Chapter 2, Question 8

Pick three currencies and go to www.oanda.com to get their current bilateral exchange rates. Is
there an arbitrage opportunity?
Solution to the problem
Using Japanese Yen (¥ ¿, British Pound (£ ¿ and United States Dollar ($ ¿.
The rate as at 12:48pm on 10/02/2021
Bid Ask
JPY 104.744/USD JPY 104.756/USD
GBP 0.72267/USD GBP 0.72258/USD
JPY 144.946/GBP JPY 144.969/GBP
Source: https://www1.oanda.com/currency/live-exchange-rates/

To compute the Implied Direct Bid Quote

¥ 104.744 £ 0.72267 ¥ 104.744 $

¿ ÷ = ×
$ $ $ £ 0.72267
¥ 144.9403
¿
£
The implied bid cross rate quote for ¥ /£ is therefore ¥ 144.9403/£.
Comparing the implied bid cross rate ¥ 144.9403/£ with the quoted rate ¥ 144.946/£, we can
conclude that there is no arbitrage opportunity between the two currencies i.e. Japanese Yen
and Bristish pounds.
To compute the Implied Ask Direct Quote
¥ 104.756 £ 0.7229 ¥ 104.756 $
¿ ÷ = ×
$ $ $ £ 0.7229
¥ 144.9701
¿
£
The implied ask cross rate quote for ¥ /£ is therefore ¥ 144.9701/£.
Comparing the implied ask cross rate ¥ 144.9701/ £ with the quoted rate ¥ 144.969/£, we can
conclude that there is no arbitrage opportunity between the two currencies i.e. Japanese Yen
and Bristish pounds.
Chapter 3, Question 7
Go to the Wall Street Journal ’s Market Data Center ( http://online.wsj.com/mdc/public/page/marketdata.html)
and find New York closing prices for currencies. Calculate the 180-day forward premium or
discount on the dollar in terms of the yen.

Solution to the Problem

The rates were picked as at 11:00pm on 13/02/2021.

Spot rate(¥ / $) 180 days forward rate( ¥ /$)

¥ 104.90−93 ¥ 104.93−96

The forward bid rate is: ¥ 104.93/$

The forward ask rate is: ¥ 104.96/$
The percentage forward premium or discount for 180 days

= ( ForwardSpot
rate−Spot rate
rate ) ×(
360
180 )
× 100

To calculate the percentage forward premium or discount for Bid rate for 180 days.

¿( ¥ 104.93/$−¥ 104.90/$
¥ 104.90 / $ ) ×(
360
180 )
×100

¥ 0.03/$ 360
¿( ) ×(
180 )
×100
¥ 104.90/$
¿ 0.0572 %
This means that United states dollar ($) is at 0.0572 percent bid forward premium against the Japanese
Yen (¥ ¿.

To calculate the percentage forward premium or discount for Ask rate for 180 days.

¿( ¥ 104.96/$−¥ 104.93/$
¥ 104.93 /$ ) ×( 360
180 )
× 100

¥ 0.03/$ 360
¿( ) ×(
180 )
×100
¥ 104.93/$
¿ 0.05718 %
This means that United states dollar ($) is at 0.05718 percent ask forward premium against the
Japanese Yen (¥ ¿.

Source of data for both spot and forward exchange rate:

https://www.wsj.com/market-data/currencies?mod=nav_top_subsection
https://www.fxempire.com/currencies/usd-jpy/forward-rates

Chapter 4, Question 7
What are the effects on the French balance of payments of the following set of transactions? Les
Fleurs de France, the French subsidiary of a British company, The Flowers of Britain, has just
received €4.4 million of additional investment from its British parent. Part of the investment is a
€0.9 million computer system that was shipped from Britain directly. The €3.5 million remainder
was financed by the parent by issuing euro-denominated Eurobonds to investors outside of
France. Les Fleurs de France is holding these euros in its Paris bank account.

Solution to the Problem

In summary, the transactions on the France BOP are as follows:

France BOP Credit Debit
Capital Account: Inflow  
Additional investment by The Flowers of Britain in Fleurs de France (FDI) €4.4 million
Current Account: Import  
Procurement of additional Computer from Britain €0.9 million
Capital Account: Outflow  
Issuing of Eurobonds to foreign investors by The Flowers of Britain €3.5 million

