FINA3020 Question Bank Solutions

Topic 2 – Spot Exchange Markets
Question 1
You need to buy CHF 1,000,000 to pay your Swiss watch supplier. Your bank quotes bid-ask rates of CHF/USD 1.3990 – 1.4000. What will be your dollar cost of the CHF 1,000,000?
The bid-ask rates of USD/CHF are:
1
1

1.4000 1.3990
 0.7143  0.7148
The dollar cost:
1
1.3990
 USD 714, 796.28
CHF 1, 000, 000 

Question 2
As a FX trader, you see the following quotes:
 USD/CAD 0.7047
 MXN/CAD 6.4390
 MXN/USD 8.7535
Is there an arbitrage opportunity, and if so, how would you exploit it?
The direct quote for the cross-rate of MXN/CAD 6.4390 should equal the implied cross-rate using the dollar as an intermediary currency; otherwise there exists a triangular arbitrage opportunity. The indirect cross rate is:
MXN USD

 8.7535  0.7047
USD CAD
 6.1686
To exploit the arbitrage opportunity:
 Borrow USD 1.
 Sell USD 1 for CAD, you get CAD 1.4190.
 Sell CAD 1.4190 for MXN, you get MXN 9.1372.
 Convert MXN 9.1372 into USD, you get USD 1.0438.
 This would yield a profit of USD 0.0438.

In this situation, buying the CAD with MXN by first buying USD with MXN and then buying the
CAD with the USD and finally selling that amount of CAD directly for MXN would make a profit because we would be buying the CAD at a low MXN price and selling the CAD at a high MXN price. Question 3
HSBC quotes bid-ask rates of USD/EUR 1.3005 – 1.3007 and JPY/USD 104.30 – 104.40. What would be HSBC’s direct asking price of JPY/EUR?
The direct asking price of yen per euro (¥/€) is the amount of yen that the bank charges someone who is buying euros with yen. The bank would want this to be the same as the price at which it sells dollars for yen (the bank’s ask price) times the price at which it sells euros for dollars (also the bank’s ask price). Thus, the asking price of yen per euro should be:
JPY 104.40 USD 1.3007

 JPY EUR 135.79
USD 1
EUR 1

Topic 3 – Understanding Forward Exchange Contracts
Question 1
Consider the following spot and forward rates