Question

Section 2 Calculations. 5pt each, 50 pts total. Show your work!

1. Suppose the dollar-pound exchange rate is quoted as $1.551 = £1.00 and the dollar-yen exchange rate is quoted at $1.00 = ¥119. What is the cross exchange rate, £ /¥? Round to 4 decimal places.
2. Suppose the dealer provides this spot rate quote: S($|£) 1.8515 – 04. If you were to buy $1,000,000 worth of British pounds and then sell them five minutes later. Calculate the dealer profit in USD, to nearest cents, from your transactions.
3. The ¥/$ spot exchange rate is $1.551/¥ and the 90-day forward premium is 5%. Calculate the 90-day forward price, work to 4 decimal places.
4. Suppose a bank customer with ¥2,000 wishes to trade out of yen, ¥, and into pound, £. The dollar-pound exchange rate is quoted as $1.55 = £1.00 and the dollar-yen exchange rate is quoted at $1.00 = ¥120. How much £, to 2 decimal places, will the customer get?
5. Suppose you observe a spot exchange rate of $1.050/€. If interest rates are 5% APR in the U.S. and 3% APR in the Euro zone then, under IRP, what is the no-arbitrage 1-year forward rate, $   /€? Round to 4 decimal places.

Answer 1

The cross exchange rate = $ / pound * yen / $

= 1.551 *119

= YEN 184.5690 / POUND

Dealers profit = 1000000 / ( 1.8519 - 1.8515)

= $2,500,000

90 days forward price = 1.551 *1.05 = $1.6286/ YEN

We need to find out the yen /pound rate

Cross exchange rate = 120*1.55 = YEN 186 PER POUND

Bank customer will get amount = 2000 / 186 = 10.75 Pounds

IRP is given by the formula ,

F = S * ( 1 + i (price currency) / [ 1 + i (base currency)

= 1.050 * 1.05/1.03

= $ 1.0704 / euro.