N.B: All numbers are indicated in American terms (1,000 = one thousand)
Exercise 1:
Use the following quotes to answer questions a) and b)
March 22, 2024: EUR/USD = 1.0805
April 4, 2024: EUR/GBP = 0.8571
May 31, 2024: GBP/INR = 106.2740 INR: Indian Rupee
June 17, 2024: EUR/USD = 1.0734
July 17, 2024: EUR/USD = 1.0937
August 19, 2024: EUR/USD = 1.1085
(Source: Thomson Reuters Eikon database)
a) a U.S exporter wants to convert 200,000 euros to dollars on August 19, 2024. How many dollars will he get ?
a1) a U.S importer has an invoice of 150,000 euros that should be paid on March 22, 2024. How many dollars will he pay ?
a2) A European exporter wants to convert 100,000 USD to euros on June 17, 2024. How many euros will he get ?
a3) A European importer has an invoice of 300,000 USD that should be paid on July 17, 2024 How many euros will he pay ?
a4)ASpanishretailerissuedanorderwithamanufacturingfirmbasedinEnglandtobuy10,000 pairs of shoes for GBP 330,000. How many euros does the Spanish retailer need to cover the payment?
a5) An investment banking firm in UK wants to buy 100,000 shares from an Indian stock market. Each share costs INR 12,000. How many British pounds will it need to make that investment?
b) On June 17, 2024, a US company signed an export contract for 100,000 euros payable on August 19, 2024. The cost of exported products amounts to 82,000 USD.
The financial director forecasts a favorable evolution of EUR/USD, and then, decides not to hedge the exchange risk.
b1) How many dollars will receive this company?
b2) Calculate the profit or the loss generated by this contract.
c) A European company, specialized in manufacturing mobile phones, decides to create a US subsidiary. The management team expects to have an annual revenue equal to or exceeding 10 million (10,000,000) euros. (Below this revenue, the annual net gain from the subsidiary is negative; above it’s positive). The company does not hedge the exchange risk.
Assume that the US subsidiary reported an annual net income of 10,000,000 USD.
c1) What does the company fear? a rise or fall of the euro against the dollar ?
c2) Assume that the exchange rate EUR / USD stands at: 1.1296 in 2017; 1.1810 in 2018; 1.1195 in 2019; 1.1421 in 2020; 0.9921 in 2021 and 1.0530 in 2022. Calculate the exchange rate USD / EUR (rounded to four decimals) each year.
Professor: Dr. Taoufik BOURAOUI
c3) What is the annual net profit or loss in Euros obtained from the U.S. subsidiary each year? Comment the results.
Exercise 2:
In some websites and databases, cross rates often appear in the form of a matrix, as shown in Table 1 and 2.
Table 1
Currencies
Source: https://www.fxtop.com Table 2
Source: Bloomberg
Determine the following quotes:
EUR/ZAR (Table 1)
EUR/USD (Table 2)
ZAR/JPY (Table 1)
USD/JPY (Table 2)
CNY/GBP (Table 1)
NZD/CNY (Table 1)
GBP/CHF (Table 2)
CAD/HKD (Table 2)
Exercise 3:
You read in your newspaper that spot quote GBP/EUR is 1.1813 - 1.1816
a) This is a quote for which currency?
b) Calculate the rate EUR/GBP.
c) What is the ask rate for GBP?
d) What is the bid rate for EUR?
Exercise 4:
Use the following quotes to answer the questions:
Sept 6, 2024 – (Source: Thomson Reuters Eikon)
€ / USD 1.1083-87
€ / GBP 0.8442-43
€ / Swedish Krone.(SEK) 11.4134-20
€ / Danish Krone.(DKK) 7.4622-26
€ / Australian $ (AUD) 1.6615-24 Canadian $ (CAD) / USD 0.7365-69
GBP / USD 1.3123-29
a) What is thenatureofthe margin takenby banks (market makers)in theexchangemarket ?
b) A European exporter has a revenue of 100,000 USD. How many euros he gets for his dollars ?
c) An Australian exporter has a revenue of 100,000 EUR. How many Australian dollars he gets for his euros ?
d) A Danish importer should pay an invoice of 100,000 EUR. What is the equivalent of this sum in Danish Krone ?
e) An European importer should pay an invoice of 740,000 Swedish Krone. How much would cost this invoice in euros ?
f) A British exporter has a revenue of 100,000 EUR. How many British pounds he gets for his euros ?
Exchange Markets
Professor: Dr. Taoufik BOURAOUI
g) A Canadian importer should pay an invoice of 120,000 USD. What is the equivalent of this sum in Canadian dollar ?
h) A US exporter has a revenue of 94,000 GBP. How many US dollars he gets for his GBP ?
