank trader Ruminder Dhillon wonders if he
can make an intermarket arbitrage profit using Libyan dinars and Saudi riyals. He has
\$1,000,000 to work with so he gathers the following quotes:

## Citibank quotes U.S. dollar per Libyan dinar: USD1.9324 = LYD1.00

National Bank of Kuwait quotes Saudi riyal per Libyan dinar: SAR 1.9405 = LYD1.00
Barclay quotes U.S. dollar per Saudi riyal: USD0.2667 = SAR1.00

## Assumptions Exchange rate

Citibank quote: US\$/dinar (\$/LYD) 1.9324
National Bank of Kuwait quote: riyal per dinar (SAR/LYD) 1.9405
Barclay quote: US\$/riyal (\$/SAR) 0.2667
Initial investment \$ 1,000,000.00

## Path #1: US\$ to riyals to dinars to US\$

Convert to riyals at Barclay quote SAR 3,749,953.13
Convert riyals to dinars at NatBank of Kuwait quote LYD 1,932,467.47
Convert dinars to US\$ at Citibank quote \$ 3,734,300.14
Arbitrage gain (loss) \$ 2,734,300.14