国际财务管理课后习题答案内容

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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.

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.

Spot 1.3431-1.3436

One-Month 1.3432-1.3442

Three-Month 1.3448-1.3463

Six-Month 1.3488-1.3508

Solution:

One-Month 01-06

Three-Month 17-27

Six-Month 57-72

4.Usingthespotandoutrightforwardquotesinproblem3,determinethecorrespondingbid-askspreadsinpoints.

Solution:

Spot 5

One-Month 10

Three-Month 15

Six-Month 20

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

ThepatternofforwardpremiumsindicatesthattheCanadiandollaristradingatanincreasingpremiumversustheU.S.dollar.Thatis,itbecomesmoreexpensive(inbothabsoluteandpercentageterms)tobuyaCanadiandollarforwardforU.S.dollarsthefurtherintothefutureonecontracts.

6.UsingExhibit5.4,calculatetheone-,three-,andsix-monthforwardpremiumordiscountfortheU.S.dollarversustheBritishpoundusingEuropeantermquotations.Forsimplicity,assumeeachmonthhas30days.Whatistheinterpretationofyourresults?

Solution:Theformulawewanttouseis:

fN,$=[(FN(£/$)-S(£/$))/S(£/$)]x360/N

f1,$=[(.5251-.5242)/.5242]x360/30=-.0023

f3,$=[(.5268-.5242)/.5242]x360/90=-.0198

f6,$=[(.5290-.5242)/.5242]x360/180=-.0183

ThepatternofforwardpremiumsindicatesthattheBritishpoundistradingatadiscountversustheU.S.dollar.Thatis,itbecomesmoreexpensivetobuyaU.S.dollarforwardforBritishpounds(inabsolutebutnotpercentageterms)thefurtherintothefutureonecontracts.

7.Giventhefollowinginformation,whataretheNZD/SGDcurrencyagainstcurrencybid-askquotations?

AmericanTerms EuropeanTerms

BankQuotations Bid Ask Bid Ask

NewZealanddollar .7265 .7272 1.3751 1.3765

Singaporedollar .6135 .6140 1.6287 1.6300

Solution:Equation5.12fromthetextimpliesSb(NZD/SGD)=Sb($/SGD)xSb(NZD/$)=.6135x1.3765=.8445.Thereciprocal,1/Sb(NZD/SGD)=Sa(SGD/NZD)=1.1841.Analogously,itisimpliedthatSa(NZD/SGD)=Sa($/SGD)xSa(NZD/$)=.6140x1.3765=.8452.Thereciprocal,1/Sa(NZD/SGD)=Sb(SGD/NZD)=1.1832.Thus,theNZD/SGDbid-askspreadisNZD0.8445-NZD0.8452andtheSGD/NZDspreadisSGD1.1832-SGD1.1841.

8. AssumeyouareatraderwithDeutscheBank.Fromthequotescreenonyourcomputerterminal,younoticethatDresdnerBankisquoting€0.7627/$1.00andCreditSuisseisofferingSF1.1806/$1.00.YoulearnthatUBSismakingadirectmarketbetweentheSwissfrancandtheeuro,withacurrent€/SFquoteof.6395.Showhowyoucanmakeatriangulararbitrageprofitbytradingattheseprices.(Ignorebid-askspreadsforthisproblem.)Assumeyouhave$5,000,000withwhichtoconductthearbitrage.WhathappensifyouinitiallyselldollarsforSwissfrancs?What€/SFpricewilleliminatetriangulararbitrage?

Solution:TomakeatriangulararbitrageprofittheDeutscheBanktraderwouldsell$5,000,000toDresdnerBankat€0.7627/$1.00.Thistradewouldyield€3,813,500=$5,000,000x.7627.TheDeutscheBanktraderwouldthenselltheeurosforSwissfrancstoUnionBankofSwitzerlandatapriceof€0.6395/SF1.00,yieldingSF5,963,253=€3,813,500/.6395.TheDeutscheBanktraderwillreselltheSwissfrancstoCreditSuissefor$5,051,036=SF5,963,253/1.1806,yieldingatriangulararbitrageprofitof$51,036.

