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# INTERNATIONAL

Tutorial Week2
Chapters3+5

CONTACT DETAILS
YourTutor&TutorinCharge: PeterAndersen peter.andersen@unsw.edu.au

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CHAPTER 3 PROBLEM 1
f
f

## 103.25/\$ 105.75/\$ 360 100 105.75/\$ 90

9.46%

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CHAPTER 3 PROBLEM 3

S\$/ 0 \$1.7745-50 /
\$/ F30 \$1.7698-1.7706 /

4

\$/ F90 \$1.7620-35 /
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CHAPTER 3 PROBLEM 4
Q. Considerthefollowingspotandforwardratesfortheyeneuro(/) exchangerates:
Spot 146.30 30days 145.75 60days 145.15 90days 144.75 180days 143.37 360days 137.85

i.e.not365days/year

A. Discount!
f
30
/ Fn / S0 360 100 / S0 n

f90

145.75/ 146.30/ 360 100 146.30/ 30 144.75/ 146.30/ 360 100 146.30/ 90 137.85/ 146.30/ 360 100 146.30/ 360

4.51% 4.24%
5.78%
5

f360

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CHAPTER 3 PROBLEM 5
Exch.Rate USD/EUR JPY/USD USD/GBP Spot 1.0435/45 98.75/85 1.6623/33 1month 20/25 12/10 30/35 2month 52/62 20/16 62/75 3month 75/90 25/19 95/110 6month 97/115 45/35 120/130

S\$/ 0 \$1.0435-45 /
Forward points = 75/90

F3\$/ \$1.0510-35 /
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CHAPTER 3 PROBLEM 5
Exch.Rate USD/EUR JPY/USD USD/GBP Spot 1.0435/45 98.75/85 1.6623/33 1month 20/25 12/10 30/35 2month 52/62 20/16 62/75 3month 75/90 25/19 95/110 6month 97/115 45/35 120/130

S\$/ 0 \$1.6623-33 /

F6\$/ \$1.6743-63 /

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CHAPTER 3 PROBLEM 6
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CHAPTER 3 PROBLEM 6
Q. IfInteldoesnothedge,whatistherangeofpossibledollarrevenuesthat incorporates95.45%ofthepossibilities? A. Wearetoldthatthestandarddeviationoftherateofdepreciationofthe dollaris4%.Thestandarddeviationofthefuturespotrateistherefore4%of thecurrentspotrateor0.04 x103/\$=4.12/\$.Thus,plusorminus2 standarddeviationsaroundtheconditionalexpectedfuturespotrateis 101.97/\$+8.24/\$=110.21/\$ 101.97/\$ 8.24/\$=93.73/\$

## Therangethatencompasses95.45%ofpossiblefuturevaluesforIntels receivableistherefore 100,000,000/110.21/\$=\$907,359 100,000,000/93.73/\$=\$1,066,894

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CHAPTER 5 QUESTION 1
Q. Howcanyouquantifycurrencyriskinafloatingexchangeratesystem? A. Tocharacterizetheriskofacurrencyposition,youmusttrytocharacterizethe conditionaldistributionofthefutureexchangeratechanges. Withfloatingexchangerates,historicalinformationonstandarddeviations providesusefulinformationaboutthisdistribution. Thehigherthisvolatility,theriskierarepositionsinthiscurrency. Finally,weshouldpointoutthatvolatilityisanadequateindicatorofriskwhen exchangeratechangesareapproximatelynormallydistributed. Inreality,thedistributionofexchangeratechangesdisplaysfattails,evenin floatingexchangeratesystems,andthisincreasestheriskofcurrency positions.

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CHAPTER 5 QUESTION 2
Q. Whymightitbehardtoquantifycurrencyriskinatargetzonesystemora peggedexchangeratesystem? A. Ifthepegortargetzoneholdsforalongtime,historicalvolatilityappearstobe zeroorverylimited,butthismaynotaccuratelyreflectunderlyingtensions thatmayultimatelyresultinadevaluationorrevaluationofthecurrency. Hence,thetruecurrencyriskdoesnotshowupindaytodayfluctuationsof theexchangerate.Itishardtoquantifythislatentvolatility.

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CHAPTER 5 QUESTION 7
Q. Whatistheeffectofaforeignexchangeinterventiononthemoneysupply? Howcanacentralbankoffsetthiseffectandstillhopetoinfluencethe exchangerate? A. Whenacentralbankbuys(sells)foreigncurrency,itsinternationalreserves increase(decrease),andthemoneysupplyincreases(decreases) simultaneously. Tooffsettheeffectonthemoneysupply,theforeignexchangeinterventioncan besterilized;thatis,thecentralbankcanperformanopenmarketoperation thatcounteractstheeffectonthemoneysupplyoftheoriginalforeign exchangeintervention.

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CHAPTER 5 QUESTION 7
Q. Whatistheeffectofaforeignexchangeinterventiononthemoneysupply? Howcanacentralbankoffsetthiseffectandstillhopetoinfluencethe exchangerate? A. Continued.. Thedirecteffectsofasterilizedinterventionaretwofold:

Thereisnoconsensusonhoweffectivesterilizedinterventionsareinaffecting thelevelandvolatilityofexchangerates.

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CHAPTER 5 QUESTION 9
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CHAPTER 5 QUESTION 11