Question

FIN 4180 – International Financial Management

Summer 2018

Assignment 2 – Forward exchange rates and implied cross exchange rates

Due: May 22, 2018

Currency	Spot quote
Australian dollar (AUD/USD)	0.7473 - 0.7476
Brazilian real (USD/BRL)	3.6538 - 3.6568
British pound (GBP/USD)	1.3506 - 1.3509
Canadian dollar (USD/CAD)	1.2864 - 1.2867
Euro (EUR/USD)	1.1852 - 1.1853
Japanese yen (USD/JPY)	110.32 – 110.36
Mexican peso (USD/MXP)	18.7069 - 19.7222
New Zealand dollar (NZD/USD)	0.6858 - 0.6861
Thai baht (USD/THB)	32.1380 - 32.1970
South Africa rand (ZAR)	12.5726 - 12.5867
South Korean won (USD/KRW)	1081.06 – 1083.06
Swiss franc (USD/CHF)	1.0019 – 1.0022

Forward prices are quoted as the absolute (not percentage) forward premium or discount in basis points (one basis point = .0001).

Currency	Period	Forward premium/discount
Thai baht (USD/THB)	9 month	29 35
British pound (GBP/USD)	6 month	-119 -121
New Zealand dollar (NZD/USD)	1 year	16 20
Swiss franc (USD/CHF)	3 month	-79 -78

Forward exchange rates and trades

1a. If the dealer’s spot and forward quotes for the British pound (£) are given above, what are the dealer’s bid and ask prices for a 6-month forward contract on the euro?

b. If a customer were to enter a forward contract with this dealer to sell $1m to obtain euros, how many euros would the customer receive in 6 months?

2a. If the dealer’s spot and forward quotes for the New Zealand dollar (NZ$) are given above, what are the dealer’s bid and ask prices for a 1-year forward contract on the New Zealand dollar?

b. If a customer were to enter a forward contract with this dealer to sell NZ$1m to obtain US dollars, how many US dollars would the customer receive in one year?

3a. If the dealer’s spot and forward quotes for the Swiss franc are given above, what are the dealer’s bid and ask prices for a 3-month forward contract on the Swiss franc?

b. If a customer were to enter a forward contract with this dealer to buy $1m to obtain Swiss francs, how many francs would the customer receive in 3 months?

4a. If the dealer’s spot and forward quotes for the Thai baht real are given above, what are the dealer’s bid and ask prices for a 9-month forward on the Thai baht real?

b. If a customer were to enter a 9-month forward contract with this dealer to sell ?1m to obtain US dollars, how many US dollars would the customer receive in 9 months?

5. If forward prices are used as an indicator of the expected increase or decrease in value of a currency, which of the foreign currencies above are expected to increase in value over the indicated time period, and which are expected to decrease in value?

Implied cross exchange rates

6a. What are this dealer’s implied cross bid and ask prices for exchanging Australian dollars to and from New Zealand dollars?

b. Which currency will be the base currency in these quotes?

7a. What are this dealer’s implied cross bid and ask prices for exchanging Canadian dollars to and from Japanese yen?

b. Which currency will be the base currency in these quotes?

8a. What are this dealer’s implied cross bid and ask prices for exchanging British pound to and from Korean won?

b. Which currency will be the base currency in these quotes.

9a. What are this dealer’s implied cross bid and ask prices for exchanging Swiss francs to and from Mexican pesos?

b. Which currency will be the base currency in these quotes.

10a. What are this dealer’s implied cross bid and ask prices for exchanging euros to and from Australian dollars?

b. Which currency will be the base currency in these quotes.

11a. What are this dealer’s implied cross bid and ask prices for exchanging Brazilian real to and from South Africa rand?

b. Which currency is the base currency for the implied bid and ask quotes you provide.

12. What would the implied bid and ask quotes from question 1 be if the quote currency from question 11 were the base currency for the quotes?

Answer 1

1a. Given rate for GBP/USD=1.3506 - 1.3509. Now 6 month forward swap points are -119/-121.

Thus 6 month forward GBP/USD=1.3506-0.0119/1.3509-0.0121=1.3387/1.3388

b. Amount received after 6 months for selling 1 million dollars=1*1.3387=GBP 1.3387 million

2a. Given rate for NZD/USD=0.6858 - 0.6861. Now 1 year forward swap points are 16/20.

Thus 1 year forward NZD/USD=0.6858+0.0016/0.6861+0.0020=0.6874/0.6881

b. Amount received after 1 year for selling 1 million NZD=1/0.6881=$1.4533 million

3a. Given rate for USD/CHF=1.0019 - 1.0022.Now 3 month forward swap points are -79/-78..

Thus 3 months forward USD/CHF=1.0019+0.0079/1.0022+0.0078=1.0098/1.0100

b. Amount received after 3 months for buying 1 million USD=1/1.0098=0.9903 million CHF

4a. Given rate for THB/USD=32.1380 - 32.1970.Now 9 month forward swap points are 29/35..

Thus 9 months forward THB/USD=32.1380+0.0029/32.1970+0.0035=32.1409/32.2005

b. Amount received after 3 months for selling 1 million THB=1/32.2005=$0.0311 million