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# Problem 5.

1 Isaac Dez
Isaac Dez 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
Spot rate on the /reais cross rate

GTQ 10.5799/
0.4462/R\$

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

b. How many quetzals will Isaac get for his reais?
Assumptions
Amount of reais from parents
Spot rate (R\$/)
Spot rate (/GTQ)
a. What is the R\$/GTQ cross rate?
Cross rate (R\$/GTQ)

Values
4,500.00
10.5799
0.4462

4.72

## Reais/GTQ = R\$/ x /GTQ

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

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?

Period
spot
1 month
2 months
3 months
6 months
12 months

Period
spot
1 month
2 months
3 months
6 months
12 months

Period
spot
1 month
2 months
3 months
6 months
12 months

Days
Forward
30
60
90
180
360
Days
Forward
30
60
90
180
360

Days
Forward
30
60
90
180
360

C\$/euro
1.3360
1.3368
1.3376
1.3382
1.3406
1.3462

C\$/euro
1.3360
1.3368
1.3376
1.3382
1.3406
1.3462

US\$/euro
1.3221
1.3230
1.3228
1.3224
1.3215
1.3194

US\$/euro
1.3221
1.3230
1.3228
1.3224
1.3215
1.3194
on the C\$/euro
0.722%
0.705%
0.659%
0.693%
0.765%

on the US\$/euro
0.817%
0.318%
0.091%
-0.091%
-0.204%

C\$ Proceeds of
12,000.00
16,032.00
16,041.65
16,050.84
16,058.41
16,087.54
16,154.69

Difference
Over Spot
\$9.65
\$18.84
\$26.41
\$55.54
\$122.69

US\$ Proceeds of
12,000.00
\$15,865.20
\$15,876.00
\$15,873.60
\$15,868.80
\$15,858.00
\$15,832.80

Difference
Over Spot
\$10.80
\$8.40
\$3.60
(\$7.20)
(\$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
1 month
2 months
3 months
6 months
12 months
24 months

/\$
Bid Rate
109.30
109.05
108.80
107.97
107.09
103.51
96.82

/\$
109.32
109.09
108.90
108.34
107.40
104.19
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)

Period
spot
1 month
2 months
3 months
6 months
12 months
24 months

Days Forward
30
60
90
180
360
720

/\$
Bid Rate
109.30
109.05
108.80
107.97
107.09
103.51
96.82

/\$
109.32
109.09
108.90
108.34
107.40
104.19
97.35

a.
Calculated
Mid-Rate
109.31000
109.07000
108.85000
108.15500
107.24500
103.85000
97.08500

b.
Forward
2.6405%
2.5356%
4.2716%
3.8510%
5.2576%
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
One-month forward
3-months forward
6-months forward

SF 1.2575/\$
SF 1.2585/S
10 to 15
14 to 22
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
Spot exchange rate:
Bid rate (SF/\$)
One-month forward
3-months forward
6-months forward
a. Calculate outright quotes
One-month forward
3-months forward
6-months forward

Values
1.2575
1.2585
10 to 15
14 to 22
20 to 30
Bid
1.2585
1.2589
1.2595

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

1.2600
1.2607
1.2615

0.0015
0.0018
0.0020

## Problem 5.5 Munich to Moscow

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
Spot rate on the ruble/dollar cross rate

\$1.3214/
Rbl 30.96/\$

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

b. How many rubles will you obtain for your euros?
Assumptions
Spot rate (\$/)
Spot rate (Rubles/\$)
a) What is the Russian ruble/euro cross rate?
Cross rate (Rubles/)

Values
15,000.00
1.3214
30.96

40.91

Rubles/ = Rubles/\$ x \$/
b) How many rubles will you obtain for your euros?

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
Spot rate on the yen/dollar cross rate

0.6178/\$
109.31/\$

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

b. How many yen will you obtain for your pound?
Assumptions
Spot rate (/\$)
Spot rate (/\$)

Values
2,000.00
0.62
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?

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?

Country
China
Hong Kong
Indonesia
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand

Currency
yuan
dollar
rupiah
won
ringgit
peso
dollar
dollar
baht

July 1997
(per US\$)
8.40
7.75
2,400
900
2.50
27
1.43
27.80
25.0

November 1997
(per US\$
###
7.73
3,600
1,100
3.50
34
1.60
32.70
40.0

Part a.
Percentage
Change vs dollar
0.0%
0.3%
-33.3%
-18.2%
-28.6%
-20.6%
-10.6%
-15.0%
-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
HKD
AUD
CHF
GBP
JPY
EUR
USD

USD
7.7736
1.015
1.0097
0.9819
0.6328
83.735
0.7549

## a. Japanese yen per US dollar?

b. US dollars per Japanese yen?
c. US dollars per euro?
d. Euros per US dollar?
e. Japanese yen per euro?
f. Euros per Japanese yen?
g. Canadian dollars per US dollar?
h. US dollars per Canadian dollar?
i. Australian dollars per US dollar?
j. US dollars per Australian dollar?
k. British pounds per US dollar?
l. US dollars per British pound?
m. US dollars per Swiss franc?
n. Swiss francs per US dollar?

