Problem 6.

1 Asian financial crisis

The Asian financial crisis which began in July 1997 wreaked havoc throughout the currency markets of East Asia.
Which of the following currencies had the largest depreciations or devaluations during the July to November period?
Which seemingly survived the first five months of the crisis with the least impact on their currencies?
Part a)
July 1997 November 1997 Percentage
Country Currency (per US$) (per US$ Change vs dollar
China yuan 8.40 8.40 0.0%
Hong Kong dollar 7.75 7.73 0.3%
Indonesia rupiah 2,400 3,600 -33.3%
Korea won 900 1,100 -18.2%
Malaysia ringgit 2.50 3.50 -28.6%
Philippines peso 27 34 -20.6%
Singapore dollar 1.43 1.60 -10.6%
Taiwan dollar 27.80 32.70 -15.0%
Thailand baht 25.0 40.0 -37.5%

Part b)
The Chinese yuan's value against the US dollar, as a result of the Chinese government maintaining its peg to the dollar,
did not change at all during the crisis. The Thai baht, however, fell 37.5% in only five months, with the Indonesian
rupiah a close second with a loss of 33.3%.
Problem 6.2 Bloomberg Currency Cross Rates

Use the following cross rate table from Bloomberg to answer the following questions. If you are not familiar with all of the 3-letter currency
codes, refer to the table inside the back cover of this text.

Currency USD EUR JPY GBP CHF CAD AUD HKD

HKD 7.7734 9.2639 0.0693 13.6644 5.9618 6.2881 5.7597
AUD 1.3496 1.6084 0.012 2.3724 1.0351 1.0917 0.1736
CAD 1.2362 1.4732 0.011 2.1731 0.9481 0.916 0.159
CHF 1.3038 1.5539 0.0116 2.292 1.0547 0.9661 0.1677
GBP 0.5689 0.678 0.0051 0.4363 0.4602 0.4215 0.0732
JPY 112.195 133.7084 197.222 86.049 90.758 83.1309 14.4333
EUR 0.8391 0.0075 1.475 0.6436 0.6788 0.6217 0.1079
USD 1.1918 0.0089 1.7578 0.767 0.8089 0.741 0.1286

http://www.bloomberg.com/markets/currencies/fxc.html. Accessed July 6, 2005.

Quote Calculated
a. Japanese yen per US dollar? 112.195
b. US dollars per Japanese yen? 0.0089 0.0089
c. US dollars per euro? 1.1918
d. Euros per US dollar? 0.8391 0.8391
e. Japanese yen per euro? 133.7084
f. Euros per Japanese yen? 0.0075 0.0075
g. Canadian dollars per US dollar? 1.2362
h. US dollars per Canadian dollar? 0.8089 0.8089
i. Australian dollars per US dollar? 1.3496
j. US dollars per Australian dollar? 0.741 0.7410
k. British pounds per US dollar? 0.5689
l. US dollars per British pound? 1.7578 1.7578
m. US dollars per Swiss franc? 0.767
n. Swiss francs per US dollar? 1.3038 1.3038
Problem 6.3 Forward premiums on the dollar/euro ($/€)

Use the following spot and forward bid-ask rates for the U.S. dollar/euro (US$/€) exchange rate from July 5, 2005, to answer the
following questions

a) Calculate the mid-rates from the bid-ask rate quotes.

b) Calculate the forward premium on the different maturities using the mid-rates from part a).

Since the exchange rate quotes are direct quotes on the dollar (US$/€), the proper forward premium calculation is:

Forward premium = ( Forward - Spot ) / (Spot) x (360 / days)

a) b)
Calculated Forward
Period Days Forward Bid Rate Ask Rate Mid-Rate Premium
spot 1.19040 1.19140 1.19090
1 month 30 1.19294 1.19560 1.19427 3.3958%
2 months 60 1.19450 1.19294 1.19372 1.4208%
3 months 90 1.20006 1.19450 1.19728 2.1429%
6 months 180 1.21153 1.20006 1.20580 2.5015%
12 months 360 1.21153 1.21153 1.21153 1.7323%
24 months 720 1.23358 1.23358 1.23358 1.7919%

The forward rates progressively require more and more US dollars per euro than the current spot rate. Therefore the euro is selling
forward at a premium and the dollar is selling forward at a discount.

c) Which maturities have the smallest and largest forward premiums?

The 12 month forward rate as the smallest premium, while the 1 month forward possesses the largest premium.
Problem 6.4 Zurich Trading

You receive the following quotes for Swiss francs against the dollar for spot, one-month forward,
3-months forward, and 6 months forward.

