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标题: Economics 【Reading 17】Sample [打印本页]
作者: invic    时间: 2012-3-28 09:47     标题: [2012 L2] Economics 【Session 4 - Reading 17】Sample

A U.S. importer wants to buy stuffed toys from the nation of South Apoa for a total cost of 6 million Apoas. The spot exchange rate is Apoa:USD 0.50. The USD equivalent cost is:
A)
USD 12,000,000.
B)
Apoa 3,000,000.
C)
USD 3,000,000.


$0.50 times 6,000,000 Apoa = USD 3,000,000.
作者: invic    时间: 2012-3-28 09:47

Which of the following statements about the foreign exchange market is least accurate?
A)
In the spot market, currencies are traded for immediate delivery but in the forward market, contracts are made to buy and sell currencies for future delivery.
B)
A foreign currency is at a forward discount if the forward rate expressed in domestic currency is below the spot rate, whereas a forward premium exists if the forward rate is above the spot rate.
C)
Foreign exchange quotations can be expressed on a direct basis–the foreign currency price of the home currency–or an indirect basis–the home currency price of another currency.


Foreign exchange quotations can be expressed on a direct basis — the home currency price of another currency—or an indirect basis—the foreign currency price of the home currency.
作者: invic    时间: 2012-3-28 09:48

本帖最后由 invic 于 2012-3-28 09:49 编辑


The direct method of foreign exchange quotations:
A)
is used primarily in the U.K., Canada, and the U.S.
B)
quotes the domestic currency per unit of foreign currency which is FCC.
C)
quotes the foreign currency per unit of domestic currency which is DC:FC.


The direct method of foreign exchange quotations is quoted as FCC.
作者: invic    时间: 2012-3-28 09:48

The direct quote method is:
A)

Domestic Currency:Foreign Currency.
B)

Foreign Currencyomestic Currency.
C)

1/(Foreign Currencyomestic Currency).


Direct quotes are the usual method of quoting currencies. Indirect quotes are used in the U.K., Canada, and U.S.
作者: invic    时间: 2012-3-28 09:50

If the indirect quote for U.S. dollars in Sydney is 0.7927, what is the equivalent indirect quote in New York City for Australian dollars?
A)
0.3964.
B)
0.7927.
C)
1.2615.


Indirect quotes are foreign currency per domestic currency or DC:FC. An indirect quote in Sydney for USD of 0.7927 means AUD:USD 0.7927 which equals an indirect quote in New York City of USD:AUD 1.26.
作者: invic    时间: 2012-3-28 09:51

An indirect quote for pesos to a $U.S. investor is 8.0000-8.5000. If you have $100, how many pesos will you be able to buy?
A)
800.
B)
11.8.
C)
850.


For the examination, remember that the bank must make its profit through the bid-ask spread (the foreign-exchange market is typically transaction-fee free), so you will always buy at the "high" price and sell at the "low price." Here, the "high" price is 8.0000 USD:MXN (At 8.0000 USD:MXN the peso is worth more than at 8.5000 USD:MXN ).
$100.00 × 8.0000 = 800.0000 Pesos
作者: invic    时间: 2012-3-28 09:51

GBP:USD 0.5550 is:
A)
an indirect quote in Great Britain.
B)
a direct quote in Great Britain.
C)
an indirect quote in the U.S.


In country X, an indirect quote is foreign currency over domestic currency, or DCX:FC. The quote GBP:USD 0.5550 is DC:FC (or indirect) to an investor in Great Britain and FCC (or direct) to an investor in the United States.
作者: invic    时间: 2012-3-28 09:52

If the bid is GBP:USD 1.8709 and the ask is GBP:USD 1.8841, what is the bid−ask quote in USD:GBP?
A)
0.5345 − 0.5407.
B)
1.8841 − 1.8709.
C)
0.5308 − 0.5345.


To convert to USD:GBP just take the reciprocal of each number and reverse the bid−ask quote.
1 / (GBP:USD 1.8709) = USD:GBP 0.5345 and 1 / (GBP:USD 1.8841) = USD:GBP 0.5308. The bid−ask quote is now 0.5308 − 0.5345.
作者: invic    时间: 2012-3-28 09:52

Suppose that the quote for the CAD in New York is CAD:USD 0.6666. What is the quote for USD in Toronto USD:CAD?
A)
1.5001.
B)
0.3333.
C)
1.0000.


Take the reciprocal of 0.6666 = 1 / 0.6666 = 1.5001
作者: invic    时间: 2012-3-28 09:53

In Japan, the direct quote of USD:JPY 108.82 is the equivalent of an indirect quote of:
A)
JPY:USD 0.091895.
B)
JPY:USD 0.009189.
C)
JPY:USD 0.918949.


JPY:USD 0.009189 is the reciprocal of USD:JPY 108.82.
作者: invic    时间: 2012-3-28 09:53

If the exchange rate value of the CAD goes from USD 0.60 to USD 0.80, then the CAD:
A)
appreciated and Canadians will find U.S. goods cheaper.
B)
depreciated and Canadians will find U.S. goods more expensive.
C)
depreciated and Canadians will find U.S. goods cheaper.


The CAD is now more expensive in terms of USD, and thus it has appreciated. Therefore, each CAD yields more USD than before, and Canadians are able to purchase more U.S. goods with each CAD, making U.S. goods relatively cheaper.
作者: invic    时间: 2012-3-28 09:54

In the U.S., the indirect quote of USD:EUR 0.827541 is the equivalent of a direct quote of:
A)
EUR:USD 0.0012.
B)
EUR:USD 1.2084.
C)
EUR:USD 0.1208.


EUR:USD 1.2084 is the reciprocal of USD:EUR 0.827541.
作者: invic    时间: 2012-3-28 09:54

Given an indirect quote of GBP:CHF 2.2254, what is the direct quote?
A)
CHF:GBP 4.4940.
B)
CHF:GBP 0.0449.
C)
CHF:GBP 0.4494.


CHF:GBP 0.4494 is the reciprocal of GBP:CHF 2.2254.
作者: chunty    时间: 2012-3-28 09:57

If the exchange rate is USD:JPY 120, a bottle of rice wine that costs JPY2,400 costs:
A)
USD 24.
B)
USD 20.
C)
USD 200.


If one USD buys 120 JPY, 20 USD buys 2,400 JPY, which is the price of the bottle of wine.
作者: chunty    时间: 2012-3-28 09:58

A foreign currency is quoted at $1.5558 - 70. The percentage spread is closest to:
A)
0.07707%.
B)
0.00120%.
C)
0.07713%.


Percent spread = [(Ask price – Bid price)/Ask price] × 100
Percent spread = [(1.5570 – 1.5558)/1.5570] × 100 = 0.07707%
作者: chunty    时间: 2012-3-28 09:58

Today’s spot CAD bid exchange rate is EUR:CAD 1.425 and the ask exchange rate is EUR:CAD 1.435. The percent spread is closest to:
A)
0.697%.
B)
0.702%.
C)
0.489%.


The percentage spread is the same irrespective of how the quote is made. The percentage spread is calculated as: (1.435 − 1.425) / 1.435 × 100 = 0.697%
作者: chunty    时间: 2012-3-28 09:59

Assume that the EUR:USD six-month forward exchange rate is quoted at 1.2102 − 1.2112. What is the bid-ask spread as a percentage of the ask price based on a direct quote for euros?
A)
0.0858%.
B)
0.0847%.
C)
0.0816%.


Our quote is in terms of the number of dollars per euro, and a direct quote for euros is the number of euros per dollar. So, we must invert the rates given to get USD:EUR = 0.8256 − 0.8263. The spread is the difference between the bid and the ask or 0.8263 − 0.8256 = 0.0007. The spread as a percent of the ask price is (0.0007 / 0.8263) or 0.0847%. Rounding is per market convention
作者: chunty    时间: 2012-3-28 10:00

A bank in the U.S. is quoting a bid of CAD:USD 0.9350 and an ask of CAD:USD 0.9400. For a direct U.S. quote, what is the percentage spread?
A)

0.5319%.
B)

5.5500%.
C)

0.0053%.


% spread = (ask price − bid price) / ask price × 100
(0.9400 − 0.9350) / 0.9400 × 100 =

(0.005 / 0.9400) × 100 = 0.5319%
作者: chunty    时间: 2012-3-28 10:01

Given a foreign currency quotation bid of $0.8955 and an ask of $0.9045 what is the percentage bid-ask spread, and who profits from it?
% Bid-AskSpreadProfits?
A)
0.9950%Customer
B)
1.0050%Bank
C)
0.9950%Bank


% spread = [(ask price bid − price) / ask price] × 100
= [(0.9045 − 0.8955) / 0.9045 ] × 100 = 0.9950%
The bid-ask spread is how banks make their profit on foreign currency transactions.
作者: chunty    时间: 2012-3-28 10:05

The percentage spread between foreign currency quotations is equal to the:
A)

ask price minus the bid price divided by the ask price multiplied by 100.
B)

ask price minus the bid price divided by the bid price multiplied by 100.
C)

ask price divided by the bid price.


