<p> FURTHER QUESTIONS TO TEST BANK NUMBER ONE</p><p>A. The six-month interest rate or the Canadian $ is 9% when the six-month interest rate for the US $ is 6.75%. At the same time the spot Canadian $ quotation in New York is US $0.9100 and the six-month forward rate is US $0.9025.</p><p>(a) Is interest rate parity holding? Why? (b) If not, how could advantage be taken of the situation?</p><p>(c) If a large number of operators decide to do the arbitrage suggested</p><p> under (b), what will the effect be upon spot and forward quotations and</p><p> upon interest rates for the two currencies?</p><p>B. Imagine that you are a trader working for a New York bank. The spot exchange rate against the Canadian $ is US $0.9968 and the one-month and one- year forward rates are respectively US $0.9985 and US $1.0166. Twelve-month interest rates in the USA and Canada may be taken as 6.45% and 4.46% respectively.</p><p>(a) What is the forward premium as an annual percentage? (b) Which currency is at a premium? Why?</p><p>You become party to some inside information which suggests that US interest rates will rise by 1 per cent per annum during the next month. The bank has a rule that in the foreign exchange markets ‘buy equals sell’. This means that for any currency the total of long positions must equal the total of short positions – but this aggregation disregards maturity.</p><p>(c) Indicate the mechanics of two operations by which you may trade in expectation of profit for the bank should the inside information turn out to be well-founded.</p><p>© Pearson Education Limited 2004 C. On 27 March 2004 the following applied:</p><p>£/krone spot value 3.79–3.80 11 9 £ three-month interest 13 /16–13 /16</p><p>1 15 Krone three-month interest 6 /16–5 /16</p><p>1 £/krone three-month forward 7 /8–7pm</p><p>(The ensuing three months consists of 90 days)</p><p>The treasurer of a £-based company decided to hedge a krone receivable due in three months time. What are two alternative methods, and what are the effective interest rates for each? Why are they not the same?</p><p>D. A UK company has a requirement for krone for 3 months. A proposition is put that the currency should be borrowed direct due to the low interest rate. At 27 March</p><p>2004:</p><p>£/krone spot 3.2075–3.2175 £/krone three-month forward 2.75–2.25 cents pm</p><p>11 9 £ three-month interest 13 /16–13 /16</p><p>7 3 krone three-month interest 5 /8–5 /4</p><p>Should the proposition be carried?</p><p>E. Given the exchange rate and interest rate information below, what quote would you expect for buying and selling forward Doppels:</p><p>(a) for one month forward? (b) for two months forward?</p><p>(c) if the quotes obtained were different from these what factors would</p><p> determine the corporate response to the existence of such differentials</p><p>© Pearson Education Limited 2004 Exchange Rate</p><p>1 1 £/Doppel spot £1  3.33 /4  3.34 /4</p><p>Eurocurrency Interest Rates one month three months 1 1 15 Sterling 10 /4–10 /8 10–9 /16</p><p>1 5 1 5 Doppel 4 /2–4 /8 4 /2–4 /8</p><p>F. You are a Foreign Exchange Dealer in a large UK-based company, in which the treasury is a profit centre. Your dealing limit is £10m. You are given the following quotes:</p><p>Spot 12 month Forward £/$ £1  $1.5802/12 515/505</p><p>$/Doppel $1  DP2.0065/75 359/354</p><p>£/Doppel 1763/1728</p><p>You are also aware of the following 12-month euro interest rates:</p><p>1 15 £ 13 /16–12 /16 3 1 $ 9 /8–9 /4</p><p>5 3 Doppel 7 /16–7 /16</p><p>(a) If your only objective is to generate a profit, what would you do and why? (b) Does this course of action involve any drawbacks for the company?</p><p>© Pearson Education Limited 2004</p>