TEST 1

FIN542
(NOV 2023)

Name: _______________________________________
Class: ______________________________________

QUESTION 1

You are given the following quotes:

MYR/USD MYR/NZD
Spot rate MYR4.7200/4.7225/USD MYR2.6817/2.6826/NZD
1-month swap rate 35/55 64/47
3-month interest rate New Zealand 6.2% per annum
Malaysia 7.5% per annum
United States 5.8% per annum
Based on the above information, you are required to:

(i) Compute the bid-ask spread percentage for spot exchange rate MYR/US$ and MYR/NZ$.

(4 marks)

(ii) Compute the one-month forward outright rate for MYR/US$ and MYR/NZ$.

(4 marks)

(iii) Assume that you have US$ 5,500 one month later, how much would you have in terms of MYR?

(2 marks)

(iv) Compute the annualized one-month forward premium/ discount for MYR/NZ$.

(4 marks)

(v) Compute the three-month forward rate for MYR/NZ$.

(4 marks)

(vi) Assume that you need NZ$20,000 to travel to New Zealand three months later, how much MYR do
you need to pay for the exchange?

(2 marks)

QUESTION 2

Assume the following information:

Singapore interest rate 7.5%

Malaysia interest rate 9.0%
Spot rate MYR3.3200/3.3250/SGD
One-year forward rate MYR3.3320/3.3400/SGD

Given the above information, identify if covered interest arbitrage exists. Assume a Malaysian company
can either borrow or invest Malaysian ringgit 1 million. Show the calculation and determine the profit (in
MYR) that the company may earn.

(10 marks)
QUESTION 3

On December 13th 2022, a trader takes a long position in five (5) British pound futures contracts at an
opening price of USD1.1753. The settlement prices for December 13th, 14th, and 15th are USD1.1700,
USD1.1680, and USD1.1740 respectively. On December 16th, 2022, the trader decided to close out the
contract at a price of USD1.1747. The margin account currently has a balance of USD10,000 and a
minimum of USD8,000 must be maintained.

Calculate the daily marked-to-market transactions and the changes in the margin account. Determine
the net profit or loss from the futures contracts (assume one contract size of the British pound is 62,500
units).

(10 marks)

QUESTION 4

A currency trader notices the following quotes:

Malaysian Market Japan Market

MYR4.7500/4.7570/USD JPY139.7300/139.7500/USD
MYR3.2600/3.2680/JPY100

The trader wishes to perform currency arbitrage by taking advantage of the exchange rate of Japanese
yen per US dollar. Explain the steps involved and compute profit from this strategy assuming that the
trader has MYR1,000,000 as an initial investment.
(10 marks)