国际财务管理课后习题答案chapter5.docx

国际财务管理课后习题答案chapter5.docx

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国际财务管理课后习题答案chapter5

国际财务管理课后习题答案chapter-5

CHAPTER5THEMARKETFORFOREIGNEXCHANGE

SUGGESTEDANSWERSANDSOLUTIONSTOEND-OF-CHAPTER

QUESTIONSANDPROBLEMS

QUESTIONS

1.Giveafulldefinitionofthemarketforforeignexchange.

Answer:

Broadlydefined,theforeignexchange（FX）marketencompassestheconversionofpurchasingpowerfromonecurrencyintoanother,bankdepositsofforeigncurrency,theextensionofcreditdenominatedinaforeigncurrency,foreigntradefinancing,andtradinginforeigncurrencyoptionsandfuturescontracts.

2.Whatisthedifferencebetweentheretailorclientmarketandthewholesaleorinterbankmarketforforeignexchange?

Answer:

Themarketforforeignexchangecanbeviewedasatwo-tiermarket.Onetieristhewholesaleorinterbankmarketandtheothertieristheretailorclientmarket.InternationalbanksprovidethecoreoftheFXmarket.Theystandwillingtobuyorsellforeigncurrencyfortheirownaccount.Theseinternationalbanksservetheirretailclients,corporationsorindividuals,inconductingforeigncommerceormakinginternationalinvestmentinfinancialassetsthatrequiresforeignexchange.Retailtransactionsaccountforonlyabout14percentofFXtrades.Theother86percentisinterbanktradesbetweeninternationalbanks,ornon-bankdealerslargeenoughtotransactintheinterbankmarket.

3.Whoarethemarketparticipantsintheforeignexchangemarket?

Answer:

ThemarketparticipantsthatcomprisetheFXmarketcanbecategorizedintofivegroups:

internationalbanks,bankcustomers,non-bankdealers,FXbrokers,andcentralbanks.InternationalbanksprovidethecoreoftheFXmarket.Approximately100to200banksworldwidemakeamarketinforeignexchange,i.e.,theystandwillingtobuyorsellforeigncurrencyfortheirownaccount.Theseinternationalbanksservetheirretailclients,thebankcustomers,inconductingforeigncommerceormakinginternationalinvestmentinfinancialassetsthatrequiresforeign

6.WhydoesmostinterbankcurrencytradingworldwideinvolvetheU.S.dollar?

Answer:

Tradingincurrenciesworldwideisagainstacommoncurrencythathasinternationalappeal.ThatcurrencyhasbeentheU.S.dollarsincetheendofWorldWarII.However,theeuroandJapaneseyenhavestartedtobeusedmuchmoreasinternationalcurrenciesinrecentyears.Moreimportantly,tradingwouldbeexceedinglycumbersomeanddifficulttomanageifeachtradermadeamarketagainstallothercurrencies.

7.Banksfinditnecessarytoaccommodatetheirclients’needstobuyorsellFXforward,inmanyinstancesforhedgingpurposes.Howcanthebankeliminatethecurrencyexposureithascreatedforitselfbyaccommodatingaclient’sforwardtransaction?

Answer:

Swaptransactionsprovideameansforthebanktomitigatethecurrencyexposureinaforwardtrade.Aswaptransactionisthesimultaneoussale（orpurchase）ofspotforeignexchangeagainstaforwardpurchase（orsale）ofanapproximatelyequalamountoftheforeigncurrency.Toillustrate,supposeabankcustomerwantstobuydollarsthreemonthsforwardagainstBritishpoundsterling.Thebankcanhandlethistradeforitscustomerandsimultaneouslyneutralizetheexchangerateriskinthetradebyselling（borrowed）Britishpoundsterlingspotagainstdollars.Thebankwilllendthedollarsforthreemonthsuntiltheyareneededtodeliveragainstthedollarsithassoldforward.TheBritishpoundsreceivedwillbeusedtoliquidatethesterlingloan.

