FOREIGN EXCHANGE PROBLEM SET

FOREIGN EXCHANGE PROBLEM SET

1. Consider the following foreign exchange quotations for the Euro (EUR) against other currencies, and euro-US$ and euro-EUR interest rate quotations, on October 8, 2003.

Based on these, work through the questions that follow.

Currency Spot Bid-Ask 1 mnth fwd 3 mnth fwd 1 yr fwd

SFr 1.5496 450-550 1.5470 1.5419 1.5216

£ (UK) 0.7115 112-118 0.7123 0.7143 0.7247

US$ 1.1811 809-803 1.1800 1.1780 1.1700

N$(MX) 13.2741 541-941 13.3144 13.4041 13.8622

INR (India) 53.6179 000-379 53.5873 n.a 53.4602

Interest Rates Currency 1 month 3 months 1 year

US$ 1.12000% 1.15000% 1.34000%

EUR 2.10413% 2.13613% 2.25875%

a) From the US perspective, what are the direct and indirect quotes of the EUR spot exchange rate on October 8, 2003?

• El tipo de cambio Spot directo es: 1.1811 USD/EUR

• El tipo de cambio Spot indirecto resulta de dividir 1/1.1811=

0.8467 EUR/USD.

b) (Use direct quotes only, from US perspective) What are the 90-day, and 1-year forward rates on the EUR?

• A 90 días= 1.1780 USD7EUR

• A un año= 1.1700 USD7EUR

c) Is the EUR at a forward premium or a forward discount relative to the US$? Explain. What is the percentage forward premium or discount on the 90-day EUR?

Forward Premium or discount is: the excess (or deficit) resulting from a forward delivery contract in currency trading. A positive percentage value means a forward premium, and a negative percentage value means a forward discount.

De conformidad a lo anterior, se puede determinar que el EUR presenta un “forward discount”, en relación al dólar, puesto que el tipo de cambio spot es mayor que los proyectados; así:

Tipo de cambio forward – tipo de cambio spot x 100%

Tipo de cambio spot

= (1.1780-1.1811) x100

1.1811

= -0.2624%

El resultado es negativo por lo tanto es un forward discount, de - 0.26%

d) The US$/EUR exchange rate was US$0.95/EUR on October 8, 2002. During the year, did the EUR depreciate or appreciate? By what percentage?

R/ Si hace un año la relación EUR/USD era 1/0.95, podemos decir que a un año después el Euro se ha apreciado en 24.33% en relación al dólar, porque con la misma cantidad de Euros, se puede comprar más dólares hoy.

(1.1811- 0.95) x100 = 24.326%

0.95

e) The inflation rate during the previous year in the US was 3%, and the inflation rate for the EUR zone was 1%. Would the theory of RPPP have predicted a EUR depreciation or EUR appreciation over the past year?

R/ Tema aún no visto en clases.

f) (Using the data from questions d and e) Compared against the actual change in $/EUR did the EUR undergo real appreciation or real depreciation? By what percentage?

R/ Tema aún no visto en clases.

g) Suppose you export US$1,500,000 worth of products to a buyer in the EU for a total EUR price of Euro 1,270,003 but your buyer in the EU will pay 90 days from now.

Suppose further that the buyer will make the payment with a check drawn in EUR (assume no transaction costs).

i. Suppose the actual exchange rate 90 days from now is US$1.25/EUR. How many dollars will you get 90 days from now?

Si el tipo de cambio a 90 días es de $1.25USD/EUR, entonces multiplicamos la cantidad de Euros a recibir por el tipo de cambio y recibiremos $1,587,503.75 (USD).

= 1, 270,003.00EUR x 1.25USD/EUR

= 1,587,503.75USD

ii. Suppose the actual exchange

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