Assumptions Values
Spot exchange rate:
Bid rate (SF/$) 1.2575
Ask rate (SF/$ 1.2585
One-month forward 10 to 15
3-months forward 14 to 22
6-months forward 20 to 30

a) Calculate outright quotes Bid Ask

One-month forward 1.2585 1.2600
3-months forward 1.2589 1.2607
6-months forward 1.2595 1.2615

b) What do you notice about the spread?

It widens, most likely a result of thinner and thinner trading volume.

Added/optional question: What is the 6-month Swiss bill rate?

Spot rate, midrate (SF/$) 1.2580
Six-month forward rate, midrate (SF/$) 1.2605
Maturity (days) 180
6-month US dollar treasury rate (yield) 4.200%
Solving for implied SF interest rate 6.450%
Check calculation: the six-month forward 1.2719
Problem 6.5 Traveling: Copenhagen to St. Petersburg

On your post-graduation celebratory trip you are leaving Copenhagen, Denmark

for St. Petersburg, Russia. Denmark’s currency is the krone (Denmark, although
an EU member, is not a participant in the euro itself, but rather maintains a
managed rate against the euro.)You leave Copenhagen with 10,000 Danish kroner
still in your wallet. Wanting to exchange all of these for Russian rubles, you
obtain the following quotes.

Assumptions Values
Beginning your trip with Danish kroner 10,000.00
Spot rate (Dkr/$) 8.5515
Spot rate (Roubles/$) 29.070

a) Calculate the cross rate

Cross rate (Dkr/rouble) 0.2942

b) What would be the proceeds in Rubles?

Converting your Finnish markkas into Rubles 33,994.04
Problem 6.6 Forward Premiums on the Australian dollar (A$)

Use the following spot and forward quotations on the U.S. dollar/Australian dollar (US$/A$) from July 5, 2005 to answer the following
questions:

a) Calculate the mid-rates from the bid-ask rate quotes.

b) Calculate the forward premium on the different maturities using the mid-rates from part a).

Since the exchange rate quotes are direct quotes on the dollar (US$/A$), the proper forward premium calculation is:

Forward premium = ( Forward - Spot ) / (Spot) x (360 / days)

a) b)
Calculated Forward
Period Days Forward Bid Rate Ask Rate Mid-Rate Premium
spot 0.74140 0.74190 0.7417
1 month 30 0.73983 0.74055 0.7402 -2.362%
2 months 60 0.73871 0.73924 0.7390 -2.164%
3 months 90 0.73752 0.73805 0.7378 -2.085%
6 months 180 0.73412 0.73524 0.7347 -1.880%
12 months 360 0.72870 0.73050 0.7296 -1.625%
24 months 720 0.71900 0.71999 0.7195 -1.494%

The forward rates progressively require fewer and fewer US dollars per Australian dollar. The dollar is therefore selling forward at a
premium, and simultaneously, the Australian dollar would be said to be selling forward at a discount.
Problem 6.7 Riskless profit on the franc

Riskless profit on the Swiss franc. The following exchange rates are available to you.
(You can buy or sell at the stated rates.)

Assumptions Values
Beginning funds in Swiss francs (SF) 10,000,000.00
Mt. Fuji Bank (yen/$) 120.00
Mt. Rushmore Bank (SF/$) 1.6000
Matterhorn Bank (yen/SF) 80.00

Try Number 1: Start with SF to $

Step 1: SF to $ 6,250,000.00
Step 2: $ to yen 750,000,000.00
Step 3: yen to SF 9,375,000.00
Profit? (625,000.00)
A loss.

Try Number 2: Start with SF to yen

Step 1: SF to yen 800,000,000.00
Step 2: yen to $ 6,666,666.67
Step 3: $ to SF 10,666,666.67
Profit? 666,666.67
A profit.
Problem 6.8 Trans-Atlantic Arbitrage

Trans-Atlantic arbitrage. A corporate treasury with operations in New York

simultaneously calls Citibank in mid-town (New York City) and Barclays in London.
The two banks give the following quotes at the same time on the euro.

Assumptions Values
Beginning funds $ 1,000,000.00
Citibank NY quotes:
Bid ($/euro) 1.1840
Ask ($/euro) 1.1860
Barclays London quotes:
Bid ($/euro) 1.1830
Ask ($/euro) 1.1850

Arbitrage Strategy #1
Initial investment $ 1,000,000.00
Buy euros from Barclays (at the ask rate) € 843,881.86
Sell euros to Citibank (at the bid rate) $ 999,156.12
Arbitrage profit (loss) $ (843.88)

Arbitrage Strategy #2
Initial investment $ 1,000,000.00
Buy euros from Citibank (at the ask rate) € 843,170.32
Sell euros to Barclays (at the bid rate) $ 997,470.49
Arbitrage profit (loss) $ (2,529.51)

The arbitrager cannot make a profit using these quotes.

