1.

In London a dealer quotes:

/CHF Spot 3.5250/55
/JPY Spot 180.80/181.30
What do you expect the CHF/JPY rate to be in Geneva?
Suppose that in Geneva you get a quote CHF/JPY Spot 51.1530/51.2550, is there an
arbitrage opportunity?

The CHF/JPY rates are:

(CHF/JPY) bid = (CHF/GBP)bid x (GBP/JPY)bid
= (GBP/JPY)bid/(GBP/CHF)ask
= 180.80/3.5255 = 51.2835
Similarly, (CHF/JPY)ask = 181.30/3.5250 = 51.4326
If a Geneva dealer is quoting CHF/JPY 51.1530/51.2550, there is an arbitrage
opportunity. Buy CHF against JPY in Geneva; sell CHF against GBP and GBP
against JPY in London.

2. The following quotes are obtained in New York:

/$ = 1.5275/85
$/CHF = 1.5530/35
What rates do you expect for /CHF spot in London?
If a London bank quotes /CHF 2.3730/40, can you make arbitrage profits? If so,
then how?
Solution
Implied (/CHF)bid = (/$)bid x ($/CHF)bid = 1.5275 x 1.5530 = 2.3722
Implied (/CHF)ask = (/$)ask x ($/CHF)ask = 1.5285 x 1.5535 = 2.3745
There is no arbitrage opportunity.

3.The following quotes are obtained in New York:

$/CHF Spot: 1.5880/90
1-month forward: 10/5
2-month forward: 20/10
3-month forward: 30/15
Calculate the outright forward rates.
Solution
The points are big/small, so they have to be subtracted.
1-month forward rate = 1.5870/85
2-month forward rate = 1.5860/80
3-month forward rate = 1.5850/75

4.A bank is quoting the following rates:

$/CHF Spot: 1.5975/80
2-month: 20/10
3-month: 25/15
$/SAR Spot: 3.7550/60 SAR: Saudi Riyals
2-month: 20/40
3-month: 30/50
A firm wishes to buy Riyals against CHF 3 months forward with an option over the third
month. What rate will the bank quote?
Solution
(CHF/SAR)bid Spot = 3.7550 / 1.5980 = 2.3498
(CHF/SAR)ask Spot = 3.7560 / 1.5975 = 2.3512
The 2-month outright forward rates are:
$/CHF = 1.5955/70
$/SAR = 3.7570/3.7600
(CHF/SAR)bid = (CHF/$))bid x ($/SAR)bid = ($/SAR)bid / ($/CHF)ask
= 3.7570 / 1.5970 = 2.3525
(CHF/SAR)ask= 3.7600 / 1.5955 = 2.3566
The 3-month outright forward rates are:
$/CHF = 1.5950/65
$/SAR = 3.7580/3.7610
(CHF/SAR)bid = (CHF/$))bid x ($/SAR)bid = ($/SAR)bid / ($/CHF)ask
= 3.7580 / 1.5965 = 2.3539
(CHF/SAR)ask= 3.7610 / 1.5950 = 2.3580
CHF is at a premium for both 2-month and 3-month maturities. For a firm selling CHF,
the bank would offer the least possible premium for the option period, giving them the 2month rate.
5. Electronics Corporation Ltd., your customers, have imported 5,000 catridges at a
landed cost in Mumbai, of US $ 20 each. They have the choice of paying for the
goods immediately or in three months time. They have a clean overdraft limit with
you where 10% p.a. rate of interest is charged. Calculate which of the following
methods would be cheaper to your customer:
a) Pay in three months time with interest at 7% and cover the exchange risk
forward for three months.
b) Settle now at the current spot rate and pay interest of the overdraft for three
months.
The rates are as follows:
Mumbai $/INR Spot : 48.7548.80
3-month swap : 25/35
(Hint: For the exercise three months should be taken as a quarter year; exchange
commission is to be ignored.)

Solution
a) Amount = 5000 x 20 = $100,000
Repayment in 3 months time = 100000(1 + 0.07/4) = $101750
3-month outright forward rate = 49.00/49.15
Repayment obligation in rupees = $101750 x 49.15 = Rs. 5,001,012.50
b) Rupee overdraft = 100000 x 48.80 = Rs. 4,880,000
Interest on overdraft = 4880000 x (1 + 0.10/4) = Rs. 5,002,000.00
The first option is better.

6. Calculate the 30-day, 90-day, and 180-day forward discounts for the British pound.
Here are the relevant rates for the pound:
Spot:
1 = $1.8220
30-day forward:
1 = $1.8180
90-day forward:
1 = $1.8086
180-day forward: 1 = $1.7949
ANSWER.
The 30-day forward discount is: [($1.8180 - $1.8220)/$1.8220] x 12 x 100 = -2.63%
The 90-day forward discount is: [($1.8086 - $1.8220)/$1.8220] x 4 x 100 = -2.94%
The 180-day forward discount is: [($1.7949- $1.8220)/$1.8220] x 2 x 100 = -2.97%
In this case, the forward discounts at these maturities are not very small, indicating that
British and U.S. interest rates are quite distinct from each other.