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    Currency derivatives and hedge in the foreign exchange market

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    Use currency derivatives to speculate or hedge in the foreign exchange market to solve the following problems:

    Problem 1:
    An investor wishes to buy euros spot (at $0.9080) and sell euros forward for 180 days (at $0.9146).
    a. What is the swap rate on euros?
    b. What is the forward premium or discount on 180-day euros?

    Problem 2:
    Suppose the euro is quoted at 0.7064-80 in London and the pound sterling is quoted at 1.6244-59 in Frankfurt.
    a. Is there a profitable arbitrage situation? Describe it.
    b. Compute the percentage bid-ask spreads on the pound and euro.

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    Solution Summary

    This solution give step by step equations for questions involving currency derivatives and hedge in the foreign exchange market.