1. BMW needs to buy $10,000,000 to purchase CVJ boots (automotive parts) for its

new Z4 model from DuPont. BMW's banker quotes bid ask rates of $1.12-$1.14/.

What will be the euro cost of the boots?

2. Deutsche Bank quotes bid-ask rates of EUR0.9850-0.9855/USD and 104.30-

104.40/USD. What would be the Deutsche Bank direct asking price for yen in terms of

euros (i.e. EUR/JPY)?

3. If the JPY/USD exchange rate is 104.30/$ and it takes 25.15 THB (Thai bahts) to

purchase one USD, what is the yen price of the baht?

4. The Mexican peso (MXN) has weakened substantially relative to the dollar (USD).

Suppose the current rate of exchange is MXN9.5/USD. Your investment advisor at

Goldman Sachs argues that the peso will lose 15% of its value relative to the dollar over

the next year. What is Goldman Sachs' forecast of the exchange rate in one year? Would

your answer differ if Goldman Sachs had predicted a 15% appreciation of the dollar

relative to the peso over the next year?

5. If the spot exchange rate of the yen relative to the dollar is 105.75/$ and the 90-day

forward rate is 103.25/$, is the dollar at a forward premium or discount? What is the

percentage premium or discount expressed in percent per annum for a 360 day year?

6. Suppose today is Tuesday, January 2, 2018. If you enter a 30-day forward contract to

purchase euros, when will you pay your dollars and receive your euros (hint: February 2,

2018 is a Friday).

7. As a currency trader, you are confronted with the following quotes on your

computer screen:

(Note: JPY/USD swap points should be divided by 100 before adding to spot rates.

USD/EUR and USD/GBP should be divided by 10,000).

Exchange Rate Spot 1-month 2-month 3-month 6-month

USD/EUR 1.0435/45 20/25 52/62 75/90 97/115

JPY/USD 98.75/85 12/10 20/16 25/19 45/35

USD/GBP 1.6623/33 30/35 62/75 95/110 120/130

a. What are the outright forward bid and ask quotes for the USD/EUR at the 3-month

maturity?

b. Suppose you want to swap out of $10,000,000 and into yen for two months. What

are the cash flows associated with this swap?

c. If one of your corporate customers calls you and wants to buy pounds in six months

for dollars, what price would you quote?

8. Assume you are a forex trader at Deutsche Bank. From the quote screen on your

computer terminal, you notice that Swiss Bank Corp is quoting 127.43/ and $1.0916/. Additionally, Wachovia is quoting 116.71/$. Describe how you can make

a triangular arbitrage profit by trading at these prices. Assume you have $5,000,000 with

which to begin the arbitrage. Ignore bid-ask spreads for this problem. What is the net

payoff to the 'negative' arbitrage strategy starting again from $5,000,000, but 'going

around the other way'?

9. Skeptical of any real arbitrage opportunity, you decided to take a closer look at the

prices at which you will actually have to transact. Suppose you construct the following

chart of spot quotes:

Bid Ask

JPY/EUR 127.43 127.48

JPY/USD 116.71 116.79

USD/EUR 1.0916 1.0920

a. Calculate the percentage bid ask spread for each exchange rate.

b. Fill in the following table with correct bid and ask exchange rates:

Bid Ask

EUR/JPY

USD/JPY

EUR/USD

10. You are given the following monthly, continuously compounded return (x 100) data

on the USDEUR exchange rate:

monthly st,$/ st,/$

mean 0.11 -0.11

variance 8.27 8.27

std dev 2.88 2.88

a. Calculate the annualized mean, variance and standard deviation for the USD rates of

appreciation / depreciation.

Suppose you manage an international fixed income portfolio denominated in euros for

Deutsche Bank in Frankfurt. It is the end of August 2017. Having invested in US

Treasury Bonds in the past, you will be receiving $100 million at the end of August 2018.

Assume there is no chance the US government will default on this payment.

b. Using your answer from part (a), what is your expectation of the spot exchange rate

at which you will transact in August 2018 if you do not hedge transactions exchange risk

and the exchange rate in August 2017 is St,$/

= 1.2190?

c. What is the nature of the risk of this position?

d. Your manager would like to know the value at risk for this position. Assume the rate

of appreciation of the USD relative to the EUR over the next year will be normally

distributed with the means, standard deviations and variances you calculated above.

What is the value at risk (VaR) at the 5% level?

e. What cautions would you provide to your manager regarding this VaR analysis?

c. Is there any triangular arbitrage opportunity to be had now, again starting with

$5,000,000 but now paying the relevant bid and ask prices? If there is a (positive)

arbitrage profit, how much would you gain (in USD)? If there is no arbitrage

opportunity, how much would you lose (in USD)? Show results for attempting arbitrage

in 'both directions.'