Problem 6.9 Victoria Exports

A Canadian exporter, Victoria Exports, will be receiving six payments of €10,000, ranging from now to 12 months in the future.
Since the company keeps cash balances in both Canadian dollars and U.S. dollars, it can choose which currency to change the euros
to at the end of the various periods. Which currency appears to offer the better rates in the forward market?

Days Forward Premium C$ Proceeds of Difference

Period Forward C$/euro on the C$/euro € 10,000.00 Over Spot
spot 1.4811 $14,811.00 -
1 month 30 1.4816 0.405% $14,816.00 $5.00
2 months 60 1.4823 0.486% $14,823.00 $12.00
3 months 90 1.4830 0.513% $14,830.00 $19.00
6 months 180 1.4860 0.662% $14,860.00 $49.00
12 months 360 1.4932 0.817% $14,932.00 $121.00

Days Forward Premium US$ Proceeds of Difference

Period Forward US$/euro on the US$/euro € 10,000.00 Over Spot
spot 1.1914 $11,914.00 -
1 month 30 1.1926 1.209% $11,926.00 $12.00
2 months 60 1.1941 1.360% $11,941.00 $27.00
3 months 90 1.1956 1.410% $11,956.00 $42.00
6 months 180 1.2013 1.662% $12,013.00 $99.00
12 months 360 1.2130 1.813% $12,130.00 $216.00

The Canadian exporter will be receiving six payments of 10,000 euros, ranging from now to 12 months in the future. Since
the company keeps cash balances in both Canadian dollars and US dollars, it can choose which currency to change the euros
to at the end of the various periods. And since the company wishes to lock in the forward rate for each and every payment, it
would appear that the company should lock in forward rates in US$ for all payments. Since the euro is selling forward at a
greater premium against the US dollar than the Canadian dollar, the resulting dollar proceeds are relatively higher.
Problem 6.10 Forward Premiums on WSJ Quotes in Exhibit 6.7

Using the Wall Street Journal quotes listed in Exhibit 6.7 in the chapter, calculate the forward premiums or discounts for both quotation
forms (US$ equivalent and Currency per US$). Why are the forward premiums or discounts not identical? If you use the correct
forward premium formulation, shouldn't the same premiums be identical?

US$ equivalent US$ equivalent Currency/US$ Currency/US$

Assumptions Thu Wed Thu Wed
U.K. (Pound) 1.8410 1.8343 0.5432 0.5452
1-month forward 1.8360 1.8289 0.5447 0.5468
3-months forward 1.8259 1.8187 0.5477 0.5498
6-months forward 1.8120 1.8048 0.5519 0.5541

a) Forward premium (discount)

1-month forward -3.2591% -3.5327% -3.3046% -3.5113%
3-months forward -3.2808% -3.4018% -3.2865% -3.3467%
6-months forward -3.1505% -3.2165% -3.1527% -3.2124%

b) Why are the forward discounts not identical?

They would be if the "Currency/US$" quote is calculated as the reciprocal of "US$ equivalent" carrying the digits.

U.K. (Pound) 1.8410 1.8343 0.5432 0.5452

1-month forward 1.8360 1.8289 0.5447 0.5468
3-months forward 1.8259 1.8187 0.5477 0.5498
6-months forward 1.8120 1.8048 0.5519 0.5541

Forward premium (discount)

1-month forward -3.2591% -3.5327% -3.2591% -3.5327%
3-months forward -3.2808% -3.4018% -3.2808% -3.4018%
6-months forward -3.1505% -3.2165% -3.1505% -3.2165%
Problem 6.11 Financial Times Quotes

Using the spot and forward quotes on the British pound in Exhibit 6.7 in the
chapter, demonstrate how the Financial Times is calculating the forward
premiums on the:

From Exhibit 6.6 Values

Spot rate, closing mid-point ($/₤) 1.8418
One month rate 1.8368
Three months rate 1.8268
One year rate 1.7885

Calculating the forward premium INCORRECTLY:

One month rate: (S-F)/(F) x 12 3.2666%
Three months rate: (S-F)/(F) x 4 3.2844%
One year rate: (S-F)/(F) 2.9802%

Calculating the forward premium CORRECTLY:

One month rate: (F-S)/(S) x 12 3.2577%
Three months rate: (F-S)/(S) x 4 3.2577%
One year rate: (F-S)/(S) 2.8939%
Problem 6.12 Venezuelan bolivar (A)

The Venezuelan government officially floated the Venezuelan bolivar (Bs) in February of 2002.
Within weeks, its value had moved from the pre-float fix of BS778/$ to Bs1025/$.

Assumptions Values
Fixed rate of exchange, Bs/$ 778
New freely floating rate (2 weeks later), Bs/$ 1,025

a) Is this a devaluation or depreciation?