% spread = [(ask price – bid price) / ask price] × 100
作者: chunty    时间: 2012-3-28 10:07

Which of the following statements about foreign currency bid-ask spreads is least accurate? Foreign currency bid-ask spreads:
A)

are not directly affected by bank and currency dealer positions.
B)

decrease as the size of the transaction decreases.
C)

are a function of transaction volume and volatility.


Bid-ask spreads are size related in that the smaller the transaction the larger the spread.
作者: chunty    时间: 2012-3-28 10:07

Which of the following will cause a currency's bid-ask spread to widen? The:
A)
government has recently become more stable.
B)
bid-ask spread is for a small transaction rather than a large one.
C)
bid-ask spread is a spot quote rather than a forward quote.


The bid is the price at which the bank will buy foreign currency, and the ask is the price at which the bank will sell foreign currency. The more actively a currency is traded, the narrower the spread. Forward spreads are wider than spot spreads. The smaller the transaction size, the wider the spread. The greater the exchange-rate volatility, the greater the bid-ask spread.
作者: chunty    时间: 2012-3-28 10:08

A bid-ask spread on a foreign currency will be narrower the:
A)

more actively traded the currency and the larger the transaction.
B)

more actively traded the currency and the smaller the transaction.
C)

less actively traded the currency and the smaller the transaction.


The more actively a currency is traded, and the larger the transaction, the narrower the spread.
作者: chunty    时间: 2012-3-28 10:08

Suppose the spot CHF:USD exchange rate quotation is 0.7910 - 0.7917. The percentage bid-ask spread on the USD is:
A)
0.0884%.
B)
0.0007%.
C)
8.8840%.


The bid-ask spread = [(0.7917 − 0.7910) / 0.7917] × 100 = 0.0884%
作者: chunty    时间: 2012-3-28 10:09

Given an exchange rate of CAD:USD 0.9250 and CHF:USD 1.6250, what is the exchange rate quoted in CHF:CAD?
A)
0.5692.
B)
1.5032.
C)
1.7568.


(CHF:USD 1.6250) / (CAD:USD 0.9250) = CHF:CAD 1.7568
作者: chunty    时间: 2012-3-28 10:10

Given P the direct quotes in U.S. dollars for the Mexican peso (MXN) and the Peruvian nuevo sol (PEN), determine the PEN:MXN bid-ask cross rates. Select the closest correct answer.

MXN:USD Bid/Ask: 0.11001 - 0.11036
PEN:USD Bid/Ask: 0.28818 - 0.28918
A)
PEN:MXN 2.62890 - 2.64630.
B)
PEN:MXN 0.38300 - 0.38554.
C)
PEN:MXN 2.61127 - 2.62867.


This problem demonstrates the "Bid-Ask Matrix Method" to calculate the bid and ask quotes:
Step 1: Put the bid-ask quotes into a matrix. Use direct quotes in the common currency.

Currency

Bid

Ask

MXN

0.11001

0.11036

PEN

0.28818

0.28918


Step 2: "Divide Out" the diagonals and take the reciprocal. Remember that the quotes are direct quotes for a USD investor.
(Remember to put MXN in the numerator - because MXN is in the numerator of the quote we are asked to calculate.)

MXNBid / PENAsk = 0.11001 / 0.28918 = MXNEN 0.38042,
1 / MXNEN 0.38042 = PEN:MXN 2.62867
MXNAsk / PENBid = 0.11036 / 0.28818 = PEN:MXN 0.38296,
1 / MXNEN 0.38296 = PEN:MXN 2.61127

Step 3: Quote : The PEN:MXN Bid-Ask is:
(Note: The lower number from Step 2 is the bid, the higher number is the ask.)
PEN:MXN 2.61127 to 2.62867
作者: chunty    时间: 2012-3-28 10:10

Given the following quotes, USD:GBP 2.0000 and USD:MXN 8.0000, calculate the direct GBP:MXN spot cross exchange rate.
A)
4.0000.
B)
0.6250.
C)
0.2500.


If we had 1 GBP we could buy 0.50 USD. That 0.50 USD would buy 4 Pesos. Alternately, you can invert the first quote to read GBP:USD 0.5000. Then, 0.5000GBP:USD × 8.0000USD:MXN = 4.0000GBP:MXN.
作者: chunty    时间: 2012-3-28 10:11

A bank in Canada is quoting USD:CAD bid 1.4950 − ask 1.5005, and EUR:USD bid 0.9350 − ask 0.9400. What is exchange rate bid and ask for EUR:CAD?
A)
EUR:CAD 1.5904 − 1.6048.
B)
EUR:CAD 1.3978 − 1.4105.
C)
EUR:CAD 0.6254 − 0.6264.


First invert the EUR:USD quote by 1 / 0.9350 = 1.0695 and 1 / 0.9400 = 1.0638 for a quote of USD:EUR 1.0638 − 1.069. Then set up a bid-ask matrix.
1.4950 / 1.0695 = EUR:CAD 1.3978
1.5005 / 1.0638 = EUR:CAD 1.4105
The EUR:CAD bid-ask quote is 1.3978 − 1.4105
作者: chunty    时间: 2012-3-28 10:11

Given the following quotes for the Canadian dollar (CAD) and the British pound (GBP), determine the GBP:CAD bid-ask spread. (Note: Carry calculations to at least five decimal places)
USD:CAD 1.59031 − 1.59701
USD:GBP 0.69459 − 0.69686
A)
GBP:CAD 2.29921 − 2.31631.
B)
GBP:CAD 2.28211 − 2.29921.
C)
GBP:CAD 2.28957 − 3.28863.


We recommend using the following "Bid-Ask Matrix Method" to calculate the bid and ask quotes:Step 1: Put the bid-ask quotes into a matrix as below:

Currency

Bid

Ask

USD:CAD

1.59031

1.59701

USD:GBP

0.69459

0.69686


Step 2: “Divide Out” the diagonals.(Remember to put CAD in the numerator - because CAD is in the numerator of the quote we are asked to calculate.)
CADBid / GBPAsk = 1.59031 / 0.69686 = GBP:CAD 2.28211
CADAsk / GBPBid = 1.59701 / 0.69459 = GBP:CAD 2.29921
作者: chunty    时间: 2012-3-28 10:12

An analyst observes that the exchange rate for Mexican pesos is USD:MXN 8.0000, and the exchange rate for Polish zlotys is USDLN 6.0000. The PLN:MXN exchange rate is closest to:
A)
1.3333.
B)
0.7500.
C)
14.0000.


The cross rate of PLN:MXN is (USD:MXN 8) / (USDLN 6) = 1.3333 PLN:MXN.
作者: chunty    时间: 2012-3-28 10:12

The current spot rates for currency exchange are as follows: USD:THB 0.02240 and THB:AUD 23.89923. What is the AUD:USD spot cross exchange rate?
A)
1.86796.
B)
0.00094.
C)
0.53534.


The AUD:USD cross rate is calculated in the following manner:
Step 1:  Multiply the two quotes together (THB will cancel out) to obtain USD:AUD as follows: USD:THB 0.02240 × THB:AUD 23.89923 = USD:AUD 0.53534.
Step 2: Take the reciprocal of this result to obtain AUD:USD as follows: 1 / USD:AUD 0.53534 = AUD:USD 1.86796
An alternative calculation method is as follows:
Step 1: Take the reciprocal of the USD:THB quote as:  1 / USD:THB 0.02240 = THB:USD 44.64286
Step 2: Divide this result by the THB:AUD quote as: THB:USD 44.64286 / THB:AUD 23.89923 = AUD:USD 1.86796
作者: chunty    时间: 2012-3-28 10:17

Given the following bid-ask spreads, calculate the DKK:CHF bid ask spread:
A)
1.6771 − 1.9733.
B)
0.50675 − 0.59627.
C)
0.53749 − 0.56216.


Set up a bid-ask matrix using:

USD:CHF bid-ask 1.3096 − 1.4528
USDKK bid-ask 2.4365 − 2.5843
(USD:CHF 1.3096) / (USDKK 2.5843) = DKK:CHF 0.50675
(USD:CHF 1.4528) / (USDKK 2.4365) = DKK:CHF 0.59627
作者: chunty    时间: 2012-3-28 10:17

If the CAD is trading at CAD:USD 0.6403 and the GBP is trading GBP:CAD 2.5207, the GBP:USD exchange rate is:
A)
GBP:USD 0.6196.
B)
GBP:USD 3.9367.
C)
GBP:USD 1.6140.


(CAD:USD 0.643) × (GBP:CAD 2.5207) = GBP:USD 1.6140.
作者: chunty    时间: 2012-3-28 10:18

If the spot exchange rate between the British pound and the U.S. dollar is USD:GBP 0.7775, and the spot exchange rate between the Canadian dollar and the British pound is GBP:CAD 1.8325, what is the CAD:USD spot cross exchange rate?
A)
1.42477.
B)
0.42428.
C)
0.70186.


First, convert USD:GBP 0.7775 to 1/0.7775 = GBP:USD 1.28617.
Then, divide GBP:USD 1.28617 by GBP:CAD 1.8325 = CAD:USD 0.70187.
作者: chunty    时间: 2012-3-28 10:18

The Japanese yen is trading at USD:JPY 115.2200 and the Danish krone (DKK) is trading at DKK:JPY 16.4989. The DKK:USD exchange rate is:
A)
DKK:USD 6.9835.
B)
DKK:USD 0.1432.
C)
DKK:USD 0.5260.


