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Chap05 Tutorial Questions

The document contains a chapter of tutorial questions on foreign exchange including: 1. How a bank can eliminate currency exposure from accommodating a client's FX forward transaction. 2. The definition of triangular arbitrage and the conditions that allow for opportunities. 3. Calculating an AUD/CHF cross-rate given USD quotes. 4. Additional multiple choice questions test knowledge of FX markets, spot and forward rates, arbitrage opportunities.

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Le Hong Phuc (K17 HCM)
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119 views5 pages

Chap05 Tutorial Questions

The document contains a chapter of tutorial questions on foreign exchange including: 1. How a bank can eliminate currency exposure from accommodating a client's FX forward transaction. 2. The definition of triangular arbitrage and the conditions that allow for opportunities. 3. Calculating an AUD/CHF cross-rate given USD quotes. 4. Additional multiple choice questions test knowledge of FX markets, spot and forward rates, arbitrage opportunities.

Uploaded by

Le Hong Phuc (K17 HCM)
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 PDF, TXT or read online on Scribd
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IBF301 | Que Anh Nguyen

Chapter 5_Tutorial Questions


A. Eun Chap 5
1. Banks find it necessary to accommodate their clients’ needs to buy or sell FX forward, in many
instances for hedging purposes. How can the bank eliminate the currency exposure it has
created for itself by accommodating a client’s forward transaction?
2. What is triangular arbitrage? What is a condition that will give rise to a triangular arbitrage
opportunity?
3. A bank is quoting the following exchange rates against the dollar for the Swiss franc and the
Australian dollar:
SFr/$ = 1.5960--70
A$/$ = 1.7225—35
An Australian firm asks the bank for a SFr/A$ quote. What cross-rate would the bank quote?
4. Doug Bernard specializes in cross-rate arbitrage. (pg. 249)
5. Deutsche Bank case study pg. 249
6. Omni Advisors case study pg. 250

B. Additional MCQs
1. The foreign exchange market closes
A) never. B) 4:00 p.m. GMT (London time).
C) EST (New York time). D) (Tokyo time).
2. At the wholesale level,
A) most trading flows over Reuters and EBS platforms.
B) most trading takes place OTC between individuals on the floor of the exchange.
C) most trading flows through specialized "broking" firms.
D) most trading takes place over the phone.
3. Intervention in the foreign exchange market is the process of
A) the government of a country prohibiting transactions in one or more currencies.
B) a central bank buying or selling its currency in order to influence its value.
C) commercial banks in different countries coordinating efforts in order to stabilize
one or more currencies.
D) a central bank requiring the commercial banks of that country to trade at a set price
level.
4. Consider a U.S. importer desiring to purchase merchandise from a Dutch exporter invoiced in
euros, at a cost of €512,100. The U.S. importer will contact his U.S. bank (where of course he has
an account denominated in U.S. dollars) and inquire about the exchange rate, which the bank
IBF301 | Que Anh Nguyen

quotes as €1.0242/$1.00. The importer accepts this price, so his bank will ________ the importer's
account in the amount of ________.
A) debit; €512,100 B) credit; $500,000
C) debit $500,000 D) debit $524,492
5. The current exchange rate is €1.00 = $1.50. Compute the correct balances in Bank A's
correspondent account(s) with Bank B if a currency trader employed at Bank A buys €100,000
from a currency trader at Bank B for $150,000 using its correspondent relationship with Bank B.
A) Bank A's pound-denominated account at B will fall by €100,000.
B) Bank B's pound-denominated account at A will rise by €100,000.
C) Bank B’s dollar-denominated account at A will fall by $150,000.
D) Bank A's dollar-denominated account at B will fall by $150,000.
6. Using the table shown, what is the most current spot exchange rate shown for British pounds?
Use a direct quote from a U.S. perspective.