8.ACD/$banktraderiscurrentlyquotingasmallfigurebid-askof35-40,whentherestofthemarketistradingatCD1.3436-CD1.3441.Whatisimpliedaboutthetrader’sbeliefsbyhisprices?

Answer:

ThetradermustthinktheCanadiandollarisgoingtoappreciateagainsttheU.S.dollarandthereforeheistryingtoincreasehisinventoryofCanadiandollarsbydiscouragingpurchasesofU.S.dollarsbystandingwillingtobuy$atonlyCD1.3435/$1.00andofferingtosellfrominventoryattheslightlylowerthanmarketpriceofCD1.3440/$1.00.

9.Whatistriangulararbitrage?

Whatisaconditionthatwillgiverisetoatriangulararbitrageopportunity?

Answer:

TriangulararbitrageistheprocessoftradingoutoftheU.S.dollarintoasecondcurrency,thentradingitforathirdcurrency,whichisinturntradedforU.S.dollars.Thepurposeistoearnanarbitrageprofitviatradingfromthesecondtothethirdcurrencywhenthedirectexchangebetweenthetwoisnotinalignmentwiththecrossexchangerate.

Most,butnotall,currencytransactionsgothroughthedollar.Certainbanksspecializeinmakingadirectmarketbetweennon-dollarcurrencies,pricingatanarrowerbid-askspreadthanthecross-ratespread.Nevertheless,theimpliedcross-ratebid-askquotationsimposeadisciplineonthenon-dollarmarketmakers.Iftheirdirectquotesarenotconsistentwiththecrossexchangerates,atriangulararbitrageprofitispossible.

PROBLEMS

1.UsingExhibit5.4,calculateacross-ratematrixfortheeuro,Swissfranc,Japaneseyen,andtheBritishpound.UsethemostcurrentAmericantermquotestocalculatethecross-ratessothatthetriangularmatrixresultingissimilartotheportionabovethediagonalinExhibit5.6.

Solution:

Thecross-rateformulawewanttouseis:

S（j/k）=S（$/k）/S（$/j）.

Thetriangularmatrixwillcontain4x（4+1）/2=10elements.

¥

SF

£

$

Euro

138.05

1.5481

.6873

1.3112

Japan（100）

1.1214

.4979

.9498

Switzerland

.4440

.8470

U.K

1.9077

2.UsingExhibit5.4,calculatetheone-,three-,andsix-monthforwardcross-exchangeratesbetweentheCanadiandollarandtheSwissfrancusingthemostcurrentquotations.Statetheforwardcross-ratesin“Canadian”terms.

Solution:

Theformulaswewanttouseare:

FN（CD/SF）=FN（$/SF）/FN（$/CD）

or

FN（CD/SF）=FN（CD/$）/FN（SF/$）.

WewillusethetopformulathatusesAmericantermforwardexchangerates.

F1（CD/SF）=.8485/.8037=1.0557

F3（CD/SF）=.8517/.8043=1.0589

F6（CD/SF）=.8573/.8057=1.0640

3.Restatethefollowingone-,three-,andsix-monthoutrightforwardEuropeantermbid-askquotesinforwardpoints.

Spot1.3431-1.3436

One-Month1.3432-1.3442

Three-Month1.3448-1.3463

Six-Month1.3488-1.3508

Solution:

One-Month01-06

Three-Month17-27

Six-Month57-72

4.Usingthespotandoutrightforwardquotesinproblem3,determinethecorrespondingbid-askspreadsinpoints.

Solution:

Spot5

One-Month10

Three-Month15

Six-Month20

5.UsingExhibit5.4,calculatetheone-,three-,andsix-monthforwardpremiumordiscountfortheCanadiandollarversustheU.S.dollarusingAmericantermquotations.Forsimplicity,assumeeachmonthhas30days.Whatistheinterpretationofyourresults?

