THE UNIVERSITY OF THE WEST INDIES, MONA

DEPARTMENT OF ECONOMICS

ECON3007: INTERNATIONAL FINANCE

Tutorial Paper 2 – Foreign Exchange Markets and Exchange Rates

Table 1: Dollar/Franc Exchange Values

IN U.S.$ CURRENCY PER U.S. $
Wed. Tues. Wed. Tues.
Switzerland (franc) .5851 .5846
30-day forward .5853 .5848
90-day forward .5854 .5849
180-day forward .5851 .5847

1. Table 1 gives hypothetical dollar/franc exchange values for Wednesday, May 5, 2008.
a. Fill out the last two columns of the table.
b. On Wednesday, the spot price of the two currencies was ________ dollars per franc, or
_______ francs per dollar.
c. From Tuesday to Wednesday, in the spot market the dollar (appreciated/depreciated) against
the franc; the franc (appreciate/depreciated) against the dollar.
d. In Wednesday’s spot market, the cost of buying 100 francs was _______dollars; the cost of
buying 100 dollars was _______francs.
On Wednesday, the 30-day forward franc was at a (premium /discount of _______dollars,
which equalled ______ percent on an annual basis. What about the 90-day forward franc?

2. a) The dollar price of British pounds in Tokyo and Bonn are as shown below:
Tokyo Bonn
R = $/£ = 1.45 R = $/£ = 1.40

Explain why the above is a disequilibrium situation and what will happen to force the two prices
towards equality.
b) Suppose the exchange rates in three financial centers are as shown below:

New York London Paris

R=$/£=1.45 R=$/euro=0.20 R=euro/£ = 7

If you have dollars and are interested in buying pounds, where would you obtain them?

c) Explain why the situation presented in the table in part b) is a disequilibrium situation and what
will happen to produce equilibrium.
3. Calculate the forward discount or premium for the following spot and three-month forward rates:
a. SR = $2.00/£1 and FR = $2.01/£1
b. SR = $2.00/£1 and FR = $1.96/£1

4. What is the cross rate implied by the following quotes?

a. C$/$ = 1.5613, $/€ = 1.0008

b. ¥/$ = 124.84, $/£ = 1.5720

5. Suppose IBM sells computers in Japan and receives revenues in yen. IBM’s expenses however
are in dollars.
a) Does IBM risk an appreciation or depreciation of the yen?

b) What can IBM do in the forward market to eliminate the risk you described in part a?

c) What can IBM do in the swap market to eliminate the risk of part a?

6. Assume a speculator anticipates that the spot rate of the franc in three months will be lower than
today’s three- month forward rate of the franc, $0.50= 1 franc.
a. How can this speculator use $ 1 million to speculate in the forward market?
b. What occurs if the franc’s spot rate in three months is $0.40; $0.60; $0.50?

7. When is an option “in the money” and “at the money?”