Exercise 5:
A broker has dollar/yen prices from three banks:
Bank A: US$/ ¥ = 141.10 – 141.69
Bank B: US$/¥ = 141.15 – 141.43
Bank C: US$/¥ = 141.57 – 141.95
What are the buying and selling prices a broker can offer to his customers ?
Exercise 6:
Suppose the following quotes: Spot: 1CHF = 169.78 JPY
30-day forward points: -24
90-day forward points: 31
180-day forward points: 63
Calculate the forward discount or premium in percentage on the CHF for each maturity. State whether your answer is a discount or premium.
Exercise 7:
You have the following two bid prices: EUR/AUD = 1.6609 ; AUD/GBP = 0.5080 What bid and ask rates should a bank quote for euro in terms of pounds to make a ten pips spread ?
Exercise 8:
A bank quotes the following rate: £/$ = 1.3123-1.3129
How many pounds would this bank have to transact in order to earn $1,000 on a round-trip transaction (buying pounds for dollars and then selling the pounds for dollars)?
Exercise 9: Arbitrage
Suppose the euro is quoted at 0.8442-0.8449 in London, and the pound sterling is quoted at 1.1825-1.1832 in Frankfurt.
Is there a profitable arbitrage situation? If so, describe it.
Exercise 10: Arbitrage
Suppose the following quotations:
Bank A: €/$ = 1.1047 – 1.1051
Bank B: €/$ = 1.1042 – 1.1049
Is there a profitable arbitrage situation? If so, describe it.
Exercise 11: Arbitrage
Professor: Dr. Taoufik BOURAOUI
From the quote screen on your computer terminal, you notice that Bank A is quoting €0.9023/$1.00; Bank B is offering CHF 0.8433/$1.00 and Bank C is quoting CHF/€ at 1.0702
a) Show how you can make a triangular arbitrage profit by trading at these prices. Assume you have $5,000,000 with which to conduct the arbitrage.
Exercise 12: PPP
The Economist magazine conducts a semi-annual analysis of PPP. It is known as the Big Mac index. It examines the price of the McDonald’s Big Mac in different countries and checks it against exchange rates with the US dollar. We extract from The Economist, July 2024, the following data:
• Big Mac price in UK: 4.59 GBP
• Big Mac price in US: 5.69 $
• Exchange rate: 1 US$ = 0.7777 GBP
• ImpliedPPPofthedollar (Purchasing Power Parity; local price divided by price in United States): 0.8067
a) Divide the price of the Big Mac in local currency in UK by its price in the U.S. in US dollars. What number do you get and what is it called?
b) Divide the price of the Big Mac in local currency (GBP) by the actual exchange rate. What number do you get and what is it called?
c) Compare the actual exchange rate with the implied PPP of the U.S. dollar. Does PPP hold?
d) Is the US dollar undervalued or overvalued vis-à-vis GBP compared to PPP ? Calculate the percentage of over or under valuation of the US dollar by using the following formula: (Actual Exchange Rate - PPP)/ (PPP) X 100.
Exercise 13: PPP
On January 7, 2020, the Argentinian Peso was trading at 1 US$ = 59.6994 Ps. During the one year period (January 2020 - December 2020), Argentina’s inflation rate was 42% on annualized basis. Inflation rate in the United States during that same period was 1.25% annualized.
a) What should have been the exchange rate US$/Ps in January 2021 if Purchasing Power Parity held ?
b) By what percentage was the Argentinian peso appreciated or depreciated against the US dollar ?
Exercise 14: PPP
Suppose the following data: Brazil Mexico Argentina United States Price of one pair of shoes (Adidas)
Exchange rates
670 BRL 2587 MXN 18230 ARS 129 USD
BRL/MXN = 3.8702
BRL/ARS = 27.1902
Exchange Markets
Professor: Dr. Taoufik BOURAOUI
USD/BRL = 5.1938
a) Does Absolute Purchasing Power Parity hold for the BRL with respect to the MXN, ARS, and the USD? The BRL is undervalued or overvalued relative to the MXN, ARS, and the USD?
b) What are the real exchange rates BRL/MXN, BRL/ARS and USD/BRL?
Exercise 15: IRP
The 3-month interest rate in the United States is 8% per annum; in Japan the comparable 3 month interest rate is 2% per annum. The spot rate is 1¥ = $0.007692. If interest rate parity holds, what is the 3-month forward rate ¥/$?
Exercise 16: IRP
If the Swiss franc is $0.68 on the spot market and the 6-month forward rate is $0.70, what is the annualized interest rate in the United States over the next six months? The annualized interest rate in Switzerland over 6 months is 2%.
Exercise 17: IRP
Assume that the annualized interest rate for the Mexican peso over six months is 6%, while the annualized interest rate for US dollar over six months is 5%
According to IRP, what should be the six-month forward premium or discount of the peso with respect to the US dollar?
