International Finance: an Analytical Approach

Chapter 2

The Foreign Exchange Market

1. On 12 August, a Commonwealth Bank dealer in Melbourne concluded a transaction with a Citibank dealer in New York. The former agreed to buy from the latter USD5000000 at an exchange rate (AUD/USD) of 1.77 for delivery on 14 August. On the delivery date, the exchange rate rose to 1.83. How much would the Commonwealth Bank be required to pay to settle the transaction?

Solution

In this problem, 12 August is the contract date, whereas 14 August is the delivery date. What is relevant for this transaction is the exchange rate agreed upon on the contract date, which is 1.77. Therefore the Commonwealth Bank is required to pay:

2. The exchange rate between the British pound and the Australian dollar (GBP/AUD) rose from 0.3780 to 0.3960 in one week.

(a) Calculate the percentage appreciation or depreciation of the Australian dollar.

(b) Using the result obtained in (a), calculate the percentage appreciation or depreciation of the pound.

(d) Using the result obtained in (c), calculate the percentage appreciation or depreciation of the pound.

(e) Using the result obtained in (d), calculate the percentage appreciation or depreciation of the Australian dollar.

Solution

(a) The Australian dollar appreciates by:

= 4.8%

(b) By using equation (2.4), the percentage depreciation of the pound is:

= -4.6%

(d) The pound depreciates by:

(e) From (d) the percentage appreciation of the Australian dollar is:

= 4.7%

3. If the exchange rate between the British pound and the Australian dollar (GBP/AUD) is 0.3980, what is:

(a) the direct quote from an Australian perspective?

(b) the indirect quote from an Australian perspective?

(d) the indirect quote from a British perspective?

Solution

From an Australian perspective, GBP/AUD is the indirect quotation, and vice versa. Therefore:

(a) 2.5126

(b) 0.3980

(d) 2.5126

4. The USD/AUD exchange rate is quoted as 0.4977–0.5176.

(a) What is the bid–offer spread in points and in percentage terms? What is the monetary value of the point in this case?

(b) Calculate the AUD/USD exchange rate. What is the bid–offer spread in points and in percentage terms? What is the monetary value of the point in this case?

Solution

(a) The bid–offer spread is:

0.5176-0.4977=0.0199

or 199 points. In percentage terms it is:

The value of one point is 100th US cent.

(b) The bid and offer AUD/USD exchange rates are calculated, respectively, as:

The bid–offer spread is:

2.0092-1.9320=0.0772

or 772 points. In percentage terms it is:

The value of one point is 100th Australian cent.

5. Dealer A quotes 0.6030–0.6050 for the EUR/AUD exchange rate to Dealer B. What is:

(a) the price at which A is willing to buy the Australian dollar?

(b) the price at which A is willing to buy the euro?

(d) the price at which B can buy the euro?

(e) the price at which A is willing to sell the Australian dollar?

(f) the price at which A is willing to sell the euro?

(g) the price at which B can sell the Australian dollar?

(h) the price at which B can sell the euro?

Solution

(a) The price at which A is willing to buy the Australian dollar is A’s bid rate, which is 0.6030.

(b) The price at which A is willing to buy the euro is the price at which A is willing to sell the AUD, which is 0.6050.

(d) The price at which B can buy the euro is the price at which B can sell the Australian dollar, which is 0.6030.

(e) The price at which A is willing to sell the Australian dollar is A’s offer rate, which is 0.6050.

(f) The price at which A is willing to sell the euro is the price at which A is willing to buy the Australian dollar, which is 0.6030.

(g) The price at which B can sell the Australian dollar is A’s bid rate, which is 0.6030.

(h) The price at which B can sell the euro is the price at which B can buy the Australian dollar, which is 0.6050.

10. The following exchange rates are quoted:

GBP/AUD 0.3820–90

AUD/EUR 1.6400–80

Calculate the bid–offer spread on the exchange rate between the pound and the euro expressed in direct quotation from a British perspective.

Solution

Thus, the bid–offer spread is 0.0146 or 146 points.

13. The spot and forward rates between the Australian dollar and the euro (AUD/EUR) are as follows:

Spot 1.6030

Onemonth forward 1.6260

Threemonth forward 1.5920

Calculate the forward spread in percentage per annum for both maturities. State whether the Australian dollar sells at a premium or a discount.

Solution

The one-month forward spread is:

which means that the euro is selling at a premium. Similarly, the three-month spread is:

which means that the euro is selling at a discount.