ECS4020 International Finance & Risk Management: Dr.

Amrit Judge October 2011

INTERNATIONAL FINANCE & RISK MANAGEMENT : LECTURE 1 QUESTIONS

Reading : Shapiro (9th Ed), Chapter 2 and Chapter 7 pages 264 289. Eun & Resnick (5th Ed), Chapter 5 pages 108-130.
1. 2. 3. 4. Give a definition of arbitrage. Identify the factors that affect the equilibrium exchange rate. What are the advantage/disadvantages of a strong and a weak currency? In 1995, US$1 bought YEN90. In 2009, it bought Yen110. (a)What was the $ value of the yen in 1995? (b)What was the yens value in 2009? (c)By what % has the yen fallen in value between 1995 and 2009? (d)By what % has the $ risen in value between 1995 and 2009?

5. What is meant by a currency trading at a discount or at a premium in the forward market? 6. What is triangular arbitrage? What is a condition that will give rise to a triangular arbitrage opportunity? 7. Assume you are a trader with Deutsche Bank. From the quote screen on your computer terminal, you notice that Dresdner Bank is quoting 1.6230/$1.00 and Credit Suisse is offering SF1.4260/$1.00. You learn that UBS is making a direct market between the Swiss franc and the mark, with a current /SF quote of 1.1250. Show how you can make a triangular arbitrage profit by trading at these prices. (Ignore bid-ask spreads for this problem). Assume you have $5,000,000 with which to conduct the arbitrage. What happens if you initially sell dollars for Swiss francs? What /SF price will eliminate triangular arbitrage? 8. Suppose US$/C$=0.664, C$/=0.725 and US$/=0.483. Is there an arbitrage opportunity? If yes, what is the arbitrage profit earned if you have at your disposal $10 million or the equivalent in C$ or s? 9. The spot rate for the is $0.1500 and the 3 month forward rate is $0.1505. Your company is prepared to speculate that the rate will move to $0.1650 by the end of 3 months. (a) How would the speculation be undertaken using the spot market only? (b) How would speculation be arranged using the forward markets? (c) If your company were prepared to put $1m at risk on the deal, what would the profit outturns be if expectations were met? Ignore all interest rate implications.

10.

A foreign exchange trader gives the following quotes for the spot, one-month, three month and six month to a US based treasurer. SPOT = $0.02478 - $0.02480 1 month Outright forward 3 month Outright forward 6 month Outright forward Bid Offer Difference $0.02482 $0.02486 0.00004 Bid Offer Difference $0.02469 $0.02472 0.00003 Bid Offer Difference $0.02464 $0.02469 0.00005

(a) If the treasurer wished to buy s 3 months forward, how much would he pay in dollars? (b) If he wished to purchase US dollars 1 month forward, how much would the treasurer have to pay in s? (c) Assuming that s are being bought, what is the premium or discount, for the 1, 3 and 6 month forward rates in annual percentage terms? 11. Suppose GBP is quoted at $1.9519 - $1.9536

ECS4020 International Finance & Risk Management: Dr. Amrit Judge October 2011

Swiss franc is quoted at $0.9250 - $0.9267 What is the direct quote for the GBP in Zurich?