Exercise 18: forward contract
A US importer purchased computers from NEC, a Japanese electronics company, and was billed 250,000¥ payable in three months. Currently, the spot exchange rate is 1$ = ¥105. The three-month money market interest rate is 8 percent per annum in the U.S. and 7 percent per annum in Japan. The importer decided to use the forward market hedge to deal with this yen account payable.
a) Explain the 3 operations of a forward market hedge and calculate the 3-month forward rate $/¥.
Exercise 19: forward contract
(Take always the customer’s point of view, unless specified otherwise)
Calculate a three-month bid and ask forward quotation €/$ from the following data:
Spot rate €/$: 1.1260-1.1285
Three-month interest rate in US: 2.8500%-2.9600%
Three-month interest rate in France: 2.9000%-2.9010%
Exercise 20: NDF
ABC is an Australian based company importing goods from China. The company is required to pay 1 million CNY in one month. ABC recognizes the importance of currency risk management and so would like to hedge their exposure with a non-deliverable forward. The contract specifications provided by the bank are as follows:
• Currency pair: AUD/CNY
• Notional amount: 1 million CNY
• NDF rate: AUD/CNY = 5.0100
• Settlement date: t = one month
• Fixing date: t = one month – 2 days
Professor: Dr. Taoufik BOURAOUI
Determine for each of the below cases the transactions that should be conducted at the maturity date. For the cash settlement between the two parties, specify whether it is paid or received by ABC.
- Case 1: on the fixing date, the AUD depreciates against CNY and falls to 4.9000
- Case 2: on the fixing date, the AUD appreciates against CNY and reaches 5.1000
Exercise 21: futures contract
On September 11, a US firm expects to receive from a customer in Switzerland 625,000 CHF. The current spot exchange rate is 1CHF = 1.0536 $. The delivery will occur in December 10. The Swiss franc futures price for December delivery is 1CHF = 1.0636 $. The size of the CME futures contract is 125,000 CHF.
a) What movement of exchange rate CHF/$ does this firm fear?
b) Should this US firm buy or sell futures contract in order to hedge exchange risk?
c) How many futures contracts should it buy or sell?
d) What is the US firm’s profit or loss on December 10 if the spot rate on that date is 1CHF = 1.0500 $
e) Deduct the effective amount paid/received by this US firm on December 10 to honor its contract. What do you conclude?
Exercise 22: futures contract
On January 10, Volkswagen agrees to import auto parts worth $7 million from the United States. The parts will be delivered on March 4 and are payable immediately in dollars. Volkswagen decides to hedge its dollar position by entering into futures contracts. The spot rate is 1€ =$0.8947 and the March futures price is 1€= $0.9002.
The standardized amount of the euro futures contract is 125,000€.
a. To hedge its currency risk, Volkswagen will buy or sell euro futures contracts?
b. Calculate the number of euro futures contracts.
Exercise 23: currency swap
An European firm borrows 1,000,000 US$ at 2.8% for 1 year. It needs to hedge the exchange risk by contracting a currency swap with its bank.
a) What does this firm fear?
The bank offers to this firm a currency swap contract with the following conditions:
Interest rate on dollar: 2.8%
Interest rate on euro: 4.9%
The spot rate is : €/$: 1,2000 – 1,2060
The euro is at 1-year forward discount of 0,015 (1,5%)
b) Calculate the 1-year forward rate
c) Determine the cash flows exchanged between the firm and the bank.
Exercise 24: Call option
Mr. Surato purchased a Call option on British pounds for 0.02$ per unit. The strike price was 1.45$ and the spot rate at the time the option was exercised was 1.46$.
Assume there are 31,250 units in a British pound option. What was Surato’s net profit or loss on this option?
Exercise 25: Put option
Mr. Duever purchased a Put option on British pounds for 0.04$ per unit. The strike price was 1.80$ and the spot rate at the time the pound option was exercised was 1.59$.
Assume there are 31,250 units in a British pound option. What was Duever’s net profit or loss on the option?
Exercise 26: Call & Put options
The current spot rate Singapore dollar / US dollar (S$/US$) is : 1 S$ = 0.6000 US$
A trader expects that the Singapore dollar will appreciate versus the US dollar in the coming 90 days, probably to about 1 S$ = 0.7000 US$
He has the following options on the Singapore dollar:
a) Should the trader buy a put on Singapore dollars or a call on Singapore dollars ? why ?
b) What is the break-even price?
c) What is the gross profit/loss and the net profit/loss (including premium) if the spot rate at the end of the 90 days is 1 S$ = 0.7000 US$?
d) What is the gross profit/loss and the net profit/loss (including premium) if the spot rate at the end of the 90 days is 1 S$ = 0.6400 US$?