EUR
10.2976
1.3446
1.3376
1.3008
0.8382
110.9238
1.3247

JPY
0.0928
0.0121
0.0121
0.0117
0.0076
0.009
0.0119
Quote
83.735
0.0119
1.3247
0.7549
110.9238
0.009
1.0097
0.9904
1.015
0.9852
0.6328
1.5804
1.0184
0.9819

GBP
12.2853
1.6042
1.5958
1.5519
132.3348
1.193
1.5804
Calculated
0.0119
0.7549
0.0090
0.9904
0.9852
1.5803
0.9819

CHF
7.9165
1.0337
1.0283
0.6444
85.2751
0.7688
1.0184

7.6987
1.0053
0.9725
0.6267
82.9281
0.7476
0.9904

AUD
7.6584
0.9948
0.9674
0.6234
82.4949
0.7437
0.9852

HKD
0.1306
0.1299
0.1263
0.0814
10.7718
0.0971
0.1286

## 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

Period
spot
1 month
2 months
3 months
6 months
12 months
24 months

US\$/
Bid Rate
1.3231
1.3230
1.3228
1.3224
1.3215
1.3194
1.3147

US\$/
1.3232
1.3231
1.3229
1.3227
1.3218
1.3198
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)

Period
spot
1 month
2 months
3 months
6 months
12 months
24 months

Days Forward
30
60
90
180
360
720

US\$/
Bid Rate
1.3231
1.3230
1.3228
1.3224
1.3215
1.3194
1.3147

US\$/
1.3232
1.3231
1.3229
1.3227
1.3218
1.3198
1.3176

a)
Calculated
Mid-Rate
1.32315
1.32305
1.32285
1.32255
1.32165
1.31960
1.31615

b)
Forward
-0.0907%
-0.1360%
-0.1814%
-0.2267%
-0.2683%
-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
Mt. Rushmore Bank
Mt Blanc Bank

92.00/\$
SF1.02/\$
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
Beginning funds in Swiss francs (SF)
Mt. Fuji Bank (yen/\$)
Mt. Rushmore Bank (SF/\$)
Matterhorn Bank (yen/SF)
Step 1: SF to \$
Step 2: \$ to yen
Step 3: yen to SF
Profit?

Step 1: SF to yen
Step 2: yen to \$
Step 3: \$ to SF
Profit?

Values
12,000,000.00
92.00
1.0200
90.00

11,764,705.88
1,082,352,941.18
12,026,143.79
26,143.79
A profit.

1,080,000,000.00
11,739,130.43
11,973,913.04
(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

Period
spot
1 month
2 months
3 months
6 months
12 months
24 months

US\$/A\$
Bid Rate
0.98510
0.98131
0.97745
0.97397
0.96241
0.93960
0.89770

US\$/A\$
0.98540
0.98165
0.97786
0.97441
0.96295
0.94045
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)

Period
spot
1 month
2 months
3 months
6 months
12 months
24 months

Days Forward
30
60
90
180
360
720

US\$/A\$
Bid Rate
0.98510
0.98131
0.97745
0.97397
0.96241
0.93960
0.89770

US\$/A\$
0.98540
0.98165
0.97786
0.97441
0.96295
0.94045
0.89900

a.
Calculated
Mid-Rate
0.98525
0.98148
0.97766
0.97419
0.96268
0.94003
0.89835

b.
Forward
-4.5917%
-4.6252%
-4.4902%
-4.5816%
-4.5902%
-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
\$1.262425/

Barclays London
\$1.262223/

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
Beginning funds

## Citibank NYC quotes:

Bid (\$/)
Barclays London quotes:
Bid (\$/)
Arbitrage Strategy #1
Initial investment
Sell euros to Citibank (at the bid rate)
Arbitrage profit (loss)
Arbitrage Strategy #2
Initial investment
Sell euros to Barclays (at the bid rate)
Arbitrage profit (loss)
The arbitrager can make a \$ 79.22 profit using these quotes.

Values
1,000,000.00

1.2624
1.2625
1.2622
1.2623

\$
\$
\$

\$
\$
\$

1,000,000.00
792,204.71
1,000,079.22
79.22

1,000,000.00
792,079.21
999,762.38
(237.62)

## 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
Fixed rate of exchange, Bs/\$
New freely floating rate (2 weeks later), Bs/\$

Values
778
1,025

## a. Is this a devaluation or depreciation?

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
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:
% Chg = (S1 - S2) / (S2)

Devaluation
then
Depreciation

-24.10%

## 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
Exchange rate, January 1, 2003 (Bs/\$)
Exchange rate, February 1, 2003 (Bs/\$)
Forecast fall in value from Feb 1 to early summer, 2003

