Question 1

The followings are the quotation from a forex counter in Malaysia.

We sell = I want to buy foreign currency

We buy = I want to sell foreign currency

a) If you hold USD 1000, how much MYR that you can exchange for?

1,000 x 4.1508 = 4,150.80 *USD see wrong *

b) If you hold MYR 3000, how much GBP that you can exchange for?

3,000 / 5.18 = GBP579.15

c) If you hold EUR 1230, how much MYR that you can exchange for?

1,230 x 4.5121 = RM5,549.88

d) If you hold MYR 4800, how much SGD that you can exchange for?

4,800 / 3.01 = SGD1,594.68

Question 2

The followings are the forex quotes from one of the popular money changer in Malaysia

a) If you hold MYR 2500, how much Thai Baht that you can exchange for?

2,500 / 11.96 x 100 = THB20,903.01

b) If you hold MYR 3680, how much Indonesia Rupiah that you can exchange for?

3,680 / 0.0343 x 100 = IDR10,728,862.97

c) If you hold MYR 4380, how much UAE dirham that you can exchange for?

4,380 / 119.25 x 100 = UAE Dirham 3,672.96

d) If you hold RMB 18,850, how much MYR that you can exchange for?

18,850 x 62.68 / 100 = MYR11,815.18

BBMF2073 FOREX AND DERIVATIVES

Question 3

The followings are the forex quotes from one of the money changer in Malaysia.

a) If you hold AUD 1,760, how much Chinese RMB that you can exchange for?

1,760 x 3.0324 = MYR5,337.02

5,337.02 / 65.18 x 100 = RMB8.188.13

b) If you hold GBP 1,080, how much Indonesia Rupiah that you can exchange for?

1,080 x 5.0677 = MYR5,473.12

5,473.12 / 0.0343 x 100 = IDR15,956,606.41

c) If you hold RMB 7,800, how much UAE Dirham that you can exchange for?

7,800 x 62.68 / 100 = MYR4,889.04

4,889.04 /119.25 x 100 = UAE Dirham 4.099.82

d) If you hold IND 5,000,000, how much Chinese RMB that you can exchange for?

5,000,000 x 0.0306 / 100 = MYR1,530

1,530 / 65.18 x 100 = RMB2,347.35

Question 4

The followings are the forex quotes from one of the money changer in Malaysia.

a) Compute the bid and offer price for AUD/NTD.

AUD/MYR offer rate = 3.0584

NTD / MYR bid rate = 0.1264

AUD/NTD offer rate = 24.20

AUD/MYR bid rate = 3.0324

NTD / MYR offer rate = 0.1388

AUD/NTD bid rate = 21.85

b) Compute the bid and offer price for EUR/GBP.

EUR/MYR offer rate = 4.5232

GBP/MYR bid rate = 5.0677

EUR/GBP offer rate = 0.8926

EUR/MYR bid rate = 4.5121

GBP/MYR offer rate = 5.18

EUR/GBP bid rate = 0.8711

c) Compute the bid and offer price for GBP/THB.

GBP/MYR offer rate= 5.18

THB/MYR bid rate = 0.1065

GBP/THB offer rate = 48.64

GBP/MYR bid rate= 5.0677

THB/MYR offer rate = 0.1196

GBP / THB bid rate = 42.37

d) Compute the bid and offer price for NTD/THB.

NTD/MYR offer rate = 0.1388

THB/MYR bid rate = 0.1065

NTD/THB offer rate = 1.303

NTD/MYR bid rate = 0.1264

THB/MYR offer rate = 0.1196

NTD/THB bid rate = 1.057

Question 5

The followings are the forex quotes from one of the money changer in Malaysia.
a) Compute the bid and offer price for AUD/USD.

AUD/MYR offer price = 3.0590

USD/MYR bid price = 4.18

AUD/USD offer price = 0.7318

AUD/MYR bid price = 3.054

USD/MYR offer price = 4.1868

AUD/USD bid price 0.7294

b) Compute the bid and offer price for EUR/USD.

EUR/MYR offer price = 4.5270

USD/MYR bid price = 4.1800

EUR/USD offer price = 1.083

EUR/MYR bid price = 4.5232

USD/MYR offer price = 4.1868

EUR/USD bid price = 1.080

c) Compute the bid and offer price for USD/THB.

USD/MYR offer price = 4.1868

THB/MYR bid price = 0.1196

USD/THB offer price = 35.01

USD/MYR bid price = 4.18

THB/MYR offer price = 0.133

USD/THB bid price = 31.43

d) Compute the bid and offer price for EUR/NTD.

