Question

Q1. Utah Bank’s bid price for Canadian dollars is $.7938 and its ask price is $.81. What is the bid/ask percentage spread?

Q2. If the direct exchange rate of the euro is $1.25, what is the euro’s indirect exchange rate? That is, what is the value of a dollar in euros?

Q3. Assume Poland’s currency (the zloty) is worth $.17 and the Japanese yen is worth $.008. What is the cross rate of the zloty with respect to yen? That is, how many yen equal a zloty?

Q4. You just came back from Canada, where the Canadian dollar was worth $.70. You still have C$200 from your trip and could exchange them for dollars at the airport, but the airport foreign exchange desk will only buy them for $.60. Next week, you will be going to Mexico and will need pesos. The airport foreign exchange desk will sell you pesos for $.10 per peso. You met a tourist at the airport who is from Mexico and is on his way to Canada. He is willing to buy your C$200 for 1,300 pesos. Should you accept the offer or cash the Canadian dollars in at the airport? Explain.

Q5. Explain why firms may issue stock in foreign markets

Answer 1

1.

SPREAD =ASK PRICE - BID PRICE / ASK PRICE

($.81 - $.7938)/$.81 = .02 or 2%

2.

INDIRECT EXCHANGE RATE = 1 / EXCHANGE RATE

1/$1.25 per euro = 0.8 euros per dollar

3.

YEN = DOLLAR PER ZOLTY / DOLLAR PER YEN

$0.17 per zloty/$0.008 per yen = 21.25 yen per zloty,

where 1 zloty = 21.25 yen

4.

Exchange with the tourist. If you exchange the C$ for pesos at the

foreign exchange desk, the cross-rate is $.60/$10 = 6.

Thus, the C$200 would be exchanged for 1,200 pesos (computed as 200 × 6).

If you exchange Canadian dollars for pesos with the tourist,

you will receive 1,300 pesos

5.

Firms may issue stock in foreign markets when they are concerned that their home market may be unable to absorb the entire issue. In addition, these firms may have foreign currency inflows in the foreign country that can be used to pay dividends on foreign issued stock. They may also desire to enhance their global image. Since the euro can be used in several countries, firms may need a large amount of euros if they are expanding across Europe.