The cross rate between USD and DKK is calculated in the following manner:
(JPY:USD)(DKK:JPY) = (1 / 115.2200) × 16.4989 = DKK:USD 0.1432 (the Yen cancels out)
作者: chunty    时间: 2012-3-28 10:19

A Mexican dealer gives a quote of USD:MXN 8.00 - 8.10 and a London dealer quotes USD:GBP 2.00 - 2.10. What is the GBP:MXN bid and ask from the perspective of a Mexican dealer?
A)
3.81 − 4.05.
B)
3.81 − 3.86.
C)
4.00 − 4.05.


This result is determined as follows:
Step 1: Invert GBP quote.
First, we need to invert the GBP quotes to make the currency units GBP:USD. Then, when we multiply by the USD:MXN quote we will have the correct GBP:MXN units. (Remember that when you take the reciprocal of a quote, the bid becomes the ask and vice versa. So, for the bid we take the given ask)
Bid: 1.00000 / 2.10000USD:GBP = 0.47619GBP:USD
Ask: 1.00000 / 2.00000USD:GBP = 0.50000GBP:USD
Step 2: Calculate GBP:MXN bid-ask Prices.
Bid: 8.00000USD:MXN × 0.47619GBP:USD = 3.80952GBP:MXN, or 3.81GBP:MXN.
Ask: 8.10000USD:MXN × 0.50000GBP:USD = 4.05000GBP:MXN, or 4.05GBP:MXN.
Thus, the GBP:MXN bid-ask is: 3.81 - 4.05.
作者: chunty    时间: 2012-3-28 10:19

Donna Ackerman, CFA, is an analyst in the currency trading department at State Bank. Ackerman is training a new hire, Fred Bos, a recent college graduate with a BA in economics.
Ackerman and Bos have the following information available to them:

Spot Rates


Bid Price

Ask Price


USD:EUR

€1.0000

€1.0015


USD:GBP

₤2.0000

₤2.0100


GBP:EUR

€0.3985

€0.4000

Ackerman and Bos are interested in pursuing profitable arbitrage opportunities for State Bank. Using the appropriate bid or ask rates for the USD:EUR and the USD:GBP, what will be the profits from triangular arbitrage, starting with $1,000?
A)
$248.46.
B)
$243.78.
C)
$245.65.


The USD:EUR and USD:GBP rates imply that the arbitrage free cross rates for the GBP:EUR are:bid = €1.000/₤2.0100 = €0.4975
ask = €1.0015/₤2.0000 = €0.5008
Since the cross rates given (€0.3985 − €0.4000) are outside of the arbitrage-free cross rates, profitable arbitrage is available. It takes too few euros to buy 1 pound, so we want our arbitrage trades to go in the direction that will cause us to sell overvalued euros for pounds at the ask rate of €0.4000.
Start with $1,000.
Use the $1,000 to buy euros ($1,000 × €1.000/$) = €1,000.
Use the €1,000 to buy sterling (€1,000 / €0.4000/₤) = ₤2,500. This step is the key.
Use the ₤2,500 to buy dollars (₤2,500 / ₤2.0100/$) = $1,243.78.
Arbitrage profit = $1,243.78 − $1,000 = $243.78.
Now, Ackerman and Bos note there is a larger observed spread for British pounds versus Euros in the spot market. Which of the following statements is least likely consistent with this situation? Consider each statement individually.
A)
The proportion of trading volume related to currency arbitrage is greater in the British pound than in the Euro.
B)
The total volume of spot market transactions is higher in the Euro than in the British pound.
C)
The British pound is more volatile than the Euro.


If the proportion of trading volume related to currency arbitrage is greater in the pound than in the Euro, we might expect pound spreads to be narrower, all else equal, because arbitrage activity tends to reduce transaction costs and increase market efficiency. The other two effects are consistent with a larger spread on the pound.
Ackerman explains to Bos that a theoretical relationship exists between forward rates and future spot rates, called the foreign exchange expectation relation. This relation suggests that:
A)
the forward rate is a biased predictor of the expected future spot rate, and there is a foreign currency risk premium present.
B)
the forward rate is an unbiased predictor of the expected future spot rate, and there is a foreign currency risk premium present.
C)
the forward rate is an unbiased predictor of the expected future spot rate, and there is no foreign currency risk premium present.


The foreign exchange expectation relation is F = E(S1), meaning that the forward rate is an unbiased predictor of the expected future spot rate. If this is the case, there is no foreign currency risk premium present in the forward rate. When the forward rate is not an unbiased predictor, this implies that some investors are willing to pay a premium to hedge foreign currency exposure.
作者: chunty    时间: 2012-3-28 10:20

Suppose the AUD trades for USD 0.735802 in New York and JPY 79.3048 in Tokyo. The USD trades for JPY 109.2343 in Tokyo. Is there an arbitrage opportunity available for a currency trader?
A)
Yes, the trader can make USD 0.0135 per USD invested.
B)
No, there is no arbitrage opportunity.
C)
Yes, the trader can make USD 0.0872 per USD invested.


If the U.S. trader converts USD 1.00 for JPY 109.2343, the JPY 109.2343 can be converted to AUD 1.3774 (109.2343/79.3048). The AUD 1.3774 can then be converted to USD 1.0135 (1.3774 × 0.735802). Therefore, the profit per USD invested is 0.0135.
作者: chunty    时间: 2012-3-28 10:20

Suppose the GBP trades for CHF 2.20279 in Zurich and USD 1.62699 in London. The USD trades for CHF 1.2755 in Zurich. Is there an arbitrage opportunity available for a currency trader?
A)
No, there is no arbitrage opportunity.
B)
Yes, the trader can make USD 0.06147 per USD invested.
C)
Yes, the trader can make USD 0.0930 per USD invested.


If the U.S. trader buys 1 GBP for $1.62699, that GBP can be converted to CHF 2.20279. The CHF 2.20279 can then be converted to 2.20279 × 1/1.2755 = USD 1.72700. The total profit is 1.727000 − 1.62699 = USD.10001. The profit per USD invested is 0.10001/1.62699 = 0.06147.
作者: chunty    时间: 2012-3-28 10:21

Given the following quotes, what must the Euro indirect quote (EUR:USD) be in order to prevent arbitrage opportunities?

USD:CAD = 1.3045
EUR:CAD = 1.58588
A)
0.1774.
B)
1.2157.
C)
0.8226.


Recall that for a no arbitrage opportunity to exist the following relationship must hold:

(FC1/DC) × (DC/FC2) × (FC2/FC1) = 1

If the USD = FC1 and CAD = FC2, then we must first invert EUR:CAD = 1.58588 to arrive at CAD:EUR = 0.630564. Next we solve for:

(FC1/DC) × 0.630564 × 1.3045 = 1
(FC1/DC) = [1/(0.630564 × 1.3045)] = 1.2157

Of course, the easiest way to answer this question is to divide EUR:CAD = 1.58588 by USD:CAD = 1.3045 which is equal to EUR:USD or 1.2157.

作者: chunty    时间: 2012-3-28 10:22

Donna Ackerman, CFA, is an analyst in the currency trading department at State Bank. Ackerman is training a new hire, Fred Bos, a recent college graduate with a BA in economics.
Ackerman and Bos have the following information available to them:

Spot Rates


Bid Price

Ask Price


USD:EUR

1.0000

1.0015


USD:GBP

2.0000

2.0100

Ackerman asks Bos to determine the bid-ask spread (the difference between the ask price and the bid price) for GBP:EUR. The answer is:
A)
GBP:EUR 0.0017.
B)
GBP:EUR 0.0033.
C)
GBP:EUR 0.0085.


The bid price is 1.0000 / 2.0100 = GBP:EUR 0.4975.
The ask price is 1.0015 / 2.0000 = GBP:EUR 0.5008.
The bid-ask spread is 0.5008 − 0.4975 = 0.0033.
作者: chunty    时间: 2012-3-28 10:22

On a recent vacation, John Dorn exchanged $100 U.S. for euros. Dorn did not spend any of the euros, so at the end of the trip, he exchanged the euros back for dollars. If the bid-ask quote during this period was USD:EUR 1.04-1.13, how many dollars did Dorn have at the end of the trip?
A)

$95.
B)

$108.
C)

$92.

$100(bid USD:EUR 1.04) = 104 EUR
104 EUR / (ask USD:EUR 1.13) = $92
作者: chunty    时间: 2012-3-28 10:22

A Hong Kong company needs to pay one of its suppliers 8,000,000 Indian rupees 90 days from now. The company is worried that rupees will appreciate during this time and decides to partially hedge its exchange rate risk by entering a contract to purchase half of the rupees 90 days into the future for a price of HKD:INR 5.9364. The current exchange rate is HKD:INR 5.7921.
90 days later, the exchange rate is HKD:INR 5.8764. What is the gain/loss of entering this forward contract?
A)
−6,880 HKD.
B)
9,906 HKD.
C)
6,880 HKD.


