Tutorial 5: Foreign Exchange Market- Part 2

Question 1
The followings are the quotation from a forex counter in Malaysia.

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

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* 1,000*4.1508=RM 4,510.80

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b) If you hold MYR 3000, how much GBP that you can exchange for?
rs e
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* 3,000/5.1800=GBP 579.15

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

* 1,230*4.5121= RM 5,549.88
v i y re

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

* 4,800/3.01= SGD 1,594.68

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* The risk related to the vulnerability of an institution to changes in its profit or loss,
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and hence to its shareholders’ wealth as a result of fluctuations in exchange rates.

* Transaction exposure risk:

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- Also known as business exposure risk, occurs whenever a company has a

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commitment to pay or receive foreign currency either immediately or at some future

date.

- Any movements in exchange rates will alter foreign currencies value in relation to
the “home currency”, causing a company to gain or suffer losses.

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 Q2

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

Currencies We buy We sell

100 New Taiwan Dollar 12.640 13.880
100 Indonesia Rupiah 0.0306 0.0343
100 Thai Baht 10.650 11.960
100 Chinese RMB 62.680 65.180
100 UAE Dirham 112.10 119.25

a) If you hold MYR 2500, how much Thai Baht that you can exchange for?
MYR 11.960
= =0.1196
THB 100

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1 MYR = 0.1196 THB

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MYR 2,500 rs e
= =THB 20,903.01
THB 0.1196
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b) If you hold MYR 3680, how much Indonesia Rupiah that you can exchange for?
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MYR 0.0343
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= =0.000343
v i y re

IDR 100

1 MYR = 0.000343 IDR

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MYR 3,680
= =IDR 10,728,862.97
IDR 0.000343
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Th

c) If you hold MYR 4380, how much UAE dirham that you can exchange for?
MYR 119.25
= =1.1925
UED 100

1 MYR = 1.1925 UED

MYR 4,380
= =UED 3,672.96
UED 1.1925

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

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 MYR 62.680
= =0.6268
RMB 100

1 MYR = 0.6268 RMB

RMB× MYR=0.6268 ×18,850

¿ MYR 11,815.18

Question 3

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

Currencies We buy We sell

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1 AUD 3.0324 3.0584

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100 Indonesia Rupiah 0.0306 0.0343

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1 GBP 5.0677 5.1800

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100 Chinese RMB 62.680 65.180

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100 UAE Dirham rs e 112.10 119.25
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a) If you hold AUD 1,760, how much Chinese RMB that you can exchange for?
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AUD AUD MYR 100

= × =3.0324 × =4.6523
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RMB MYR RMB 65.180

v i y re

1,760× 4.6523=RMB 8188.05

b) If you hold GBP 1,080, how much Indonesia Rupiah that you can exchange for?
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GBP GBP MYR 100

= × =5.0677 × =14,774.63
IND MYR IND 0.0343

1,080× 14,774.63=IND 15,956,600.4

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

RMB RMB MYR 62.680 100

= × = × =0.5256
UAE MYR UAE 100 119.25

7,800× 0.5256=UAE 4,099.82

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

IND IND MYR 0.0306 100

= × = × =0.0004695
RMB MYR RMB 100 65.180

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 5,000,000× 0.0004695=RMB 2,347.50

Question 4

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

Currencies We buy (Bid) We sell (Offer)

1 AUD 3.0324 3.0584
100 New Taiwan Dollar (NTD) 12.640 13.880
1 EUR 4.5121 4.5232
1 GBP 5.0677 5.1800
100 Thai Baht (THB) 10.650 11.960

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

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Bid price: Offer price:

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AUD AUD MYR AUD AUD MYR
= ×
NTD MYR NTD
rs e = ×
NTD MYR NTD
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1 1
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¿ 3.0324 × ¿ 3.0584 ×
0.1388 0.1264
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¿ 21.8473 ¿ 24.1962
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1AUD= 21.8473 NTD 1AUD= 24.1962NTD

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

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Bid price: Offer price:

EUR EUR MYR EUR EUR MYR

= × = ×
GBP MYR GBP GBP MYR GBP

1 1
¿ 4.5121 × ¿ 4.5232 ×
5.1800 5.0677

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 ¿ 0.8711 ¿ 0.8926

1EUR= 0.8711 GBP 1EUR= 0.8926 GBP

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

Bid price: Offer price:

