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Exchange Rate
Problem |
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You are the
treasurer of a large American firm which does business in |
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You currently
have some things to take care of and some problems to solve. |
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Your firm has
"Eurocurrency deposits" (bank accounts) of all major currencies. |
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You arrive at
work and turn on the terminal on your desk, and find the following : |
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Exhange
Rates |
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spot |
1mo fwd |
6mos fwd |
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Pound* |
1.6000 |
1.5940 |
1.5670 |
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Swiss Franc |
2.0000 |
1.9975 |
1.9870 |
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Euro |
1.1000 |
1.1016 |
1.1108 |
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*American
Terms -- others in European Terms |
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Euro-Pound (spot
cross rate): |
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1.749 |
(E PER 1
POUND) |
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Eurocurrency Interest Rates (annual rates)* |
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1 month |
1 month |
6 mos |
6 mos |
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depos. rate |
lending rt. |
depos. rate |
lending rt. |
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Dollar |
5.0000 |
5.1000 |
4.9000 |
5.0000 |
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Pound |
10.0000 |
10.3000 |
9.6000 |
9.8000 |
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Swiss Franc |
4.0000 |
4.1000 |
3.9500 |
4.0000 |
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Euro |
7.0000 |
7.1000 |
7.1000 |
7.2000 |
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*interest =
amount x annual rate x fraction of year |
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Problems: |
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1. To sell SFM 500.00 forward 1 month for
dollars, what will be the proceeds? |
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2. Beginning with $100,000.00, consided the potential for triangular arbitrage,
converting first |
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to
euros, then to pounds and back to dollars.
What will be the profit? |
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3. You need to hedge** against the foreign
exchange risk of accepting a SF payment of |
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SF10,000.00 |
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Assume the SF10,000.00
payment will be made to you in one month. |
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Work out each of the
three options available to you. Figure the proceeds in one month, |
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each
way. |
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You can use
the forward exchange rate, you can resort to temporarily withdrawing from a |
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Eurocurrency account,
or you can borrow in the Eurocurrency market. |
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** The idea
here is that you want to protect against the possibility of the Swiss Franc |
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falling
in value before the payment is
received and converted to dollars. |
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