IftheDeutscheBanktraderinitiallysold$5,000,000forSwissfrancs,insteadofeuros,thetradewouldyieldSF5,903,000=$5,000,000x1.1806.TheSwissfrancswouldinturnbetradedforeurostoUBSfor€3,774,969=SF5,903,000x.6395.TheeuroswouldberesoldtoDresdnerBankfor$4,949,481=€3,774,969/.7627,oralossof$50,519.Thus,itisnecessarytoconductthetriangulararbitrageinthecorrectorder.

TheS(€/SF)crossexchangerateshouldbe.7627/1.1806=.6460.Thisisanequilibriumrateatwhichatriangulararbitrageprofitwillnotexist.(Thestudentcandeterminethisforhimself.)AprofitresultsfromthetriangulararbitragewhendollarsarefirstsoldforeurosbecauseSwissfrancsarepurchasedforeurosattoolowarateincomparisontotheequilibriumcross-rate,i.e.,Swissfrancsarepurchasedforonly€0.6395/SF1.00insteadoftheno-arbitragerateof€0.6460/SF1.00.Similarly,whendollarsarefirstsoldforSwissfrancs,anarbitragelossresultsbecauseSwissfrancsaresoldforeurosattoolowarate,resultingintoofeweuros.Thatis,eachSwissfrancissoldfor€0.6395/SF1.00insteadofthehigherno-arbitragerateof€0.6460/SF1.00.

9. Thecurrentspotexchangerateis$1.95/£andthethree-monthforwardrateis$1.90/£.Basedonyouranalysisoftheexchangerate,youareprettyconfidentthatthespotexchangeratewillbe$1.92/£inthreemonths.Assumethatyouwouldliketobuyorsell£1,000,000.

a. Whatactionsdoyouneedtotaketospeculateintheforwardmarket?Whatistheexpecteddollarprofitfromspeculation?

b. Whatwouldbeyourspeculativeprofitindollartermsifthespotexchangerateactuallyturnsouttobe$1.86/£.

Solution:

a. Ifyoubelievethespotexchangeratewillbe$1.92/£inthreemonths,youshouldbuy£1,000,000forwardfor$1.90/£.Yourexpectedprofitwillbe:

$20,000=£1,000,000x($1.92-$1.90).

b. Ifthespotexchangerateactuallyturnsouttobe$1.86/£inthreemonths,yourlossfromthelongpositionwillbe:

-$40,000=£1,000,000x($1.86-$1.90).

10. OmniAdvisors,aninternationalpensionfundmanager,planstosellequitiesdenominatedinSwissFrancs(CHF)andpurchaseanequivalentamountofequitiesdenominatedinSouthAfricanRands(ZAR).

Omniwillrealizenetproceedsof3millionCHFattheendof30daysandwantstoeliminatetheriskthattheZARwillappreciaterelativetotheCHFduringthis30-dayperiod.ThefollowingexhibitshowscurrentexchangeratesbetweentheZAR,CHF,andtheU.S.dollar(USD).

CurrencyExchangeRates

ZAR/USD

ZAR/USD

CHF/USD

CHF/USD

Maturity

Bid

Ask

Bid

Ask

Spot

6.2681

6.2789

1.5282

1.5343

30-day

6.2538

6.2641

1.5226

1.5285

90-day

6.2104

6.2200

1.5058

1.5115

DescribethecurrencytransactionthatOmnishouldundertaketoeliminatecurrencyriskoverthe30-dayperiod.

Calculatethefollowing:

•TheCHF/ZARcross-currencyrateOmniwoulduseinvaluingtheSwissequityportfolio.

•ThecurrentvalueofOmni’sSwissequityportfolioinZAR.

•TheannualizedforwardpremiumordiscountatwhichtheZARistradingversustheCHF.

