International-Financial-Management-6-edition-Chapt

PROBLEMS1.UsingtheAmericantermquotesfromExhibit5.4,calculateacross-ratematrixfortheeuro,Swissfranc,Japaneseyen,andtheBritishpoundsothattheresultingtriangularmatrixissimilartotheportionabovethediagonalinExhibit5.6.Solution:Thecross-rateformulawewanttouseis:S(j/k)=S($/k)/S($/j).Thetriangularmatrixwillcontain4x(4+1)/2=10elements.¥SF£$Euro112.751.4128.83511.2238Japan(100)1.2531.74061.0854Switzerland.5911.8662U.K1.46552.UsingtheAmericantermquotesfromExhibit5.4,calculatetheone-,three-,andsix-monthforwardcross-exchangeratesbetweentheCanadiandollarandtheSwissfranc.Statetheforwardcross-ratesin“Canadian”terms.Solution:Theformulaswewanttouseare:FN(CD/SF)=FN($/SF)/FN($/CD)orFN(CD/SF)=FN(CD/$)/FN(SF/$).WewillusethetopformulathatusesAmericantermforwardexchangerates.F1(CD/SF)=.8671/.9628=.9006F3(CD/SF)=.8686/.9624=.9025F6(CD/SF)=.8715/.9614=.90653.AforeignexchangetraderwithaU.S.banktookashortpositionof£5,000,000whenthe$/£exchangeratewas1.55.Subsequently,theexchangeratehaschangedto1.61.Isthismovementintheexchangerategoodfromthepointofviewofthepositiontakenbythetrader?Byhowmuchhasthebank’sliabilitychangedbecauseofthechangeintheexchangerate?CFAGuidelineAnswer:Theincreaseinthe$/£exchangerateimpliesthatthepoundhasappreciatedwithrespecttothedollar.Thisisunfavorabletothetradersincethetraderhasashortpositioninpounds.Bank’sliabilityindollarsinitiallywas5,000,000x1.55=$7,750,000Bank’sliabilityindollarsnowis5,000,000x1.61=$8,050,0004.Restatethefollowingone-,three-,andsix-monthoutrightforwardEuropeantermbid-askquotesinforwardpoints.Spot1.3431-1.3436One-Month1.3432-1.3442Three-Month1.3448-1.3463Six-Month1.3488-1.3508Solution:One-Month01-06Three-Month17-27Six-Month57-725.Usingthespotandoutrightforwardquotesinproblem4,determinethecorrespondingbid-askspreadsinpoints.Solution:Spot5One-Month10Three-Month15Six-Month206.UsingExhibit5.4,calculatetheone-,three-,andsix-monthforwardpremiumordiscountfortheCanadiandollarversustheU.S.dollarusingAmericantermquotations.Forsimplicity,assumeeachmonthhas30days.Whatistheinterpretationofyourresults?Solution:Theformulawewanttouseis:fN,CD=[(FN($/CD)-S($/CD/$)/S($/CD)]x360/Nf1,CD=[(.9628-.9629)/.9629]x360/30=-.0012f3,CD=[(.9624-.9629)/.9629]x360/90=-.0021f6,CD=[(.9614-.9629)/.9629]x360/180=-.0031ThepatternofforwardpremiumsindicatesthattheCanadiandollaristradingatadiscountversustheU.S.dollar.Thatis,itbecomeslessexpensivetobuyaCanadiandollarforwardforU.S.dollars(inabsoluteandpercentageterms)thefurtherintothefutureonecontracts.7.UsingExhibit5.4,calculatetheone-,three-,andsix-monthforwardpremiumordiscountfortheU.S.dollarversustheBritishpoundusingEuropeantermquotations.Forsimplicity,assumeeachmonthhas30days.Whatistheinterpretationofyourresults?Solution:Theformulawewanttouseis:fN,$=[(FN(£/$)-S(£/$))/S(£/$)]x360/Nf1,$=[(.6824-.6824)/.6824]x360/30=.0000f3,$=[(.6822-.6824)/.6824]x360/90=-.0012f6,$=[(.6821-.6824)/.6824]x360/180=-.0009ThepatternofforwardpremiumsindicatesthatthedollaristradingatadiscountversustheBritishpoundformaturitieslongerthanonemonth.Thethree-monthdiscountislargerthanthesix-monthdiscountinpercentagebutnotabsoluteterms.8.AbankisquotingthefollowingexchangeratesagainstthedollarfortheSwissfrancandtheAustraliandollar:SFr/$=1.5960--70A$/$=1.7225--35AnAustralianfirmasksthebankforanA$/SFrquote.Whatcross-ratewouldthebankquote?CFAGuidelineAnswer:TheSFr/A$quotationisobtainedasfollows.Inobtainingthisquotation,wekeepinmindthatSFr/A$=SFr/$/A$/$,andthattheprice(bidorask)foreachtransactionistheonethatismoreadvantageoustothebank.TheSFr/A$bidpriceisthenumberofSFrthebankiswillingtopaytobuyoneA$.Thistransaction(buyA$—sellSFr)isequivalenttosellingSFrtobuydollars(atthebidrateof1.5960andthesellingthosedollarstobuyA$(atanaskrateof1.7235).Mathematically,thetransactionisasfollows:bidSFr/A$=(bidSFr/$)/(askA$/$)=1.5960/1.7235=0.9260TheSFr/A$askpriceisthenumberofSFrthebankisaskingforoneA$.Thistransaction(sellA$—buySFr)isequivalenttobuyingSFrwithdollars(attheaskrateof1.5970andthensimultaneouslypurchasingthesedollarsagainstA$(atabidrateof1.7225).Thismaybeexpressedasfollows:askSFr/A$=(askSFr/$)/(bidA$/$)=1.5970/1.7225=0.9271TheresultingquotationbythebankisSFr/A$=0.9260—0.92719.Giventhefollowinginformation,whataretheNZD/SGDcurrencyagainstcurrencybid-askquotations?AmericanTermsEuropeanTermsBankQuotationsBidAskBidAskNewZealanddollar.7265.72721.37511.3765Singaporedollar.6135.61401.62871.6300Solution:Equation5.12fromthetextimpliesSb(NZD/SGD)=Sb($/SGD)xSb(NZD/$)=.6135x1.3751=.8436.Thereciprocal,1/Sb(NZD/SGD)=Sa(SGD/NZD)=1.1854.Analogously,itisimpliedthatSa(NZD/SGD)=Sa($/SGD)xSa(NZD/$)=.6140x1.3765=.8452.Thereciprocal,1/Sa(NZD/SGD)=Sb(SGD/NZD)=1.1832.Thus,theNZD/SGDbid-askspreadisNZD0.8436-NZD0.8452andtheSGD/NZDspreadisSGD1.1832-SGD1.1854.10.DougBernardspecializesincross-ratearbitrage.Henoticesthefollowingquotes:Swissfranc/dollar=SFr1.5971?$Australiandollar/U.S.dollar=A$1.8215/$Australiandollar/Swissfranc=A$1.1440/SFrIgnoringtransactioncosts,doesDougBernardhaveanarbitrageopportunitybasedonthesequotes?Ifthereisanarbitrageopportunity,what