By entering into the forward contract, the company gained [(4,000,000 / 5.8764) − (4,000,000 / 5.9364)] = 6,880 HKD.
作者: tango_gs    时间: 2012-3-28 10:25

Which of the following statements about exchange rates is most accurate?
A)
The bid-ask spread is a function of breadth, depth, and volatility of the market for a currency.
B)
Given the bid-ask spread between pesos and dollars is 6.0000-6.0025, and the bid-ask spread between pounds and dollars is 2.0000-2.0015, then the bid-ask spread between pesos and pounds is 2.875-2.934.
C)
A bid of USD:MXN 8.000, means the bank will sell you 1 USD for 8 MXN.


When the bank bids they are buying and you are selling. Spot exchange rates, forward exchange rates, and interest rates are closely linked. The bid-ask spread between pesos and pounds is 6.0000/2.0015 = 2.9978 and 6.0025/2.0000 = 3.0013.
作者: tango_gs    时间: 2012-3-28 10:27

Which of the following statements about exchange rates is least accurate?
A)

In a perfect world, triangular currency arbitrage keeps exchange rates in equilibrium.
B)

The gain or loss on a forward contract is directly related to the current spot rate.
C)

Arbitrage cannot work effectively in the presence of government regulations hampering the flow of funds across borders.


The gain or loss on a forward contract is unrelated to the spot rate. Gains or losses are measured relative to the forward contract rate, not the spot rate. Forward contracts call for delivery of a specified amount of a currency quoted against the dollar on a specific future date.
作者: tango_gs    时间: 2012-3-28 10:28

If the forward exchange rate is FCC 2 and the spot rate is FCC 1.9 when the foreign rate of return is 12% and the domestic return is 10%, which of the following statements would be most accurate?
A)
Arbitrage is possible here, investors should borrow domestic, lend foreign.
B)
Arbitrage is possible here, investors should borrow foreign, lend domestic.
C)
The arbitrage possibilities cannot be determined with the data given.


Question 1: Is there an arbitrage opportunity?
If the result of the following formula (derived from rearranging the interest rate parity condition) is not equal to 0, there is an arbitrage opportunity.
(1 + rdomestic) − [((1 + rforeign) × ForwardFCC)) / SpotFCC] = ?
Here, ( 1 + 0.10 ) − [ (( 1 + 0.12 ) × 2.0FCC ) / 1.9FCC ] = ( 1.10 − 1.18 ) = -0.08, which is not equal to 0. Arbitrage opportunities exist.
Question 2: Borrow Domestic (local) or Foreign? Here are some "rules" regarding where to start the arbitrage (where to borrow). These rules only work if there are no transaction costs and only if the currency is quoted in FCC terms.
Rule 1: If the sign on the result of question 1 is negative, borrow domestic. If the sign is positive, borrow foreign. Here, the sign is negative, so borrow domestic.
Rule 2: See table below.
(rd − rf) < (Forward − Spot) / SpotBorrow Domestic
(rd − rf) > (Forward − Spot) / SpotBorrow Foreign

Here, borrow domestic.
(rd − rf) (Forward - Spot) / Spot
( 0.10 − 0.12 )( 2.0FCC − 1.9FCC ) / 1.9FCC
-0.02<0.05
Summary: To take advantage of arbitrage opportunities, borrow domestic and lend foreign.
作者: tango_gs    时间: 2012-3-28 10:28

Which of the following would least likely be a participant in the forward market?
A)

Long-term investors.
B)

Arbitrageurs.
C)

Traders.


Forward contracts are for 30, 90, 180, and 360-day periods and would, therefore, be considered short-term investment choices. Other participants in the forward market are hedgers who use forward contracts to protect the home currency value of foreign currency denominated assets on their balance sheets over the life of the contracts involved.
作者: tango_gs    时间: 2012-3-28 10:29

Which of the following statements related to the foreign exchange market is least accurate?
A)
The bid-ask spread is a function of trading volume, volatility, and term of the forward contract.
B)
Foreign exchange brokers provide information, anonymity, and reduced trading time.
C)
The settlement date in the spot market is two days after the trade. A Friday trade would be settled on Monday.


In the spot market, currency trades are for immediate delivery, which is defined as two business days after the transaction.
作者: tango_gs    时间: 2012-3-28 10:33

Immediate delivery is assumed in which market?
A)

Currency swap market.
B)

Spot market.
C)

Forward market.


Forward markets are contracts for future delivery. Currency swaps involve a combination of spot and forward transactions.
作者: tango_gs    时间: 2012-3-28 10:34

Given the following information:
Which of the following statements is CORRECT?
A)
Capital will flow into Great Britain.
B)
If you start by borrowing 1,000 GBP, your arbitrage profits will be 116 GBP.
C)
If you start by borrowing $1,000, your arbitrage profits will be $128.


We know that arbitrage is possible because 2.2 × (1.08/1.06) = 2.2415 > 2.0. This means that the GBP is overvalued in the forward market (it takes too few of them to buy one USD), and should be sold forward. This means that we need to buy GBP today so that we have them to sell forward.Step 1: Borrow $1,000 at 6% (repay $1,060 in one year), convert the $1,000 at the spot rate to 2,200 GBP
Step 2: Lend out the GBP 2,200 at 8% (will receive GBP 2,376 in one year)
Step 3: Sell the GBP forward at the quoted forward rate, 2,376/2.0 = $1,188
Step 4: Repay loan, $1,188 − $1,060 = $128 profit
作者: tango_gs    时间: 2012-3-28 10:40

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.
作者: tango_gs    时间: 2012-3-28 10:44

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
作者: tango_gs    时间: 2012-3-28 10:45

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.
作者: tango_gs    时间: 2012-3-28 10:45

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
作者: tango_gs    时间: 2012-3-28 10:46

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.
作者: tango_gs    时间: 2012-3-28 10:46

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.
作者: tango_gs    时间: 2012-3-28 10:47

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.
作者: tango_gs    时间: 2012-3-28 10:47

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.
作者: tango_gs    时间: 2012-3-28 10:47

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%.
作者: tango_gs    时间: 2012-3-28 10:48

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%.
作者: tango_gs    时间: 2012-3-28 10:48

A foreign currency is at a forward premium if the forward rate:
A)

expressed in domestic currency is below the spot rate.
B)

expressed in domestic currency is above the spot rate.
C)

expressed in domestic currency:foreign currency is above the spot rate.


A foreign currency is at a forward premium if the forward rate expressed in domestic currency is above the spot rate. A forward discount exists if the forward rate is below the spot rate.
作者: tango_gs    时间: 2012-3-28 10:50

The current spot rate quote is GBP:USD 2.00. A 180 day forward discount for the GBP of 2% (annualized) would reflect a forward price of:
A)
USD:GBP 2.02.
B)
GBP:USD 1.96.
C)
GBP:USD 1.98.

The GBP is at a forward discount if the forward rate expressed in GBP:USD is below the spot rate. Since the annualized discount is 2%, the 180 day forward discount is 1% of spot, or USD 0.02.


[(1.98 − 2.00) / 2.00](360 / 180) = -2%
作者: tango_gs    时间: 2012-3-28 10:52

The forward rate on a 90-day contract is USD:FC 5 and the spot is USD:FC 4. The USD is trading at a forward:
A)
premium of 1.0.
B)
discount of 1.0.
C)
premium of 0.8.


A foreign currency is at a forward premium if the forward rate expressed in dollars is above the spot rate. Forward premium = forward rate – spot rate = 5 − 4 = 1.
作者: bapswarrior    时间: 2012-3-28 10:54

Today, the spot rate on Japanese yen is $0.008000 and 180-day forward yen are priced at $0.008250. The annualized forward premium is:
A)

3.125%.
B)

6.250%.
C)

6.060%.



Forward premium = ($0.008250 − $0.008000) / $0.008000 × (360 / 180) = 0.0625 = 6.25%.
作者: bapswarrior    时间: 2012-3-28 10:55

Isaac Long is an English investor. He notices the 90–day forward rate for the Norwegian kroner is GBP 0.0859 and the spot rate is GBP 0.0887. Long calculates the annualized rate of the kroner to be trading at a:
A)
premium of 9.478%.
B)
discount of 12.63%.
C)
premium of 21.17%.


[(forward rate − spot rate) / spot rate] × (360 / number of forward contract days) = [(0.0859 − 0.0887) / 0.0887] × (360 / 90) = −0.1263 or −12.63%.
作者: bapswarrior    时间: 2012-3-28 10:55

Today, the spot rate on pounds sterling is $0.6960 and 90-day forward pounds are priced at $0.6925. The annualized forward discount is:
A)

2.022%.
B)

1.005%.
C)

2.012%.



Forward discount = ($0.6925 − $0.6960) / $0.6960 × (360 / 90) = -0.02012
作者: bapswarrior    时间: 2012-3-28 10:55

The 90-day forward rate is EUR:USD 0.9420. Given a forward premium of EUR:USD 0.0027, what is the annualized percentage forward discount or premium for the Euro?
A)
1.150%.
B)
1.146%.
C)
11.500%.