CFAGuidelineAnswer:

ToeliminatethecurrencyriskarisingfromthepossibilitythatZARwillappreciateagainsttheCHFoverthenext30-dayperiod,Omnishouldsell30-dayforwardCHFagainst30-dayforwardZARdelivery(sell30-dayforwardCHFagainstUSDandbuy30-dayforwardZARagainstUSD).

Thecalculationsareasfollows:

•Usingthecurrencycrossratesoftwoforwardforeigncurrenciesandthreecurrencies (CHF,ZAR,USD),theexchangewouldbeasfollows:

--30dayforwardCHFaresoldforUSD.Dollarsareboughtattheforwardselling priceofCHF1.5285=$1(doneatasksidebecausegoingfromcurrencyinto dollars)

--30dayforwardZARarepurchasedforUSD.Dollarsaresimultaneouslysoldto purchaseZARattherateof6.2538=$1(doneatthebidsidebecausegoingfrom dollarsintocurrency)

--Forevery1.5285CHFheld,6.2538ZARarereceived;thusthecrosscurrencyrateis 1.5285CHF/6.2538ZAR=0.244411398.

•Atthetimeofexecutionoftheforwardcontracts,thevalueofthe3millionCHF equityportfoliowouldbe3,000,000CHF/0.244411398=12,274,386.65ZAR.

•TocalculatetheannualizedpremiumordiscountoftheZARagainsttheCHFrequires comparisonofthespotsellingexchangeratetotheforwardsellingpriceofCHFfor ZAR.

Spotrate=1.5343CHF/6.2681ZAR=0.244779120

30dayforwardaskrate1.5285CHF/6.2538ZAR=0.244411398

Thepremium/discountformulais:

[(forwardrate–spotrate)/spotrate]x(360/#daycontract)=

[(0.244411398–0.24477912)/0.24477912]x(360/30)=

-1.8027126%=-1.80%discountZARtoCHF

MINICASE:SHREWSBURYHERBALPRODUCTS,LTD.

ShrewsburyHerbalProducts,locatedincentralEnglandclosetotheWelshborder,isanold-lineproducerofherbalteas,seasonings,andmedicines.ItsproductsaremarketedallovertheUnitedKingdomandinmanypartsofcontinentalEuropeaswell.

ShrewsburyHerbalgenerallyinvoicesinBritishpoundsterlingwhenitsellstoforeigncustomersinordertoguardagainstadverseexchangeratechanges.Nevertheless,ithasjustreceivedanorderfromalargewholesalerincentralFrancefor£320,000ofitsproducts,conditionalupondeliverybeingmadeinthreemonths’timeandtheorderinvoicedineuros.

Shrewsbury’scontroller,EltonPeters,isconcernedwithwhetherthepoundwillappreciateversustheeurooverthenextthreemonths,thuseliminatingallormostoftheprofitwhentheeuroreceivableispaid.Hethinksthisisanunlikelypossibility,buthedecidestocontactthefirm’sbankerforsuggestionsabouthedgingtheexchangerateexposure.

Mr.Peterslearnsfromthebankerthatthecurrentspotexchangerateis€/£is€1.4537,thustheinvoiceamountshouldbe€465,184.Mr.Petersalsolearnsthatthethree-monthforwardratesforthepoundandtheeuroversustheU.S.dollarare$1.8990/£1.00and$1.3154/€1.00,respectively.Thebankerofferstosetupaforwardhedgeforsellingtheeuroreceivableforpoundsterlingbasedonthe€/£forwardcross-exchangerateimplicitintheforwardratesagainstthedollar.

WhatwouldyoudoifyouwereMr.Peters?

SuggestedSolutiontoShrewsburyHerbalProducts,Ltd.

NotetoInstructor:Thiselementarycaseprovidesanintuitivelookathedgingexchangerateexposure.StudentsshouldnothavedifficultywithiteventhoughhedgingwillnotbeformallydiscusseduntilChapter8.ThecaseisconsistentwiththediscussionthataccompaniesExhibit5.9ofthetext.ProfessorofFinance,BanikantaMishra,ofXavierInstituteofManagement–Bhubaneswar,Indiacontributedtothissolution.

SupposeShrewsburysellsatatwentypercent