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The three-month forward rate for the Byzantine solidus (BYZ) against the Venetian ducat (VEN) is quoted as BYZ:VEN 11.98 – 12.03. The bid-ask spread on the direct quote to a Byzantine investor is closest to:
A)
BYZ:VEN 0.0500
B)
VEN:BYZ 0.0003
C)
VEN:BYZ 0.0500



The direct quote for a Byzantine investor is VEN:BYZ. The bid and ask quotes are 1 / 11.98 = VEN:BYZ 0.0834 and 1 / 12.03 = VEN:BYZ 0.0831. The spread is 0.0834 − 0.0831 = VEN:BYZ 0.0003.

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Assume that the GBP:USD six-month forward rate is quoted at a bid of 1.72546 and an ask of 1.72776. What is the spread on the indirect quote for a U.S. dealer?
A)
USD:GBP 0.000772.
B)
GBP:USD 0.000772.
C)
GBP:USD 0.002300.



For an indirect quote, the bid and ask prices must be converted to USD:GBP. This is accomplished by taking the reciprocal of each and then subtracting the bid from the ask price. 1 / 1.72546 = USD:GBP 0.579556
1 / 1.72776 = USD:GBP 0.578784
The spread is 0.578784 − 0.579556 = USD:GBP 0.000772

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Which of the following statements best describes a six month forward foreign currency spread? The six month forward foreign currency spread:
A)
tends to be larger than the spot spread.
B)
is the same as the spot spread.
C)
tends to be smaller than the spot spread.



The forward foreign currency spreads tend to be larger than the spot spreads.

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An American wants to buy six cases of champagne. Each case costs 390 SEK. If the USD:SEK exchange rate is 6.90, what is the USD cost of the champagne?
A)
USD 339.13.
B)
USD 2,340.00.
C)
USD 56.52.



Total SEK cost = 390 × 6 = 2,340 SEK. Invert the quote = 1 / 6.9 = SEK:USD 0.1449 .
Total dollar cost = SEK:USD 0.1449 × 2,340 SEK = USD 339.13

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In an attempt to reduce her inventory, a dealer holding excess foreign currency should:
A)
move the midpoint of her direct quote down.
B)
move the midpoint of her direct quote up.
C)
quote a narrower bid-ask spread.



To reduce inventory, a dealer holding excess foreign currency should move the midpoint of her direct quote down. If the dealer narrows the spread, her bid price would rise at a time when she does not want to buy.

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If the liquidity on a foreign currency forward contract decreases, the direct quote:
A)
and the indirect quote spreads will widen.
B)
spread will narrow and the indirect quote spread will widen.
C)
spread will widen and the indirect quote spread will narrow.



Both the direct quote and the indirect quote spreads will widen as the liquidity on a foreign currency forward decreases.

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The spot exchange rate is FCC 2.000. The foreign return is 15% and the domestic return is 12%. Which of the following is closest to the forward exchange rate?
A)
0.487.
B)
2.576.
C)
1.948.


We want to create a no arbitrage condition. According to the Interest Rate Parity Theorem, if the following condition does not hold, investors will take advantage of interest rate differentials to capitalize on arbitrage opportunities.
ForwardFCC = SpotFCC × [(1 + rdomestic) / (1 + rforeign)]
This condition is the formal representation of interest rate parity.
Here, ForwardFCC = 2.000 × [(1 + 0.12) / (1 + 0.15)] = 2.000 × 0.97391 = 1.94783 or about 1.948.

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The spot and 30-day forward rates for the Euro are $1.1525 and $1.1015, respectively. The Euro is selling at a forward:
A)
discount of $0.051.
B)
discount of 0.956%.
C)
premium of $0.051.



Since the forward rate is less than the spot rate, the Euro is selling at a forward discount. The amount of the discount is calculated as follows:

Forward Discount = Forward rate – Spot Rate = $1.1015 - $1.1525 = -$0.051.

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If the 90-day forward rate for the CAD is USD 0.6503, and the spot rate is USD 0.6403, then the annualized premium is:
A)
6.25%.
B)
1.00%.
C)
1.56%.



Annualized premium = [(0.6503 − 0.6403) / 0.6403] × (360 / 90) = 0.625 or 6.25%.

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The spot and 30-day forward exchange rates for the Swiss franc (CHF) are USD:CHF 0.59984 and USD:CHF 0.62734, respectively. Relative to the USD, the CHF is selling at a forward:
A)
discount of $0.073.
B)
differential of 275 points.
C)
premium of $0.073.



Forward Discount = Forward rate − Spot Rate = (1 / 0.62734) − (1 / 0.59984) = −$0.073
Since the forward rate is less than the spot rate, the Swiss franc is selling at a forward discount. Note that although in percentage terms, ($0.073 / 1.667) = −4.38%, when the forward discount is expressed in percentage terms, it is done so on an annualized basis. The correct forward premium expressed as a percentage would be equal to 0.0438 × (360 / 30) = 52.60%.

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