1

Azarkan Hind
Gouraizim Abdelaziz
Illoul Yassine
Hajar Jehou

FIN 3304- International Finance

Dr. Charafi Abdellatif

Fall Term
2013

Part A

This part of the repot includes a description about the changes in the relative value of the three
currencies: USD, EUR, and JPY over the period from 2007 to 2013. This part should also
answer the following three questions:
-

Did the currencies weaken or strengthen relative to each other?

What explanations regarding the exchange rate changes exist?
What do you believe is the most plausible explanation for the exchanges rate
movements?

We will start by comparing the USD and EUR. It is very known that the EUR and USD are
the worlds two largest currencies; they are the most popular currency pair in the world.
Concerning arbitrage opportunities, they are not really offered; nonetheless, people trade on
USD and EUR market, they present a very low spread compared to other pairs and there is a
steady liquidity for investors to trade easily. Speculators always choose to trade on this
currency pair thanks to the mixture of volatility and liquidity. When we want to describe the
weakening or strengthening of currencies relative to each other, we should first understand
what it means to say a USD is strengthen against another currency or weaken. Both terms
have similar perspective, which means they both refer to the changes in the US dollar relative
to other currencies over a specific period of time. If a strengthening USD has increased in
value compared to the currency, in our case, the EUR, this means that the USD buys more of
the EUR. Unlike the strengthen USD, the weaken is when one USD has fallen in values
compared to the EUR. According to several websites about FOREX market and according to
our data found from the Oanda website, we could conclude that the currency pair has weaken
and strengthen depending on time. According to Federal Reserve, Exchange rates, in 2008,
the dollar strengthened as businesses collected dollars during the global financial crisis. In
2009, the dollar fell thanks to debt dears. In 2010, the Greece debt crisis strengthened the
dollar. In 2011, the dollars value against the EUR fell, then regained. In 2012 and by the end
of the year the dollar weakened. In 2013, the dollar lost value against the euro, as it appeared
the EU was finally solving the crisis in the eurozone.
Comparing the USD/JPY and according to the investopedia website, when treasury bonds,
notes and bills rise, USD/JPY prices weaken, the logic is that USD never default on its bond
obligations, it is more secure. Looking at our data, we found that between 2007 and 2008, the
value of USD was strengthened against the JPY; however, starting from the end year of 2008
the USD weakened against the Japanese Yen because of several reasons. The currency pair is
traditionally, correlated, but do not always remain on a constant basis.
Concerning the relationship between EUR and JPY, the EUR/JPY rate is comprised of the
Euro as the 'base' currency, and the Japanese yen as the 'counter' or 'quote' currency. The
EUR/JPY exchange rate is actually a comparison of the value of one currency in relation to
the other. As trading occurs on currency comparison, it is easy to trade EUR/JPY in any
economic environment. The EUR/JPY exchange rate can also affect the movement of other
FOREX rates such as USD/JPY. For example, if the factors that lead to the appreciation of the
Euro affect the US Dollar more than the Yen, the USD/JPY rate may decrease. In our data, we
can clearly see that the EUR was weakened from 2007 up 2012, and after that, it started
strengthening again up to 2013 but not with the same rate as it was at the beginning year of
2007.

If we want to look at the factors that may influence the direction of the EUR and USD, the
primary factor is the strength relationship between both economies. A faster growing US
economy strengthens the dollar against the euro, and a faster growing European Union
economy strengthens the euro against the dollar. Interest rate is one of the key reasons behind
the strength of both economies. For example, when eurozone interest rates are higher, the
dollar weakens. Another factor that can have a strong influence on the USD and EUR is the
political instability among members of the European Union.
Factors influencing the USD and JPY are also referred to as the changes in correlations that
may occur for many reasons between the two currencies. Correlation can even assist you in
determining if a trend of a currency pair is powerful and if it will continue to advance in its
present direction. For instance, the EUR/USD and the USD/JPY often move in completely the
opposite directions. If the EUR/USD is climbing, then the USD/JPY is dropping. The
USD/JPY is affected by factors that influence the value of the U.S. dollar and the Japanese
yen, both in relation to each other, and to other currencies. For this reason, the interest rate
differential between the Federal Reserve (Fed) and the Bank of Japan (BoJ) will affect the
value of these currencies when compared to each other. For example, when the Fed intervenes
in open market activities to make the U.S. dollar stronger, the value of the USD/JPY cross
could increase, due to a strengthening of the U.S. dollar when compared to the Japanese yen.

Part B
1. The date and exchange rates when the difference between the implied cross rate and the
actual exchange rate for the two foreign currencies was the largest: (Attached the excel file).