Explanation:
The additional investment of €4.4 million by the Flowers of Britain in Fleurs de France, its subsidiary, is
a credit item on the French balance of payments. This investment represents an increase in the foreign
ownership of French assets. Furthermore, the additional procurement of computer systems worth €0.9
million from Britain represents an import of goods, a debit item on the French balance of payment. Lastly
funds Flowers of Britain borrowed funds from abroad by issuing Eurobonds worth €3.5 million held by
Fleur de France (its subsidiary in France). This borrowing represents a decrease in foreign ownership of
France's assets. It is capital outflow as it means a claim against French assets, and as a result, it is a debit
item in the French Balance of Payment.
Chapter 5, Question 5
Type “People’s Bank of China” into your favorite search engine and go to the English versions of the
Web site. Under “Statistics,” find the Balance Sheet of the Monetary Authority. Calculate the growth rate
of base money and the growth rate of international assets for the past few years. How much foreign
exchange intervention is China doing? Are they sterilizing it?
http://www.pbc.gov.cn/diaochatongjisi/116219/116319/2161324/2161340/index.html
Solution to the Problem
Balance Sheet of Monetary Authority Unit: 100 Million Yuan
Item 2020 2019 2018 2017 2016
Foreign Assets 218,039.98 218,638.72 217,648.06 221,164.12 229,795.78
Foreign Exchange 211,308.10 212,317.26 212,556.68 214,788.33 219,425.26
Monetary Gold 2,855.63 2,855.63 2,569.79 2,541.50 2,541.50
Other Foreign Assets 3,876.25 3,465.84 2,521.59 3,834.29 7,829.01
Claims on Government 15,250.24 15,250.24 15,250.24 15,274.09 15,274.09
Claims on Other Depository Corporations 133,355.47 117,748.86 111,517.46 102,230.35 84,739.02
Claims on Other Financial Corporations 4,447.14 4,623.39 4,642.60 5,986.62 6,324.41
Claims on Non-financial Sector - - 27.84 101.95 81.03
Other Assets 16,582.70 14,869.26 23,405.85 18,174.48 7,497.26
Total Assets 387,675.54 371,130.48 372,492.06 362,931.62 343,711.59
Reserve Money 330,428.14 324,174.95 330,956.52 321,870.76 308,979.61
Currency Issue 89,823.29 82,859.05 79,145.50 77,073.58 74,884.44
Deposits of Other Depository Corporations 222,906.08 226,023.86 235,511.22 243,802.28 234,095.17
Deposits of Non-financial Institutions 17,698.77 15,292.04 16,299.80 994.90 -
Deposits of financial corporations excluded
4,881.82 4,574.40 4,016.33 5,019.23 6,485.03
from Reserve Money
Bond Issue 900.00 1,020.00 200.00 - 500.00
Foreign Liabilities 929.67 841.77 1,164.51 880.00 3,195.07
Deposits of Government 38,681.53 32,415.13 28,224.74 28,626.03 25,062.70
Own Capital 219.75 219.75 219.75 219.75 219.75
Other Liabilities 11,634.63 7,884.49 7,710.20 6,315.84 -730.58
Total Liabilities 387,675.54 371,130.48 372,492.06 362,931.62 343,711.59
Source: http://www.pbc.gov.cn/diaochatongjisi/116219/116319/2161324/2161340/index.html
Changes and Growth rate of base money and international assets Unit: 100 Million Yuan
2020-2019 2019-2018 2018-2017 2017-2016
  Total Absolute
Absolute % Absolute % Absolute % Absolute %
International Reserve
-598.74 -0.27% 990.66 0.46% -3,516.06 -1.59% -8,631.659 -3.76% -11,755.80
(Foreign Assets)
Base money
6,253.19 1.93% -6,781.57 -2.05% 9,085.76 2.82% 12,891.15 4.17% 21,448.53
(Reserve Money)

From the computation above, China Foreign Assets (R) decreases over time under review, i.e., 2016 to
2020. On the other hand, China's Base money (Mo) increased over time. The growth rate in reserve
money is higher than the rate of growth in foreign assets. This result is an indication that the foreign
exchange intervention in China is likely to be unsterilized. The People' Bank of China intervened by 599,
9901, 3516 and 8632 (100 mln yuan) in 2020, 2019, 2018, and 2017, respectively. This intervention is an
attempt for the People's Bank of China to stabilize the Yuan.

Chapter 6, Question 13
Go to the Web site of the British Bankers’ Association (BBA). Find out which banks are on the
panel for the dollar, the euro, the yen, and the Australian dollar.
http://www.bbatrent.com/panels

List of the banks on the panels for the dollar, the euro, the yen, and the Australian dollar
US Dollar Panel Euro Panel Japanese Yen Panel Australian Dollar Panel
Bank of Tokyo-Mitsubishi UFJ Bank of Tokyo-Mitsubishi Bank of Tokyo-Mitsubishi
Commonwealth Bank of Australia 
Ltd UFJ Ltd UFJ Ltd
Bank of America Abbey National plc  Barclays Bank plc Barclays Bank plc
Barclays Bank plc Barclays Bank plc Credit Agricole CIB Deutche Bank Ag
BNP Paribas Citibank NA Deutsche Bank AG HSBC
Citibank NA Credit Suisse HSBC JP Morgan
Credit Agricole CIB Deutsche Bank AG JP Morgan Chase Lloyds Banking Group
Credit Suisse HSBC Lloyds Banking Group
The Royal Bank of Scotland Group 
Deutsche Bank AG JP Morgan Chase Mizuho Corporate Bank
HSBC Lloyds Banking Group Société Générale  
Sumitomo Mitsui Banking
JP Morgan Chase Mizuho Corporate Bank  
Corporation
Lloyds Banking Group Rabobank The Norinchukin Bank  
Rabobank Royal Bank of Canada T UBS AG  
Royal Bank of Canada Société Générale The Royal Bank of Scotland
Société Générale UBS AG Group   
Sumitomo Mitsui Banking
   
Corporation
The Norinchukin Bank    
The Royal Bank of Scotland
   
Group
UBS AG      
Source: http://www.bbatrent.com/panels

The British Bankers' Association (BBA), advised by the LIBOR Panel Banks and Users Group
(LPBAUG), maintains a reference panel of contributor banks for each currency. Individual banks are
selected within this guiding principle, based upon three criteria: the scale of market activity, reputation,
and perceived expertise in the currency concerned.
As shown in the above table, 18 banks are currently contributing to US Dollar BBA LIBOR's fixing, 15
banks for Euro BBA LIBOR, 13 banks for Japanese Yen BBA LIBOR, and 7 banks for Australian Dollar
BBA LIBOR. These lists were the last review in May 2012.