# Tutorial Solutions 4

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Tutorial solutions 4
QUESTIONS

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

Answer: The forward market involves contracting today for the future purchase or sale of foreign exchange. The forward price may be the same as the spot price, but usually it is higher (at a premium) or lower (at a discount) than the spot price.

PROBLEMS

4. Restate the following one-, three-, and six-month outright forward European term bid-ask quotes in forward points.
Spot

1.3431-1.3436

One-Month

1.3432-1.3442

Three-Month

1.3448-1.3463

Six-Month

1.3488-1.3508

Solution:
One-Month

01-06

Three-Month

17-27

Six-Month

57-72

6. Using Exhibit 5.4, calculate the one-, three-, and six-month forward premium or discount for the Canadian dollar versus the U.S. dollar using American term quotations. assume each month has 30 days. What is the interpretation of your results?

Solution: The formula we want to use is: f = [(F(\$/CD) - S(\$/CD))/S(\$/CD)] x 360/N days

f 30 = [(.9628 - .9629)/.9629] x 360/30 = -.12% f 90 = [(.9624 - .9629)/.9629] x 360/90 = -.21% f 180 = [(.9614 - .9629)/.9629] x 360/180 = -.31%

For simplicity,

The pattern of forward premiums indicates that the Canadian dollar is trading at a discount versus the U.S. dollar. That is, it becomes less expensive to buy a Canadian dollar forward.
Also, the discount increases in magnitude over time.

10. Doug Bernard specializes in cross-rate arbitrage. He notices the following quotes:

Swiss franc/dollar = SFr1.5971/\$
Australian dollar/U.S. dollar = A\$1.8215/\$
Australian dollar/Swiss franc = A\$1.1440/SFr

Ignoring transaction costs, does Doug Bernard have an arbitrage opportunity based on these quotes?

If there is an arbitrage opportunity, what steps would he take to make an

arbitrage profit, and how would he profit if he has \$1,000,000 available for this purpose.

Note: It does not matter which pair of currencies you choose to compute the implicit cross rate. You will arrive

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