International Finance Exercises
MODULE 4
APPLICATION 1
Fernando Gomez
International Finance
28-03-2015
Chapter 5
2. - Using the American term quotes from Exhibit 5.4, calculate the one-, three-, and six-month forward cross-exchange rates between the Canadian dollar and the Swiss franc. State the forward cross-rates in “Canadian” terms.
Answer:
F1 (CD/SF) = .8671/.9628 = .9006
F3 (CD/SF) = .8686/.9624 = .9025
F6 (CD/SF) = .8715/.9614 = .9065
4. - Restate the following one-, three-, and six-month outright forward European term bid-ask quotes in forward points.
Spot 1.3431-1.3436
One-Month 1.3432-1.3442
Three-Month 1.3448-1.3463
Six-Month 1.3488-1.3508
Answer:
One-Month 01-06
Three-Month 17-27
Six-Month 57-72
9. Given the following information, what is the NZD/SGD currency against currency bid-ask quotations?
American Terms
European Terms
Bank quotations
Bid / Ask
Bid / Ask
New Zealand dollar .7265 .7272 1.3751 1.3765
Singapore dollar .6135 .6140 1.6287 1.6300
Answer: Taken from the text, the equation 5.12 implies that Sb (NZD/SGD) = Sb ($/ SGD) x Sb (NZD/$) = .6135 x 1.3751 = .8436. The reciprocal, 1/Sb (NZD/SGD) = Sa (SGD/NZD) = 1.1854. Hence we can imply that: Sa (NZD/SGD) = Sa ($/SGD) x Sa (NZD/$) = .6140 x 1.3765 = .8452. The reciprocal, 1/Sa (NZD/SGD) = Sb (SGD/NZD) = 1.1832. Therefore, the NZD/SGD bid-ask spread is NZD0.8436 - NZD0.8452; and the SGD/NZD spread is SGD1.1832-SGD1.1854.
10. Doug Bernard specializes in cross-rate arbitrage. He notices the following quotes:
Swiss franc/dollar = SFr1.5971?$
Australian dollar/U.S. dollar = A$1.8215/$
Australian dollar/Swiss franc = A$1.1440/SFr
Ignoring transaction costs, does Doug Bernard have an arbitrage opportunity based on these quotes? If there is an arbitrage opportunity, what steps would he take to make an arbitrage profit, and how would he profit if he has $1,000,000 available for this
APPLICATION 1
Fernando Gomez
International Finance
28-03-2015
Chapter 5
2. - Using the American term quotes from Exhibit 5.4, calculate the one-, three-, and six-month forward cross-exchange rates between the Canadian dollar and the Swiss franc. State the forward cross-rates in “Canadian” terms.
Answer:
F1 (CD/SF) = .8671/.9628 = .9006
F3 (CD/SF) = .8686/.9624 = .9025
F6 (CD/SF) = .8715/.9614 = .9065
4. - Restate the following one-, three-, and six-month outright forward European term bid-ask quotes in forward points.
Spot 1.3431-1.3436
One-Month 1.3432-1.3442
Three-Month 1.3448-1.3463
Six-Month 1.3488-1.3508
Answer:
One-Month 01-06
Three-Month 17-27
Six-Month 57-72
9. Given the following information, what is the NZD/SGD currency against currency bid-ask quotations?
American Terms
European Terms
Bank quotations
Bid / Ask
Bid / Ask
New Zealand dollar .7265 .7272 1.3751 1.3765
Singapore dollar .6135 .6140 1.6287 1.6300
Answer: Taken from the text, the equation 5.12 implies that Sb (NZD/SGD) = Sb ($/ SGD) x Sb (NZD/$) = .6135 x 1.3751 = .8436. The reciprocal, 1/Sb (NZD/SGD) = Sa (SGD/NZD) = 1.1854. Hence we can imply that: Sa (NZD/SGD) = Sa ($/SGD) x Sa (NZD/$) = .6140 x 1.3765 = .8452. The reciprocal, 1/Sa (NZD/SGD) = Sb (SGD/NZD) = 1.1832. Therefore, the NZD/SGD bid-ask spread is NZD0.8436 - NZD0.8452; and the SGD/NZD spread is SGD1.1832-SGD1.1854.
10. Doug Bernard specializes in cross-rate arbitrage. He notices the following quotes:
Swiss franc/dollar = SFr1.5971?$
Australian dollar/U.S. dollar = A$1.8215/$
Australian dollar/Swiss franc = A$1.1440/SFr
Ignoring transaction costs, does Doug Bernard have an arbitrage opportunity based on these quotes? If there is an arbitrage opportunity, what steps would he take to make an arbitrage profit, and how would he profit if he has $1,000,000 available for this
Bibliography: Source: Eun, C. S., & Resnick, B. G. (2007). International Finance Management (5th ed.). New York: McGraw-Hill.