PROBLEM SET 3

FOREIGN EXCHANGE MARKET

Q 1. On 12 August, a Commonwealth Bank dealer in Melbourne concluded a transaction with a

Citibank dealer in New York. The former agreed to buy from the latter USD5 000 000 at an
exchange rate (AUD/USD) of 1.77 for delivery on 14 August. On the delivery date, the
exchange rate rose to 1.83. How much would the Commonwealth Bank be required to pay to
settle the transaction?

Q 2. The exchange rate between the British pound and the Australian dollar (GBP/AUD) rose
from 0.3780 to 0.3960 in one week.
(a) Calculate the percentage appreciation or depreciation of the Australian dollar.
(b) Calculate the corresponding values of the AUD/GBP exchange rate.
(c) Calculate the percentage appreciation or depreciation of the pound.

Q 3. If the exchange rate between the British pound and the Australian dollar (GBP/AUD) is
0.3980, what is:
(a) the direct quote from an Australian perspective?
(b) the indirect quote from an Australian perspective?
(c) the direct quote from a British perspective?
(d) the indirect quote from a British perspective?

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Q 4. The USD/AUD exchange rate is quoted as 0.4977–0.5176.
(a) What is the bid–offer spread? What is it in percentage terms?
(b) Calculate the AUD/USD exchange rate. What is the bid–offer spread? What is it in
percentage terms?

Q 5. If the exchange rate between the Australian dollar and the Japanese yen, expressed in
indirect quotation from an Australian perspective, is 70.10–71.60, what is the direct quotation
for this rate? What are the mid-rates in both cases?

Q 6. At 9.30 a.m. Dealer A calls Dealer B and asks for a quote on the AUD/GBP exchange
rate. Dealer B responds by quoting 2.5500–2.5540. Dealer A decides to buy GBP200 000 at the
quoted rate. At 3.30 p.m., Dealer B quotes 50–90. Will dealer A make a profit or a loss by
selling the pound at 3.30 p.m.?

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Q 7. The following exchange rates are quoted:
USD/AUD 0.5674
JPY/AUD 70.43
GBP/AUD 0.3891
EUR/AUD 0.6075
Calculate the following cross rates: JPY/USD, GBP/USD, EUR/USD, JPY/GBP, JPY/EUR
and EUR/GBP.

Q 8. On the basis of the following exchange rates, construct a cross exchange rate matrix that
does not include the Australian dollar. All exchange rates must be expressed in bid–offer terms.
GBP/AUD 0.3820–0.3900
EUR/AUD 0.6020–0.6080
CHF/AUD 0.8800–0.8860

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 Q 9. 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 NYC quotes:    
Bid ($/€)   0.9650
Ask ($/€)   0.9670
Barclays London quotes:    
Bid ($/€)   0.9640
Ask ($/€)   0.9660

Can you have an arbitrage profit?

Q 10. Assuming 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$/pound ($/£)   1.5400
National Westminster quote: euros/pound (€/£)   1.6000
Deutschebank quote: US$/euro ($/€)   0.9700
Initial investment   $ 1,000,000.00

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NOTE: The Mechanics of Foreign Exchange Trading

Suppose on September 22, Sirisha needed to hedge a CAD 10 million cash outflow three months in
the future. First she checks the market price levels using a Bloomberg terminal. The spot price on
CAD/USD exchange rate is bid-ask of 1.5621-1.5624.

With that information she dials one of her regular bankers:

Sirisha: Can you give me a two-way price on 10 Canada?

Trader: CAD spot is 21 to 24.

Sirisha: I’ll do it at 21.

Trader: So, you are buying 10 million Canadian dollars against U.S. dollars at 1.5621.

Sirisha: Actually, I want to roll it 3 months out. Can you tell me the forward points?

Trader: That’s 45 points.

Sirisha: Can you improve it a pip?

Trader: Hmmmm. OK…. You get it at 46.

Sirisha: Done. Thanks.

Trader: Good. Then your company buys 10 million Canadian Dollars at 1.5667 and sells USD
6,382,842.92 with value December, 24.

Sirisha: Agreed. Bye.