Then, the largest value is 0.1885

2. Before answering the question, as we learnt in the beginning of FIN 3305 course, there is a
difference between the rates found in the Oanda website as the market rates and OUR
convention. In order to solve the following problem, we took the data from the website as
market rates and we convert them to our convention.
Our convention:
EUR/USD = 0.6736
JPY/USD = 91.42
JPY/EUR = 135.53
Assume we have $ 10,000,000
We should find the Synthetic for JPY/EUR
[JPY/EUR]synthetic = [JPY/USD] * [USD/EUR]
[JPY/EUR]synthetic = [JPY/USD] * (1/[EUR/USD])

[JPY/EUR]synthetic = 91.42* (1/0.6736)

[JPY/EUR]synthetic = 135.7185273
Then, Synthetic= 135.7185273

, Market= 135.53

Buy EUR in the market at 135.53 and sell synthetically at 135.7185273

Sell $10,000,000 and buy JPY
JPY = 10,000,000 * (JPY/USD)
JPY= 10,000,000 * 91.42
JPY= 914,200,000
Sell JPY buy EUR with market rate
EUR= JPY* (EUR/JPY) = 914,200,000 * (1/135.53)
EUR= 6,745,370.029
Sell EUR and buy JPY synthetically
JPY= EUR* (JPY/EUR) = 6,745,370.029 * 135.7185273
JPY= 915,471,686.4
Sell JPY and buy USD
USD= JPY * (USD/JPY) = 915,471,686.4 * (1/91.42)
USD= 10,013,910.37
Finally, the profit earned through the process of triangular arbitrage if there were no
transaction costs is: USD =10,013,910.37 10,000,000 = $ 13,910.37

Part C

Home Currency = JPY

Foreign Currency = USD
The value of the deal is $ 150,000,000
Contract was written in terms of JPY at the 1st week of March 2012.
Goods delivery will be in 6 months at the 1st week of September 2012.

1. Show the exchange rate for the date closest to the contract signing date. Indicate the
value of the goods in the contract in terms of the second currency based on the
exchange rate on the date the contract was signed.
a. From part I, the exchange rate in the 1st week of March 2012 is: USD/JPY =
81.05. which means in our convention JPY/USD = 81.05
b. The value of the contract in terms of JPY on the date the contract was signed
is:

USD/JPY = 81.05 => 1 USD = 81.05 JPY (in our convention JPY/USD 81.5)
USD 150,000,000 x JPY/USD 81.05 = JPY 12,157,500,000
2. Assume that the U.S. firm did not hedge the currency risk implied in the contract.
Show the gain or loss in U.S. dollars that the firm experienced when the goods were
delivered versus the value when the contract was signed.
a. From part I, the exchange rate at the delivery date (1st week of September
2012) is: USD/JPY = 78.57
b. The value of the contract at this date in terms of JPY is:
USD/JPY = 78.57 => 1 USD = 78.57 JPY (in our convention JPY/USD 78.57)
USD 150,000,000 x JPY/USD 78.57 = JPY 11,785,500,000
c. The loss that the firm experienced when the goods were delivered versus the
value when the contract was signed:
11,785,500,000 - 12,157,500,000 = JPY -372,000,000
d. The loss that the firm experienced in U.S dollars:
372,000,000/ 78.57 = $ 4,734,631.539
3. Indicate the U.S. dollar amount the firm would have received if it had locked-in this
forward rate at contract signing
From the website mentioned in the assignment, we found that the 6-month forward
rate is:

USD/JPY = 81.64 => 1 USD = 81.64 JPY (in our convention JPY/USD 81.64)
USD 150,000,000 x JPY/USD 81.64 = JPY 12,246,000,000
What we could understand from the assignment: the difference between step 1 and our
calculation in step 3.
JPY 12,246,000,000 - 12,157,500,000 = JPY 88,500,000
In USD:

88,500,000/81.64 = USD 1,084,027.438

References
EUR and JPY currency trading. (n.d.). EUR JPY Forex Trading. Retrieved December 8, 2013, from
http://www.forexyard.com/en/trading/eur-jpy

Euro to U.S. Dollar Currency Exchange Rate Forecast (EUR to USD). (n.d.). ForecastChart.com.
Retrieved December 8, 2013, from http://www.forecast-chart.com/usd-euro.html

Forex Walkthrough. (n.d.). Investopedia. Retrieved December 8, 2013, from

http://www.investopedia.com/walkthrough/forex/intermediate/level5/jpy.aspx

Frankel, J. A. (n.d.). Foreign Exchange. : The Concise Encyclopedia of Economics. Retrieved

December 8, 2013, from http://www.econlib.org/library/Enc/ForeignExchange.html

How to Read Forex Prices. (n.d.). Inside Futures: Futures, Options and Forex Trading Courses
Available Online. Retrieved December 8, 2013, from
http://www.insidefutures.com/education/courses/forexprices.php

Japanese Yen to US Dollar Currency Exchange Rate Forecast: JPY USD. (n.d.). ForecastChart.com.
Retrieved December 8, 2013, from http://www.forecast-chart.com/usd-japanese-yen.html

Twomey, B. (2009, December 16). The U.S. Dollar And The Yen: An Interesting Partnership.
Investopedia. Retrieved December 8, 2013, from
http://www.investopedia.com/articles/forex/09/japanese-yen-us-treasury-bonds.asp