EUR/MYR offer price = 4.5270

NTD/MYR bid price = 0.1388

EUR/NTD offer price 32.62

EUR/MYR bid price = 4.5232

NTD/MYR offer price = 0.1448

EUR/NTD bid price = 31.24

Question 6

a) Explain the exposure risk in foreign exchange.

 Transaction exposure risk (or business exposure risk)

1. This occurs whenever a company has a commitment to pay or receive a foreign
currency either immediately or at some future date.
2. Movement in exchange rates will alter the value of the foreign currencies in relation
to the “home currency, thereby causing a company either to profit or suffer
exchange losses.
3. Transaction exposure risks are more short term in nature and are the result of a
company's business activities.
4. If the company has a medium term contract, it may end up with a commitment to
pay over a certain period (eg 3 years) , thus this may be a medium term risk.
5. Such risk can be either recurring ( eg regularly imports Japanese machineries will
have to pay Japanese Yen on a regular basis ) or a one time exposure in purchasing a
machinery.
6. For most business, it is because of the need to hedge against these risks that they
turn to banks to buy and sell foreign currencies, both for immediate and forward
deliveries.
Smth that has alrdy incurred and realised the profit and loss, realised gain and loss

 Translation exposure risk

Translation exposure risk arises when a company has assets and liabilities which are
denominated in foreign currencies. Movements in the exchange rates between the values of
 the foreign currencies and the home currency between two reporting balance sheet periods
will alter (either positively or negatively) the value of the company's balance sheet.
Haven’t convert. Seldom have financial impact on u. just show on financial statement. Not a
physical loss u incurred.

 Economic Exposure Risk

Economic Exposure risk arises when changes in exchange rates over a period of time affect
the competitiveness of a company via its pricing and expenditure structure. The sharp
appreciation of the Japanese Yen in the mid-1990s caused Japanese exports to become
more expensive as compared to other countries, thereby affecting the pricing
competitiveness of the country's exports.
Competitiveness. Look into persepective of whether ur product is competitive anot.
Currency stronger, harder to export, b cur product is getting more and more expensive, will
affect the export market. if china exchange rate become strong like usd, less likely to export
more to other countries. Have to see what they are relying on for government. Like japan
rely heavily on export, need to press the currency down from time to time and to manage
economic exposure risk

b) Explain the counterparty risk in foreign exchange with appropriate example.

Settlement risk (or delivery risk)

Settlement risk involves the non-receipt of the whole amount of the corresponding foreign currency.
i.e. one of the counterparties may default on the delivery date. This occurs in all immediate foreign
exchange deals (value spot, tomorrow and today) and also all forward foreign exchange and swaps
transactions

Example:

On 9 Sept 2006, XYZ Bank purchased from RST Bank 10 million USD/MYR at the rate of 3.5000 for
value spot 11 Sept 2006. XYZ Bank pays MYR35,000,000 to RST Bank with expectation to receive USD
10,000,000. The next day, XYZ Bank found that the USD 10 million was not credited into its account,
and XYZ Bank is exposed to settlement risk.

Worst situation, u canot get back the money at equivalent currency, need foreign currency at the
moment but canot get it (only get back local currency) , will involve subsequent problem – pay
investor for default. Proceed canot exchange it for equivalent foreign currency, canot pay loans,
(spend for certain purposes) incur loss for other things in foreign currency. Bond default in payment,
alrdy reach maturity need to pay 10mil usd.

Pre-settlement risk

This is the risk that one of the counterparties defaults on an outstanding foreign exchange contract
before the delivery date. This could happen when a counterparty to a forward contract defaults
before the delivery date. In such a situation, one of the counterparties will not be around to make
the foreign currency payment on the forward date and the other counterparty automatically stops
payment of the other corresponding currency

Example: Pre-Settlement Risk

On 9 Sept 2006, XYZ bank purchased 10 million USD/MYR 3-month forward for delivery 11
December 2006 at the rate of 3.5200 from ABC Bank One month later, ABC went into liquidation.
XYZ stops forward payment of MYR 35,200,000 to ABC Bank and the deal becomes null and void. XYZ
Bank’s original forex exposure is not covered and it now has to go into the market to replace the
“lost” deal.

If the two month forward USD/MYR is currently trading at 3.6000, it would mean that XYZ Bank has
now to buy the 10 million USD/MYR at 3.6000 compared with lower rate of 3.5200 which purchased
from ABC Bank one month earlier. XYZ Bank has to pay more MYR to purchase the 10 million USD
and the loss would be MYR800,000 If prevailing two-month forward USD/MYR is 3.4500, XYZ reaps a
replacement windfall profit of MYR700,000

Got time to recover and find another counterparty to match your deal and to find another one to
hedge the risk. Sometime can profit sometime can loss. Can refer to current rate. If rate benefit to u
can get windfall profit, if not will get loss.