Assignment 1 Solutions

The Chinese University of Hong Kong
CUHK Business School
FINA3020 International Finance

Assignment 1

Question 1
Hang Seng Bank quotes bid-ask rates of USD/EUR 1.3005 – 1.3007 and JPY/USD 104.30 –
104.40. What would be Hang Seng Bank’s direct asking price of JPY/EUR?
The cross-rate of JPY/EUR can be achieved by:

JPY JPY USD


EUR USD EUR
The synthetic ask is the highest product:
/ EUR
/USD
/ EUR
Synthetic StJPY
 StJPY
 StUSD
, ask
, ask
, ask

 104.40 1.3007
 135.7931

Question 2
A bank is quoting the following exchange rates against the dollar for the Swiss franc and the
Australian dollar:
CHF/USD = 1.5960 – 70
AUD/USD = 1.7225 – 35
A Swiss firm asks the bank for a CHF/AUD quote. What cross-rate would the bank quote?
In obtaining this quotation, we keep in mind that CHF/AUD = CHF/USD ÷ AUD/USD, and that the price (bid or ask) for each transaction is the one that is more advantageous to the bank. The CHF/AUD bid price is the number of CHF the bank is willing to pay to buy one AUD.
This transaction (buy AUD — sell CHF) is equivalent to selling CHF to buy dollars (at the bid rate of 1.5960 and the selling those dollars to buy AUD (at an ask rate of 1.7235).
The synthetic bid is the lowest quotient:
/ AUD
Synthetic StCHF

,bid

/USD
StCHF
,bid
/USD
StAUD
, ask

1.5960
1.7235
 0.9260


The CHF/AUD ask price is the number of CHF the bank is asking for one AUD. This transaction (sell AUD — buy CHF) is equivalent to buying CHF with dollars (at the ask rate of 1.5970 and then simultaneously purchasing these dollars against AUD (at a bid rate of
1.7225). This may be expressed as follows:

Synthetic S

CHF / AUD t , ask



/USD
StCHF
, ask
/USD
StAUD
,bid

1.5970
1.7225
 0.9271


The resulting quotation is CHF/AUD 0.9260 – 0.9271.

Question 3
Given the following information, what are the NZD/SGD currency against currency bid-ask quotations? American Terms
Bid
Ask
0.7265
0.7272
0.6135
0.6140

Bank Quotations
NZD
SGD

European Terms
Bid
Ask
1.3751
1.3765