*** (1) ***ABC Bank expects exchange rate of USD to appreciate from its

present level of .70 to .75 in 30 days against EURO.

ABC Bank is able to borrow USD 500,000,000 on a short term basis from
other banks.
Present short-term interest rates (annualized) in the inter bank market are as
follows:

Currency Lending Rate Borrowing Rate

US Dollars 5.75 5.70
EURO 5.50 5.60

• ABC Bank borrows 500,000,000 USD from other banks.

• Convert the 500,000,000 USD @ .70 (500,000,000*.70)=
350,000,000 EURO
• Lend EURO @ 5.60% Annualized (5.50%*30/360)= 0.0045
(Computed on 30 days)
• After 30 days, ABC Bank will receive EURO
350,000,000*(1+0.0045)= 351,575,000 EURO
• The annual interest rate on EURO borrowed is 5.60% or
(5.60*30/360)= 0.0046 (Computed as on 30 days)
• The total USD amount necessary to repay the loan is:
• 500,000,000*(1+0.0046)= 502,300,000 USD
• Assuming that the exchange rate on day 30 is .75 per EURO as
anticipated, the number of EURO necessary to repay the USD is
(502,300,000/.75)= 376,725,000 USD
• So, ABC Bank incurred Profit (376,725,000-350,000,000) =
26,725,000 EURO.

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*** (2) ***ABC Bank expects exchange rate of USD to depreciate from its
present level of .75 to .70 in 30 days against EURO.
ABC Bank is able to borrow USD 500,000,000 on a short term basis from
other banks.
Present short-term interest rates (annualized) in the inter bank market are as
follows:
Currency Lending Rate Borrowing Rate
US Dollars 5.75 5.70
EURO 5.50 5.60
• ABC Bank borrows 500,000,000 EURO from other banks.
• Convert the 500,000,000 EURO @ .75 (500,000,000/.75)=
666,666,666 USD
• Lend USD @ 5.75% Annualized (5.75%*30/360)= 0.0047 (Computed
on 30 days)
• After 30 days, ABC Bank will receive USD
666,666,666*(1+0.0047)= 669,799,999 USD
• The annual interest rate on EURO borrowed is 5.60% or
(5.60*30/360)= 0.0046 (Computed as on 30 days)
• The total USD amount necessary to repay the loan is:
• 500,000,000*(1+0.0046)= 502,300,000 USD
• Assuming that the exchange rate on day 30 is .70 per USD as
anticipated, the number of USD necessary to repay the
EURO is (500,000,000/.70)= 714,285,714 USD
• So, ABC Bank incurred Loss (714,285,714-669,799,999) =
44,485,715 USD.

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*** (1) *** XYZ Bank expects exchange rate of Saudi Riyal (SR) to
appreciate from its present level of 3.75 to 3.90 in 30 days against USD.
ABC Bank is able to borrow USD 100,000,000 on a short term basis from
other banks.
Present short-term interest rates (annualized) in the inter bank market are as
follows:

Currency Lending Rate Borrowing Rate

US Dollars (USD) 6.50 6.75
Saudi Riyals (SR) 5.00 5.25

• XYZ Bank borrows 100,000,000 USD from other banks.

 • Convert the 100,000,000 USD @ 3.75 (100,000,000*3.75)=
375,000,000 SR
• Lend SR @ 5.00% Annualized (5.00%*30/360)= 0.0041 (Computed
on 30 days)
• After 30 days, ABC Bank will receive SR 375,000,000*(1+0.0041)=
376,537,500 SR
• The annual interest rate on USD borrowed is 6.75% or
(6.75*30/360)= 0.0056 (Computed as on 30 days)
• The total USD amount necessary to repay the loan is:
• 100,000,000*(1+0.0056)= 100,560,000 USD
• Assuming that the exchange rate on day 30 is 3.90 per USD as
anticipated, the number of SR necessary to repay the USD is
(100,560,000*3.90)= 392,184,000 SR
• So, XYZ Bank incurred Profit (392,184,000-376,537,500) =
15,646,500 SR.

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***4***XYZ Bank expects to exchange rate of the US Dollars to appreciate

from its present level of USD.50 to USD.60 in 60 days.
Chicago bank is able to borrow USD 70,000 on a short term basis from other
banks.
Present short term interest rate (annualized) in the inter bank market are as
follows:
Currency Lending Rate Borrowing Rate
US Dollars 7.90% 8.00%
Mexican peso 8.20% 8.50%

• Now, Borrow USD 70,000 at 8.00% annualized for 60 days.

• Convert the USD 70,000 to PESO 1,40,000 (Basis USD .50 = PESO
1)
• Now, Lend the PESO 1,40,000 at 8.20% annualized for 60 days.
• After 60 days, Bank will receive interest PESO 1,40,000*8.20%
(60/360) = PESO 1913.33
 • On the other hand, after 60 days, Bank convert the PESO
(1,40,000+1913.33) = PESO 141913.33 to USD 85148 (at the rate of
USD .60= PESO 1)

• Now, Bank payment the interest 70,000*8.00%(60/360)= USD 933.33

• Now, calculated profit or loss,
{85148-(70,000+933.33)}
= 14214.67 USD (Profit)

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***5*** ABC Bank expects to exchange rate of the New Zealand dollar
(NZD) to appreciate from its present level of NZD .70 to NZD .80 in 10
days.
Central bank is able to borrow $50,000 on a short term basis from other
banks.
Present short term interest rate (annualized) in the inter bank market are as
follows:
Currency Lending Rate Borrowing Rate
New Zealand Dollars 8.00% 9.00%
Japanese 8.20% 8.30%

• Now, Borrow NZD 50,000 at 9.00% annualized for 10 days.

