4. Currently the exchange rate is 50 peso per one dollar. The analysts are predi

Question

4. Currently the exchange rate is 50 peso per one dollar. The analysts are predicting that the peso may devalue by 20%. What would be the new exchange rate if the said peso devaluation occurs? 5. (bid-ask) Suppose the direct quote for sterling pound in New York is 1.8110-9. a. What is the direct quote for dollar in London? b. How much would £1,000,000 cost in New York? 6. (cross rate) The S/ exchange rate is $1.35/, and the E/SF exchange rate is 0.61/SF. What is the SF/S exchange rate? 7. (forward rate) The spot and 90-day forward exchange rates for Euro is $1.3480 and $1.3500, respectively. a. Is the dollar or euro at a forward premium? b. What is the net annualized forward premium on euro? c. What is the net annualized forward premium on dollar?

Explanation / Answer

Question 4

Question 5

Question 6

SF/$ = SF/€ * € /$

= 1/(€ /SF) * 1/($/€ )

= 1/.61 * 1/1.35

= 1.21

Question 7

% change in value of EURO(Product) = (F-S)/S *12/M *100

=(1.35-1.3480)/1.3480 * 12/3*100

= .002/1.348 * 4 * 100

= .59%

positive sign indicates that EURO is appreciating.

% change in value of USD (price) = (S-F)/F *12/M *100

= (1.3480-1.35)/1.35 * 12/3 *100

= -.002/1.35*4*100

= -.59%

negative sign indicates that Yen is depreciating.

F - Forward raete

S - Spot rate

M - no.of months- 90 days is taken as 3 months

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