Running head: WEEK 4-CHAPTER 5 1

International Finance MG760-144

Week 4 Chapter 5

Nazifa Antara Prome

Homework Assignment

Monroe College King Graduate School

WEEK 4- CHAPTER 5 2

International Finance MG760-144

Week 4 Chapter 5
Homework Assignment

Using the American term quotes from Exhibit 5.4, calculate a cross-rate matrix for the euro,
Swiss franc, Japanese yen, and the British pound so that the resulting triangular matrix is similar
to the portion above the diagonal in Exhibit 5.6, on page 132 - 133.

1. A CD/$ bank trader is currently quoting a small figure bid-ask of 35-40, when the rest of
the market is trading at CD1.3436-CD1.3441. What is implied about the traders beliefs
by his prices? Provide a clear calculation.

The trader assumed that the Canadian dollar value to be appreciate to the US dollar. The
trader was determining to increase the inventory of Canadian Dollars by discouraging
purchases of US dollars and was willing to Buy $ at only CD 1.3435/$1.00 and offering
to sell from the stock at the lower market price of CDI 1.3440/ $1.00
 WEEK 4- CHAPTER 5 3

Question 1: you need to create table of cross rate matrix for the euro, Swiss franc, Japanese Yen,
and the British Pound

Currency Japanese yen Euro UK pound Swiss Franc

Japanese Yen - 112.75 135.0193 79.804

Euro 0.00887 - 1.1947 0.7077

UK pound 0.007406 0.8351 - 0.59106

Swiss Franc 0.0125 1.4128 1.6918 -

Cross exchange rate calculation: Please follow the calculation below to find the cross rate matrix

S (JPY/EUR) = S (USD/ EUR)/ S (USD/JPY)

= 1.2238/0.010854

= 112.75

S (JPY/GBP) = S (USD/GBP)/ S (USD/JPY)

= 1.4655/0.010854
= 135.0193

S (JPY/CHF) = S (USD/CHF)/ S (USD/JPY)

= 0.8662/0.010854
= 79.804S

(EUR/JPY) = S (USD/EUR)/ S (USD/JPY)

= 0.010854/1.2238
= 0.00887S

(EUR/GBP)= S (USD/GBP)/ S (USD/EUR)

= 1.4655/ 1.2238
WEEK 4- CHAPTER 5 4

= 1.1974S

(EUR/CHF) = S (USD/CHF)/ S (USD/EUR)

= 0.8662/ 1.2238
= 0.7077S

(GBP/ JPY) = S (USD/JPY)/ S (USD/GBP)

= 0.010854/ 1.4655
= 0.007406

2. What is meant by a currency trading at a discount or at a premium in the forward market?

Provide supportive information.

The forward market for FX includes the agreements to buy and sell foreign currencies in the
future based on the todays agreement. The interest rate differential implicit by forward premium
or discount. A forward premium occurs when dealing with foreign exchange. A forward
premium is often calculated as the difference between the spot rate and the forward rate but any
expected future exchange rate suffices. For example,

S = Current spot exchange rate.

F = Current Forward exchange rate
$ = Stands for USD interest rate
= Stands for GBP interest rate
WEEK 4- CHAPTER 5 5

For example, suppose the is appreciating from S($/) = 1.55 to F180($/) = 1.60.
The 180-day forward premium is given by:

f 180, v$ = f180 ($/) S( $/)

S( $/)

= 1.60 1.55 X 2
1.55

= 6.45%