Problem 6.

2 Forward Premiums on the Japanese Yen

Use the following spot and forward bid-ask rates for the Japanese yen/U.S. dollar (¥/$) exchange rate from September 16,
2010, to answer the following questions:

¥/$ ¥/$
Period
Bid Rate Ask Rate
spot 85.41 85.46
1 month 85.02 85.05
2 months 84.86 84.90
3 months 84.37 84.42
6 months 83.17 83.20
12 months 82.87 82.91
24 months 81.79 81.82

a. What is the mid-rate for each maturity?

b. What is the annual forward premium for all maturities?
c. Which maturities have the smallest and largest forward premiums?

a. b.
¥/$ ¥/$ Calculated Forward
Period Days Forward Bid Rate Ask Rate Mid-Rate Premium
spot 85.41 85.46 85.43500
1 month 30 85.02 85.05 85.03500 5.6447%
2 months 60 84.86 84.90 84.88000 3.9232%
3 months 90 84.37 84.42 84.39500 4.9292%
6 months 180 83.17 83.20 83.18500 5.4096%
12 months 360 82.87 82.91 82.89000 3.0703%
24 months 720 81.79 81.82 81.80500 2.2187%

c. Which maturities have the smallest and largest forward premiums?

24-month forward has the smallest forward premium
1 month forward has the largest forward premium
 ¥/$ ¥/$
Period Bid Rate Ask Rate
spot 114.23 114.27
1 month 113.82 113.87
2 months 113.49 113.52
3 months 113.05 113.11
6 months 112.05 112.11
12 months 110.20 110.27
24 months 106.83 106.98
Problem 6.4 Jumping to Japan

After spending a week in Moscow you get an email from your friend in Japan.
He can get you a really good deal on a plane ticket and wants you to meet
him in Osaka next week to continue your post-graduation celebratory trip.
You have 450,000 rubles left in your money pouch. In preparation for the trip
you want to exchange your Russian rubles for Japanese yen so you get the
following quotes:

Spot rate on the rubles/dollar cross rate Rbl 30.96/$

Spot rate on the yen/dollar cross rate ¥84.02/$

a. What is the Russian ruble/yen cross rate?

b. How many yen will you obtain for your rubles?

Assumptions Values
Beginning your trip with rubles 450,000.00
Spot rate (Rubles/$) 30.96
Spot rate (¥/$) 84.02

a) What is the Russian ruble/euro cross rate?

Cross rate (Rubles/¥) 0.3685

b) How many rubles will you obtain for your euros?

Converting your Rubles into yen 1,221,221
Problem 6.7 Bloomberg Currency Cross Rates

Use the following cross rate table from Bloomberg to answer the following questions.

Currency USD EUR JPY GBP CHF CAD AUD

HKD 7.7736 10.2976 0.0928 12.2853 7.9165 7.6987 7.6584
AUD 1.015 1.3446 0.0121 1.6042 1.0337 1.0053
CAD 1.0097 1.3376 0.0121 1.5958 1.0283 0.9948
CHF 0.9819 1.3008 0.0117 1.5519 0.9725 0.9674
GBP 0.6328 0.8382 0.0076 0.6444 0.6267 0.6234
JPY 83.735 110.9238 132.3348 85.2751 82.9281 82.4949
EUR 0.7549 0.009 1.193 0.7688 0.7476 0.7437
USD 1.3247 0.0119 1.5804 1.0184 0.9904 0.9852

Quote Calculated
a. Japanese yen per US dollar? 83.735
b. US dollars per Japanese yen? 0.0119
c. US dollars per euro? 1.3247
d. Euros per US dollar? 0.7549
e. Japanese yen per euro? 110.9238
f. Euros per Japanese yen? 0.009
g. Canadian dollars per US dollar? 1.0097
h. US dollars per Canadian dollar? 0.9904
i. Australian dollars per US dollar? 1.015
j. US dollars per Australian dollar? 0.9852
k. British pounds per US dollar? 0.6328
l. US dollars per British pound? 1.5804
m. US dollars per Swiss franc? 1.0184
n. Swiss francs per US dollar? 0.9819
 HKD

