Problem No. 1 Currency Futures The current spot rate is $1.

.55 / and the three month forward rate is $1.50 / .On the basis of your analysis of the exchange rate, you are confident that the three month forward rate will be $1.52 / . Assume that you would like to buy or sell 1,000,000. Part 1 What actions do you need to take to speculate in the forward market? What is the expected dollar profit from speculation? Part 2 What would be your speculative profit in dollar terms if in three months the spot exchange rate is $1.46 / ? Problem No. 2 Interest Rate Parity Omni Advisors, an international pension fund manager, uses the concept of interest rate parity to forecast spot exchange rates. Omni gathers the following information South African Rand (ZAR) spot rate Expected 1 Year U.S. Interest Rate Expected 1 Year South African Interest Rate $0.158 / ZAR 10 % 8%

Using Interest Rate Parity (IRP), the 90 day and 180 day forward exchange rates in $US / ZAR

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Problem 3 Cross rates of Exchange

You have obtained the following direct foreign exchange quotes from the Wall Street Journal: $0.7497 / Swiss Franc $1.0974 / $0.0895/ Mexican Peso

$0.00852 / Calculate the following cross rates Mexican Peso / Swiss Franc /

Problem 4 Foreign Exchange Quotes On Friday, the New York foreign currency market closed with a quote of $0.9100 / Euro. To stimulate economic activity the Federal Reserve hints that interest rates will be lowered by 50 basis points ( of 1 %). At the close of business on Monday, reacting to speculation that the Fed will lower interest rates, the New York currency market closed with a quote of 0.9250 $ / Euro. Has the US dollar ($) appreciated or depreciated against the Euro? How can you explain your answer? Calculate the percentage change in appreciation or depreciation.

Problem No. 5 Covered Interest Arbitrage Suppose that the current spot rate is 1.50 / and the 1 year forward exchange rate is 1.60 / . The one year interest rate is 5.5 percent in Euros and 5.2 percent in Pound Sterling. You can borrow 1,000,000 or the equivalent of 666,667. Part 1 Assume that you are a Euro based investor; can you earn a covered interest arbitrage profit? What is the amount of the arbitrage profit in ? Part 2 Assume that you are a Pound Sterling based investor; can you earn a covered interest arbitrage profit? What is the amount of the arbitrage profit in ?

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Problem No. 6 Triangular Arbitrage Assume that you are a trader with Duetsche Bank. From the quote screen on your computer, you notice the following currency exchange rates Dresden Bank Credit Suisse USB 1.0242 / $ SF 1.5030 / $ .6750 / SF

Assume that you have $5,000,000 with which to conduct arbitrage. Show how you can use triangular arbitrage to earn a profit at theses exchange rates. Problem No. 7 Currency Options Part 1 You purchase a 67 Sep SF Call Option on the Philadelphia Options Exchange (PHLX) at a premium of $0.0300 per SF. A contract is 62,500SF. Calculate the profit on a single SF contract of if at expiration of the option the spot exchange rate is $0.7025 / SF Part 2 You purchase a 60 Sep SF Put Option on the Philadelphia Options Exchange (PHLX) at a premium of $0.0250 per SF. A contract is 62,500SF. Calculate the profit on a single SF contract of if at expiration of the option the spot exchange rate is $0.5650 / SF

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