GBP GBP MYR GBP GBP MYR

= × = ×
THB MYR THB THB MYR THB

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1 1

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¿ 5.0677 × ¿ 5.1800×
0.1196 0.1065

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¿ 42.3721 rs e ¿ 48.6385
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1 GBP = 42.3721 THB 1 GBP = 48.6385 THB
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v i y re

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

Bid price: Offer price:

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NTD NTD MYR NTD NTD MYR

= × = ×
THB MYR THB THB MYR THB
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1 1
Th

¿ 12.640× ¿ 13.880×
11.960 10.650

¿ 1.0569 ¿ 1.3033

1NTD= 1.0569 THB 1NTD= 1.3033 THB

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 Question 5

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

Currencies Quotes
1 AUD 3.0540 – 90
100 New Taiwan Dollar (NTD) 13.880 - 14.480
1 EUR 4.5232 - 70
1 USD 4.1800 - 68
100 Thai Baht (THB) 11.960 - 13.30

Questions Bid Offer

a) Compute the bid and AUD AUD MYR AUD AUD MYR 1
= x = x =3.0590 x
USD MYR USD USD MYR USD 4.1800
offer price for
1 = 0.7318
AUD/USD = 3.0540 x

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4.1868

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= 0.7294

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b) Compute the bid and EUR EUR MYR EUR EUR MYR 1

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rs e = x = x =4.5270 x
USD MYR USD USD MYR USD 4.1800
offer price for
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1 = 1.0830
EUR/USD = 4.5232 x
4.1868
= 1.0803
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v i y re

c) Compute the bid and USD USD MYR USD USD MYR 100
= x = x =4.1868 x
THB MYR THB THB MYR THB 11.960
offer price for
100 = 35.0067
USD/THB = 4.1800 x
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13.30
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= 31.4286

d) Compute the bid and EUR EUR MYR EUR EUR MYR 100
x x =4.5270 x
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= =
NTD MYR NTD NTD MYR NTD 13.880
offer price for
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100 = 32.6153
EUR/NTD = 4.5232 x
14.480
= 31.2376

Question 6.

A) Explain the exposure risk in foreign exchange

- Transaction exposure risks are more short team in nature and are the result of a company’s
business activities.

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 - If the company has a medium term contract, it may end up with a commitment to pay over a
certain period (eg: 3years), thus this may be a medium term risk.

- Such risk can be either recurring or a one time exposure in purchasing a machinery. (eg:
regularly imports Japanese machineries will have to pay Japanese Yen on a regular basis)

- 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 or immediate and forward deliveries.

* 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

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the home currency between two reporting balance sheet periods will alter (+/-) the

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value of the company’s balance sheet.

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* Economic Exposure risk:

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- Arises when changes in exchange rates over a period or time affect the
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competitiveness of a company via its pricing and expenditure structure.
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* Trading exposure risk:
- Arises when an institution deliberately takes on a currency exposure with the
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intention of profiting from it. Within this instance, the company choose not to hedge a
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foreign currency receivable or payable until such time when the exchange rate move
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in its favor. If the trader is wrong and the exchange rate move against its favor, the
company ends up with foreign exchange losses.
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b) Explain the counterparty risk in foreign exchange with appropriate example.

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Settlement risk/ delivery risk:

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- Settlement risk involves the non-receipt of the whole amount of the corresponding
foreign currency, one of the counterparties may default on the delivery date.

- Occurs in all immediate foreign exchange deals such as 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 10million USD/MYR at
the rate of 3.5000 for value spot 11 Sept 2006. XYZ Bank pays MYR35,000,000 to RST
Bank with an expectation to receive USD10,000,000. The next day, XYZ Bank found that
the USD10million was not credited into its account, and XYZ Bank is exposed to
settlement risk.

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 * Pre-settlement risk:
- A 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 1: On 9 Sept 2006, XYZ Bank purchased 10million 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
MYR35,200,000 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.

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* Example 2: If the two month forward USD/MYR is currently trading at 3.6000, it

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would mean that XYZZ Bank has now to buy the 10million USD/MYR at 3.6000

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compared with lower rate of 3.5200 which purchased from ABC Bank one month

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earlier. XYZ Bank has to pay more MYR to purchase the 10million USD and the loss
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would be MYR800,000. If prevailing two-month forward USD/MYR is 3.4500,
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XYZZ reaps a replacement windfall profit of MYR700,000.
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v i y re
ed d
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Th

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