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# Foreign Exchange Market

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1. The foreign exchange quotations shown below are for the Swiss franc (SF) and the U.S. dollar (\$).

U.S. Dollar Equivalent Currency per U.S. Dollar
Wednesday Tuesday Wednesday Tuesday

Spot 0.6506 0.6508 0.6536 0.6539 1.5365 1.5370 1.5293 1.5300
30 day 0.6496 0.6500 0.6523 0.6529 1.5385 1.5400 1.5315 1.5330
90 day 0.6470 0.6481 0.6499 0.6515 1.5430 1.5457 1.5350 1.5386

Answer the following questions based on the exchange rates shown in the table above.

a. What is the percentage appreciation/depreciation of the SF using indirect ask quotes for the SF?
b. What is the percentage premium/discount on the SF using indirect bid quotes for the dollar? Using a 30-day forward rate?
c. A customer wishes to buy the SF on Wednesday. What is the exchange rate for this transaction using indirect quotes for the SF?
d. Show the point quotes on Wednesday using indirect quotes for the dollar. Without doing any calculation, can you identify the currency on premium? Also, give a rationale for your answer.

2. Assume that a bank's bid rate on Japanese yen is \$.0041 and its ask rate is \$.0043. What is the bid ask percentage spread?

3. A Japanese yen is worth \$.0080, and a Fijian dollar (F\$) is worth \$.5900. What is the value of the yen in Fijian dollars (i.e., how many Fijian dollars do you need to buy a yen)?

4. The fictional Baylor Bank believes the New Zealand dollar (NZ\$) will appreciate over the next five days from \$.48 to \$.50. The following annual interest rates apply:

Currency Lending Rate Borrowing Rate
U.S. Dollars (US\$) 7.10% 7.50%
New Zealand dollar (NZ\$) 6.80% 7.25%

Baylor Bank has the capacity to borrow either NZ \$10 million or US \$5 million. If Baylor Bank's forecast is correct, what will its dollar profit be from speculation over the five day period (assuming that it does not use any of its existing consumer deposits to capitalize on its expectations)?

5. Suppose a Swiss bank quotes spot and 90-day forward rates on Swiss franc as \$0.7957-60,8-13.

a. What are the outright 90-day forward rates?
b. What is the forward discount or premium associated with the Swiss franc?
c. Compute the percentage bid-ask spreads on spot and forward Swiss francs.

#### Solution Preview

FOREIGN EXCHANGE MARKET

1. The foreign exchange quotations shown below are for the Swiss franc (SF) and the U.S. dollar (\$).

U.S. Dollar Equivalent Currency per U.S. Dollar
Wednesday Tuesday Wednesday Tuesday

Spot 0.6506 0.6508 0.6536 0.6539 1.5365 1.537 1.5293 1.53
30 day 0.6496 0.65 0.6523 0.6529 1.5385 1.54 1.5315 1.533
90 day 0.647 0.6481 0.6499 0.6515 1.543 1.5457 1.535 1.5386

Answer the following questions based on the exchange rates shown in the table above.

a. What is the percentage appreciation/depreciation of the SF using indirect ask quotes for the SF?

Indirect ask quotes for SF has SF in the numerator (Currency per US dollar)

Wednesday Tuesday

1.5365 1.537 1.5293 1.53

Swiss Franc is depreciating as you have to spend SF 1.537 on Wednesday to buy 1\$ on Tuesday whereas you require only SF
Thus you require more SF on Wednesday than on Tuesday to buy \$1

Depreciation= 0.4575% =( 1.537-1.53)/1.53

Answer: Depreciation of the SF= 0.4575%

b. What is the percentage premium/discount on the SF using indirect bid quotes for the dollar? Using a 30-day forward rate?

Indirect quotes for the dollar has dollar in the numerator (U.S. Dollar Equivalent)

U.S. Dollar Equivalent
Wednesday Tuesday

Spot 0.6506 0.6508 0.6536 0.6539
30 day 0.6496 0.65 0.6523 0.6529

Dollar is at a premium because the bank buys 1 SF for \$0.6506 now
but after 30 days buys 1 SF for only \$0.6496
i.e. lesser dollars for 1 SF 30 days from now