Forex

Exercise Questions for Forex

Question 1 If interest rates in US and Singapore are 8% p.a. and 12% p.a. respectively, what is the 1 year forward exchange rate assuming interest rate parity holds and spot exchange rate: S$1.6372/US$1. A) S$1.5787/US$1, US$ appreciates B) S$1.6978/US$1, S$ depreciates C) S$1.5787/US$1, S$ appreciates D) S$1.6978/US$1, US$ depreciates E) None of the above Solution: B (1 + 12%) = (1/1.6372) (1 + 8%) x F F = S$1.6978/US$1 S$ depreciates, US$ appreciates

Question 2 Table: Exchange Rates on Dec 26, 2007 Bid Ask EURUSD - spot 1.0980 1.0990 1 month forward 1.1090 1.1111 2 months forward 1.0808 1.1090 USDJPY - spot 122.10 122.25 1 month forward 123.10 124.90 2 months forward 123.20 124.00 GBPUSD - spot 1.6723 1.6733 1 month forward 1.6890 1.7090 2 months forward 1.6756 1.6878 USDSGD - spot 1.3960 1.3970 1 month forward 1.3615 1.3645 2 months forward 1.3530 1.3540

On Dec 26, 2007, Bank ABC invested in US$ loans equivalent of GBP850,000 at the spot rate. The US loans yield 9% p.a.. At the same time, it purchased a 2 month forward contract to hedge the value of its US$ assets. How much will it profit in GBP in 2 months time?

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Solution: Step 1 Today, at spot bid rate of GBP/USD 1.6723, Bank A sells GBP850,000 to buy US$ to invest in US$ loans. Amount of US$ received = Amount of US$ loans = GBP850,000 x GBP1.6723/US$1 = US$1,421,455 Step 2 2 months later, US$ loans earn interest of 1.5% (= 9% x 2/12) P+I = US$1,421,455 x (1.015) = US$1,442,777 Step 3 Bank A converts US$ earnings back to GBP (Sell US$, buy GBP) at ask price (2 months forward USD1.6878/GBP1 = Bank A receives = US$1,442,777 / 1.6878 = GBP 854,827 Step 4 Profit = 854,827 850,000 = GBP 4,827

Question 3 A US firm plans to buy SGD today for purchase of S$150 mil worth of Singapore bonds from a Singapore firm in 6 months time. Payment to be made in SGD. Spot exchange rate: US$0.651/S$1. Interest rates on half year and 1 year time deposits are 5.25% and 5.50% in US and 3.25 % and 3.55% in Singapore respectively. What are the US firms gains/losses if the bond purchase deal is not executed in 6 months time? (Assume interest rate parity theory h olds). Solution: Payment in US$ to buy S$150mil now = 150 mil x 0.651 = US$97,650,000 Using interest rate parity theory: (1 + 5.25%) = (1 / 0.651) x (1 + 3.25%) x F F = US$0.6636/S$1 SGD appreciates. In 6 months time, selling S$150 mil = S$150 mil x 0.6636 = US$99,540,000 Gain for firm = US$99,540,000 - US$97,650,000 = US$1,890,000

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Question 4 If interest rates in Singapore and US are 10% pa and 8% pa respectively, calculate the 1 year forward exchange rate if spot exchange rate: S$1.6351/US$1. (Assume interest rate parity holds) (A) S$1.6654/US$1, US$ appreciates (B) S$1.6054/US$1, US$ appreciates (C) S$1.6654/US$1, US$ depreciates (D) S$1.6054/US$1, US$ depreciates (E) None of the above Solution: A (1 + 10%) = (1/1.6351) (1 + 8%) x F F = S$1.6654/US$1 S$ depreciates, US$ appreciates

Question 5

Table: Exchange Rates on Feb 16, 2007 Bid EURUSD - spot 1.0980 1 month forward 1.1090 2 months forward 1.0808 USDJPY - spot 122.10 1 month forward 123.10 2 months forward 123.20 GBPUSD - spot 1.6723 1 month forward 1.6890 2 months forward 1.6756 USDSGD - spot 1.3960 1 month forward 1.3615 2 months forward 1.3530

Ask 1.0990 1.1111 1.1090 122.25 124.90 124.00 1.6733 1.7090 1.6878 1.3970 1.3645 1.3540

On Feb 16, 2007, Bank A invested in US$ loans equivalent of EUR850,000 at the spot rate. The US$ loans yield 6% p.a.. At the same time, it purchased a 2 month forward contract to hedge the value of its US$ assets. How much will it receive in home currency in 2 months time? Solution: Step 1 Today, at spot bid rate of EUR/USD1.0980, Bank A sells EUR850,000 to buy US$ to invest in US$ loans. Amount of US$ received = Amount of US$ loans = EUR850,000 x US$1.0980/EUR1 = US$933,300 Step 2 2 months later, US$ loans earn interest of 1% (= 6% x 2/12) P+I = US$933,300 x (1.01) = US$942,633

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Step 3 Bank A converts US$ earnings back to EUR (Sell US$, buy EUR) at ask price (2 months forward) US$1.1090/EUR = Bank A receives = US$942,633 / US$1.1090 = EUR 849,985