国际财务管理课后习题答案chapter 5.docx
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国际财务管理课后习题答案chapter5
CHAPTER5THEMARKETFORFOREIGNEXCHANGE
SUGGESTEDANSWERSANDSOLUTIONSTOEND-OF-CHAPTER
QUESTIONSANDPROBLEMS
QUESTIONS
1.Giveafulldefinitionofthemarketforforeignexchange.
Answer:
Broadlydefined,theforeignexchange(FX)marketencompassestheconversionofpurchasingpowerfromonecurrencyintoanother,bankdepositsofforeigncurrency,theextensionofcreditdenominatedinaforeigncurrency,foreigntradefinancing,andtradinginforeigncurrencyoptionsandfuturescontracts.
2.Whatisthedifferencebetweentheretailorclientmarketandthewholesaleorinterbankmarketforforeignexchange?
Answer:
Themarketforforeignexchangecanbeviewedasatwo-tiermarket.Onetieristhewholesaleorinterbankmarketandtheothertieristheretailorclientmarket.InternationalbanksprovidethecoreoftheFXmarket.Theystandwillingtobuyorsellforeigncurrencyfortheirownaccount.Theseinternationalbanksservetheirretailclients,corporationsorindividuals,inconductingforeigncommerceormakinginternationalinvestmentinfinancialassetsthatrequiresforeignexchange.Retailtransactionsaccountforonlyabout14percentofFXtrades.Theother86percentisinterbanktradesbetweeninternationalbanks,ornon-bankdealerslargeenoughtotransactintheinterbankmarket.
3.Whoarethemarketparticipantsintheforeignexchangemarket?
Answer:
ThemarketparticipantsthatcomprisetheFXmarketcanbecategorizedintofivegroups:
internationalbanks,bankcustomers,non-bankdealers,FXbrokers,andcentralbanks.InternationalbanksprovidethecoreoftheFXmarket.Approximately100to200banksworldwidemakeamarketinforeignexchange,i.e.,theystandwillingtobuyorsellforeigncurrencyfortheirownaccount.Theseinternationalbanksservetheirretailclients,thebankcustomers,inconductingforeigncommerceormakinginternationalinvestmentinfinancialassetsthatrequiresforeignexchange.Non-bankdealersarelargenon-bankfinancialinstitutions,suchasinvestmentbanks,mutualfunds,pensionfunds,andhedgefunds,whosesizeandfrequencyoftradesmakeitcost-effectivetoestablishtheirowndealingroomstotradedirectlyintheinterbankmarketfortheirforeignexchangeneeds.
Mostinterbanktradesarespeculativeorarbitragetransactionswheremarketparticipantsattempttocorrectlyjudgethefuturedirectionofpricemovementsinonecurrencyversusanotherorattempttoprofitfromtemporarypricediscrepanciesincurrenciesbetweencompetingdealers.
FXbrokersmatchdealerorderstobuyandsellcurrenciesforafee,butdonottakeapositionthemselves.Interbanktradersuseabrokerprimarilytodisseminateasquicklyaspossibleacurrencyquotetomanyotherdealers.
Centralbankssometimesinterveneintheforeignexchangemarketinanattempttoinfluencethepriceofitscurrencyagainstthatofamajortradingpartner,oracountrythatit“fixes”or“pegs”itscurrencyagainst.Interventionistheprocessofusingforeigncurrencyreservestobuyone’sowncurrencyinordertodecreaseitssupplyandthusincreaseitsvalueintheforeignexchangemarket,oralternatively,sellingone’sowncurrencyforforeigncurrencyinordertoincreaseitssupplyandloweritsprice.
4.Howareforeignexchangetransactionsbetweeninternationalbankssettled?
Answer:
Theinterbankmarketisanetworkofcorrespondentbankingrelationships,withlargecommercialbanksmaintainingdemanddepositaccountswithoneanother,calledcorrespondentbankaccounts.Thecorrespondentbankaccountnetworkallowsfortheefficientfunctioningoftheforeignexchangemarket.Asanexampleofhowthenetworkofcorrespondentbankaccountsfacilitiesinternationalforeignexchangetransactions,consideraU.S.importerdesiringtopurchasemerchandiseinvoicedinguildersfromaDutchexporter.TheU.S.importerwillcontacthisbankandinquireabouttheexchangerate.IftheU.S.importeracceptstheofferedexchangerate,thebankwilldebittheU.S.importer’saccountforthepurchaseoftheDutchguilders.ThebankwillinstructitscorrespondentbankintheNetherlandstodebititscorrespondentbankaccounttheappropriateamountofguildersandtocredittheDutchexporter’sbankaccount.Theimporter’sbankwillthendebititsbookstooffsetthedebitofU.S.importer’saccount,reflectingthedecreaseinitscorrespondentbankaccountbalance.
5.Whatismeantbyacurrencytradingatadiscountoratapremiumintheforwardmarket?
Answer:
Theforwardmarketinvolvescontractingtodayforthefuturepurchaseorsaleofforeignexchange.Theforwardpricemaybethesameasthespotprice,butusuallyitishigher(atapremium)orlower(atadiscount)thanthespotprice.
6.WhydoesmostinterbankcurrencytradingworldwideinvolvetheU.S.dollar?
Answer:
Tradingincurrenciesworldwideisagainstacommoncurrencythathasinternationalappeal.ThatcurrencyhasbeentheU.S.dollarsincetheendofWorldWarII.However,theeuroandJapaneseyenhavestartedtobeusedmuchmoreasinternationalcurrenciesinrecentyears.Moreimportantly,tradingwouldbeexceedinglycumbersomeanddifficulttomanageifeachtradermadeamarketagainstallothercurrencies.
