Ashwaq Mohammed Alzhrani 441204167

Case Study-CH6-

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Q1: Are the dealer quotes shown in Exhibit 1 direct or indirect? If DM1,000,000 were sold
spot how many dollars would be received? When would settlement normally take place?

Indirect quote ( DM,FF,yen) quotes, and Direct quotes(streling,SDR)

If: DM2.0310/$

(DM 1000000/2.0310=492125.98 U.S dollar)

And the settlement take place in two days

Q2 : Examine the cross-spot rates shown in Exhibit 2. Are there any triangular arbitrage
opportunities among these currencies (assume deviations from theoretical cross rates of 5
points or less are attributable to transaction costs‫ ) ؟‬How much profit could be made on a
$5 million transaction?

Yes there are an arbitrage opportunities

1- Start with $5M sell it For ¥@154.20 and receive 32425¥

2- Sell yen to FF @ cross-rate 23.06and receive 747730.2FF
3- Sell FF to back to $ @6.6625 and you will earn from arbitrage 5018247
4- Your net profit = 18247

Q3. What would be the $/SDR bid if the SDR appreciates 15% against the dollar?

What would be the SDR/$ offer rate if the SDR appreciates 15%?

SDR

$/SDR bid = (15%+1*(1.2141))=1.396215

SDR/$ offer = (1/1.2143)/(1+15%)=0.7162

Q4. Which currencies are at a dollar discount and which are at a dollar premium? What
are the outright forward rates for the pound? For the French franc? Using the midpoints of
bid-ask spreads, what are the forward premia or discounts on an annualized percentage
basis for both these currencies?

i-

Dollar discount (bid>ask) These currencies: Sterling, DM, Yen, SDR

Dollar premium(bid<ask) FF currency only

spot for pound: 1.489/00

Forward points for pound:55/52

Spot for FF:6.6575/625

Forward points for FF:73/86

(spot +/- forward points)

Outright Forward pound -bid- 1.4730

Outright Forward pound-ask- 1.4644

Outright Forward Franc -bid- 6.6838

Outright Forward Franc -Ask- 6.6921

Using the midpoints of bid-ask spreads and spot and three-month forward the %p. a is:

%p.a for pound=((1.4158-1.4845)/1.4845)*12/3*100=18.51%

%p.a for FF =((6.12725-6.6600)/6.6600)*12/3*100=1.92%

Q5/A private speculator expects the yen to depreciate 7% against the dollar over the next
three months. How can the speculator try to profit on these expectations through a) spot
market transactions only, and b) forward market transactions only (assume no margin
requirements or restrictions on transactions in credit markets)? What will be the expected
dollar profit on a $1 million position in each case? What other considerations should factor
into the speculator’s choice between the spot and forward markets for purposes of
profiting on future movements of the yen?

If he thinks the yen is going to depreciate, he’d short selling for yen forward market and,
After the Yen falls, he buys it back at the lower rate, and the difference between the selling
price and the buying price is his profit.

1000000$* 154.30= 154,300,000¥ @4.8125%

After yen depreciate 7%:

[(154.33*(1-7%)]=143.527

Exchange ¥ for $:

154.200000*(1/143.406)=1074363.1

Profit =74,363

Other factors such as internal political stability, inflation, the overall balance of trade
Q6/ A U.S. corporate treasurer will receive a £2 million payment in 30 days from a
British customer. The treasurer has no strong opinion about the direction or
magnitude of changes in the sterling spot rate, but would like to eliminate the
uncertainty surrounding such movements. Within the context of the rates shown in
Exhibits 1 and 3, what options are available to the treasurer for hedging the foreign
exchange risk associated with the sterling payment? What is the expected cost
(expressed as an annualized percentage) of each alternative? Which alternative should
the treasurer pursue? How would your answers to the above questions change if the
treasurer believed very strongly that sterling would trade at $1.45?

To eliminate the uncertainty surrounding such movements he should inter in option contract
(long hedge) at forward price to "lock in" the exchange rate and hedge from exchange rate
volatilities, option contract gives him the right but not the obligation to exercise contract or
does not (low risk)

If he believed the sterling will depreciate against the $, he does not need to hedge, just takes
advantage from this depreciate.

Q7/ Compare the one-year forward premium or discount on the French franc to the
one-year Eurodollar and Euro franc interest rates shown in Exhibit 2. How can this
situation be arbitraged?

Using mid-point
(6.12725−6.6600)
1 Year FF Forward %p.a = ∗ 12 ∗ 100 = 8%
6.6600

Spot for FF:6.6575/625

1-year EURUSD interest rate=5.625

1-year Eurofranc interest rate=7.25

6.6575*(1+5.625%/1+7.25%)=8%

We observe IRP does hold, that is mean no-arbitrage opportunity