Anna Goldsworthy is the chief financial officer of a manufacturing firm headquartered in the United Kingdom. She is responsible for overseeing exposure to price risk in both the commodity and currency markets. Goldsworthy is settling her end-of quarter transactions and creating reports. Her intern, Scott Underwood, assists her in this process.

The firm hedges input costs using forward contracts that are priced in US dollars (USD) and Mexican pesos (MXN). Processed goods are packaged for sale under licensing agreements with firms in foreign markets. Goldsworthy is expecting to receive a customer payment of JPY 225,000,000 (Japanese yen) that she wants to convert to pounds sterling (GBP). Underwood gathers the exchange rates from Dealer A in Exhibit1.

Exhibit 1 Dealer A's Spot Exchange Rates

Spot Exchange Rates

Currency Pair (Price/Base)BidOfferMidpoint

JPY/GBP187.39187.43187.41

MXN/USD17.14717.33017.239

GBP/EUR0.73420.73440.7343

USD/EUR1.15721.15761.1574

USD/GBP1.57621.57661.576

The firm must also buy USD to pay a major supplier. Goldsworthy calls Dealer A with specific details of the transaction and asks to verify the USD/GBP quote. Dealer A calls her back later with a revised USD/GBP bid/offer quote of 1.5760/1.5768.

Goldsworthy must purchase MXN 27,000,000 to pay an invoice at the end of the quarter. In addition to the quotes from Dealer A, Underwood contacts Dealer B, who provides a bid/offer price of GBP/MXN 0.0366/0.0372. To check whether the dealer quotes are reflective of an efficient market, Underwood examines whether the prices allow for an arbitrage profit.

In three months, the firm will receive EUR 5,000,000 (euros) from another customer. Six months ago, the firm sold EUR 5,000,000 against the GBP using a ninemonth forward contract at an all-in price of GBP/EUR 0.7400. To mark the position to market, Underwood collects the GBP/EUR forward rates in Exhibit2.

Exhibit 2: GBP/EUR Forward Rates

MaturityForward Points

One month4.40/4.55

Three months14.0/15.0

Six months29.0/30.0

Goldsworthy also asks for the current 90-day Libors for the major currencies. Selected three-month Libors (annualized) are shown in Exhibit3. Goldsworthy studies Exhibit3 and says, "We have the spot rate and the 90-day forward rate for GBP/EUR. As long as we have the GBP 90-day Libor, we will be able to calculate the implied EUR 90-day Libor."

Exhibit 3: 90-Day Libor

CurrencyAnnualized Rate

GBP0.5800%

JPY0.0893%

USD0.3300%

After reading a draft report, Underwood notes, "We do not hedge the incoming Japanese yen cash flow. Your report asks for a forecast of the JPY/GBP exchange rate in 90 days. We know the JPY/GBP spot exchange rate." He asks, "Does the information we have collected tell us what the JPY/GBP exchange rate will be in 90 days?"

Goldsworthy replies, "The JPY/GBP exchange rate in 90 days would be a valuable piece of information to know. An international parity condition can be used to provide an estimate of the future spot rate."

Q1) Using the quotes in Exhibit1, the amount received by Goldsworthy from converting JPY 225,000,000 will be

Q2) Using Exhibit1, which of the following would be the best reason for the revised USD/GBP dealer quote of 1.5760/1.5768?

Q3) Using the quotes from Dealer A and B, the triangular arbitrage profit on a transaction of MXN 27,000,000 would be closest to:

Q4) Based on Exhibits 1, 2, and 3, the mark-to-market gain for Goldsworthy's forward position is closest to:

Q5) Based on Exhibit2, Underwood should conclude that three-month EUR Libor is:

Q6) Based on the exchange rate midpoint in Exhibit1 and the rates in Exhibit3, the 90-day forward premium (discount) for the USD/GBP would be closest to:

Q7) Using Exhibits 1, 2, and 3, which international parity condition would Goldsworthy most likely use to calculate the EUR Libor?

Q8) The international parity condition Goldsworthy will use to provide the estimate of the future JPY/GBP spot rate is most likely: