Table 1: Spot Exchange Rates

HKD/USD: Bid Ask Euro/Pound: Bid Ask

8.10 8.20 1.35 1.40

Yen/HKD: Bid Ask USD/Euro: Bid Ask

14.25 14.40 1.20 1.25

Table 2: 12-Month Forward Exchange Rates

HKD/USD: Bid Ask Euro/Pound: Bid Ask

8.46 8.54 1.22 1.28

Yen/HKD: Bid Ask USD/Euro: Bid Ask

14.05 14.21 1.20 1.24

Table 3: Nominal Interest Rates

Invest Borrow

Hong Kong 5% 8%

U.S 3% 5%

Japan 1% 2%

U.K 2% 4%

(a) Express the indirect HKD-Euro spot cross rates in European terms. (4)

(b) Express the direct Pound-HKD forward cross rates in Hong Kong terms. (4)

(c) Express the indirect Euro-Yen spot cross rates in European terms. (4)

(d) What is the cost in HKD for a Hong Kong importer who needs to pay USD2,000,000 to the U.S supplier immediately? (3)

(e) What are the Pound receipts for a British exporter who just received HKD1,000,000 from a Hong Kong client? (3)

(f) Freddy is a U.S investor who would like to take advantage of higher interest rates in Hong Kong. Freddy would like to hedge his position by entering into a currency forward contract. How much profit/loss in USD will Freddy make in 12-month time for an account started with USD100,000 today? (7)