Values
1,400
1,950
-40.0%

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

% chg = (S1 - S2)/(S2)

-28.21%

## 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
Days forward
European euro ( per \$)

Quoted
Spot rate
1.3300

90-day
Forward rate
90
1.3400

or discount on euro

## Calculation formula for the indirect quote on the dollar:

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.
European euro (\$ per )
Percent discount = (F-S)/(S) x (360/90)

\$0.7519

\$0.7463
-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
Days forward
Exchange rate, US\$/

Quoted
Spot rate
\$

1.5800

180-day
Forward rate
180
1.5550

or discount

## Calculation formula for the direct quote on the dollar:

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
-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
Citibank
National Westminster
Deutschebank

Assumptions
Funds available
Citibank quote for USD/GBP
National Westminster quote for EUR/GBP
Deutschebank quote for USD/EUR

Spot Rate
\$1.6194/
1.2834/
\$1.2615/

Values
USD 1,000,000
1.6194
1.2834
1.2615

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

Convert USD to EUR at Deutschebank ask quote
Convert EUR to GBP at NatWest ask quote
Convert GBP to USD at Citibank bid quote
Arbitrage gain / loss

USD 1,000,000
EUR 792,707.09
GBP 617,661.75
USD 1,000,241
USD 241.44

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

Convert USD to GBP at Citibank ask quote
Convert GBP to EUR at NatWest bid quote
Convert EUR to USD at Deutschebank bid quote
Arbitrage gain / loss

USD 1,000,000
GBP 617,512.66
EUR 792,515.75
USD 999,758.61
-USD 241.39

## 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
Citibank
National Westminster
Deutschebank

Spot Rate
\$1.619296/
1.283335/
\$1.261416/

Assumptions
Funds available

Values
USD 1,000,000.00

## Citibank quote for USD/GBP

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

Bid
1.6192
1.2833
1.2614

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

Convert USD to EUR at Deutschebank ask quote
Convert EUR to GBP at NatWest ask quote
Convert GBP to USD at Citibank bid quote
Arbitrage gain / loss

USD 1,000,000.00
EUR 792,644.26
GBP 617,564.68
USD 999,960.72
-USD 39.28

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

Convert USD to GBP at Citibank ask quote
Convert GBP to EUR at NatWest bid quote
Convert EUR to USD at Deutschebank bid quote
Arbitrage gain / loss

USD 1,000,000.00
GBP 617,436.40
EUR 792,356.14
USD 999,478.03
-USD 521.97

1.6196
1.2835
1.2616

## 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:
National Westminster quotes euros per pound:
Deutschebank quotes U.S. dollar per euro:
Assumptions
Citibank quote: US\$/pound (\$/)
National Westminster quote: euros/pound (/)
Deutschebank quote: US\$/euro (\$/)
Initial investment
Path #1: US\$ to euros to pounds to US\$
Convert to euros at Deutschebank quote
Convert euros to pounds at NatWest quote
Convert pounds to US\$ at Citibank quote
Arbitrage gain (loss)
Path #2: US\$ to pounds to euros to US\$
Convert to pounds at Citibank quote
Convert pounds to euros at NatWest quote
Convert euros to US\$ at Deutschebank quote
Arbitrage gain (loss)
Triangular arbitrage path #1 yields a positive profit.

\$1.5900/
1.2000/
\$0.7550/

\$
\$

\$
\$

Exchange rate
1.5900
1.2000
0.7550
1,000,000.00

1,000,000.00
1,324,503.31
1,103,752.76
1,754,966.89
754,966.89

1,000,000.00
628,930.82
754,716.98
569,811.32
(430,188.68)

## 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:
National Bank of Kuwait quotes Saudi riyal per Libyan dinar:
Barclay quotes U.S. dollar per Saudi riyal:
Assumptions
Citibank quote: US\$/dinar (\$/LYD)
National Bank of Kuwait quote: riyal per dinar (SAR/LYD)
Barclay quote: US\$/riyal (\$/SAR)
Initial investment
Path #1: US\$ to riyals to dinars to US\$
Convert to riyals at Barclay quote
Convert riyals to dinars at NatBank of Kuwait quote
Convert dinars to US\$ at Citibank quote
Arbitrage gain (loss)
Path #2: US\$ to dinars to riyals to US\$
Convert to dinars at Citibank quote
Convert dinars to riyals at NatBank of Kuwait quote
Convert riyals to US\$ at Barclay quote
Arbitrage gain (loss)
Triangular arbitrage path #1 yields a positive profit.

USD1.9324 = LYD1.00
SAR 1.9405 = LYD1.00
USD0.2667 = SAR1.00

\$
\$

\$
\$

Exchange rate
1.9324
1.9405
0.2667
1,000,000.00

1,000,000.00
SAR 3,749,953.13
LYD 1,932,467.47
3,734,300.14
2,734,300.14

1,000,000.00
LYD 517,491.20
SAR 1,004,191.68
267,787.79
(732,212.21)