2162++more+FX+exercises_2023

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MORE FX exercises 1. Consider a U.S. importer desiring to purchase merchandise from a Dutch exporter invoiced in euros, at a cost of € 512,100. The U.S. importer will contact his U.S. bank (where of course he has an account denominated in U.S. dollars) and inquire about the exchange rate, which the bank quotes as € 1.0242/$1.00. The importer accepts this price, so his bank will ____________ the importer's account in the amount of ____________. Debit, $500,000 . 2. Suppose that the current exchange rate is € 0.80 = $1.00. The direct quote, from the U.S. perspective is € 1.00 = $1.25 The direct quotation, from the U.S. perspective, the price of one unit of the foreign currency priced in U.S. dollars. 3. Suppose that the current exchange rate is € 1.00 = $1.60. The indirect quote, from the U.S. perspective is: € 0.6250 = $1.00 The indirect quote from a U.S. perspective is how many units of foreign currency you get for a dollar

4. The Bid price is the price that a dealer stands ready to pay The bid price is the price a dealer will pay; the ask price is the price he charges to sell. Answer a is a bit tricky, but the dealer's historical cost is not necessarily the price at which he will be willing to buy more 5. In conversation, interbank foreign exchange traders use a shorthand abbreviation in expressing spot currency quotations. Consider a $/  bid-ask quote of $1.9072-$1.9077. The "big figure", assumed to be known to all traders is: 1.90 6. The AUD/$ spot exchange rate is AUD1.60/$ and the SF/$ is SF1.25/$. The AUD/SF cross exchange rate is: 1.2800

7. You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro exchange rate is quoted as $1.20 = € 1.00 and the dollar-pound exchange rate is quoted at $1.80 =  1.00. If a bank quotes you a cross rate of  1.00 = € 1.50 how much money can an astute trader make? No arbitrage is possible 9. Market microstructure refers to The basic mechanics of how a marketplace operates 10. The forward market Involves contracting today for the future purchase of sale of foreign exchange at a price agreed upon today. 11. If one has agreed to buy foreign exchange forward : You have a long position in the forward contract 12. The current spot exchange rate is $1.55/ € and the three-month forward rate is $1.50/ € . You enter into a short position on € 1,000. At maturity, the spot exchange rate is $1.60/ € . How much have you made or lost? Lost $100 Your loss will be $100 = € 1,000  ($1.50/ € - $1.60/ € )

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13. The current spot exchange rate is $1.45/ € and the three-month forward rate is $1.55/ € . Based upon your economic forecast, you are pretty confident that the spot exchange rate will be $1.50/ € in three months. Assume that you would like to buy or sell € 100,000. What actions would you take to speculate in the forward market? How much will you make if your prediction is correct? Take a short position in a forward contract on euro. If you're right you will make $5,000. You would agree to sell euro at $1.55; if you can buy them for $1.50 you make $0.05. Do that 100,000 times and you make $5,000. 14. The current spot exchange rate is $1.50/ € and the three-month forward rate is $1.55/ € . Based on your analysis of the exchange rate, you are confident that the spot exchange rate will be $1.62/ € in three months. Assume that you would like to buy or sell € 1,000,000. What actions do you need to take to speculate in the forward market? What is the expected dollar profit from speculation? Buy € 1,000,000 forward for $1.55/ € . if you agree to buy € 1,000,000 forward for $1.55/ € and the price is actually turns out to be $1.62/ € in three months, your expected profit will be $7,000 = € 1,000,000  ($1.62 - $1.55) 15. When a currency trades at a discount in the forward market : The forward rate is less than the spot rate

16. The € /$ spot exchange rate is $1.50/ € and the 120 day forward exchange rate is 1.45/ € The forward premium (discount) is: The dollar is trading at a 10% discount to the euro for delivery in 120 days. 17. The S$/$ spot exchange rate is 1.60, the C$/$ spot rate is 1.33 and the S$/C$ 1.15. Determine the triangular arbitrage profit that is possible if you have $1,000,000. $46,093 profit [($1,000,000 S$1.60/$1)/(S$1.15/CD1)] (CD1.33/$1) = $1,046,093. The 3 month forward rate between British pound and the Swiss franc is £0.5/SF. A speculator predicts the spot rate in three months to be £0.49/SF and has £1,000,000 for speculation. Should sell the Swiss franc forward 19. ) If the speculator's predictions prove correct, the speculator will make a profit of (£1,000,000/.49*.5) 1,000,000 = £20,048

20 ) If the speculator's predictions prove wrong and the actual spot rate in 3 months is £0.52 speculator will make a loss of (£1,000,000/.52*.5) 1,000,000 = £38,461.54 21. The 3 month forward rate between British pound and the Swiss franc is £0.5. A speculator predicts the spot rate in three months to be £0.51 and has £1,000,000 for speculation. The speculator should not get a long position on Swiss francs 22. The world's largest foreign exchange trading center is: London 23. ) The $/CD spot bid-ask rates are $0.7560-$0.7625. The 3-month forward points are 12-16. Determine the $/CD 3-month forward bid-ask rates. forward bid = $0.7560 + 0.0012 = $0.7572; forward ask = $0.7625 + 0.0016 = $0.7641.

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