7.Banksfinditnecessarytoaccommodatetheirclients’needstobuyorsellFXforward,inmanyinstancesforhedgingpurposes.Howcanthebankeliminatethecurrencyexposureithascreatedforitselfbyaccommodatingaclient’sforwardtransaction?
Answer:
Swaptransactionsprovideameansforthebanktomitigatethecurrencyexposureinaforwardtrade.Aswaptransactionisthesimultaneoussale(orpurchase)ofspotforeignexchangeagainstaforwardpurchase(orsale)ofanapproximatelyequalamountoftheforeigncurrency.Toillustrate,supposeabankcustomerwantstobuydollarsthreemonthsforwardagainstBritishpoundsterling.Thebankcanhandlethistradeforitscustomerandsimultaneouslyneutralizetheexchangerateriskinthetradebyselling(borrowed)Britishpoundsterlingspotagainstdollars.Thebankwilllendthedollarsforthreemonthsuntiltheyareneededtodeliveragainstthedollarsithassoldforward.TheBritishpoundsreceivedwillbeusedtoliquidatethesterlingloan.
8.ACD/$banktraderiscurrentlyquotingasmallfigurebid-askof35-40,whentherestofthemarketistradingatCD1.3436-CD1.3441.Whatisimpliedaboutthetrader’sbeliefsbyhisprices?
Answer:
ThetradermustthinktheCanadiandollarisgoingtoappreciateagainsttheU.S.dollarandthereforeheistryingtoincreasehisinventoryofCanadiandollarsbydiscouragingpurchasesofU.S.dollarsbystandingwillingtobuy$atonlyCD1.3435/$1.00andofferingtosellfrominventoryattheslightlylowerthanmarketpriceofCD1.3440/$1.00.
9.Whatistriangulararbitrage?
Whatisaconditionthatwillgiverisetoatriangulararbitrageopportunity?
Answer:
TriangulararbitrageistheprocessoftradingoutoftheU.S.dollarintoasecondcurrency,thentradingitforathirdcurrency,whichisinturntradedforU.S.dollars.Thepurposeistoearnanarbitrageprofitviatradingfromthesecondtothethirdcurrencywhenthedirectexchangebetweenthetwoisnotinalignmentwiththecrossexchangerate.
Most,butnotall,currencytransactionsgothroughthedollar.Certainbanksspecializeinmakingadirectmarketbetweennon-dollarcurrencies,pricingatanarrowerbid-askspreadthanthecross-ratespread.Nevertheless,theimpliedcross-ratebid-askquotationsimposeadisciplineonthenon-dollarmarketmakers.Iftheirdirectquotesarenotconsistentwiththecrossexchangerates,atriangulararbitrageprofitispossible.
PROBLEMS
1.UsingExhibit5.4,calculateacross-ratematrixfortheeuro,Swissfranc,Japaneseyen,andtheBritishpound.UsethemostcurrentAmericantermquotestocalculatethecross-ratessothatthetriangularmatrixresultingissimilartotheportionabovethediagonalinExhibit5.6.
Solution:
Thecross-rateformulawewanttouseis:
S(j/k)=S($/k)/S($/j).
Thetriangularmatrixwillcontain4x(4+1)/2=10elements.
¥
SF
£
$
Euro
138.05
1.5481
.6873
1.3112
Japan(100)
1.1214
.4979
.9498
Switzerland
.4440
.8470
U.K
1.9077
2.UsingExhibit5.4,calculatetheone-,three-,andsix-monthforwardcross-exchangeratesbetweentheCanadiandollarandtheSwissfrancusingthemostcurrentquotations.Statetheforwardcross-ratesin“Canadian”terms.
Solution:
Theformulaswewanttouseare:
FN(CD/SF)=FN($/SF)/FN($/CD)
or
FN(CD/SF)=FN(CD/$)/FN(SF/$).
WewillusethetopformulathatusesAmericantermforwardexchangerates.
F1(CD/SF)=.8485/.8037=1.0557
F3(CD/SF)=.8517/.8043=1.0589
F6(CD/SF)=.8573/.8057=1.0640
3.Restatethefollowingone-,three-,andsix-monthoutrightforwardEuropeantermbid-askquotesinforwardpoints.
Spot1.3431-1.3436
One-Month1.3432-1.3442
Three-Month1.3448-1.3463
Six-Month1.3488-1.3508
Solution:
One-Month01-06
Three-Month17-27
Six-Month57-72
4.Usingthespotandoutrightforwardquotesinproblem3,determinethecorrespondingbid-askspreadsinpoints.
Solution:
Spot5
One-Month10
Three-Month15
Six-Month20
5.UsingExhibit5.4,calculatetheone-,three-,andsix-monthforwardpremiumordiscountfortheCanadiandollarversustheU.S.dollarusingAmericantermquotations.Forsimplicity,assumeeachmonthhas30days.Whatistheinterpretationofyourresults?
Solution:
Theformulawewanttouseis:
fN,CD=[(FN($/CD)-S($/CD/$)/S($/CD)]x360/N
f1,CD=[(.8037-.8037)/.8037]x360/30=.0000
f3,CD=[(.8043-.8037)/.8037]x360/90=.0030
f6,CD=[(.8057-.8037)/.8037]x360/180=.0050
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