Week 2 Work Problems

Question 1.
Please provide your name.

(Type: Fill In The Blank Survey)

___________

Question 2.
The current exchange rate is 1.00 = $2.00. Bank America and Bank Britannia have a correspondent
banking relationship. If an American account holder at Bank America asks the bank to make a payment
of 45,000 to a British company using the funds the American has in his dollar-denominated account,
what are the changes to the parties banking accounts? Assume the British company banks with Bank
Britannia.

( ) The American account holder's account at Bank America will fall by $90,000.

( ) Bank America's account at Bank Britannia will fall by 45,000.

( ) The British company's account at Bank Britannia will rise by 45,000.

( ) All of the above

Question 3.
It is common practice among currency traders worldwide to both price and trade currencies against the
U.S. dollar. Consider a currency dealer who makes a market in 5 currencies against the dollar. If he were
to supply quotes for each currency in terms of all of the others, how many quotes would he have to
provide?

( ) 36

( ) 30

( ) 60

( ) 120

( ) None of the above

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Question 4.
Suppose the spot ask exchange rate, Sa($|), is $1.90 = 1.00 and the spot bid exchange rate, Sb($|), is
$1.89 = 1.00. If you were to buy $10,000,000 worth of British pounds and then sell them five minutes
later, how much of your $10,000,000 would be eaten by the bid-ask spread?

( ) $1,000,000

( ) $52,910.05

( ) $100,000

( ) $52,631.58

Question 5.
Consider a U.S. importer desiring to purchase merchandise from a Dutch exporter invoiced in euros, at a
cost of 512,100. The U.S. importer will contact his U.S. bank (where of course he has an account
denominated in U.S. dollars) and inquire about the exchange rate, which the bank quotes as
1.0242/$1.00. The importer accepts this price, so his bank will ____________ the importer's account in
the amount of ____________.

( ) Debit; $500,000

( ) Credit; 512,100

( ) Credit; $500,000

( ) Debit; 512,100

Question 6.
In conversation, interbank foreign exchange traders use a shorthand abbreviation in expressing spot
currency quotations. Consider a $/ bid-ask quote of $1.9072-$1.9077. The big figure, assumed to be
known to all traders is _____.

( ) 1.9077

( ) 1

( ) 1.90

( ) 77

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Question 7.
The dollar-euro exchange rate is $1.25 = 1.00 and the dollar-yen exchange rate is 100 = $1.00. What is
the euro-yen cross rate?

( ) 125 = 1.00

( ) 1.00 = 125

( ) 1.00 = 0.80

( ) None of the above

Question 8.
Find the no-arbitrage cross exchange rate. The dollar-euro exchange rate is quoted as $1.60 = 1.00 and
the dollar-pound exchange rate is quoted at $2.00 = 1.00.

( ) 1.25/1.00

( ) $1.25/1.00

( ) 1.25/1.00

( ) 0.80/1.00

Question 9.
Suppose a bank customer with 1,000,000 wishes to trade out of euro and into Japanese yen. The
dollar-euro exchange rate is quoted as $1.60 = 1.00 and the dollar-yen exchange rate is quoted at $1.00
= 120. How many yen will the customer get?

( ) 192,000,000

( ) 5,208,333

( ) 75,000,000

( ) 5,208.33

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Question 10.
Suppose you observe the following exchange rates: 1 = $.85; 1 = $1.60; and 2.00 = 1.00. Starting
with $1,000,000, how can you make money?

( ) Exchange $1m for 625,000 at 1 = $1.60. Buy 1,250,000 at 2 = 1.00; trade for $1,062,500
at 1 = $.85.

( ) Start with dollars, exchange for euros at 1 = $.85; exchange for pounds at 2.00 = 1.00;
exchange for dollars at 1 = $1.60.

( ) Start with euros; exchange for pounds; exchange for dollars; exchange for Euros.

( ) No arbitrage profit is possible.

Question 11.
The current spot exchange rate is $1.55 per and the three-month forward rate is $1.50 per . Based on
your analysis of the exchange rate, you are confident that the spot exchange rate will be $1.52 per in
three months. Assume that you would like to buy or sell 1,000,000. What actions do you need to take
to speculate in the forward market?