Solution:

Theformulawewanttouseis:

fN,CD=[（FN（$/CD）-S（$/CD/$）/S（$/CD）]x360/N

f1,CD=[（.8037-.8037）/.8037]x360/30=.0000

f3,CD=[（.8043-.8037）/.8037]x360/90=.0030

f6,CD=[（.8057-.8037）/.8037]x360/180=.0050

ThepatternofforwardpremiumsindicatesthattheCanadiandollaristradingatanincreasingpremiumversustheU.S.dollar.Thatis,itbecomesmoreexpensive（inbothabsoluteandpercentageterms）tobuyaCanadiandollarforwardforU.S.dollarsthefurtherintothefutureonecontracts.

6.UsingExhibit5.4,calculatetheone-,three-,andsix-monthforwardpremiumordiscountfortheU.S.dollarversustheBritishpoundusingEuropeantermquotations.Forsimplicity,assumeeachmonthhas30days.Whatistheinterpretationofyourresults?

Solution:

Theformulawewanttouseis:

fN,$=[（FN（£/$）-S（£/$））/S（£/$）]x360/N

f1,$=[（.5251-.5242）/.5242]x360/30=-.0023

f3,$=[（.5268-.5242）/.5242]x360/90=-.0198

f6,$=[（.5290-.5242）/.5242]x360/180=-.0183

ThepatternofforwardpremiumsindicatesthattheBritishpoundistradingatadiscountversustheU.S.dollar.Thatis,itbecomesmoreexpensivetobuyaU.S.dollarforwardforBritishpounds（inabsolutebutnotpercentageterms）thefurtherintothefutureonecontracts.

7.Giventhefollowinginformation,whataretheNZD/SGDcurrencyagainstcurrencybid-askquotations?

AmericanTermsEuropeanTerms

BankQuotationsBidAskBidAsk

NewZealanddollar.7265.72721.37511.3765

Singaporedollar.6135.61401.62871.6300

Solution:

Equation5.12fromthetextimpliesSb（NZD/SGD）=Sb（$/SGD）xSb（NZD/$）=.6135x1.3765=.8445.Thereciprocal,1/Sb（NZD/SGD）=Sa（SGD/NZD）=1.1841.Analogously,itisimpliedthatSa（NZD/SGD）=Sa（$/SGD）xSa（NZD/$）=.6140x1.3765=.8452.Thereciprocal,1/Sa（NZD/SGD）=Sb（SGD/NZD）=1.1832.Thus,theNZD/SGDbid-askspreadisNZD0.8445-NZD0.8452andtheSGD/NZDspreadisSGD1.1832-SGD1.1841.

8.AssumeyouareatraderwithDeutscheBank.Fromthequotescreenonyourcomputerterminal,younoticethatDresdnerBankisquoting€0.7627/$1.00andCreditSuisseisofferingSF1.1806/$1.00.YoulearnthatUBSismakingadirectmarketbetweentheSwissfrancandtheeuro,withacurrent€/SFquoteof.6395.Showhowyoucanmakeatriangulararbitrageprofitbytradingattheseprices.（Ignorebid-askspreadsforthisproblem.）Assumeyouhave$5,000,000withwhichtoconductthearbitrage.WhathappensifyouinitiallyselldollarsforSwissfrancs?

What€/SFpricewilleliminatetriangulararbitrage?

Solution:

TomakeatriangulararbitrageprofittheDeutscheBanktraderwouldsell$5,000,000toDresdnerBankat€0.7627/$1.00.Thistradewouldyield€3,813,500=$5,000,000x.7627.TheDeutscheBanktraderwouldthenselltheeurosforSwissfrancstoUnionBankofSwitzerlandatapriceof€0.6395/SF1.00,yieldingSF5,963,253=€3,813,500/.6395.TheDeutscheBanktraderwillreselltheSwissfrancstoCreditSuissefor$5,051,036=SF5,963,253/1.1806,yieldingatria