Question

1.Chapter 3, Question 6. Bid/Ask Spread Utah Bank’s bid price for Canadian dollars is $.7938 and its ask price is $.8100. What is the bid/ask percentage spread?

2.Chapter 3, Question 10. Indirect Exchange Rate 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?

3.Chapter 3, Question 11. Cross Exchange Rate 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?

4.Chapter 3, Question 18. Foreign Exchange 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.

5.Chapter 3, Question 24. Interpreting Exchange Rate Quotations Today you notice the following exchange rate quotations: (a) $1 = 3.00 Argentine pesos and (b) 1 Argentine peso = .50 Canadian dollars. You need to purchase 100,000 Canadian dollars with U.S. dollars. How many U.S. dollars will you need for your purchase?

6.Pricing of ADR Today, the stock price of Genevo Co. (based in Switzerland) is priced at SF80 per share. The spot rate of the Swiss fanc (SF) is $.70. A share of ADR of Genevo Co. represents two shares of its stock traded on SIX Swiss Exchange. What should be the price of the ADR?

7.Forward Contract The Wolfpack Corp. is a U.S. exporter that invoices its exports to the United Kingdom in British pounds. If it expects that the pound will depreciate against the dollar in the future, should it hedge its exports with a forward contract and how to hedge (purchase or sell a forward contract?)? What if it expects pound to appreciate against the dollar in the future? Explain.

8.Forward Contract Your company desires to avoid the risk from exchange rate fluctuations, and it will need C$200,000 in 90 days to make payment on imports from Canada. You decide to hedge your position by purchasing Canadian dollar forward. The current spot rate of the Canadian dollar is $.77, while the forward rate is $.80. You expect the spot rate in 90 days to be $.82. How many dollars will you need for the C$200,000 in 90 days if you purchase Canadian dollar forward?

Chapter 4

1.Chapter 4, Question 1. Percentage Depreciation Assume the spot rate of the British pound is $1.73. The expected spot rate 1 year from now is assumed to be $1.66. What percentage depreciation does this reflect?2.

Chapter 4, Question 2. Inflation Effects on Exchange Rates Assume that the U.S. inflation rate becomes high relative to Canadian inflation. Other thing being equal, how should this affect the (a) U.S. demand for Canadian dollars, (b) supply of Canadian dollars for sale, and (c) equilibrium value of the Canadian dollar?3.

Chapter 4, Question 3. Interest Effects on Exchange Rates Assume U.S. interest rates fall relative to British interest rates. Other thing being equal, how should this affect the (a) U.S. demand for British pounds, (b) supply of pounds for sale, and (c) equilibrium value of the pound?

Answer 1

1. Bid/ask percentage spread = (8100-7938)/8100 =0.02 or 2%

2.indirect exchange rate = 1/ (1.25/euros) = 0.80 euros /$

3. 17/0.008=21.25

Ie., 1 zolty = 21.25 yen

4.It will better to exchange with the tourist . At the airport exchange counter you will be receiving only 1200 Pesos because the cross rate is 0.6/0.1= 6 ie. 1c$= 6MP therefore for 200 C$ you receive 200x6=1200 pesos only. But the tourist offers 1300 pesos which is much better option to accept. Here he is offering you 6.5 pesos for a Canadian dollar.