Exam 5: The Market for Foreign Exchange

The current exchange rate is £1.00 = $2.00.Compute the correct balances in Bank A's correspondent account(s)with bank B if a currency trader employed at Bank A buys £45,000 from a currency trader at bank B for $90,000 using its correspondent relationship with Bank B)

The forward price

The current spot exchange rate is $1.50/€ and the three-month forward rate is $1.55/€.Based on your analysis of the exchange rate,you are confident that the spot exchange rate will be $1.62/€ in three months.Assume that you would like to buy or sell €1,000,000.What actions do you need to take to speculate in the forward market? What is the expected dollar profit from speculation?

You are a U.S.-based treasurer with $1,000,000 to invest.The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00.If a bank quotes you a cross rate of £1.00 = €1.20 how much money can an astute trader make?

Nondollar currency transactions

Suppose that the current exchange rate is £1.00 = $2.00.The indirect quote,from the U.S.perspective is

The €/$ spot exchange rate is $1.50/€ and the 90-day forward premium is 10 percent.Find the 90-day forward price.

When a currency trades at a discount in the forward market

Consider the balance sheets of Bank A and Bank B.Bank A is in London,Bank B is in New York.The current exchange rate is £1.00 = $2.00.Show the correct balances in each account if a currency trader employed at Bank A buys £50,000 from a currency trader at bank B for $100,000 using its correspondent relationship with Bank B.

As a rule,when the interest rate of the foreign currency is greater than the interest rate of the quoting currency,

If one has agreed to buy foreign exchange forward

Consider the following spot and forward rate quotations for the Swiss franc: Calculate the three-month forward premium in American terms.Assume 30-day months and 360-day years.

Consider the balance sheets of Bank A and Bank B.Bank A is in London,Bank B is in New York.The current exchange rate is £1.00 = $2.00.Show the correct balances in each account if a currency trader employed at Bank A buys £45,000 from a currency trader at bank B for $90,000 using its correspondent relationship with Bank B.

Which of the following are correct?

The largest and most active financial market in the world is

The foreign exchange market closes

When a currency trades at a premium in the forward market

It is common practice among currency traders worldwide to both price and trade currencies against the U.S.dollar.Consider a currency dealer who makes a market in 5 currencies against the dollar.If he were to supply quotes for each currency in terms of all of the others,how many quotes would he have to provide?

Suppose you observe the following exchange rates: €1 = $1.60; £1 = $2.00.Calculate the euro-pound exchange rate.

-Using the table,what is the 6-month forward pound-yen cross-exchange rate?