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Session6_IF_FX_markets

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					                            INTERNATIONAL FINANCE
                                      (Practical session)

                                6. Foreign exchange markets

A – SELF-ASSESSMENT QUESTIONS

1. Which are the three most important global FX trading centers (order them according to the
   volume of trades)?

2. Which are the three most important currencies, traded on the FX market?

3. Who are the participants on the FX market and which of them is the most important?

4. Explain the following currency quotates:
      a. Direct quote
      b. Indirect quote
      c. American quote
      d. European quote

5. Explain the terms currency pair, base currency and quote (terms) currency by using a
   concrete example!

6. What is a pip in currency trading and how does it differ from bps? Show on a concrete
   example!

7. How are spot rates quoted in the FX market?
     a. Point quotation
     b. Outright quotation

8. How are forward rates quoted on the FX market?
     a. Point quotation
     b. Outright quotation

9. What are bid and ask (offer) quotes? What is the spread (margin) and how can it be
   expressed?

10. How are changes in spot rates over time measured (apreciation/depreciation)?
      a. Direct formula
      b. Indirect formula

11. How are differences in forward vs. spot rates measured (forward premium/discount)?
      a. Direct formula
      b. Indirect formula

12. What is a cross rate?

13. What is currency arbitrage and, specifically triangular currency arbitrage?

B - EXERCISES


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14. US dollar sells for 0,82 EUR in Amsterdam. In New York it is possible to buy one Euro
    for the price of 1,25 USD.
        a. Is currency arbitrage possible?
        b. Calculate the potential profit margin based on these quotes!

15. In December 1994 the mexican authorities officially changed the value of the peso from
    Ps 3,2/$ to 5,5 Ps/$. Was this a depreciation, devaluation, apreciation or revaluation of the
    peso?

16. Average value of the euro, expressed in terms of US dollars, was 1,25 USD/EUR in 2005
    and 1,38 USD/EUR in 2006.
       a. By what percentage did the euro appreciate against the dollar?
       b. By what percentage did the dollar appreciate against the euro?

17. 8. Use the exchange rate data below to calculate the cross rate JPY/EUR!

                                     USD/EUR 1,3750
                                     USD/JPY 0,0052


18. Answer the following questions based on american quotation of the euro and the swiss
    franc on the spot and futures markets in the table below.

        Currency           Spot          Forward (1m)        Forward (3m)        Forward (6m)
        EUR             1,3372-95           25-35               40-60               75-110
        CHF             1,4336-84           45-38               55-44                65-48

       a. Write down the outright bid and ask quotes (CELOVITE kotacije) for the spot rate
          and the 1-, 3- and 6- month forward rates.
       b. Calculate the mid-point quotes of the Euro and Franc in terms of the US dollar.
       c. Calculate the bid-ask spreads (margins) for the spot rate and all three forward rates
          (as percentage in point (pips) and as percentage). What do you notice?
       d. Exactly how much swiss franc does it take to buy 1 million euros on the spot
          market?
       e. Exactly hom much swiss franc do you receive by selling 1 milion euros in the spot
          market?
       f. Calculate the bid and ask quotes for the direct quotation of the euro in Switzerland
          for spot and 1-, 3- and 6- month forward rates with the help of cross rates.
       g. Write down the indirect bid and ask quotes of the euro in Switzerland for spot and
          1-, 3- and 6- month forward rates with the help of cross rates.

19. You ask the FX trader about the spot and 1-month forward quotes of the british pound
    (GBP) in terms of brazilian real (BRL). In reply, you receive the following quotes:
    4,2423-35; 10-30.
       a. What is the annualized forward premium or discount of the british pound (GBP)
           against the brazilian real in the 1-month forward market based on the mid-point
           quote?




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       b. What is the annualized forward premium or discount of the brazilian real (BRL)
          against the british pound in the 1-month forward market based on the mid-point
          quote?

20. Just before the worsening of the global financial crisis (12.9.2008) the price of the euro
    (EUR) was 127,34 in terms of icelandic kronas (ISK). At the end of october (31.10.) the
    price of the EUR on the FX market jumped to 191,99 ISK.
        a. By what percentage did ISK appreciate/depreciate against the EUR in the period
            from 12.9. to 31.10.?
        b. By what percentage did EUR appreciate/depreciate against the ISK in the period
            from 12.9. to 31.10.?
        c. Did the change in exchange rate lead to an increase or decrease of the purchasing
            power of the ISK? What effect would this have on the standard of living of
            Icelanders?

21. The spot rate was 1.3545 USD/EUR at the beginning of 2005.
       a. What was the spot rate at the end of 2005 if you know that the euro appreciated by
           10 percent during the year. Calculate the result with four decimal places precision!
       b. What would have been the spot rate at the end of 2005 if you know instead that the
           dollar depreciated by 5%? Calculate the result with four decimal places precision!

22. You have the information about the following exchange rates: 1,3550 USD/EUR in New
    York, 93,250 JPY/USD in Tokio and 124,95 JPY/EUR in Frankfurt. What is the amount
    of riskless profit, expressed in EUR, that can be realized by triangular currency arbitrage,
    if you have 1.000.000 EUR available?

23. What is the spot rate of EUR/GBP if the 3-month forward rate is 1,4545 EUR/GBP, and at
    the same time, you know that:
        a. EUR is selling at a 10% annualized 3-month forward premium against the GBP in
           the 3-month forward market.
        b. GBP is selling at a 10% annualized 3-month forward premium against the EUR in
           the 3-month forward market.
        c. Calculate what would have to be the percentage annualized 3-month discount of
           the GBP under the question b. in order to get the same answer under questions a.
           and b.?

24. Direct spot rate of the EUR in Croatia is 7,1225 HRK (bid quote). The spread, expressed
    in relative terms is 0,15%.

How much EUR does a slovenian importing company have to pay and on which day, if it
buys 500.000 HRK from its bank on Monday?




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