International-Financial-Management---Bekaert-2e---Solutions---Ch02.doc
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International-Financial-Management---Bekaert-2e---Solutions---Ch02.doc
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Chapter2:
TheForeignExchangeMarket5
Chapter 2
TheForeignExchangeMarket
QUESTIONS
1.Whatisanexchangerate?
Answer:
Anexchangerateistherelativepriceoftwocurrencies,liketheU.S.dollarpriceoftheeuro,theThaibahtpriceoftheMalaysianringgit,ortheMexicanpesopriceoftheCanadiandollar.
2.Whatisthestructureoftheforeignexchangemarket?
IsitliketheNewYorkStockExchange?
Answer:
Theinterbankforeignexchangemarketisaverylarge,diverse,over-the-countermarket,notaphysicaltradingplacewherebuyersandsellersgathertoagreeonapricetoexchangecurrencies.Traders,whoareemployeesoffinancialinstitutionsinthemajorfinancialcitiesaroundtheworld,dealwitheachotherprimarilyoverthephoneorviacomputer,withwrittenorformalelectronicconfirmationsoftransactionsoccurringonlylater.
3.Whatisaspotexchangeratecontract?
Whendoesdeliveryoccuronaspotcontract?
Answer:
Whencurrenciesintheinterbankspotmarketaretraded,certainbusinessconventionsarefollowed.Forexample,whenthetradeinvolvestheU.S.dollar,businessconventiondictatesthatspotcontractsaresettledin2businessdays—thatis,thepaymentofonecurrencyandreceiptoftheothercurrencyoccursin2businessdays.Onebusinessdayisnecessarybecauseoftheback-officepaperworkinvolvedinanyfinancialtransaction.Theseconddayisneededbecauseofthetimezonedifferencesaroundtheworld.
Severalexceptionstothe2-business-dayrulearenoteworthy.First,forexchangesbetweentheU.S.dollarandtheCanadiandollarortheMexicanpeso,theruleis1businessday.Second,ifthetransactioninvolvesthedollarandthefirstofthe2daysisaholidayintheUnitedStatesbutnotintheothersettlementcenter,thefirstdayiscountedasabusinessdayforsettlementpurposes.Third,FridaysarenotpartofthebusinessweekinmostMiddleEasterncountries,althoughSaturdaysandSundaysare.Hence,non–MiddleEasterncurrenciessettleonFridays,andMiddleEasterncurrenciessettleonSaturdays.
4.WhatwastheJapaneseyenspotpriceoftheU.S.dollaronDecember21,2010?
Answer:
ExaminingExhibit2.5forDecember21,2010wefindthattheJapaneseyenspotpriceoftheU.S.dollarwas¥84.12/$.
5.WhatwastheU.S.dollarspotpriceoftheSwissfranconDecember21,2010?
Answer:
ExaminingExhibit2.5forDecember21,2010,wefindthattheU.S.dollarspotpriceoftheSwissfrancwas$1.0289/CHF.
6.Howlargearethebid–askspreadsintheinterbankspotmarket?
Whatistheirpurpose?
Answer:
Thepurposeofthebid-askspreadistoallowtraderstoprofitbybuyingacurrencyatalowbidpriceandsellingthatcurrencyatahigheraskprice.Bid–askspreadsinthespotforeignexchangemarketarequitesmall,oftenonlytwoorthreebasispoints.Forexample,ayen–dollartradermightquoteabidpriceofyenperdollaratwhichsheiswillingtobuydollarsinexchangeforyenof,say,¥83.74/$.Thetraderwouldthenquoteahigheraskpriceatwhichsheiswillingtoselldollarsforyen,say,atanexchangerateof¥83.76/$.Thispercentagebid-askspreadis
7.WhatwastheeuropriceoftheBritishpoundonDecember21,2010?
Why?
Answer:
Wecanfindthisinformationtwoways.Thecross-ratequotefromExhibit2.6is€1.1818/£.TheexchangeratesofeurosperdollaranddollarsperpoundfromExhibit2.5are€0.7636/$and$1.5477/£.Weknowthattherewouldbeatriangulararbitragepossibilityifthecross-ratediffersfromtheindirectrateusingthedollarasanintermediary.Thus,wefindthesamevalueifwecalculate
8.IfthedirecteuropriceoftheBritishpoundishigherthantheindirecteuropriceoftheBritishpoundusingthedollarasavehiclecurrency,howcouldyoumakeaprofitbytradingthesecurrencies?
Answer:
IfthedirecteuropriceoftheBritishpoundishigherthantheindirecteuropriceoftheBritishpoundusingthedollarasavehiclecurrency,therewouldbeatriangulararbitrage.Wewouldwanttobuypoundsattheindirectlowpriceandsellpoundsatthedirecthighprice.SupposeinQuestion7thatthedirectpriceeurosperpoundwere€1.2115/£andtheexchangeratesversusthedollarare€0.7636/$and$1.5477/£.Theindirecteuropriceofthepoundistherefore
Ifwestartwith€10,000,000,wecanconverteurostodollarsandget
€10,000,000/€0.7636/$=$13,095,862
Convertingthesedollarsintopoundsgives
$13,095,862/$1.5477/£=£8,461,499
Convertingthesepoundsintoeurosgives
€1.2115/££8,461,499=€10,251,106
Thus,wemakeaprofitof€251,106or2.51%.
9.Whatisanappreciationofthedollarrelativetothepound?
Whathappenstothedollarpriceofthepoundinthissituation?
Answer:
Anappreciationofthedollarrelativetothepoundmeansthatittakesfewerd
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