Since we have a forward premium, we have to subtract it from the forward rate to get the spot rate of EUR:USD 0.9393. (Note that the $ is weaker in the forward market as it takes more dollars to buy one Euro.)
The annualized percentage forward premium = (0.0027 / 0.9393) × (360 / 90) × 100 = 1.150%
作者: bapswarrior    时间: 2012-3-28 10:56

The spot and 30-day forward rates for the Australian dollar (AUD) are USD 0.3075 and USD 0.3120, respectively. The AUD is selling at a forward:
A)
premium of USD 0.0045.
B)
rate of USD 0.3075.
C)
discount of USD 0.0045.


USD 0.3120 – USD 0.3075 = USD 0.0045 premium.
作者: bapswarrior    时间: 2012-3-28 10:56

Assume the 1 year USD:EUR forward rate is 0.89348, the German interest rate is 3.38 percent, and the U.S. interest rate is 1.90 percent. If interest rate parity (IRP) holds, the USD:EUR spot rate is approximately:
A)
0.91204.
B)
1.56670.
C)
0.88069.


Interest rate parity is given by:
Forward FCC = Spot FCC × [(1 + rdomestic) / (1 + rforeign)], or alternatively
Spot FCC = Forward FCC × [(1 + rforeign) / (1 + rdomestic)] = 0.89348 × (1.0190 / 1.0338) = 0.88069

Note that in this question, the dollar is the foreign currency and the Euro is the domestic currency.
作者: bapswarrior    时间: 2012-3-28 10:57

Assume that the domestic nominal rate of return is 4% and the foreign nominal rate of return is 5%. If the current exchange rate is FCC 0.400, the forward rate consistent with interest rate parity is:
A)
0.396.
B)
0.400.
C)
0.318.


F/S= (1 + rD) / (1 + rF) where the currency is quoted as FCC
F = (1.04/1.05)(0.400) = 0.396
作者: bapswarrior    时间: 2012-3-28 10:57

Given a forward exchange rate of 5 DC/FC, a spot rate of 5.102 DC/FC, domestic interest rates of 8%, and foreign rates of 10%, which of the following statements is CORRECT based on the approximation formula?
A)
Arbitrage opportunities do not exist.
B)
Arbitrage opportunities exist.
C)
Borrow local currency and lend foreign currency.


If (rD − rF) is approximately equal to the forward premium, which is (Forward D/F) − Spot(D/F) / Spot(D/F), then no arbitrage opportunities exist.
0.08 − 0.10 ≅ (5 − 5.102) / 5.102.
-0.02 ≅ -0.01999.
作者: bapswarrior    时间: 2012-3-28 10:58

Suppose the Argentina peso is at a 1-year forward premium of 4% relative to the Brazilian real and that Argentina’s 1-year interest rate is 7%. If interest rate parity holds, then the Brazilian interest rate is closest to:
A)
6.60%.
B)
11.00%.
C)
3.00%.


According to interest rate parity the currency with the lower interest rate is expected to appreciate so the Argentina rate of 7% is approximately 4% less than the Brazilian rate of 7 + 4 = 11%.
作者: bapswarrior    时间: 2012-3-28 10:59

Given the following information, what is the forward exchange rate implied by interest rate parity?
A)
0.612 KPW/$.
B)
1.635 KPW/$.
C)
1.665 KPW/$.

Forward rate (DC/FC) = Spot Rate (DC/FC) × [(1 + domestic rate) / (1 + foreign rate)],
Forward rate = 1 / 1.65 (KPW/$) × (1.09 / 1.10) = 0.60055 $/KPW, or 1.665 KPW/$.
Alternatively, forward rate = 1.65 (KPW/$) × (1.10 / 1.09) = 1.665 (KPW/$).
作者: bapswarrior    时间: 2012-3-28 10:59

The domestic interest rate is 8% and the foreign interest rate is 6%. If the spot rate is 4 domestic units/foreign unit, what should the forward exchange rate be for interest rate parity to hold?
A)
3.930.
B)
4.075.
C)
4.250.


Using the following interest rate parity equation:
ForwardDC/FC=SpotDC/FC × [(1 + rdomestic) / (1 + rforeign )]  
Solving for the forward rate:  ForwardDC/FC = 4 × [(1 + 0.08) / (1 + 0.06)]

= 4(1.08) / (1.06)
= 4(1.01887)
= 4.07547
作者: bapswarrior    时间: 2012-3-28 10:59

The domestic interest rate is 7% and the foreign interest rate is 9%. If the forward exchange rate is 5 domestic units per foreign unit, what spot exchange rate is consistent with interest rate parity (IRP)?
A)
4.91.
B)
5.72.
C)
5.09.


Using the following IRP equation: ForwardFCC = SpotFCC × [(1 + rdomestic) / (1 + rforeign )]  
Solving for the spot rate: SpotFCC = ForwardFCC × [(1 + rforeign) / (1 + rdomestic)]  
                                    = [(1 + 0.09) / (1 + 0.07)](5)
                                    = (1.09 / 1.07)(5)
                                    = 5.09
作者: bapswarrior    时间: 2012-3-28 11:00

The domestic interest rate is 9% and the foreign interest rate is 7%. If the forward exchange rate is FCC 5.00, what spot exchange rate is consistent with interest rate parity?
A)
4.83.
B)
4.91.
C)
5.09.


ForwardFCC / SpotFCC = (1 + rdomestic) / (1 + rforeign).
SpotFCC = ForwardFCC (1 + rforeign) / (1 + rdomestic) = (5.00)(1.07) / (1.09) = 4.908
作者: bapswarrior    时间: 2012-3-28 11:00

One-year interest rates are 7.5% in the U.S. and 6.0% in New Zealand. The current spot exchange rate is NZD:USD 0.5500. If interest rate parity holds, today’s one-year forward rate (NZD:USD) must be closest to:
A)

NZD:USD 0.55778.
B)

NZD:USD 0.54233.
C)

NZD:USD 0.56675.


Interest rate parity is given by:

ForwardFCC = 0.5500 × (1.075/1.06) = NZD:USD 0.55778
作者: bapswarrior    时间: 2012-3-28 11:01

Lance Tuipuloto, CFA, is reviewing interest rate parity for a client meeting on a planned foreign investment. The domestic interest rate is 8% and the foreign interest rate is 6%. If the forward rate is 4.00 domestic units per foreign unit, what should the spot exchange rate be for interest rate parity to hold?
A)
3.93.
B)
3.98.
C)
4.08.


F/S = (1 + rdomestic) / (1 + rforeign). Note in this equation exchange rates are quoted as Domestic/Foreign.S = F (1 + rF) / (1 + rD) = (4.00)(1.06) / (1.08) = 3.93
作者: bapswarrior    时间: 2012-3-28 11:02

The U.S. interest rate is 4%, the Jordan interest rate is 7% and the $/JOD spot rate is 2.0010. What is the $/JOD forward rate that satisfies interest rate parity?
A)

$0.5142 / JOD.
B)

$1.9450 / JOD.
C)

$1.0936 / JOD.


Forward(DC/FC) = Spot (DC/FC)[(1 + r domestic) / (1 + r foreign)]
(2.0010)(1.04/1.07)

(2.0010)(0.972)
= 1.9450
作者: bapswarrior    时间: 2012-3-28 11:02

A resident of China can invest in Chinese yuan at 5.5% or in Egyptian pounds at 6%. The current spot rate is 80 CY/EGP. What is the one-year forward rate expressed in CY/EGP?
A)

79.6226.
B)

80.3792.
C)

88.9876.


Forward (DC/FC) = Spot (DC/FC)[(1 + rdomestic) / (1 + rforeign)]
(80 CY/EGP)[(1 + 0.055) / (1 + 0.06)]

(80)(0.99528)
= 79.6226
作者: bapswarrior    时间: 2012-3-28 11:04

An investor can invest in Tunisian dinar at r = 6.25% or in Swiss francs at r = 5.15%. She is a resident of Tunisia and the current spot rate is CHF:TND 0.8105. What is the approximate one-year forward rate expressed in CHF:TND?
A)
0.8016.
B)
0.8194.
C)
0.8215.


The approximate forward premium/discount is given by the interest rate differential. This differential is: 6.25% − 5.15% = 1.10%. Since Tunisia has higher interest rates, its currency will be at a discount in the forward market. This discount equals: 0.011 × 0.8105 = 0.0089. Since the exchange rate is quoted in CHF:TND, as a depreciating currency, it will take more TND to buy one CHF. The forward rate is thus: 0.8105 + 0.0089 = CHF:TND 0.8194. In other words, the CHF is stronger in the forward market.
作者: bapswarrior    时间: 2012-3-28 11:06

Bob Bowman, CFA, is an analyst who has been recently assigned to the currency trading desk at Ridgeway Securities, a hedge fund management firm based in New York. Ridgeway’s stellar reputation as a top tier hedge fund manager has been built upon many years of its portfolio outperforming both the market and its peer group. Ridgeway’s portfolio is globally diversified, with less than 35% of its assets currently invested in U.S. securities. Ridgeway seeks to enhance its portfolio returns through the active use of currency futures that correspond to its investments. From time to time, Ridgeway will also take advantage of arbitrage opportunities that arise in the currency markets.In his new position, Bowman will be reporting to the head currency trader, Jane Anthony. Among Bowman’s new responsibilities, he will be performing an ongoing analysis of global currency rates. His analysis is expected to include projections of future exchange rates and a sensitivity analysis of exchange rates in a variety of interest rate scenarios. Using his projections as a starting point, he will then be expected to suggest possible trading strategies for Ridgeway. Bowman knows that his analysis will begin with the underlying principles of the five basic international parity relationships. However, he does realize that certain principles will be more useful than others when applied to a “real-world” situation. To test his knowledge of the subject, Anthony has asked Bowman to prepare a presentation on the interrelationships between exchange rates, interest rates, and inflation rates. For the presentation, Bowman will need to prepare a brief analysis of current market conditions and formulate some basic trading strategies based upon his projections. He also will need to demonstrate his ability to calculate predicted spot rates for currencies, given some basic inflation rate and interest rate assumptions.
Bowman begins his task by gathering the following current market statistics:
1 year U.S. Interest Rates = 8% 1 year U.K. Interest Rates = 10% 1 year $/₤ forward rate = 1.70 Current $/₤ spot rate = 1.85
Bowman knows that if the forward rate is lower than what interest rate parity indicates, the appropriate strategy would be to borrow:
A)
pounds, convert to dollars at the forward rate, and lend the dollars.
B)
pounds, convert to dollars at the spot rate, and lend the dollars.
C)
dollars, convert to pounds at the spot rate, and lend the pounds.


