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5. You'rethe treasurer of Japanese firm needing to buy USD. You call the foreign
exchange trading desk at Bank of Tokyo-Mitsubishi and the bank gives you quote of
112.65/ 112 75 for USDJPY. At what rate would you be able buy USD from the bank?
9.
Assume the following:
Spot USDBRL 1365
6MO USD Money Market Rates 1.5%
6MO BRL Money Market Rates 10. 75%
What is the 6MO USDBRL forward rate? (Recall that Money Market Rates are
annualized rates)
10.
Assume the following:
Spot GBPUSD .3280
9MO GBP Money Market Rates 0.65%
9MO USD Money Market Rates 1.75%
What is the 9MO GBP/USD forward rate? (Recall that LIBOR is an annualized
rate)
11. Considering questions and 10 above, what underlying theory did you use to make
your calculations? Briefly explain why it important for managers to know and
understand this theory
12. You are currency trader sitting at your desk monitoring the currency markets. It's
lunch time on Friday before long holiday weekend. so many dealers have stepped
away from the trading desk and everything seems pretty quiet. You suddenly notice that
you can buy EURUSD from HSBC in the Londor market at 1750, you can buy
USDJPY from JPMorgan Chase in New York at 112.75, and you can sell EURJPY to
M&T Bank in Buffalo at 132 68. Giventhis information is there an arbitrage
opportunity? Support your answer mathematically
13. Blowfast Corporation, U.S. exporter. sold wind turbines to Mexican customer at a
price of 5,000,000 U.S dollars. In order to close the sale. however, Blowfast needed
to
agree to make its invoice payable in Mexican pesos, thus agreeing to take on the
exchange rate risk for the transaction. The USDMXN exchange rate on the day of the
sale was 12.0000. making the cost the customer (per the invoice) 60,000,000 pesos.
The terms of payment were: net. 6 months. If the value of the peso fell against the U.S
dollar such that one dollar would buy 17.0000 pesos by the date the invoice needed to be
paid. what ollar amount would Blowfast receive assuming that it exchanged the recently
received pesos for U.S. dollars inz foreign exchange transaction on the payment date?
16. You have been hired as consultant to the central bank for small country that. for
many years, has suffered from repeated currency crises and rampant in iflation. The
country depends heavily on both the German and French financial and product markets
What type of exchange rate policy would have the greatest impact and reduce currency
volatility between the client country and both Germany and France?
24. Under fixed exchange rate system, the government bears the responsibility to
ensure that the Balance of Payments is near zero. If the sum of the current and capital
accounts do not approximate zero. the government is expected to intervene in the foreign
exchange market by buying or selling official foreign exchange reserves. the sum of
the current and capital accounts is GREATER THAN ZERO what action does the
government need to take in order to preserve the fixed exchange rate
The Following Question is worth total of points:
Use the data table to answer the following questions:
EURUSD Spot Quotes
Bank
Bid
Ask
Citibank
1.1730
1.1735
HSBC
1.1732
1.1737
JP Morgan Chase
.1725
1.1730
EURUSD 6-month Forward Quotes
Bank
Bid
Ask
Barclays Bank
.1697
1.1704
Royal Bank
1.1700
1.1707
6-month Interest Rates (per annum simple interest)
Bank
Currency
Interest Rate
Bank America
U.S Dollar
0.50%
Deutsche Bank
Euro
1.50%
a
Given the above three spot quotations for EURUSD is there an opportunity for
arbitrage in the spot market? If so, from which banks would you choose for which
transactions? Assume that you had EUR 2,000,000 of capital available for an arbitrage
transaction. What would the USD profit be?
b. Assume that you are U.S corporation and need to buy EUR 4,000,000 tocover an
A/P due in months. Of the two banks that have quoted the forward prices which bank
would you use for your transaction? How much money did you save your company by
choosing this price as opposed to the other price?
c. Is there covered interest arbitrage opportunity? Start with the assumption that you
will borrow 1,000,000 U.S. dollars and can convert them into Euro's at the spot rate of
EUR/USD=1.1730. Demonstrate your answer mathematically.
The Following Question is worth a total of points:
Considering Purchasing Power Parity and the Law of One Price:
a. Assume that the current price of Big Mac in the United States today is $5.75
Assume also that the current price of Big Mac in Malaysia 14.00 ringgits and that the
current USDMYR exchange rate is 4.2250. What the implied ppp of the USD?
b. Using the assumptions above, what is the under (-), over (+) valuation against the
dollar in percentage terms?
c. What are the implications associated with your answer to part t b.?
d. Describe the short-falls. if any, of PPP as predictor of currency rates?

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Answer 5:

The rate at which I can buy is the ask rate since the bank sells at the ask rate. Thus my rate for buying USD would be 112.75 USDJPY....