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Exercise Qns For Forex (Solution)

The document contains 5 questions regarding foreign exchange rates and interest rate parity. It provides the spot and forward exchange rates for various currency pairs on different dates. It then uses these rates to calculate the forward rates based on interest rate parity, as well as the profits or losses from investments and hedging transactions involving currency exchanges and loans over time periods of 1-6 months. The solutions show the calculations step-by-step and determine whether currencies appreciate or depreciate based on the interest rates and forward rates.

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237 views

Exercise Qns For Forex (Solution)

The document contains 5 questions regarding foreign exchange rates and interest rate parity. It provides the spot and forward exchange rates for various currency pairs on different dates. It then uses these rates to calculate the forward rates based on interest rate parity, as well as the profits or losses from investments and hedging transactions involving currency exchanges and loans over time periods of 1-6 months. The solutions show the calculations step-by-step and determine whether currencies appreciate or depreciate based on the interest rates and forward rates.

Uploaded by

hoholalahoop
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Forex

Exercise Questions for Forex

Question 1 If interest rates in US and Singapore are 8% p.a. and 12% p.a. respectively, what is the 1 year forward exchange rate assuming interest rate parity holds and spot exchange rate: S$1.6372/US$1. A) S$1.5787/US$1, US$ appreciates B) S$1.6978/US$1, S$ depreciates C) S$1.5787/US$1, S$ appreciates D) S$1.6978/US$1, US$ depreciates E) None of the above Solution: B (1 + 12%) = (1/1.6372) (1 + 8%) x F F = S$1.6978/US$1 S$ depreciates, US$ appreciates

Question 2 Table: Exchange Rates on Dec 26, 2007 Bid Ask EURUSD - spot 1.0980 1.0990 1 month forward 1.1090 1.1111 2 months forward 1.0808 1.1090 USDJPY - spot 122.10 122.25 1 month forward 123.10 124.90 2 months forward 123.20 124.00 GBPUSD - spot 1.6723 1.6733 1 month forward 1.6890 1.7090 2 months forward 1.6756 1.6878 USDSGD - spot 1.3960 1.3970 1 month forward 1.3615 1.3645 2 months forward 1.3530 1.3540

On Dec 26, 2007, Bank ABC invested in US$ loans equivalent of GBP850,000 at the spot rate. The US loans yield 9% p.a.. At the same time, it purchased a 2 month forward contract to hedge the value of its US$ assets. How much will it profit in GBP in 2 months time?

Forex

Solution: Step 1 Today, at spot bid rate of GBP/USD 1.6723, Bank A sells GBP850,000 to buy US$ to invest in US$ loans. Amount of US$ received = Amount of US$ loans = GBP850,000 x GBP1.6723/US$1 = US$1,421,455 Step 2 2 months later, US$ loans earn interest of 1.5% (= 9% x 2/12) P+I = US$1,421,455 x (1.015) = US$1,442,777 Step 3 Bank A converts US$ earnings back to GBP (Sell US$, buy GBP) at ask price (2 months forward USD1.6878/GBP1 = Bank A receives = US$1,442,777 / 1.6878 = GBP 854,827 Step 4 Profit = 854,827 850,000 = GBP 4,827

Question 3 A US firm plans to buy SGD today for purchase of S$150 mil worth of Singapore bonds from a Singapore firm in 6 months time. Payment to be made in SGD. Spot exchange rate: US$0.651/S$1. Interest rates on half year and 1 year time deposits are 5.25% and 5.50% in US and 3.25 % and 3.55% in Singapore respectively. What are the US firms gains/losses if the bond purchase deal is not executed in 6 months time? (Assume interest rate parity theory h olds). Solution: Payment in US$ to buy S$150mil now = 150 mil x 0.651 = US$97,650,000 Using interest rate parity theory: (1 + 5.25%) = (1 / 0.651) x (1 + 3.25%) x F F = US$0.6636/S$1 SGD appreciates. In 6 months time, selling S$150 mil = S$150 mil x 0.6636 = US$99,540,000 Gain for firm = US$99,540,000 - US$97,650,000 = US$1,890,000

Forex

Question 4 If interest rates in Singapore and US are 10% pa and 8% pa respectively, calculate the 1 year forward exchange rate if spot exchange rate: S$1.6351/US$1. (Assume interest rate parity holds) (A) S$1.6654/US$1, US$ appreciates (B) S$1.6054/US$1, US$ appreciates (C) S$1.6654/US$1, US$ depreciates (D) S$1.6054/US$1, US$ depreciates (E) None of the above Solution: A (1 + 10%) = (1/1.6351) (1 + 8%) x F F = S$1.6654/US$1 S$ depreciates, US$ appreciates

Question 5

Table: Exchange Rates on Feb 16, 2007 Bid EURUSD - spot 1.0980 1 month forward 1.1090 2 months forward 1.0808 USDJPY - spot 122.10 1 month forward 123.10 2 months forward 123.20 GBPUSD - spot 1.6723 1 month forward 1.6890 2 months forward 1.6756 USDSGD - spot 1.3960 1 month forward 1.3615 2 months forward 1.3530

Ask 1.0990 1.1111 1.1090 122.25 124.90 124.00 1.6733 1.7090 1.6878 1.3970 1.3645 1.3540

On Feb 16, 2007, Bank A invested in US$ loans equivalent of EUR850,000 at the spot rate. The US$ loans yield 6% p.a.. At the same time, it purchased a 2 month forward contract to hedge the value of its US$ assets. How much will it receive in home currency in 2 months time? Solution: Step 1 Today, at spot bid rate of EUR/USD1.0980, Bank A sells EUR850,000 to buy US$ to invest in US$ loans. Amount of US$ received = Amount of US$ loans = EUR850,000 x US$1.0980/EUR1 = US$933,300 Step 2 2 months later, US$ loans earn interest of 1% (= 6% x 2/12) P+I = US$933,300 x (1.01) = US$942,633

Forex

Step 3 Bank A converts US$ earnings back to EUR (Sell US$, buy EUR) at ask price (2 months forward) US$1.1090/EUR = Bank A receives = US$942,633 / US$1.1090 = EUR 849,985

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