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Exercise - Cross Rate

Omni Advisors plans to sell Swiss Franc equities and purchase equivalent South African Rand equities to realize proceeds of 3 million CHF. To eliminate risk of the Rand appreciating against the Franc over 30 days, Omni should sell 30-day forward Francs against 30-day forward Rands. This establishes a cross-currency rate of 0.244411398 CHF/ZAR. The current value of Omni's Swiss portfolio in Rands is 12,274,386.65 ZAR. The annualized forward discount shows the Rand trading at a 1.80% discount versus the Franc.

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74 views

Exercise - Cross Rate

Omni Advisors plans to sell Swiss Franc equities and purchase equivalent South African Rand equities to realize proceeds of 3 million CHF. To eliminate risk of the Rand appreciating against the Franc over 30 days, Omni should sell 30-day forward Francs against 30-day forward Rands. This establishes a cross-currency rate of 0.244411398 CHF/ZAR. The current value of Omni's Swiss portfolio in Rands is 12,274,386.65 ZAR. The annualized forward discount shows the Rand trading at a 1.80% discount versus the Franc.

Uploaded by

vikneswaran ayappan
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Exercise- Cross Rate

Omni Advisors, an international pension fund manager, plans to sell equities


denominated in Swiss Francs (CHF) and purchase an equivalent amount of
equities denominated in South African Rands (ZAR). Omni will realize net
proceeds of 3 million CHF at the end of 30 days and wants to eliminate the
risk that the ZAR will appreciate relative to the CHF during this 30-day period.
The following exhibit shows current exchange rates between the ZAR, CHF,
and the U.S. dollar (USD).

Currency Exchange Rates

ZAR/USD ZAR/USD CHF/USD CHF/USD


Maturity Bid Ask Bid Ask
Spot 6.2681 6.2789 1.5282 1.5343
30-day 6.2538 6.2641 1.5226 1.5285
90-day 6.2104 6.2200 1.5058 1.5115

You are required to:


(a) Describe the currency transaction that Omni should undertake to
eliminate currency risk over the 30-day period.

Answer:
To eltto eliminate the currency risk arising from the possibility that ZAR will
appreciate against the CHF over the next 30-day period, Omni should
sell 30-day forward CHF against 30-day forward ZAR delivery (sell 30-
day forward CHF against USD and buy 30-day forward ZAR against
USD).

(b) Calculate the following:


i. The CHF/ZAR cross-currency rate Omni would use in valuing the
Swiss equity portfolio.

Answer:
Using the currency cross rates of two forward foreign currencies
and three currencies (CHF, ZAR, USD), the exchange would
be as follows:
--30 day forward CHF are sold for USD. Dollars are
bought at the forward selling price of CHF1.5285 = $1
(done at ask side because going from currency into
dollars)(3m)
--30 day forward ZAR are purchased for USD. Dollars are
simultaneously sold to purchase ZAR at the rate of 6.2538
= $1 (done at the bid side because going from dollars into
currency)(3m)
--For every 1.5285 CHF held, 6.2538 ZAR are received;
thus the cross currency rate is 1.5285 CHF/6.2538
ZAR = 0.244411398.(3m)
BFI2043 INTERNATIONAL FINANCE / FE / S01

ii. The current value of Omni’s Swiss equity portfolio in ZAR.

Answer:
At the time of execution of the forward contracts, the value of
the 3 million
CHF equity portfolio would be 3,000,000
CHF/0.244411398 = 12,274,386.65 ZAR.(3m)
• To calculate the annualized premium or discount of
the ZAR against the CHF requires comparison of the spot
selling exchange rate to the forward selling price of CHF for
ZAR.(3m)

iii. The annualized forward premium or discount at which the ZAR is


trading versus the CHF.

Answer:
Spot rate = 1.5343 CHF/6.2681 ZAR =
0.244779120(2m)
30 day forward ask rate 1.5285 CHF/6.2538
ZAR = 0.244411398(2m)
The premium/discount formula is:
[(forward rate – spot rate) / spot rate] x (360 / #
day contract) =
[(0.244411398 – 0.24477912) / 0.24477912] x
(360 / 30) =(4m)
-1.8027126 % = -1.80% discount ZAR to
CHF(2m)

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