FINS1612 Tutorial Homework: Chapters 15+16 U1C 2018

Use Equation Editor, Mathtype, etc. if you feel it helps present your working out better.

‘The FX market has a well-established set of language conventions. These conventions have been developed
to allow the efficient communication of market data.’ Explain and illustrate this statement by reference to
the language conventions used in the spot FX markets. Use the example quote AUD/USD0.7052–56 explain
your answer.
Distinguish between the base currency and the terms currency.
Distinguish between the bid rates and the offer rates. As a customer of a bank that provided you with the
above quote, what transactions can you do at the bid rate versus at the offer rate.
Explain what is meant by the spread.

An FX dealer is quoting spot USD/SGD1.2750–56. Explain from the perspective of the dealer what the FX
quote indicates.
Transpose the quotation.

A men’s fashion label in the UK is exporting goods to Denmark. An FX dealer quotes the following rates:
USD/DKK 5.4031–37
USD/GBP 0.6063–69
In order to ascertain the firm’s exposure to foreign exchange risk, calculate the GBP/DKK cross rate.

A Swiss manufacturer generates receipts in USD from its exports of chocolate to America. At the same time,
the company imports cocoa from Nigeria, incurring commitments in NGN (naira). Rates are quoted at:
USD/NGN 162.2520–29
CHF/USD 1.1310–19
Calculate the CHF/NGN cross rate.

A German importer has entered into a contract under which it will require payment in GBP in one month.
The company is concerned at its exposure to foreign exchange risk and decides to enter into a forward
exchange contract with its bank:
Spot Rates: EUR/GBP0.8260–67
1-month EUR interest rate 4.75% p.a.
1-month GBP interest rate 3.25% p.a.
Explain what is meant by a forward rate. Given the above data, find the forward rate offered by the bank.
FINS1612 Tutorial Homework: Chapters 15+16 U1C 2018

‘If the spot rate is AUD/USD0.9220–0.9225, and the six-month forward points are ‘58 to 63’, the six-month
forward rate would be AUD/USD0.9278–0.9288.’
Is the above statement true or false? Show your working.
Does the data in this question indicate that the interest rate on six-month money in the USA is higher than
in Australia? Or is the interest rate in the USA lower than in Australia? How do you know?

‘If the spot rate is AUD/USD0.9220–0.9225, and the six-month forward points are ‘63 to 58’, the six-month
forward rate would be AUD/USD0.9157–0.9167’
Is the above statement true or false? Show your working.

Importers, exporters, investors and borrowers may all be participants in the FX markets.
Explain (through the use of example transactions) why each of these parties would be involved in FX
market.

Distinguish between speculative and arbitrage transactions in the FX market. Describe arbitrage
transactions using an example of a triangular arbitrage.

What advantages and disadvantages are associated with maintaining a fixed exchange rate system?
Why might China, as a major trading country, move toward adopting a floating exchange rate regime?

Many developed economies operate within a floating exchange-rate regime. Where a country has a
floating exchange rate, identify and discuss the circumstances in which the central bank of that country
might conduct transactions in the FX market.

The Reserve Bank of Australia sometimes intervenes in the FX markets. Discuss the importance of the RBA
trading under its own name during these periods. What is the rationale for the RBA targeting its
interventions in the AUD/USD exchange market.

During the global financial crisis, the Reserve Bank actively intervened in the FX markets. Outline the
purpose of this intervention and explain how the intervention was carried out.