Problem 5.

1 Anne Dietz in Changi #3 (Singapore)

Anne Dietz lives in Singapore, but is making her first business trip to Sydney,
Australia. Standing in Singapore's new terminal #3 at Changi Airport, she looks at the
foreign exchange quotes posted over the FX trader's booth. She wishes to exchange
1,000 Singapore dollars (S$ or SGD) for Australian dollars (A$ or AUD).

a. What is the Singapore dollar to Australian dollar cross rate?

b. How many Australian dollars will Anne get for her Singapore dollars?

Assumptions Values
Singapore dollars to be exchanged SGD 1,000.00
Spot rate (SGD = 1.00 USD) 1.3400
Spot rate (USD = 1.00 AUD) 0.7640

a. What is the SGD per AUD cross rate?

1.0238
SGD per AUD = SGD/USD x USD/SGD

b. How many Australian dollars will Anne get?

AUD 977
Converting SGD to AUD at the calculated cross rate.
Problem 5.4 Andreas Broszio (Geneva)

Andreas Broszio just started as an analyst for Credit Suisse in Geneva, Switzerland. He receives the following
quotes for Swiss francs against the dollar for spot, one-month forward, 3-months forward, and 6-months forward.

Spot exchange rate:

Bid rate SF 1.2575/$
Ask rate SF 1.2585/S
One-month forward 10 to 15
3-months forward 14 to 22
6-months forward 20 to 30

a. Calculate outright quotes for bid and ask, and the number of points spread between each.
b. What do you notice about the spread as quotes evolve from spot toward six months?
c. What is the 6-month Swiss bill rate?

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 Spread

One-month forward 1.2585 1.2600 0.0015
3-months forward 1.2589 1.2607 0.0018
6-months forward 1.2595 1.2615 0.0020

b. What do you notice about the spread?

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

c. 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 5.10 Swissie Triangular Arbitrage

The following exchange rates are available to you. (You can buy or sell at the stated rates.)

Mt. Fuji Bank ¥92.00/$

Mt. Rushmore Bank SF1.02/$
Mt Blanc Bank ¥90.00/SF

Assume you have an initial SF12,000,000. Can you make a profit via triangular arbitrage?
If so, show the steps and calculate the amount of profit in Swiss francs (Swissies).

Assumptions Values
Beginning funds in Swiss francs (SF) 12,000,000.00
Mt. Fuji Bank (yen/$) 92.00
Mt. Rushmore Bank (SF/$) 1.0200
Matterhorn Bank (yen/SF) 90.00

Try Number 1: Start with SF to $

Step 1: SF to $ 11,764,705.88
Step 2: $ to yen 1,082,352,941.18
Step 3: yen to SF 12,026,143.79
Profit? 26,143.79
A profit.

Try Number 2: Start with SF to yen

Step 1: SF to yen 1,080,000,000.00
Step 2: yen to $ 11,739,130.43
Step 3: $ to SF 11,973,913.04
Profit? (26,086.96)
A loss.
Problem 5.13 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/$.

a. Is this a devaluation or depreciation?

b. By what percentage did its value change?

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?

Devaluation
then
This is a case in which a government has changed its currency from a
Depreciation
governmentally determined fixed rate, to a regime in which the currency
is allowed to change in value based on supply and demand forces in the
market. As a result of the move, the currency's value in this case was a
"depreciation" against the U.S. dollar.

b. By what percentage did its value change?

Percentage devaluation is: -24.10%

% Chg = (S1 - S2) / (S2)

Problem 5.15 Indirect Forward Premium on the Australian dollar

Calculate the forward premium on the Australian dollar (the Australian dollar is the home currency) if the spot rate is
€0.6151/A$ and the 3-month forward rate is €0.6216/A$.

Quoted 90-day Percent premium

Assumptions Spot rate Forward rate or discount on euro
Days forward 90
European euro (€ per A$) € 0.6151 € 0.6216

Calculation formula for the indirect quote on the dollar:

Percent premium = (S-F)/(F) x (360/90) -4.1828%

The euro would be selling forward at a premium against the Australian dollar, or equivalently, the Australian dollar is 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/(€/A$)), and recalculate the quote using the direct quotation formula.

Australian dollar (A$ per €) $1.6258 $1.6088

Percent discount = (F-S)/(S) x (360/90) -4.1828%

Problem 5.16 Direct Forward Discount on the Dollar

Calculate the forward discount on the dollar (the dollar is the home currency) if the spot rate is spot rate is $1.5800/£ and
the 6-month forward rate is $1.5550/£

Quoted 180-day Percent premium

Assumptions Spot rate Forward rate or discount
Days forward 180
Exchange rate, US$/£ $ 1.5800 $ 1.5550

Calculation formula for the direct quote on the dollar:

Percent premium = ( Forward - Spot ) / ( Spot ) x ( 360 / 180 ) -3.1646%

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 (£/US$) £0.6329 £0.6431

Percent forward premium = ( Spot - Forward ) / ( Forward ) x ( 360 / 180 ) -3.1646%

Problem 5.17 Mexican Peso - European Euro Cross Rate

Calculate the cross rate between the Mexican peso (Ps) and the euro (€ ) from the
following two spot rates: Ps12.45/$ and € 0.7550/$.

Assumptions Exchange rate

Mexican peso, pesos/dollar (Ps/$) 12.45
European euro, euros/dollar (€/$) 0.7550

Calculated cross rate, pesos/euro 16.4901

pesos/euro = (Ps/$) / (€/$)

or equivalently, euros/peso (€/Ps) 0.0606