Solution: International Inance Ssignment

INTERNATIONAL FINANCE
ASSIGNMENT 2
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 USD5 000 000 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:
1.77  5 000 000  AUD8 850 000
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.
(c) Calculate the corresponding values of the AUD/GBP exchange rate.
(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:
0.3960
S ( AUD / GBP )   1  0.048 = 4.8%
0.3780
(b) By using equation (2.4), the percentage depreciation of the pound is:
1
 1  0.046 = -4.6%
1  0.048
(c) The corresponding values of the reciprocal exchange rate (GBP/AUD) are:
1
 2.6455
0.3780
1
 2.5253
0.3960
(d) The pound depreciates by:
2.5253
 1  0.045  4.5%
2.6455
(e) From (d) the percentage appreciation of the Australian dollar is:
1
 1  0.047 = 4.7%
1  0.045
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?
(c) the direct quote from a British 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
(c) 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:
0.0199
 0.040  4%
0.4977
The value of one point is 100th US cent.
(b) The bid and offer AUD/USD exchange rates are calculated, respectively, as:
1
 1.9320
0.5176
1
 2.0092
0.4977
The bid–offer spread is:
2.0092-1.9320=0.0772
or 772 points. In percentage terms it is:
0.0772
 0.040  4%
1.9320
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?
(c) the price at which B can buy the Australian dollar?
(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.
(c) The price at which B can buy the Australian dollar is A’s offer rate, 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.
6. If the exchange rate between the Australian dollar and the Japanese yen,
expressed in indirect quotation from an Australian perspective, is 70.10-71.60, what
is the direct quotation for this rate? What is the mid-rate in both cases?
Solution
7. At 9.30 a.m. Dealer A calls Dealer B and asks for a quote on the AUD/GBP
exchange rate. Dealer B responds by quoting 2.5500–2.5540. Dealer A decides
to buy GBP 200000 at the quoted rate. At 3.30 pm, Dealer B quote 50-90. Will
Dealer A make profit or loss by selling the pound at 3.30 pm?
Solution
The rate that B quotes at 3.30 pm is 2.5550-2.5590. A’s selling price for the pound
is 2.5550, in which case the profit/loss realised by selling the pound is:
200,000 (2.5550 – 2.5590) = AUD 200
8. The exchange rate between the Australian dollar and the euro, expressed in direct
quotation from an Australian perspective, rises from 1.62405 to 1.62808.
Calculate: (a) appreciation or depreciation of the euro in points and pips.
(b) appreciation or depreciation of the Australian dollar in points and pips.
Solution
(a) The appreciation/depreciation of the euro is:
1.62808 – 1.62405 = 0.00403 or 40.3 points, which is equivalent to 403 pips.
(b) In indirect quotation, the exchange rate decline from 0.6158 to 0.6142, in which
case the appreciation/depreciation of the Australian dollar is:
0.6142 - 0.6158 = -0.0160 or 160 points, which is equivalent to 1600 pips.
9. The following exchange rate are quoted:

USD/AUD 0.5674
JPY/AUD 70.43
GBP/AUD 0.3891
EUR/AUD 0.6075
Solution
S(JPY/USD) 70.43/0.5674 = 124.13

S(GBP/USD) 0.3891/0.5674 = 0.6859
S(EUR/USD) 0.6075/0.5674 = 1.0707
S(JPY/GBP) 70.43/0.3891 = 181.01
S(JPY/EUR) 70.43/0.6075 = 115.93
S(EUR/GBP 0.6075/0.3891 = 1.5613
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
(GBP / AUD) b 0.3820
(GBP / EUR) b    0.6265
( EUR / AUD) a 1 / 1.6400
(GBP / AUD) a 0.3890

(GBP / EUR) a    0.6411
( EUR / AUD) b 1 / 1.6480
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
One-month forward 1.6260
Three-month 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:
1.6260  1.6030
 12  0.172  17.2%
1.6030
which means that the euro is selling at a premium. Similarly, the three-month
spread is:
1.5920  1.6030 12
  0.028  2.8%
1.6030 3
which means that the euro is selling at a discount.

Solution: International Inance Ssignment

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INTERNATIONAL FINANCE

1. On 12 August, a Commonwealth Bank dealer in Melbourne concluded a

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

9. The following exchange rate are quoted:

S(JPY/USD) 70.43/0.5674 = 124.13

10. The following exchange rates are quoted:

(GBP / AUD) a 0.3890

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