If the forward rate is lower than what the interest rate parity indicates, the appropriate strategy would be: borrow pounds, convert to dollars at the spot rate, and lend dollars. (Study Session 4, LOS 17.h)
Bowman also knows that if the forward rate is higher than what interest rate parity indicates, the appropriate strategy would be to borrow:
A)
dollars, convert to pounds at the spot rate, and lend the pounds.
B)
dollars, convert to pounds at the forward rate, and lend the pounds.
C)
pounds, convert to dollars at the spot rate, and lend the dollars.


If the forward rate is higher than what interest rate parity indicates, the appropriate strategy would be: borrow dollars, convert to pounds at the spot rate, and lend the pounds. (Study Session 4, LOS 17.h)
Based on the information above, Bowman would like to calculate the forward rate implied by interest rate parity. The answer is:
A)
1.82 $/₤.
B)
1.88 $/₤.
C)
1.67 $/₤.


Given the above relationship, interest rate parity does not hold.
(If interest parity held, 1.70 = 1.85 × (1.08 / 1.10), but 1.85 × (1.08 / 1.10) = 1.82).
Therefore, an arbitrage opportunity exists.
To determine whether to borrow dollars or pounds, express the foreign rate in hedged US$ terms (by manipulating the equation for IRP). We get:
(1.70 / 1.85) × 1.10 = 1.0108, which is less than 1.08 (U.S. rate), so we should start by borrowing British pounds and lending U.S. dollars.
Arbitrage Example:
(Study Session 4, LOS 17.h)

A junior colleague asks Bowman for the mathematical equation that describes interest rate parity. Which of the following equations most accurately describes interest rate parity? (S0 is the spot exchange rate expressed in dollars per unit of foreign currency, F0,T is the forward exchange rate, and rUS and rFX are the risk-free rates in the U.S. and foreign country.)
A)
S1 = F0,t [(1+rUS) / (1+rFX)].
B)
F0,t = S0 [(1+rFX) / (1+rUS)].
C)
F0,t = S0 [(1+rUS) / (1+rFX)].


Interest Rate Parity
Interest rates between countries and their exchange rates (spot and futures) must be in equilibrium at all times or else there will be arbitrage opportunities. Interest rate parity says that:
F0,t = S0 [(1+rUS) / (1+rFX)]
Where:
S0 =the current exchange rate in the spot market
F0,t =the current exchange rate in the forward of futures market
rUS=the risk-free interest rate in the U.S.
rFX=the risk-free interest rate in the foreign market

Note: the above currency quotes are expressed in $/FX. (Study Session 4, LOS 17.h)

Now, suppose Bowman has the following information available to him: the current spot exchange rate for Indian Rupees is $0.02046. Inflation over the next 5 years is expected to be 3% in the U.S. and 5% in India. Bowman must calculate the U.S. Dollar/Indian Rupee expected future spot exchange rate in 5 years implied by purchasing power parity (PPP). The answer is:
A)
$0.02250.
B)
$0.01858.
C)
$0.02010.


The PPP assumption is that the future spot exchange rate will change exactly as the inflation rates affect the values of each currency. For the computation, raise the U.S. inflation rate to the 5th power (because of 5 years) and divide it by the Indian inflation rate raised to the 5th power. Then multiply the result by the spot exchange rate. ((1.03)5 / (1.05)5) × 0.02046 = $0.01858. (Study Session 4, LOS 17.h)
Bowman routinely calculates the expected spot rate for the Japanese Yen per U.S. dollar. He knows that the current spot exchange rate is 189.76 Yen/USD. He is also aware that the interest rates in Japan, Great Britain, and the U.S. are 8%, 4%, and 5% respectively. Calculate the expected spot rate for Yen/USD in a one year period.
A)
187.95 Yen/USD.
B)
184.49 Yen/USD.
C)
195.18 Yen/USD.

The exact methodology of the covered interest rate parity (IRP) is: expected spot rate in one period (FC/DC) = spot rate today (FC/DC) × [(1 + RFC) / (1 + RDC)].
Setting up this equation gives us E(S1) = 189.76 Yen/USD × (1.08 / 1.05) = 195.18 Yen/USD. (Study Session 4, LOS 17.h)
作者: bapswarrior    时间: 2012-3-28 11:07

Jennifer Nance has recently been hired as an analyst at the Central City Bank in the currency trading department. Nance, who recently graduated with a degree in economics, will be working with other analysts to determine if there are profit opportunities in the foreign exchange market.Nance has the following information available on currency spot exchange rates:
Nance is asked to determine if a profitable arbitrage opportunity exists, and if so, to determine the amount of profit in percent.
A)
Yes, a 1.3% arbitrage profit is available.
B)
Yes, a 1.2% arbitrage profit is available.
C)
Yes, a 2.18% arbitrage profit is available.


Typically, we assume that the rates versus the $ are “correct” and calculate the implied cross rate: MXN:USD 0.9905 × 9.75 = USD:MXN 9.657. Since 9.657 < 9.8674, the euro is overvalued in Berne, relative to the Mexican peso. Hence, you want to sell euros for pesos in Berne. A $100 U.S. investment would buy 100.96 euros in New York. Taking 100.96 euros to Berne, one could acquire 996.21 Mexican Pesos. Buying U.S. Dollars with 996.21 Mexican Pesos would yield $102.18. Percent profit: (102.18 / 100) − 1 = 0.0218 or 2.18%.

Now suppose that the 12 month forward rate between Japanese Yen and U.S. Dollars is YEN:USD 0.007690. The current spot exchange rate is YEN:USD 0.007556. The U.S. interest rate is 6.03%. Japan’s interest rate is 5.60%.
Which of the following is closest to the amount Nance could earn on a $1,000 principal?
A)
$231 profit by borrowing dollars and lending yen.
B)
$14 profit by borrowing dollars and lending yen.
C)
$227 profit by borrowing yen and lending dollars.


Nance should proceed as follows: borrow $1,000 at 6.03%. (After 12 months, repay the loan for $1,060.30.) Convert the borrowed $1,000 into ($1,000 / 0.007556) = 132,345.16 Yen. Lend the Yen in Japan for 12 months at 5.60% interest. At the end of the year, receive 139,756.48 Yen. Using the forward contract, convert the yen back to dollars at the forward rate of 0.007690. Receive (139,756.48 Yen × 0.007690 = $1,074.73, pay back the dollar loan of $1,060.30 and realize a profit of $14.43.

作者: bapswarrior    时间: 2012-3-28 11:07

Suppose that the current interest rates in the U.S. and the European Union are 13.665% and 8.500%, respectively. Also, the spot rate for the dollar is 1.1975 US$/euro, and the 1-year forward rate is 1.2545 US$/euro. If $100 is invested, what is the total arbitrage profit that a U.S. investor could earn?
A)

No arbitrage profit can be made.
B)

$5.7000.
C)

$23.0670.


Interest rate parity requires that:
(Forward/Spot) = [(1+rD)/(1+rF)]
(1.2545/1.1975) = [1.13665/1.085]
So, interest rate parity holds and no arbitrage opportunity exists.
Alternately:
(1 + 0.13665) = [(1 + 0.085)(1.2545) / 1.1975]
1.13665 = [(1.085)(1.2545) / 1.1975]

1.13665 = 1.36113 / 1.1975
1.13665 = 1.13665, therefore no arbitrage profit can be made.
作者: bapswarrior    时间: 2012-3-28 11:08


If (rD − rF) > Forward premium, which is (Forward D/F) − Spot(D/F) / Spot(D/F), then:
A)
borrow domestic currency and lend out foreign currency.
B)
arbitrage opportunities don't exist.
C)
borrow foreign currency and lend out domestic currency.


