Apt Financial Consultants CPA Reviews

P17 INTERNATIONAL FINANCE

FOREIGN EXCHANGE MARKET

QUESTION ONE
a). Distinguish the following terms
a). Spot rate and Forward rate
b). Outright rate and Swap rate

b). The exchange rate between $ and DM is $ and DM is $0.35/DM and that between
DM and FFr is DM 0.31/FFr. What is the $/FFr exchange rate?

QUESTION TWO (NBAA: P17 Nov. 2004,Q2a)

A foreign exchange dealer provided the following quotations for the South-African
Rand (SAR) against the Tanzanian shilling (TZS) on the 31st September 2004:
TZS/SAR Spot 50-55
Three Months Forward 2-7 dis.

Required:
i) Calculate the percentage bid-ask spread on the three month forward TZS (2.5
Marks)
ii) Calculate the profit made by the dealer in purchasing and selling SAR I,000,000
three month forward. (2.5 Marks)
iii) Using the spot and forward offer prices calculate the forward premium/discount
on the SAR (2.5 Marks)

QUESTION THREE (NBAA: P17 MAY 2003,Q3)

a) Define a Forward Exchange Contract and explain the following terms
i) Par
ii) Discount
iii) Premium
In relation to the forward exchange contracts

b) Use the rates below to answer the questions that follow:

Currency Rates for Tanzanian Shilling (TZS) Spot and Forward
Spot 1 Month Forward 3 Months Forward
Ugandan Shillings (UGS) 1.4310-1.4580 0.80-0.70 c pm 2.40-2.30 c pm
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Kenyan Shillings (KES) 0.10-0.12 0.6-0.5 c pm 0.61-0.51 c pm

Austrian Shillings (AS) 0.0316-0.318 0.03-0.025 c pm 0.035-0.029 c pm
Note: c pm = Cent Premium
Required
1) Give the rates at which the bank would:
i) Buy from a customer, Ugandan Shillings and Kenyan
Shillings three months forward. (2 marks)
ii) Sell to a customer, Kenyan shillings and Austrian Shillings one
month forward (2 marks)

2) Calculate the cost or value in TZS to a customer who wishes to

i) Buy AS 15,000 from the bank spot (2.5 marks)
ii) Sell KES 1,000,000 to the bank one month forward
iii) Buy UGS 1,500,000 from the bank three months forward. (2.5 marks)
iv) Sell KES 7,000 to the bank three months forward (2.5 marks)

QUESTION FOUR
Using the rates below give the rates at which the bank would
i) Buy from a customer US dollars and Canadian dollars three
months forward
ii) sell to a customer Dutch guilders and Swiss franc one month
forward
Currency Rates for Sterling (£) Spot and Forward
Spot 1 Month Forward 3 Months Forward
US Dollars 1.4310-1.4580 0.80-0.70 c pm 2.40-2.30 c pm
Canadian Dollars 1.8105-1.8135 1.10-0.95 c pm 3.45-3.30 c pm
Dutch Guilders 4.20-4.22 6-5 c pm 14 ½ -13 ½ c pm
Swiss Francs 3.16-3.18 4 ½ -3 ½ c pm 12 ¼ -11 ¼ c pm
Note: c pm = Cent Premium

QUESTION FIVE
The following spot rates are observed in the foreign exchange market:
Currency Units Required to Buy One US Dollar
Britain (Pound) 0.62
Italy (Lira) 13,000
Japan (Yen) 140.0
Netherlands (guilder) 1.90
Sweden (Krona) 6.40
(Switzerland (franc) 1.50
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On the basis of this information, compute to the nearest second decimal the number of
a). British pounds that can be acquired for US $ 100
b). US Dollars that 50 Dutch guiders will buy
c). Swedish Krona that can be acquired for U.S $ 40
d). US Dollar that 200 Swiss francs can buy
e). Italian lira that can be acquired for U.S $ 10
f). U.S Dollars that 1,000 Japanese yen will buy

QUESTION SIX
C.3 An import – export merchant contracts on 31 December to buy 1,500 tones
of product X from a supplier in Portugal at a price of Escudos 11,820 per tone.
Shipment will be made directly to a customer in Germany whom he has sold the
product at Euros balance by the end of February. Payment to the suppliers is to
be made immediately on shipment, whilst one months credit from the date of
shipment is allowed to the Germany customer.

The merchant arranges with his bank to cover these transactions in GBP on the
forward exchange market. The exchange rates at December 31 being given as
below:
Escudos Euros
Spot 107.45-107.75 3.84-3.88
1. Month forward 55-105 c dis 21/2-11/2 c dis
2. Months forward 75-175 c dis 4-3 c dis
3. Months forward 106-250 c dis 61/2-51/2 c dis

Exchange commission is GBP 1 per mille (maximum GBP 10) on each

transaction.

Required:
Calculate (to the nearest GBP) the profit the merchant will make on the
transaction.

QUESTION SEVEN
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(a) The following exchange rates are available:

Dutch guiders (f1) per US dollar f1 1.9025/US $

Canadian dollar per US dollar C$ 1.2646/US $

Dutch guiders per Canadian dollar f1 1.5214/C $
Are there any opportunities for marker arbitrage? Show how a Dutch investor
with f1 1000,000 can benefit from the possible arbitrage between the three
markets.

(b) Assuming no transaction costs, suppose :£1 = $2.4110 in New York,

$=FF 3.997 in paris, and FF1 = :£ 0.1088 in London. How would you
take profitable advantage of these rates?