A) $1.72 = £1.00 B) $1.60 = £1.00


C) $1.00 = £0.625 D) $1.61 = £1.00
7. Suppose the spot ask exchange rate, Sa($/£), is $1.90 = £1.00 and the spot bid exchange rate,
Sb($/£), is $1.89 = £1.00. If you were to buy $10,000,000 worth of British pounds and then sell
them five minutes later, how much of your $10,000,000 would be "eaten" by the bid-ask spread?
A) $52,632 B) $100,000 C) $1,000,000 D) $52,910
8. In conversation, interbank foreign exchange traders use a shorthand abbreviation in expressing
spot currency quotations. Consider a $/£ bid-ask quote of $1.2519-$1.2523. The currency dealer
would likely quote that as ________.
A) 4 points B) 19-23
C) 23-19 D) none of the options
9. A dealer in British pounds who thinks that the pound is about to depreciate
A) may want to widen his bid-ask spread by raising his ask price and lowering his bid.
B) may want to lower his ask price while raising his bid.
IBF301 | Que Anh Nguyen

C) may want to lower both his bid price and his ask price.
D) none of the options
10. Suppose you observe the following exchange rates: €1 = $1.60; £1 = $2.00. Calculate the
euro-pound exchange rate.
A) £1.3333 = €1.00 B) €3.00 = £1
C) 1.25 = £1.00 D) 1.3333 = £1.00
11. What is the ASK cross-exchange rate for Swiss Francs priced in euro? Hint: Find the price that
a currency dealer will take in euro to sell Swiss francs.

A) €0.5466/CHF B) €0.5389/CHF
C) €0.5386/CHF D) €0.5463/CHF
12. Suppose a bank customer with €1,000,000 wishes to trade out of euro and into Japanese yen.
The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-yen exchange rate is
quoted at $1.00 = ¥120. How many yen will the customer get?
A) ¥5,208,333 B) ¥75,000,000 C) ¥5,208.33 D) ¥192,000,000
13. Using the table above, what is the bid price of euro in terms of pounds?

A) €1.3378/£ B) £0.7479/€ C) £0.7475/€ D) €1.3371/£


14. You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro exchange rate is
quoted as $1.60 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00. If a bank
quotes you a cross rate of £1.00 = €1.20 how can you make money?
A) Buy £ $2/£, buy € at €1.20/£, sell € at $1.60/€
B) Buy euro at $1.60/€, buy £ at €1.20/£, sell £ at $2/£
C) No arbitrage is possible
D) none of the options
15. The $/CD spot bid-ask rates are $0.7560–$0.7625. The 3-month forward points are 12 –16.
Determine the $/CD 3-month forward bid-ask rates.
IBF301 | Que Anh Nguyen

A) $0.7572–$0.7641
B) 12–$0.7616
C) 48–$0.7609
D) Cannot be determined with the information given.
16. The current spot exchange rate is $1.55/€ and the three-month forward rate is $1.50/€. Based
on your analysis of the exchange rate, you are confident that the spot exchange rate will be
$1.52/€ in three months. Assume that you would like to buy or sell €1,000,000. What actions do
you need to take to speculate in the forward market?
A) Sell euro today at the spot rate, buy them forward.
B) Take a long position in a forward contract on €1,000,000 at $1.50/€.
C) short position in a forward contract on €1,000,000 at $1.50/€.
D) Buy euro today at the spot rate, sell them forward.
17. The current spot exchange rate is $1.50/€ and the three-month forward rate is $1.55/€. Based
on your analysis of the exchange rate, you are confident that the spot exchange rate will be
$1.62/€ in three months. Assume that you would like to buy or sell €1,000,000. What actions do
you need to take to speculate in the forward market? What is the expected dollar profit from
speculation?
A) Wait three months, if your forecast is correct buy €1,000,000 at $1.62/€.
B) Sell €1,000,000 forward for $1.50/€.
C) Buy €1,000,000 today at $1.50/€; wait three months, if your forecast is correct sell
€1,000,000 at $1.62/€.
D) Buy €1,000,000 forward for $1.55/€.
18. The €/$ spot exchange rate is $1.50/€ and the 120 day forward exchange rate is 1.45/€. The
forward premium (discount) is
A) the dollar trading at an 8% premium to the euro for delivery in 120 days.
B) the dollar trading at a 10% discount to the euro for delivery in 120 days.
C) the dollar trading at a 5% discount to the euro for delivery in 120 days.
D) the dollar trading at a 5% premium to the Swiss franc for delivery in 120 days.
19. Bank dealers in conversations among themselves use a shorthand notation to quote bid and
ask forward prices in terms of forward points. Complete the following table:
IBF301 | Que Anh Nguyen

A) 1.9042–1.9049 B) 1.9040–1.9047
C) 1.9032–1.9030 D) none of the options

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