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Illustrative Examples on Exchange Rates

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1. Assume the British pound is worth $1.5658 and the Brazilian real is worth $0.3852. What is the cross rate of the British pound with respect to the Brazilian real? That is, how many Brazilian reals equal a British pound? If you have 5,000 British pounds that you want to exchange for Brazilian reals, how many Brazilian reals will you get?

2. Today, the stock price of the Swiss Watch Company (based in Switzerland) is priced at CHF40.72 per share. The spot rate of the pound is $1.0274 per CHF (Swiss franc). During the next year, you expect that the stock price of Swiss Watch Company will go up by 1.20%. You also expect that the Swiss francs will depreciate against the dollar by 3.98% during the next year. You own American depository receipts (ADRs) that represent Swiss Watch Company stock. Each share that you own represents one share of the stock traded on the Swiss stock exchange. What is the estimated value of the ADR per share in one year?

3. XYZ Bank expects that the Mexican peso (MXN) will depreciate against the dollar from its spot rate of $0.0740 to $0.0695 in 60 days. The following annual lending and borrowing rates exist:

Currency Lending Rate Borrowing Rate
US Dollars 2.08% 2.11%
Mexican peso (MXN) 5.60% 5.65%

XYZ Bank has the capacity to borrow either MXN 620,000 or $45,880. If the bank's forecast is correct, what will its dollar profit be from speculation over the 60-day period? NOTE: Follow the convention of assuming 360 days in a year for the purpose of converting annual interest rates to 60-day rates. To get full credit for this problem, you must describe each of the steps the bank should take and not just show calculations without explanation as to what those calculations represent. You must also show the speculation profit in US dollars, rounded to the nearest cent.

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Solution Summary

This solution shows step-by-step calculations to determine currency exchange computations.

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1. British Pound =$1.5658
Brazilian Real =$0.3852

Cross Rate of British Pound with Respect to the Brazilian Real=Exchange Rate of GBP / Exchange Rate of Brazilian Real

1 GBP = 4.0649013 Brazilian Reals
Therefore, 5000 British Pounds could be exchanged for = 20324.51 Brazilian Reals

2. Current Share Price of Swiss Watch Company = 40.72 CHF
Spot Rate of Swiss ...

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