CHAPTER 2

THE FOREIGN EXCHANGE MARKET

1. On 12 August, a Commonwealth Bank dealer in Melbourne concluded a
transaction with a Citibank dealer in New York. The former agreed to buy from the
latter USD5 000 000 at an exchange rate (AUD/USD) of 1.77 for delivery on 14
August. On the delivery date, the exchange rate rose to 1.83. How much would the
Commonwealth Bank be required to pay to settle the transaction?

Solution
In this problem, 12 August is the contract date, whereas 14 August is the
delivery date. What is relevant for this transaction is the exchange rate agreed
upon on the contract date, which is 1.77. Therefore the Commonwealth Bank is
required to pay:
1.77 5 000 000 AUD8 850 000

2. The exchange rate between the British pound and the

Australian dollar (GBP/AUD) rose from 0.3780 to 0.3960 in one
week.
(a) Calculate the percentage appreciation or depreciation of the Australian dollar.
(b) Using the result obtained in (a), calculate the percentage appreciation or
depreciation of the pound.
(c) Calculate the corresponding values of the AUD/GBP exchange rate.
(d) Using the result obtained in (c), calculate the percentage appreciation or
depreciation of the pound.
(e) Using the result obtained in (d), calculate the percentage appreciation or
depreciation of the Australian dollar.

Instructor Resource Manual to accompany International finance: An analytical approach 3e

by Moosa 2009 McGraw-Hill Australia

Solution
(a) The Australian dollar appreciates by:
0.3960
S ( AUD / GBP )
1 0.048 = 4.8%
0.3780

(b) By using equation (2.4), the percentage depreciation of the

pound is:
1
1 0.046 = -4.6%
1 0.048

(c) The corresponding values of the reciprocal exchange rate

(GBP/AUD) are:
1
2.6455
0.3780
1
2.5253
0.3960

(d) The pound depreciates by:

2.5253
1 0.045 4.5%
2.6455

(e) From (d) the percentage appreciation of the Australian dollar is:
1
1 0.047 = 4.7%
1 0.045

3. If the exchange rate between the British pound and the

Australian dollar (GBP/AUD) is 0.3980, what is:
(a) the direct quote from an Australian perspective?
(b) the indirect quote from an Australian perspective?
(c) the direct quote from a British perspective?
(d) the indirect quote from a British perspective?
Solution
From an Australian perspective, GBP/AUD is the indirect quotation,
and vice versa. Therefore:
(a) 2.5126
Instructor Resource Manual to accompany International finance: An analytical approach 3e
by Moosa 2009 McGraw-Hill Australia

(b) 0.3980
(c) 0.3980
(d) 2.5126
4. The USD/AUD exchange rate is quoted as 0.49770.5176.
(a) What is the bidoffer spread in points and in percentage
terms? What is the monetary value of the point in this case?
(b) Calculate the AUD/USD exchange rate. What is the bidoffer
spread in points and in percentage terms? What is the monetary
value of the point in this case?
Solution
(a) The bidoffer spread is:
0.5176-0.4977=0.0199
or 199 points. In percentage terms it is:
0.0199
0.040 4%
0.4977

The value of one point is 100th US cent.

(b) The bid and offer AUD/USD exchange rates are calculated,
respectively, as:
1
1.9320
0.5176
1
2.0092
0.4977

The bidoffer spread is:

2.0092-1.9320=0.0772
or 772 points. In percentage terms it is:
0.0772
0.040 4%
1.9320

The value of one point is 100th Australian cent.

Instructor Resource Manual to accompany International finance: An analytical approach 3e

by Moosa 2009 McGraw-Hill Australia

5. Dealer A quotes 0.60300.6050 for the EUR/AUD exchange rate

to Dealer B. What is:
(a) the price at which A is willing to buy the Australian dollar?
(b) the price at which A is willing to buy the euro?
(c) the price at which B can buy the Australian dollar?
(d) the price at which B can buy the euro?
(e) the price at which A is willing to sell the Australian dollar?
(f) the price at which A is willing to sell the euro?
(g) the price at which B can sell the Australian dollar?
(h) the price at which B can sell the euro?
Solution
(a) The price at which A is willing to buy the Australian dollar is As bid rate,
which is 0.6030.
(b) The price at which A is willing to buy the euro is the price at which A is
willing to sell the AUD, which is 0.6050.
(c) The price at which B can buy the Australian dollar is As offer rate, which is
0.6050.
(d) The price at which B can buy the euro is the price at which B can sell the
Australian dollar, which is 0.6030.
(e) The price at which A is willing to sell the Australian dollar is As offer rate,
which is 0.6050.
(f) The price at which A is willing to sell the euro is the price at which A is willing
to buy the Australian dollar, which is 0.6030.
(g) The price at which B can sell the Australian dollar is As bid rate, which is
0.6030.
(h) The price at which B can sell the euro is the price at which B can buy the
Australian dollar, which is 0.6050.

Instructor Resource Manual to accompany International finance: An analytical approach 3e

by Moosa 2009 McGraw-Hill Australia

10. The following exchange rates are quoted:

GBP/AUD

0.382090

AUD/EUR

1.640080

Calculate the bidoffer spread on the exchange rate between the pound and the
euro expressed in direct quotation from a British perspective.
Solution
(GBP / EUR) b

(GBP / AUD ) b
0.3820

0.6265
( EUR / AUD) a 1 / 1.6400

(GBP / EUR) a

(GBP / AUD) a
0.3890

0.6411
( EUR / AUD ) b 1 / 1.6480

Thus, the bidoffer spread is 0.0146 or 146 points.

13. The spot and forward rates between the Australian dollar and
the euro (AUD/EUR) are as follows:
Spot

1.6030

One-month forward

1.6260

Three-month forward

1.5920

Calculate the forward spread in percentage per annum for both maturities. State
whether the Australian dollar sells at a premium or a discount.
Solution
The one-month forward spread is:
1.6260 1.6030
12 0.172 17.2%
1.6030

which means that the euro is selling at a premium. Similarly, the

three-month spread is:
1.5920 1.6030 12

0.028 2.8%
1.6030
3

which means that the euro is selling at a discount.

Instructor Resource Manual to accompany International finance: An analytical approach 3e
by Moosa 2009 McGraw-Hill Australia

Instructor Resource Manual to accompany International finance: An analytical approach 3e

by Moosa 2009 McGraw-Hill Australia