0.1306
0.1299
0.1263
0.0814
10.7718
0.0971
0.1286
Currency USD EUR
AUD 1.0903 1.5684
CAD 0.9626 1.3847
CHF 1.1644 1.675
GBP 0.4873 0.701
JPY 114.156 164.2134
EUR 0.6952
USD 1.4385
 JPY GBP CHF CAD AUD HKD
0.0096 2.2375 0.9364 1.1327 0.1407
0.0084 1.9754 0.8267 0.8829 0.1242
0.0102 2.3896 1.2097 1.068 0.1502
0.0043 0.4185 0.5062 0.4469 0.0629
234.2687 98.0368 118.5913 104.7005 14.7282
0.0061 1.4266 0.597 0.7222 0.6376 0.0897
0.0088 2.0522 0.8588 1.0389 0.9172 0.129
Problem 6.9 Trading in Zurich

Andreas Broszio just started as an analyst for Credit Suisse in Zurich, Switzerland. He receives the following quotes for
Swiss francs against the dollar for spot, one-month forward, 3-months forward, and 6-months forward.

Spot exchange rate:

Bid rate SF 1.2575/$
Ask rate SF 1.2585/S
One-month forward 10 to 15
3-months forward 14 to 22
6-months forward 20 to 30

a. Calculate outright quotes for bid and ask, and the number of points spread between each.
b. What do you notice about the spread as quotes evolve from spot toward six months?
c. What is the 6-month Swiss bill rate?

Assumptions Values
Spot exchange rate:
Bid rate (SF/$) 1.2575
Ask rate (SF/$) 1.2585
One-month forward 10 to 15
3-months forward 14 to 22
6-months forward 20 to 30

a. Calculate outright quotes Bid Ask

One-month forward 1.2585 1.2600
3-months forward 1.2589 1.2607
6-months forward 1.2595 1.2615

b. What do you notice about the spread?

It widens, most likely a result of thinner and thinner trading volume.

c. Added/optional question: What is the 6-month Swiss bill rate?

 s the following quotes for
forward.

Spread
0.0015
0.0018
0.0020
Problem 6.10 Triangular Arbitrage Using the Swiss Franc

The following exchange rates are available to you. (You can buy or sell at the stated
rates.)

Mt. Fuji Bank ¥92.00/$

Mt. Rushmore Bank SF1.02/$
Mt Blanc Bank ¥90.00/SF

Assume you have an initial SF12,000,000. Can you make a profit via triangular
arbitrage? If so, show the steps and calculate the amount of profit in Swiss francs.

Assumptions Values
Beginning funds in Swiss francs (SF) 12,000,000.00
Mt. Fuji Bank (yen/$) 92.00
Mt. Rushmore Bank (SF/$) 1.0200
Mt Blanc Bank (yen/SF) 90.00

The Triangular Arbitrage can be:

SF/$ => $/yen => yen/SF
SF/yen => yen/$ => $/SF

1. Starting with SF/$, the total funds in this case will be:
SF/$ 11,764,705.88
$/yen 1,082,352,941.18
Yen/SF 12,026,143.7908
Total funds 12,026,143.79
Profit 26,143.79

2. Starting with SF/yen, the total funds in this case will be:
SF/yen 1,080,000,000.00
yen/$ 11,739,130.43 `
$/SF 11,973,913.04
Total funds 11,973,913.04
Profit (26,086.96)
Problem 6.12 Transatlantic Arbitrage

A corporate treasury working out of Vienna with operations in New York

simultaneously calls Citibank in New York City and Barclays in London. The
two banks give the following quotes at the same time on the euro:

Citibank NYC Barclays London

$0.7551-61/€ $0.7545-75/€

Using $1 million or its euro equivalent, show how the corporate treasury could
make geographic arbitrage profit with the two different exchange rate quotes.

Assumptions Values
Beginning funds $ 1,000,000.00

Citibank NYC quotes:

Bid ($/€) 0.7551
Ask ($/€) 0.7561
Barclays London quotes:
Bid ($/€) 0.7545
Ask ($/€) 0.7575

Scenario 1: Buy at Citibank NYC and sell at Barclays London:

Buy euros from Citibank NYC (at ask rate) $ 1,322,576.38
Sell euros from Barclays London (at bid rate) € 997,883.88
Arbitrage profit (€ 2,116.12)

Scenario 2: Buy at Barclays London and sell at Citibank NYC:

Buy euros from Barclays London (at ask rate) $ 1,320,132.01
Sell euros to Citibank NYC (at bid rate) 996,831.68
Arbitrage profit (€ 3,168.32)