( ) Take a long position in a forward contract on 1,000,000 at $1.50 per .

( ) Take a short position in a forward contract on 1,000,000 at $1.50 per .

( ) Buy Euro today at the spot rate, sell them forward.

( ) Sell Euro today at the spot rate, buy them forward.

Question 12.
The current spot exchange rate is $1.45 per and the three-month forward rate is $1.55 per . Based
upon your economic forecast, you are pretty confident that the spot exchange rate will be $1.50 per in
three months. Assume that you would like to buy or sell 100,000. What actions would you take to
speculate in the forward market? How much will you make if your prediction is correct?

( ) Take a short position in a forward. If you're right you will make $15,000.

( ) Take a long position in a forward contract on euro. If you're right you will make $5,000.

( ) Take a short position in a forward contract on euro. If you're right you will make $5,000.

( ) Take a long position in a forward contract on euro. If you're right you will make $15,000.

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Question 13.
The /$ spot exchange rate is $1.50 per and the 120 day forward exchange rate is 1.45 per . The
forward premium (discount) is _____________________________

Note: Assume a 360-day year.

( ) the dollar is trading at an 8% premium to the Euro for delivery in 120 days.

( ) the dollar is trading at a 5% premium to the Swiss franc for delivery in 120 days.

( ) the dollar is trading at a 10% discount to the Euro for delivery in 120 days.

( ) the dollar is trading at a 5% discount to the Euro for delivery in 120 days.

Question 14.
The /$ spot exchange rate is $1.50 per and the 90-day forward premium is 10 percent. Find the 90-
day forward price.

( ) $1.65 per

( ) $1.5375 per

( ) $1.9125 per

( ) None of the above

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Question 15.
The treasurer of American Airlines calls Citibank and asks for a quote on British pounds (GBPs) (to be
used in conjunction with a three-month dollar-denominated bridge loan for terminal expansion at
Heathrow). (Note: the base currency is listed first and the quote currency second)

GBP/USD spot rate quote: 1.3340 - 1.3344

GBP/USD 3-month swap points: 130-120

a. The AA treasurer wants to buy spot and sell 3 months forward 1 million GBP (a spot-against-
forward FX swap).

At what rate of exchange in USD per GBP would the spot transaction take place? Show your answer to
four decimal places.

___________

b. At what rate of exchange in USD per GBP would the forward transaction take place? Show your
answer to four decimal places.

___________

c. Now suppose the corporate treasurer only wants to sell 3 months forward 1 million GBP (an
outright forward). At what rate of exchange in USD per GBP would the forward transaction take place?
Show your answer to four decimal places.

___________

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Question 16.
You are a dealer in the interbank foreign exchange market and you note the
following exchange rates available from your competitors. (Note: the base currency
is listed first and the quote currency second. Assume no bid-ask spread.) Be sure to
scroll down to see all parts of this question.

Bank Exchange Rate

Citibank EUR/USD 1.30

UBS GBP/USD 1.60

Barclays GBP/EUR 1.25

a. What is the cross-rate between the euro and the pound based on the Citibank and UBS quotes?
Express your answer in EUR per 1 GBP to 4 decimal places.

___________

b. Can you make a triangular arbitrage profit given the above exchange rates? Type in either Yes or
No:

___________

c. Suppose you have US dollars available for arbitrage. Which of the following strategies would
allow you to make an arbitrage profit? Select strategy and type in Strategy I or Strategy II:

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___________

d. Suppose you have an initial USD 100 M available to arbitrage. What would be your arbitrage
profits in USD? Do not round intermediate results and express your answer in millions of dollars to four
decimal places. Hint: you are being asked to provide the USD you will have after executing the arbitrage
strategy less your original USD 100 M.

