Problem 6.

6 Crisis in the Pacific

The Asian financial crisis which began in July 1997 wreaked havoc throughout the currency markets of East Asia.

a. Which of the following currencies had the largest depreciations or devaluations during the July to November period?
b. Which seemingly survived the first five months of the crisis with the least impact on their currencies?

Country
China
Hong Kong

Currency
yuan
dollar

Indonesia
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand

rupiah
won
ringgit
peso
dollar
dollar
baht

July 1997
(per US$)
8.40
7.75

November 1997
(per US$
8.40
7.73

Part a.
Percentage
Change vs dollar
0.0%
0.3%

2,400
900
2.50
27
1.43
27.80
25.0

3,600
1,100
3.50
34
1.60
32.70
40.0

-33.3%
-18.2%
-28.6%
-20.6%
-10.6%
-15.0%
-37.5%

Part b.
The Chinese government kept up against the dollar, meaning that the Chines yuan maintained value against the US
dollar. The Thai baht fell 37.5% in five months, and the Indonesian rupiah had a loss of 33.3%

European Terms: S(/$) and F(/$)

(S0 - S1) / S1

Problem 6.8 Forward Premiums on the Dollar/Euro ($/)

Use the following spot and forward bid-ask rates for the U.S. dollar/euro (US$/) exchange rate from December 10, 2010, to
answer the following questions:

Period
spot
1 month
2 months
3 months
6 months
12 months
24 months

US$/
Bid Rate
1.3231
1.3230
1.3228
1.3224
1.3215
1.3194
1.3147

US$/
Ask Rate
1.3232
1.3231
1.3229
1.3227
1.3218
1.3198
1.3176

a. What is the mid-rate for each maturity?

b. What is the annual forward premium for all maturities?
c. Which maturities have the smallest and largest forward premiums?
Since the exchange rate quotes are direct quotes on the dollar (US$/), the proper forward premium calculation is:
Forward premium = ( Forward - Spot ) / (Spot) x (360 / days)

Period
spot
1 month
2 months
3 months
6 months
12 months
24 months

Days Forward
30
60
90
180
360
720

US$/
Bid Rate
1.3231
1.3230
1.3228
1.3224
1.3215
1.3194
1.3147

US$/
Ask Rate
1.3232
1.3231
1.3229
1.3227
1.3218
1.3198
1.3176

a)
Calculated
Mid-Rate
1.32315
1.32305
1.32285
1.32255
1.32165
1.31960
1.31615

b)
Forward
Premium
-0.0907%
-0.1360%
-0.1814%
-0.2267%
-0.2683%
-0.2645%

The forward rates progressively require less and less U.S. dollars per euro than the current spot rate. Therefore the dollar is
selling forward at a premium and the euro is selling forward at a discount.
c) Which maturities have the smallest and largest forward premiums?
The 24 month forward rate had a small premium. The 1 month forward possesses the largest premium.

Problem 6.10 Triangular Arbitrage Using the Swiss Franc

The following exchange rates are available to you. (You can buy or sell at the stated rates.)
Mt. Fuji Bank
Mt. Rushmore Bank
Mt Blanc Bank

92.00/$
SF1.02/$
90.00/SF

Assume you have an initial SF12,000,000. Can you make a profit via triangular arbitrage?
If so, show the steps and calculate the amount of profit in Swiss francs.

Assumptions
Beginning funds in Swiss francs (SF)
Mt. Fuji Bank (yen/$)
Mt. Rushmore Bank (SF/$)
Mt Blanc Bank (yen/SF)
Try Number 1: Start with SF to $
Step 1: SF to $
Step 2: $ to yen
Step 3: yen to SF
Profit?

Values
12,000,000.00
92.00
1.0200
90.00

11,764,705.88
1,082,352,941.18
12,026,143.79
26,143.79
Profit or Loss?
Profit or Loss?

Try Number 2: Start with SF to yen

Step 1: SF to yen
Step 2: yen to $
Step 3: $ to SF
Profit?

1,080,000,000.00
11,739,130.43
11,973,913.04
(26,086.96)
Profit or Loss?
LOSS

D16 / D18
D22 x D17
D23 / D19
D24 - D16

Problem 6.12 Transatlantic Arbitrage

A corporate treasury working out of Vienna with operations in New York
simultaneously calls Citibank in New York City and Barclays in London. The two
banks give the following quotes at the same time on the euro:
Citibank NYC
$0.7551-61/

Barclays London
$0.7545-75/

Using $1 million or its euro equivalent, show how the corporate treasury could make
geographic arbitrage profit with the two different exchange rate quotes.

Assumptions
Beginning funds

Citibank NYC quotes:

Bid ($/)
Ask ($/)
Barclays London quotes:
Bid ($/)
Ask ($/)
Arbitrage Strategy #1
Initial investment
Buy euros from Barclays (at the ask rate)
Sell euros to Citibank (at the bid rate)
Arbitrage profit (loss)
Arbitrage Strategy #2
Initial investment
Buy euros from Citibank (at the ask rate)
Sell euros to Barclays (at the bid rate)
Arbitrage profit (loss)
The arbitrager cannot make a profit using these quotes.

Values
1,000,000.00

0.7551
0.7561
0.7545
0.7575

$
$
$

$
$
$

1,000,000.00
1,320,132.01
996,831.68
(3,168.32)

1,000,000.00
1,322,576.38
997,883.88
(2,116.12)

D16
D16 / D23
D27 x D19
D28 - D26