If (rD − rF) > Forward premium, which is (Forward D/F) − Spot(D/F) / Spot(D/F), then you would borrow foreign currency and lend out local currency. If the domestic rate is high relative to the hedged foreign rate, you would borrow foreign currency units and then sell them for domestic currency units at the spot rate, lend these domestic currency units at the domestic interest rate and simultaneously sell just enough domestic currency forward so that you can repay your foreign loan.
作者: bapswarrior    时间: 2012-3-28 11:09

Given currency quotes in FCC, if:  1 + rDC <

(1 +rFC)(forward rate)</SUB)

  funds will:

spot rate

A)
flow out of the domestic country.
B)
flow in and out of the domestic country.
C)
flow into the domestic country.

This equation is Interest Rate Parity rearranged! If the term on the left (1 + rDC), is less than the term on the right, it means that the domestic rate is low relative to the hedged foreign rate. Therefore, there is a profitable arbitrage from borrowing the domestic currency and lending at the foreign interest rate.
Because we lend in the foreign market, we say that the funds flow out of the domestic economy
作者: bapswarrior    时间: 2012-3-28 11:10

The spot rate for the dollar is 0.1432 $/ADF. Andorran and U.S. interest rates are 6.6% and 7.2%, respectively. If the 1-year forward rate is 0.1430 $/ADF, a U.S. investor could earn an arbitrage dollar profit per ADF of:
A)
$0.0011.
B)
$0.0010.
C)
$0.0075.


Let us first check if an arbitrage opportunity exists. Applying the interest rate parity theorem, we have:

Forward rate = 0.1432 × 1.072/1.066 = 0.1440 $/ADF > 0.1430 $/ADF (quoted forward rate)



This implies that an arbitrage opportunity exists. The inequality implies that ADF is mispriced (weak) in the forward market or is underpriced relative to the dollar. We should buy ADF in the forward market and sell the dollar in the spot market. This requires that we borrow in Andorra and convert the francs into dollars at the spot rate. Invest the proceeds in U.S. securities @ 7.2%, and simultaneously enter into a forward transaction where we sell the dollars for ADF @ 0.1430 $/ADF. Assuming that we borrow 1 ADF today and convert it into dollars, we will have 0.1432 dollars to invest at 7.2% for one year. After one year we will have 0.1432 × 1.072 = 0.1535 dollars. At that point, we will owe an Andorran bank 1 × 1.066 or 1.066 ADF, including interest. We will need to convert enough dollars at the forward rate to pay off this loan. At the forward contract rate, we will need to convert 1.066 × 0.1430 = 0.1524 dollars into ADF to pay off our obligation. This will leave us with an arbitrage profit of 0.1535 − 0.1524 = 0.0011 dollars.
作者: bapswarrior    时间: 2012-3-28 11:11

The forward rate between Swiss francs and U.S. dollars is 1.8 SF/$ and the current spot rate is 1.90 SF/$. The Swiss interest rate is 8.02% and the U.S. rate is 11.02%. Assume you can borrow francs or dollars and you live in Switzerland. If an arbitrage opportunity exists, how can you take advantage of it?
A)

Borrow domestic currency.
B)

Lend foreign currency.
C)

Borrow foreign currency.


Borrow foreign if 1 + rD> [(1 + rF)(forward rate)] / spot rate
1 + 0.0802 > [(1 + 0.1102)(1.8)] / 1.9
1.0802 > 1.99836 / 1.9
1.0802 > 1.0518 therefore borrow foreign (dollars) and lend domestic (francs).
Alternatively, U.S. rate is 11.02 − 8.02 = 3% higher and USD is at (1.8 − 1.9) / 1.9 = 5.3% discount since USD will fall more than the extra 3% interest, better to lend francs.
作者: bapswarrior    时间: 2012-3-28 11:11

If 1 + the domestic interest rate < (1 + the foreign interest rate × the forward rate) / spot rate, an investor seeking arbitrage profits should borrow:
A)
foreign, convert to domestic, lend out domestic, and convert back to foreign.
B)
domestic, convert to foreign, borrow foreign, and convert back to domestic.
C)
domestic, lend out foreign, and convert back to domestic.


If 1 + rD < (1 + rF)(forward rate) / spot rate, then borrow domestic, lend out foreign, and convert back to domestic.
作者: bapswarrior    时间: 2012-3-28 11:12

The spot rate between the Canadian dollar and the British pound is 1.265 CAD/₤ and the forward rate is 1.193 CAD/₤. The interest rate in Canada and England are 6.13% and 6.01%, respectively. A person living in Toronto, Canada can borrow either Canadian dollars or pounds. If an arbitrage opportunity exists, which currency would they lend or borrow?
A)

Lend pounds.
B)

Borrow pounds.
C)

Borrow Canadian dollars.


Use the following formula to determine if an arbitrage opportunity exists and which currency to borrow.
if 1 + rD > [(1 + rF)(Forward rate)] / Spot rate, then borrow foreign.
1.0613 > [(1.0601)(1.193)] / 1.265
1.0613 > 1.265 / 1.265
1.0613 > 1 therefore borrow foreign (British pound) and lend domestic (Canadian dollar).
作者: bapswarrior    时间: 2012-3-28 11:12

The forward rate between the Mexican peso and the U.S. dollar is 556.75 MXN/USD and the spot rate is 581.23 MXN/USD. The Mexican interest rate is 5.89%, and the U.S. rate is 5.75%. If a person lives in Mexico and can borrow $10,000 or the equivalent in pesos, how much can she make if currency arbitrage opportunities exist?
A)

$459.39.
B)

Arbitrage opportunities do not exist.
C)

$479.59.


First determine if arbitrage opportunities exist by using the following equation:
if 1 + rD > [(1 + rF)(Forward rate)] / Spot rate, then borrow foreign (dollars).
1.0589 > [(1.0575)(556.75)] / 581.23
1.0589 > 588.763 / 581.23
1.0589 > 1.01296, therefore, borrow foreign (dollars).
Borrow $10,000 at 5.75%, interest = $575 due at the end of the year. Convert to pesos using the spot rate: ($10,000) × (581.23 MXN/USD) = 5,812,300 pesos.
Lend out at 5.89%: (5,812,300 pesos) × (1.0589) = 6,154,644.47 pesos. Convert to dollars: (6,154,644.47 MXN) × (USD/556.75 MXN) = $11,054.59. $11,054.59 − $10,000 (original amount borrowed) − $575 (interest) = $479.59 profit.
作者: bapswarrior    时间: 2012-3-28 11:13

The annual interest rates in England and New Zealand are 6.54% and 7.03%, respectively. The one-year forward exchange rate between the British pound and the New Zealand dollar is 0.45 GBP/NZD and the spot rate is 0.41 GBP/NZD. If a person living in London can borrow 10,000 pounds or the equivalent amount in New Zealand dollars, how much arbitrage profit, if any, can he make?
A)

1,043.61 GBP.
B)

1,093.20 GBP.
C)

1,124.88 GBP.


Borrow 10,000 GBP at 6.54% = 654 GBP interest due at the end of the year.
Convert to NZD: (10,000 GBP) × (1 NZD/0.41 GBP) = 24,390 NZD.
Lend out NZD at 7.03% interest: (24,390 NZD) × (1.0703) = 26,104.88 NZD.
Convert back to GBP: (26,104.88 NZD) × (0.45 GBP/NZD) = 11,747.20 GBP.
11,747.20 GBP − 10,000 GBP (original amount borrowed) − 654 GBP interest = 1,093.20 GBP profit.
作者: bapswarrior    时间: 2012-3-28 11:14

The annual interest rate is 8.02% in Mexico and 7.45% in Canada. The spot peso-dollar exchange rate is 569.87 MXN/CAD, and the one-year forward rate is 526.78 MXN/CAD. If an arbitrage opportunity exists, how much would a person living in Mexico make borrowing 15,000,000 pesos or the equivalent in Canadian dollars?
A)

1,292,410 pesos.
B)

1,284,230 pesos.
C)

1,304,207 pesos.


Note that peso is at a forward premium (less pesos per CAD in the future) and that peso interest rate is higher. Therefore it is clear there are arbitrage profits from lending in pesos and borrowing CAD.
First convert to Canadian dollars to determine the amount of interest due at the end of the year. (15,000,000 MXN) × (CAD/569.87 MXN) = 26,321.79 CAD.
26,321.79 CAD × 0.0745 = 1,960.97 CAD interest due at the end of the year.
Lend out pesos 15,000,000 pesos × 1.0802 = 16,203,000 pesos received at the end of the year.
Convert to Canadian dollars (16,203,000 MXN) × (CAD/526.78 MXN) = 30,758.57 CAD.
Subtract the original loan amount and interest: 30,758.57 − 26,321.79 (original loan) − 1,960.97 (interest) = 2,475.81 CAD profit.
Convert the remainder back to pesos: (2,475.81 CAD) × (526.78 MXN/CAD) = 1,304,207.19 peso profit.
作者: bapswarrior    时间: 2012-3-28 11:15

The interest rates in the U.S. and Great Britain are 7.23% and 6.94% respectively. The forward rate is 1.70$/₤ and the spot rate is 1.73$/₤. Which currency would an investor borrow, if any, to make an arbitrage profit?
A)

Lending pounds.
B)

Borrow dollars.
C)

Borrow pounds.