• Convert the NZD 50,000 to JPY 71428.57 (Basis NZD .70 = JPY 1)
• Now, Lend the JPY at 8.20% annualized for 10 days.
• After 10 days, Bank will receive interest JPY 71428.57*8.20%
(10/360) = 113.89 JPY
• On the other hand, after 10 days, Bank convert the JPY (71428.57
+113.89)= 71524.46 JPY to NZD
• 57233.97 (at the rate of NZD .80= JPY 1)

• Now, Bank payment the interest 50,000*9.00 %( 10/360) = NZD 125

• Now, calculated profit or loss,
(57233.97 – 50,125)
= 7108.97 (Profit)
 ***1*** If Japanese Yen (JPY)’s one year forward rate is quoted at
$0.0131 and the JPY’s spot rate is quoted at $0.0121. What would be the
forward premium/discount?

Solution: We Know,
F/S = 1+P
Or, F/S-1 = P
Or, P = F/S-1
Or, P = 0.0131/0.0121-1
= $0.08264 or, 8.26%

So, the premium amount is 8.26% (Answer)

***2*** If Chinese Yuan (CNY)’s one year forward rate is quoted at

$0.175 and the CNY’s spot rate is quoted at $0.150. What would be the
forward premium/discount?

Solution: We Know,
F/S = 1+P
Or, F/S-1 = P
Or, P = F/S-1
Or, P = 0.175/0.150-1
= $0.1666 or, 16.66%

So, the premium amount is 16.66% (Answer)

***3*** If Indian (INR)’s one year forward rate is quoted at $0.0250 and
the INR’s spot rate is quoted at $0.0224. What would be the forward
premium/discount?

Solution: We Know,
F/S = 1+P
 Or, F/S-1 = P
Or, P = F/S-1
Or, P = 0.0250/0.0224-1
= $0.1160 or, 11.60%

So, the premium amount is 11.60% (Answer)

***4*** If Hong Kong Dollar (HKD)’s one year forward rate is quoted
at $0.1313 and the HKD’s spot rate is quoted at $0.1288. What would be
the forward premium/discount?

Solution: We Know,
F/S = 1+P
Or, F/S-1 = P
Or, P = F/S-1
Or, P = 0.1313/0.1288-1
= $0.0194 or, 1.94%

So, the premium amount is 1.94% (Answer)

***5*** If Malaysian Ringgit (MYR)’s one year forward rate is quoted

at $0.3200 and the MYR’s spot rate is quoted at $0.3176. What would be
the forward premium/discount?

Solution: We Know,
F/S = 1+P
Or, F/S-1 = P
Or, P = F/S-1
Or, P = 0.3200/0.3176-1
= $0.0075567 or, .75%

So, the premium amount is .75% (Answer)

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 ***1*** If Great Britain Pound (GBP)’s one year forward rate is quoted
at $1.50 and the GBP’s spot rate is quoted at $1.58. What would be the
forward premium/discount?

Solution: We Know,
F/S = 1+P
Or, F/S-1 = P
Or, P = F/S-1
Or, P = 1.50/1.58-1
= $(.0506) or, 5.06%

So, the discount amount is 5.06% (Answer)

***2*** If Russian Ruble (RUB)’s one year forward rate is quoted at

$.0310 and the RUB’s spot rate is quoted at $.0320. What would be the
forward premium/discount?

Solution: We Know,
F/S = 1+P
Or, F/S-1 = P
Or, P = F/S-1
Or, P = .0310/.0320-1
= $(.0312) or, 3.12%

So, the discount amount is 3.12% (Answer)

 ***3*** If Thai Baht (THB)’s one year forward rate is quoted at $.0300
and the THB’s spot rate is quoted at $.0333. What would be the forward
premium/discount?

Solution: We Know,
F/S = 1+P
Or, F/S-1 = P
Or, P = F/S-1
Or, P = .0300/.0333-1
= $(.0990) or, 9.90%

So, the discount amount is 9.90% (Answer)

***4*** If Swiss Franc (CHF)’s one year forward rate is quoted at

$1.001 and the CHF’s spot rate is quoted at $1.009. What would be the
forward premium/discount?

Solution: We Know,
F/S = 1+P
Or, F/S-1 = P
Or, P = F/S-1
Or, P = 1.001/1.009-1
= $(.0079) or, .79%

So, the discount amount is .79% (Answer)

 ***5*** If Omani Rial (OMR)’s one year forward rate is quoted at $2.50
and the OMR’s spot rate is quoted at $2.60. What would be the forward
premium/discount?

Solution: We Know,
F/S = 1+P
Or, F/S-1 = P
Or, P = F/S-1
Or, P = 2.50/2.60-1
= $(.0384) or, 3.84%

So, the discount amount is 3.84% (Answer)

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