| Category | Assignment | Subject | Marketing |
|---|---|---|---|
| University | _____________ | Module Title | M31512 Foreign Exchange Market Analysis |
(a) Define in detail the market for foreign exchange and explain the difference between the retail market and the interbank (wholesale) market for foreign exchange.
(b) Who are the market participants in the foreign exchange market?
(c) Explain why most interbank currency trading involves the U.S. dollar and what a currency trading at a discount or at a premium in the forward market means.
(d) Carefully explain triangular arbitrage and the conditions that give rise to a triangular arbitrage opportunity.
(e) A Euro/$ bank trader is quoting a bid-ask of 35-40, while the rest of the market is trading at €1.3436-€1.3441. What is implied about the trader’s beliefs by his prices?
(f) Briefly explain the real exchange rate and its importance in international finance.
You work as a trader on the Foreign Exchange desk at Arion Bank in Reykjavik, Iceland, looking for a profitable arbitrage opportunity. Using the following cross rates given by the bank, determine whether there is a triangular arbitrage opportunity for the ISK5 million that you seek to invest.
Alpha Bank quotes EUR 148.299 /ISK (= 148.299 EUR per ISK) HSBC quotes GBP 178.299 /ISK (=178.299 GBP per ISK)
Caixa Bank quotes EUR 0.832014 /GBP (= 0.832014 EUR per GBP)
A foreign exchange trader with a U.S. bank took a short position of £5,000,000 when the $/£ exchange rate was 1.29. Subsequently, the exchange rate has changed to 1.36. Is this movement in the exchange rate good from the point of view of the position taken by the trader? How much has the bank’s liability changed because of the change in the exchange rate?
Assume you are a trader with Optima Bank located in Athens. From the quote screen on your computer terminal, you notice that Optima Bank is quoting €0.7627/$1.00, and Credit Suisse is offering SF1.1806/$1.00. You learn that UBS is making a direct market between the Swiss franc and the euro, with a current €/SF quote of .6395.
(a) Show how you can make a triangular arbitrage profit by trading at these prices. (Ignore bid-ask spreads for this problem.) Assume you have $5,000,000 with which to conduct the arbitrage.
(b) What happens if you initially sell dollars for Swiss francs? What €/SF price will eliminate triangular arbitrage?
The current spot exchange rate is $1.29/£ and the three-month forward rate is $1.24/£. Based on your analysis of the exchange rate, you are confident that the spot exchange rate will be $1.26/£ in three months. Assume that you would like to buy or sell £5,000,000.
a. What actions must you take to speculate in the forward market? What is the expected dollar profit from speculation?
b. What would be your speculative profit in dollar terms if the spot exchange rate turns out to be $1.20/£.
|
6. Assume the following information: |
|
|
|
Quoted Price |
|
Spot rate of Canadian dollar |
$0.90 |
|
90-day forward rate of Canadian dollar |
$0.89 |
|
90-day Canadian interest rate |
5% |
|
90-day U.S. interest rate |
0.7% |
Given the above information:
(a) what would be the yield (percentage return) to a U.S. investor who used covered interest arbitrage? (Assume the investor invests $1,000,000.)
(b) What market forces would occur to eliminate any further possibilities of covered interest arbitrage?
Assume the following information:
Quoted Price
Value of Canadian dollar in U.S. dollars $0.90
Value of New Zealand dollar in U.S. dollars $0.30
Value of Canadian dollar in New Zealand dollars NZ$3.02
(a) Based on the above information, is triangular arbitrage possible? If so, explain the steps reflecting triangular arbitrage and compute the profit from this strategy if you had $10,000,000 to use.
(b) What market forces would occur to eliminate any further possibilities of triangular arbitrage?
The one-year interest rate in New Zealand is 6 per cent, while the one-year U.S. interest rate is 10 per cent. The spot rate of the New Zealand dollar (NZ$) is $.60. The forward rate of the New Zealand dollar is $.65.
(a) Is covered interest arbitrage feasible for U.S. investors? Is it possible for New Zealand investors?
(b) Explain why covered interest arbitrage is or is not feasible in each case. Assume an Investment of £50,000,000.
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