The alteration in the value of an exchange rate who value Devaluation
is set by government is either a devaluation or revaluation. then
In this case, the Venezuelan government moved from a fixed Depreciation
rate to a flexible exchange rate, the bolivar falling in value.

b) By what percentage did its value change?

Percentage devaluation is: -24.10%
% Chg = (S1 - S2) / (S2)
Problem 6.13 Venezuelan bolivar (B)

The Venezuelan political and economic crisis deepened in late 2002 and early 2003. On
January 1st, 2003, the bolivar was trading at Bs1400/$. By February 1st, its value had
fallen to Bs1950/$. Many currency analysts and forecasters were predicting that the
bolivar would fall an additional 40% from its February 1st value by early summer 2003.

Assumptions Values
Exchange rate, January 1, 2003 (Bs/$) 1,400
Exchange rate, February 1, 2003 (Bs/$) 1,950
Forecast fall in value from Feb 1 to early summer, 2003 -40.0%

a) What was the percentage change in January?

% chg = (S1 - S2)/(S2) -28.21%

b) Forecast value for June 2003?

We are actually solving the equation for S2 (Bs/$) 3,250
S2 = (S1)/(1+%chg) = (1950)/(1-.40)
Problem 6.14 Indirect quotation on the dollar

Calculate the forward premium on the dollar (the dollar is the home currency) if the spot rate is €1.0200/$ and the 3-month
forward rate is €1.0300/$.

Quoted 90-day Percent premium

Assumptions Spot rate Forward rate or discount on euro
Days forward 90
European euro (euros per $) € 0.8264 € 0.8230

Calculation formula for the indirect quote on the dollar:

Percent premium = (S-F)/(F) x (360/90) 1.6525%

The euro would be selling forward at a premium against the dollar, or equivalently, the dollar selling
forward against the euro at a discount.

In a way, the terminology is a bit tricky. One might say that the "forward premium is a premium."

Check calculation
One way to check percentage change calculations is to invert each of the currency
quotes (1/(euros/$)), and recalculate the quote using the direct quotation formula.

European euro ($ per euro) $1.2101 $1.2151

Percent discount = (F-S)/(S) x (360/90) 1.6525%

Problem 6.15 Direct quotation on the dollar

Calculate the forward discount on the dollar (the dollar is the home currency) if the spot rate is spot rate is $1.5500/£ and
the 6-month forward rate is $1.5600/£

Quoted 180-day Percent premium

Assumptions Spot rate Forward rate or discount
Days forward 180
Exchange rate, US$/pound $ 1.8200 $ 1.8000

Calculation formula for the direct quote on the dollar:

Percent premium = ( Forward - Spot ) / ( Spot ) x ( 360 / 180 ) -2.1978%

The forward rate requires fewer US dollars in exchange for pounds than the current spot rate. The dollar is therefore
selling forward at a premium against the pound (and the pound is simultaneously selling forward at a discount versus the
US dollar).

Check calculation
Inverting the quotes (pounds/US$) £0.5495 £0.5556

Percent forward premium = ( Spot - Forward ) / ( Forward ) x ( 360 / 180 ) -2.1978%

Problem 6.16 Mexican peso - European euro cross rates

Calculate the cross rate between the Mexican peso (Ps) and the euro (€ ) from the
following two spot rates: Ps10.20/$; € 1.02/$.

Assumptions Exchange rate

Mexican peso, pesos/dollar (Ps/$) 11.43
European euro, euros/dollar (€/$) 0.8404

Calculated cross rate, pesos/euro 13.6007

pesos/euro = (Ps/$) / (€/$)

or equivalently, euros/peso (€/Ps) 0.0735

Problem 6.17 Around the horn.

Assume the following quotes, calculate how a market trader at Citibank with $1,000,000
can make an inter-market arbitrage profit.:

Assumptions Exchange rate

Citibank quote: US$/pound ($/£) 1.8400
National Westminster quote: euros/pound (€/£) 1.4600
Deutschebank quote: US$/euro ($/€) 1.1800
Initial investment $ 1,000,000.00

Path #1: US$ to euros to pounds to US$

Start with US$ $ 1,000,000.00
Convert to euros at Deutschebank quote € 847,457.63
Convert euros to pounds at NatWest quote £580,450.43
Convert pounds to US$ at Citibank quote $ 1,068,028.79
Arbitrage gain (loss) $ 68,028.79

Path #2: US$ to pounds to euros to US$

Start with US$ $ 1,000,000.00
Convert to pounds at Citibank quote £543,478.26
Convert pounds to euros at NatWest quote € 793,478.26
Convert euros to US$ at Deutschebank quote $ 936,304.35
Arbitrage gain (loss) $ (63,695.65)