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International Finance - MG760-144 Week 4 - Chapter 5 Nazifa Antara Prome Homework Assignment Monroe College King Graduate School

The document discusses two questions regarding international finance concepts. [1] Provides a cross-rate matrix calculating exchange rates between the Japanese Yen, Euro, British Pound, and Swiss Franc based on given spot rates. [2] Defines a currency trading at a discount or premium in the forward market, explaining that a forward premium occurs when the future forward rate is higher than the current spot rate due to expected currency appreciation. It provides an example calculating the 180-day forward premium between the US Dollar and Euro.

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226 views5 pages

International Finance - MG760-144 Week 4 - Chapter 5 Nazifa Antara Prome Homework Assignment Monroe College King Graduate School

The document discusses two questions regarding international finance concepts. [1] Provides a cross-rate matrix calculating exchange rates between the Japanese Yen, Euro, British Pound, and Swiss Franc based on given spot rates. [2] Defines a currency trading at a discount or premium in the forward market, explaining that a forward premium occurs when the future forward rate is higher than the current spot rate due to expected currency appreciation. It provides an example calculating the 180-day forward premium between the US Dollar and Euro.

Uploaded by

Kiran
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Running head: WEEK 4-CHAPTER 5 1

International Finance MG760-144


Week 4 Chapter 5

Nazifa Antara Prome


Homework Assignment

Monroe College King Graduate School


WEEK 4- CHAPTER 5 2

International Finance MG760-144


Week 4 Chapter 5
Homework Assignment

Using the American term quotes from Exhibit 5.4, calculate a cross-rate matrix for the euro,
Swiss franc, Japanese yen, and the British pound so that the resulting triangular matrix is similar
to the portion above the diagonal in Exhibit 5.6, on page 132 - 133.

1. A CD/$ bank trader is currently quoting a small figure bid-ask of 35-40, when the rest of
the market is trading at CD1.3436-CD1.3441. What is implied about the traders beliefs
by his prices? Provide a clear calculation.

The trader assumed that the Canadian dollar value to be appreciate to the US dollar. The
trader was determining to increase the inventory of Canadian Dollars by discouraging
purchases of US dollars and was willing to Buy $ at only CD 1.3435/$1.00 and offering
to sell from the stock at the lower market price of CDI 1.3440/ $1.00
WEEK 4- CHAPTER 5 3

Question 1: you need to create table of cross rate matrix for the euro, Swiss franc, Japanese Yen,
and the British Pound

Currency Japanese yen Euro UK pound Swiss Franc

Japanese Yen - 112.75 135.0193 79.804

Euro 0.00887 - 1.1947 0.7077

UK pound 0.007406 0.8351 - 0.59106

Swiss Franc 0.0125 1.4128 1.6918 -

Cross exchange rate calculation: Please follow the calculation below to find the cross rate matrix

S (JPY/EUR) = S (USD/ EUR)/ S (USD/JPY)

= 1.2238/0.010854

= 112.75

S (JPY/GBP) = S (USD/GBP)/ S (USD/JPY)


= 1.4655/0.010854
= 135.0193

S (JPY/CHF) = S (USD/CHF)/ S (USD/JPY)


= 0.8662/0.010854
= 79.804S

(EUR/JPY) = S (USD/EUR)/ S (USD/JPY)


= 0.010854/1.2238
= 0.00887S

(EUR/GBP)= S (USD/GBP)/ S (USD/EUR)


= 1.4655/ 1.2238
WEEK 4- CHAPTER 5 4

= 1.1974S

(EUR/CHF) = S (USD/CHF)/ S (USD/EUR)


= 0.8662/ 1.2238
= 0.7077S

(GBP/ JPY) = S (USD/JPY)/ S (USD/GBP)


= 0.010854/ 1.4655
= 0.007406

2. What is meant by a currency trading at a discount or at a premium in the forward market?


Provide supportive information.

The forward market for FX includes the agreements to buy and sell foreign currencies in the
future based on the todays agreement. The interest rate differential implicit by forward premium
or discount. A forward premium occurs when dealing with foreign exchange. A forward
premium is often calculated as the difference between the spot rate and the forward rate but any
expected future exchange rate suffices. For example,

S = Current spot exchange rate.


F = Current Forward exchange rate
$ = Stands for USD interest rate
= Stands for GBP interest rate
WEEK 4- CHAPTER 5 5

For example, suppose the is appreciating from S($/) = 1.55 to F180($/) = 1.60.
The 180-day forward premium is given by:

f 180, v$ = f180 ($/) S( $/)


S( $/)

= 1.60 1.55 X 2
1.55

= 6.45%

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