___________

Question 17.
A currency trading firm simultaneously calls two Korean banks. The two banks give the following
quotes. These quotes are in Korean won per 1 Japanese yen

Bid Ask

Shinhan Bank J PY/KRW 13.5733 13.6047

Korea Exchange Bank JPY/KRW 13.6872 13.7188

Suppose you work for a trading firm that allows you JPY 100 M for a single arbitrage play. Hint: as you
work through this problem you are determining whether selling JPY (bank buys JPY) to one bank and
then buying JPY (bank sells JPY) from the other bank provides an arbitrage opportunity.

a. Is an arbitrage strategy possible? Type in Yes or No:

___________

b. Indicate the strategy the trading firm could implement to make an arbitrage profit. Select your
Strategy and type in Strategy I or Strategy II:

Strategy I

1. Sell JPY to Shinhan Bank

2. Sell KRW to Korea Exchange Bank

Strategy II

1. Sell JPY to Korea Exchange Bank

2. Sell KRW to Shinhan Bank

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___________

c. What would be your arbitrage profits in JPY? Do not round intermediate results and express your
answer in whole JPY (not millions). Hint: you are being asked to provide the JPY you will have after
executing the arbitrage strategy less your original JPY 100 M.

___________

Question 18.
You arrive at work at Citibank in New York and observe that the spot rate is USD 1.15 per EUR and the 3-
month forward rate is USD 1.10 per EUR. Your view is the spot rate will be USD 1.12 per EUR in 3
months. You are permitted to take a speculative position of EUR 1,000,000.

Note: Include commas in numerical answers - 1,234,567 not 12345657

a. To exploit the speculative opportunity would you buy or sell EUR forward? Type in Buy or Sell.

___________

b. If you are correct, what will be your profits from speculation? Provide your answer as a whole
number of USD (do not include USD in your answer).

___________

c. If instead, the spot rate in 3 months is actually USD 1.00 per EUR, would you recognize a gain or
loss from this speculation?

___________

d. Under the scenario in which the spot rate in 3 months is USD 1.00 per EUR, what is your loss?
Provide your answer as a whole unsigned number of USD (do not include USD or - in your answer).

___________

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Question 19.
A currency dealer quotes the following rates on the GBP/USD dollar exchange rate. (Note: the base
currency is listed first and the quote currency second)

Spot GBP/USD 1.7000 1.7010

1 month 2-3

2 month 5-7

3 month 10 - 15

12 month 50 - 60

What are the 3-month outright forward bid and ask rates?

( ) 1.7005 1.7015

( ) 1.7010 1.7025

( ) 1.6990 1.6995

( ) 1.7002 1.7007

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Question 20x.
A currency dealer quotes the following rates on the EUR/USD dollar exchange rate. (Note: the
base currency is listed first and the quote currency second):

Spot EUR/USD 1.2835 1.2837

1 month 2-3
2 month 5-7
3 month 8 - 11
12 month 50 - 60

a. The CFO of Alitalia wishes to sell 100M EUR spot and pay with USD. At what rate of
exchange in USD per EUR would the transaction take place? Provide your answer to four
decimal places.

__________

b. The CFO of Michelin wishes to buy 100M EUR 2 months forward. At what rate of
exchange in USD per EUR would the transaction take place? Provide your answer to four
decimal places.

__________

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Question 20y.
A currency dealer quotes the following rates on the EUR/USD dollar exchange rate. (Note: the
base currency is listed first and the quote currency second):

Spot EUR/USD 1.2835 1.2837

1 month 2-3
2 month 5-7
3 month 8 - 11
12 month 50 - 60

a. The CFO of Allianz SE wishes to sell 100M EUR spot and buy 100M EUR 3 months later.
At what rate of exchange in USD per EUR would the spot transaction typically take place?
Provide your answer to four decimal places. Hint: This transaction is an FX swap.

__________

b. At what rate of exchange in USD per EUR would the transaction in 3 months take place?
Provide your answer to four decimal places.

__________

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Question 20z.
A currency dealer quotes the following rates on the EUR/USD dollar exchange rate. (Note: the
base currency is listed first and the quote currency second):

Spot EUR/USD 1.2835 1.2837

1 month 2-3
2 month 5-7
3 month 8 - 11
12 month 50 - 60

The CFO of Grupo ACS wishes to buy 100M USD 1 month forward. At what rate of exchange
in USD per EUR would the transaction take place? Provide your answer to four decimal
places.

__________

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