Question

Use the data table to answer questions 9, 10, and 11:

	EURUSD Spot Quotes
	Bank		Bid		Ask
	Citibank		1.1930		1.1935
	HSBC		1.1935		1.1940
	JP Morgan Chase		1.1925		1.1930
	EUR/USD 6-month Forward Quotes
	Bank		Bid		Ask
	Barclays Bank		1.1870		1.1875
	Royal Bank of Canada		1.1900		1.1905
6-month Interest Rates (annualized - simple interest)
Bank		Currency		Interest Rate
Bank of America		U.S. Dollar		0.50%
Deutsche Bank		Euro		1.50%

10) Assume that you are a U.S. corporation and need to buy EUR 3,000,000 to cover an A/P due in 6 months. Of the two banks that have quoted the forward prices, which bank would you use for your transaction? How much money did you save your company by choosing this price as opposed to the other price?

Answer 1

U S Corporation need to buy EUR 3,000,000 to cover an A/P due in 6 months.

By considering the 6 months forward rate quoted by two banks Barclays Bank and Royal Bank of Canada, the payments for U S corporation after 6 months will be as follows

Barclays Bank EUR/USD 1.1870 - 1.1875

EUR 3,000,000 = USD (3,000,000/1.1870) = USD 2,527,380

Royal Bank of Canada EUR/USD 1.1900 - 1.10905

EUR 3,000,000 = USD (3,000,000/1.1900) = USD 2,521,008

I will prefer Royal Bank of Canada to buy EUR 3,000,000 at 6 months forward rate.

Amount of money saved by choosing Royal Bank of Canada over the other bank, Barclays Bank is

= USD 2,527,380 - USD 2,521,008 = USD 6,372