Use the following formula to determine if an arbitrage opportunity exists and which currency to borrow.
if 1 + rD > [(1 + rF)(Forward rate)] / Spot rate then borrow foreign.
1.0723 > [(1.0694)(1.70)] / 1.73
1.0723 > 1.81798 / 1.73
1.0723 > 1.0509, therefore borrow foreign (pounds).
Alternatively, the dollar is appreciating. [(1.73 − 1.70) / 1.70] = 1.76% and the $U.S. interest rate is higher. Clearly, investing in $U.S. (and borrowing pounds) is the way to go.
作者: bapswarrior    时间: 2012-3-28 11:16

Jennifer Nance has recently been hired as an analyst at the Central City Bank in the currency trading department. Nance, who recently graduated with a degree in economics, will be working with other analysts to determine if there are profit opportunities in the foreign exchange market.
Nance has the following data available:

US Dollar ($)

UK Pound (£)

Euro (€)


Expected inflation rate

6.0%

3.0%

7.0%


One-year nominal interest rate

10.0%

6.0%

9.0%

Market Spot Rates


US Dollar ($)

UK Pound (£)

Euro (€)


US Dollar ($)

$1.0000

$1.6000

$0.8000


UK Pound (£)

0.6250

1.0000

2.0000


Euro (€)

1.2500

0.5000

1.0000


Market 1-year Forward Rates
US Dollar ($)UK Pound (£)Euro (€)
US Dollar ($)$1.0000$1.6400$0.8082
UK Pound (£)0.60981.00002.0292
Euro (€)1.23730.49281.0000
Assume borrowing and lending rates are equal and bid-ask spreads are zero in the spot and forward markets. Using the data above, Nance is asked to calculate the profits in pounds from covered interest arbitrage between the United Kingdom and the United States, assuming an investor starts by borrowing ₤500,000. The answer is:
A)
₤6,750.00.
B)
₤36,585.37.
C)
₤6,585.37.


In this example, covered interest arbitrage involves borrowing pounds at the U.K. interest rate, converting to dollars at the spot rate, investing the dollars at the U.S. interest rate, converting the dollar investment proceeds back to pounds at the forward rate, and repaying the pound loan. Arbitrage profits are the difference between the proceeds from the forward contract and the amount repaid on the loan.
We start by borrowing 500,000. At a borrowing rate of 6.0%, we will have to repay 500,000(1.06) = 530,000 at the end of the year.
We convert the 500,000 pounds to dollars at the spot rate of $1.6000, which gives us 500,000 × 1.6000 = $800,000.
We invest $800,000 for one year at 10.0%, and at the end of the year we receive $800,000(1.10) = $880,000.
This means that initially we must enter into a forward contract at $1.6400 and then at the end of the year convert $880,000 into ($880,000 / $1.6400) = 536,585.37.
We pay back the 530,000 loan balance and our arbitrage profits are 536,585.37 − 530,000 = 6,585.37.
Nance is asked to calculate the one-year forward EUR:USD rate that would preclude profits from covered interest arbitrage between the U.S. dollar and the Euro?
A)
EUR:USD 0.7925.
B)
EUR:USD 0.8082.
C)
EUR:USD 0.8073.


Interest rate parity implies that, in order to prevent covered interest arbitrage, the one-year forward EUR:USD rate should be equal to $0.8000(1.10) / (1.09) = $0.8073.
作者: bapswarrior    时间: 2012-3-28 11:16

Terrance Burnhart, a junior analyst at Wertheim Investments Inc., was discussing the concepts of purchasing power parity (PPP) and interest rate parity (IRP) with his colleague, Francis Ferngood. During the conversation Burnhart made the following statements:
Statement 1: Absolute PPP is based on a number of unrealistic assumptions that limits its real-world usefulness. These assumptions are: that all goods and services can be transported among countries at no cost; all countries use the same basket of goods and services to measure their price levels; and all countries measure their rates of inflation the same way.

Statement 2: IRP rests on the idea of equal real interest rates across international borders. Real interest rate differentials would result in capital flows to the higher real interest rate country, equalizing the rates over time. Another way to say this is that differences in interest rates are equal to differences in expected changes in exchange rates.

With respect to these statements:
A)
both are correct.
B)
only statement 1 is correct.
C)
only statement 2 is correct.


IRP means that interest rates and exchange rates will adjust so the risk adjusted return on assets between any two countries and their associated currencies will be the same. PPP is based on the idea that a given basket of goods should cost the same in different countries after taking into account the changes in exchange rates. PPP does not hold due to transportation costs and other factors.
作者: bapswarrior    时间: 2012-3-28 11:17

Professor Imada Suzaken made the following statement to his economics class: “If you can earn 8% on A-rated bonds in the U.S. but only 6% on similar bonds in Canada, Canadian investors may want to buy those bonds in the U.S. for the excess return. However, after collecting the extra dollars, the investors would lose those profits when they converted their gains into their home currency.”
Suzaken is describing:
A)
exchange-rate parity.
B)
purchasing-power parity.
C)
interest-rate parity.


Interest-rate parity is the concept that exchange rates must change so that the return on investments with identical risk will be the same in any currency. Suzaken’s statement reflects interest rate parity.
作者: bapswarrior    时间: 2012-3-28 11:17

Doug Wyatt is a currency trader for Global Currency Exchange Inc. Wyatt has compiled the following information concerning the U.S. dollar ($) / Australian dollar (AUD) exchange rate. Which of the following statements concerning the currencies is CORRECT?
A)
The AUD is selling at a forward premium of 3.21%.
B)
The AUD is selling at a forward discount of 4.83%.
C)
The AUD is selling at a forward premium of 4.83%.


Remember that the forward premium or discount is always on the currency in the denominator of the quote. In this case, the premium or discount is on the AUD. The forward premium or discount is calculated as [(forward rate − spot rate) / spot rate](12 / number of months forward).
Since bid/ask quotes are given, use the midpoints. The spot midpoint = $0.747 and the forward midpoint is $0.753.
Forward premium/discount = [($0.753 - $0.747) / $0.747][12 / 3] = 0.008032 × 4 = 0.0321.
The AUD is selling at a forward premium of 3.21%.
作者: bapswarrior    时间: 2012-3-28 11:18

A currency trader has compiled the following currency quotes:

USD/EUR ($/€)

USD/GBP ($/£)

JPY/USD (¥)


Spot rate

$1.2139

$1.7730

115.674


6-month forward rate

$1.2067

$1.7894

114.867

Which of the following statements regarding currencies is CORRECT?
A)
The euro is strong relative to the dollar and the yen is weak relative to the dollar.
B)
The pound is strong relative to the dollar and the dollar is strong relative to the yen.
C)
The euro is weak relative to the dollar and the yen is strong relative to the dollar.


Remember that the forward premium or discount is always on the currency in the denominator of the quote.
USD/EUR premium/discount = [(1.2067 − 1.2139) / 1.2139](12 / 6) = -1.19%. Since the Euro is selling at a forward discount, the Euro is weak relative to the dollar and the dollar is strong relative to the Euro.
USD/GBP premium/discount = [(1.7894 − 1.7730) / 1.7730](12 / 6) = 1.85%. Since the Pound is selling at a forward premium, the Pound is strong relative to the dollar and the dollar is weak relative to the Pound.
JPY/USD premium/discount = [(114.867 − 115.674) / 115.674](12 / 6) = -1.40%. Since the dollar is selling at a forward discount, the dollar is weak relative to the yen and the yen is strong relative to the dollar.
Note that you did not necessarily need to calculate the amount of the discount or premium for this question.
作者: bapswarrior    时间: 2012-3-28 11:18

Mary Beth Morgan and Shaban Shoshi are currency traders for Mercury Forex Inc. They have compiled the following information concerning currencies in Sweden (SEK), New Zealand (NZD), and United States (USD).

SEK/USD

USD/NZD


Spot bid rate

7.8927

$0.6994


Spot ask rate

7.9021

$0.7000


3-month forward bid rate

7.8780

$0.7010


3-month forward ask rate

7.8794

$0.7020


As they are reviewing the information in the currency quotes, Morgan states, “the Swedish Krona is trading at a forward premium, however that premium is less than 1%.” Shoshi replies, I’ll have to double check that, but it looks like the NZD is weak relative to the USD.”
With regard to their statements:
A)
both are incorrect.
B)
only Shoshi is correct.
C)
only Morgan is correct.


Remember that the forward premium or discount is always on the currency in the denominator of the quote.
Since bid/ask quotes are given, use the midpoints. The spot mid point = 7.8974 and the forward midpoint = 7.8787. Since Morgan’s statement is in terms of the Swedish Krona, we need to convert the currency quotes to USD/SEK.
Spot midpoint = (1 / 7.8974) = $0.1266 Forward midpoint = (1 / 7.8787) = $0.1269 USD/SEK premium/discount = [($0.1269 − $0.1266) / $0.1266](12 / 3) = 0.95% premium for the Swedish Krona. Morgan’s statement is correct.
To evaluate Shoshi’s statement, first find the midpoints.
Spot USD/NZD midpoint = $0.6997. Forward USD/NZD midpoint = $0.7015. USD/NZD premium/discount = [($0.7015 − $0.6997) / $0.6997](12 / 3) = 1.03% premium.
Since the NZD is trading at a forward premium, the NZD is strong relative to the USD. Shoshi’s statement is incorrect.



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