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Exercise: The Market For Foreign Exchange: BMFM 33135 Oct 2020

This document contains 5 questions regarding foreign exchange rates and arbitrage opportunities. Question 1 asks about implied beliefs based on bid-ask quotes. Question 2 asks about profit/loss on a position and change in liability given exchange rate movements. Question 3 presents exchange rates and asks to check for an arbitrage opportunity. Question 4 also presents rates and asks to show steps to gain from an arbitrage opportunity. Question 5 provides current and forward exchange rates and asks to calculate forward cross rates between currencies and determine if an arbitrage opportunity exists given additional rates.

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131 views3 pages

Exercise: The Market For Foreign Exchange: BMFM 33135 Oct 2020

This document contains 5 questions regarding foreign exchange rates and arbitrage opportunities. Question 1 asks about implied beliefs based on bid-ask quotes. Question 2 asks about profit/loss on a position and change in liability given exchange rate movements. Question 3 presents exchange rates and asks to check for an arbitrage opportunity. Question 4 also presents rates and asks to show steps to gain from an arbitrage opportunity. Question 5 provides current and forward exchange rates and asks to calculate forward cross rates between currencies and determine if an arbitrage opportunity exists given additional rates.

Uploaded by

Sylvia Gyn
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

BMFM 33135 Oct 2020

Exercise: The market for foreign exchange

Question 1

A CAD/$ bank trader is currently quoting a small figure bid-ask of 35-40, when the rest of the
market is trading at CAD1.3436-CAD1.3441. What is implied about the trader’s beliefs by his
prices?

Question 2

A foreign exchange trader with a US bank took a short position of £5,000,000 when the $/£
exchange rate was 1.55. Subsequently, the exchange rate has changed to 1.61.

(a) Is the movement in the exchange rate good from the point of view of the position taken by
the trader?

(b) By how much the bank’s liability changed because of the change of the exchange rate?

Question 3: Triangular Arbitrage

Sam is an FX trader with $1 million on hand. He detects the following exchange rates:

Check the rate: (EUR/USD) X (USD/GBP) = 0.8678 X 1.5028 = 1.3041

Calculate for arbitrage opportunity.

Ms Wan Iffah
BMFM 33135 Oct 2020

Question 4: Triangular Arbitrage

Suppose you have $1 million and you are provided with the following exchange rates: EUR/USD
= 0.8631, EUR/GBP = 1.4600 and USD/GBP = 1.6939.

EUR/GBP = EUR/USD X USD/GBP = 0.8631 X 1.6939 = 1.4620

Show the steps to gain arbitrage opportunity.

Question 5

June 5, 2013
US Dollar foreign-exchange rates in late New York Trading

Wednesday
Country/Currency In US$ Per
US$
Australian Dollar .9542 1.0480
1-mos forward .9521 1.0503
3-mos forward .9482 1.0546
6-mos forward .9425 1.0610

Switzerland Franc 1.0614 .9421


1-mos forward 1.0617 .9418
3-mos forward 1.0624 .9412
6-mos forward 1.0636 .9402

UK Pound 1.5405 .6491


1-mos forward 1.5402 .6493
3-mos forward 1.5396 .6495
6-mos forward 1.5389 .6498

(a) Calculate the 1-month, 3-month and 6-month forward cross exchange rates between the Australian
Dollar and the Swiss Franc. State the forward cross-rates in “Australian” terms.

(b) Calculate the 1-month, 3-month and 6-month forward cross exchange rates between the Swiss
Franc and the UK Pound. State the forward cross-rates in “Swiss” terms.

(c) Calculate forward cross exchange rates between the Australian Dollar and the Swiss Franc. State the
forward cross-rates in “Australian” terms.

(d) Based on (c), assume you want to trade and you are provided with the following information:

Ms Wan Iffah
BMFM 33135 Oct 2020

Australian Dollar/US Dollar = 1.0480


Swiss Franc/US Dollar = 0.9421
Australian Dollar/ Swiss Franc = 1.1144

i) Is there any arbitrage opportunity?

ii) Determine the steps to gain the opportunity, assume you have $1,000,000 on hand to trade.
Steps to gain arbitrage opportunity:

Ms Wan Iffah

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