International Finance Problems Essay Example

PROBLEMS 1. Mississippi Mud Pies, Inc. needs to buy 1,000,000 Swiss francs (CHF) to pay its Swiss chocolate supplier. Its banker quotes bid–ask rates of CHF1.3990–1.4000/USD. What will be the dollar cost of the CHF1,000,000? 
Answer: The bank’s bid rate is CHF1.3990/$. That is the price at which the bank is willing to buy $1 in return for CHF1.3990. The bank sells dollars at its ask price CHF1.4000/$.
Mississippi Mud Pies must sell dollars to the bank to buy CHF. Therefore Mississippi Mud Pies will receive the bank’s bid rate of CHF1.3990/$. 
The dollar cost of CHF1 million is consequently
CHF 1 million / CHF1.399/$ = $714,796 2. If the Japanese yen–U.S. dollar exchange rate is ¥104.30/$, and it takes 25.15 Thai bahts to purchase 1 dollar, what is the yen price of the baht? 
Answer: To prevent triangular arbitrage, the direct quote of the yen price of the baht (¥/THB) must equal the yen price of the dollar times the dollar price of the baht (which is the reciprocal of the baht price of the dollar: 
¥104.30/$ 1/(THB25.15/$) = ¥104.30/$ $0.03976/THB = ¥ 4.1471/THB 3. As a foreign exchange trader, you see the following quotes for Canadian dollars (CAD), U.S. dollars (USD), and Mexican pesos (MXN): 
CAD1.419/USD MXN6.4390/CAD MXN8.7535/USD Is there an arbitrage opportunity, and if so, how would you exploit it? 
Answer: The direct quote for the cross-rate of MXN6.4390/CAD should equal the implied cross-rate using the dollar as an intermediary currency; otherwise there exists a triangular arbitrage opportunity. The indirect cross rate is 
MXN8.7535/USD / CAD1.419/USD = MXN6.1688/CAD 
This indirect cross rate is less than the direct quote so there is an arbitrage opportunity to exploit between the three currencies. In this situation, buying the CAD with MXN by first buying USD with MXN and then buying the CAD with the USD and finally selling that amount of CAD directly for MXN would make a profit because we would be buying the CAD at a low MXN