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# Exchange Rates

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1. The \$/? exchange rate is ?1 = \$0.95, and the ?/SFr exchange rate is SFr 1 = ?0.71. What is the SFr/\$ exchange rate?

2. Suppose the direct quote for sterling in New York is 1.1110 -5.
a. How much would £500,000 cost in New York?
b. What is the direct quote for dollars in London?

3. Suppose the euro is quoted at 0.6064- 80 in London and the pound sterling is quoted at 1.6244- 59 in Frankfurt.
a. Is there a profitable arbitrage situation? Describe it.

4. As a foreign exchange trader at Sumitomo Bank, one of your customers would like spot and thirty-day forward yen quotes on Australian dollars. Current market rates are
Spot 30-day
¥101.37-85/U.S.\$1 15-13
A\$1.2924-44/U.S.\$1 20-26

a. What bid and ask yen cross rates would you quote on spot Australian dollars?
b. What outright yen cross rates would you quote on thirty-day forward Australian dollars?
c. What is the forward premium or discount on buying thirty-day Australian dollars against yen delivery?

4. In 1995, one dollar bought ¥80. In 2000, it bought about ¥110.
a. What was the dollar value of the yen in 1995? What was the yen's dollar value in 2000?
b. By what percent has the yen fallen in value between 1995 and 2000?
c. By what percent has the dollar risen in value between 1995 and 2000?

#### Solution Preview

1. The \$/? exchange rate is ?1 = \$0.95, and the ?/SFr exchange rate is SFr 1 = ?0.71. What is the SFr/\$ exchange rate?
\$/? x ?/SFr = \$ / SFr
0.95 x 0.71 = \$ 0.6745 / SFr
Or SFr/\$ = 1/ 0.6745 = SFr 1.4826 /\$

2. Suppose the direct quote for sterling in New York is 1.1110 -5.
a. How much would £500,000 cost in New York?
Bid = 1 £ = \$ 1.1110
Ask = 1 £ = \$ 1.1115
Thus you can sell 1 £ for \$ 1.1110 and buy 1 £ for \$ 1.1115
Thus, £500,000 would cost 500,000 x \$ 1.1115 = \$ 555,750

b. What is the direct quote for dollars in London?
Bid rate = 1/1.1115 = £ 0.8997 / \$
Ask rate = 1/1.1110 = £ 0.9001 / \$
Direct quote for dollars in London is 0.8997 0.9001
3. Suppose the euro is quoted at 0.6064- 80 in London and the pound sterling is quoted at 1.6244- 59 in Frankfurt.
a. Is there a profitable arbitrage situation? Describe it.

At London: Sterling / Euro rate = 0.6064-0.6080
At Frankfurt: Sterling / Euro rate = 1/1.6259 - 1/ 1.6244 = 0.6150 - 0.6156
Thus one can buy 1 euro for 0.6080 pound in London and sell it for 0.6150 pounds in Frankfurt , thereby making an arbitrage profit of 0.6150 - 0.6080 = 0.007 pound per euro.
(This gives a ...