BBMF2073 FOREX AND DERIVATIVES

Tutorial 6: Foreign Exchange Market – Part 3 ANSWER

Question 1

a) The following is the iphone 7 price list and the spot exchange rate for both countries.

Price of Iphone in US $649

Price of Iphone in Malaysia RM3199
Spot exchange rate for USD/MYR RM4.37

Justify whether law of one price hold?

$649 X 4.37= RM2,836.13

Since the price after conversion is not equal to the selling price in Malaysia, thus the law of
one price does not hold.

b) Refer to the above question, answer the question below:

Assuming now is 1 January

A Malaysian apple products reseller is due to pay US$12million on 1 March

March futures are trading at RM4.50 per dollar

Standard contract size is 100,000 USD

What is the result of a futures hedge if on 1 March the spot rate is RM4.80 per dollar?

$12,000,000/100,000= 120 contracts.

Action Today's value (RM) Value at maturity (RM) P/L (RM)

Value of USD12 mil 52,440,000 (57,600,000) (5,160,000)
Long 120 USD/MYR (54,000,000) 57,600,000 3,600,000
Net= (1,560,000)
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Question 2

Assume that the spot exchange rate is S0 = 24.94 yen per ringgit Malaysia and the expected
annual inflation rate for the Malaysia is 6.23%, and the annual expected Japanese inflation
rate is 1.35%. Compute the exchange rate after 6 month.

Question 3

Explain the interest rate parity with appropriate example.

Interest rate parity mentioned that the return for the country with higher interest rate will
be adjusted via the forward rate of the foreign exchange, make it has no difference in the
return in both countries. For instance, a higher interest rate country tend to have a
depreciated forward rate, and the adjustment is exactly the differential in interest rate.

Question 4

Today’s market price for 1 USD = 4.37 MYR

Given the following interest rates for the two currencies:

USD= 1% per annum

MYR= 3% per annum

a) Calculate the forward rate of USD/MYR

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b) Determine whether the swap point is at par, premium, or discount.

Premium

Question 5

Spot bid rate of USD/MYR 4.4500

6 month forward bid /offer 375/385

6-month forward bid rate X

Interest rate for USD 2.00%

Interest rate for MYR 3.70%

a) Compute the 6-month forward bid rate and 6-month forward offer rate.
4.4500 + 0.0375= 4.4875

b) Explain the forward discount and forward premium with appropriate example.

If the forward exchange rate for a currency is higher than the spot rate, there is a
premium on that currency. For example, if the interest rate of a quoted currency is
higher than the based currency, the currency pair tend to have a forward premium. A
discount exists when the forward exchange rate is lower than the spot rate. For
example, if the interest rate of a quoted currency is lower than the based currency,
the currency pair tend to have a forward discount.

Question 6

GBP/MYR USD/MYR AUD/MYR SGD/MYR

Spot rate 5.43 00-30 4.37 00-30 3.27 00-30 3.08 00-30
3-month 88/85 78/73 24/20 90/95
forward
6-month 150/147 145/135 45/40 170/180
forward
9-month 220/215 295/285 250/235 240/250
forward
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a) Compute the bid rate of 6-month GBP/MYR.

5.4300 - 0.0150 = 5.4150

b) Compute the offer rate of 3-month SGD/MYR.

3.0830 + 0.0095 = 3.0925

c) Compute the bid rate of 9-month AUD/MYR.

3.2700 - 0.0250 = 3.2450

d) Compute the offer rate of 6 month USD/MYR.

4.3730 - 0.0135 = 4.3595