Question 5: Exchange A) foreign exchange trader with a US bank took a short poss

Question

Question 5: Exchange

A) foreign exchange trader with a US bank took a short possition of 5 million pounds, when the GBP:USD exchange rate was 1.45.
Exchange rate changed to 1.51. How much did the banks liability change because of the change in exchange rate?

b) A newpaper provided following pidpoint spot exchange rates. Compute all the cross exchange rates based on these quotes
€:$ = 0.9119
$:SFr = 1.5971
$:¥ = 128.17

c) Exchange trading room has a quotes of the euro from various correspondents and heard the following:
Bank A 1.1210-15
Bank B 12-17
What does these quotes mean?

d) Does dollar exchange rate of the british pound or the polish zloty has a higher percentage bid-ask spread, and why?

e) Are these quotes reasonable, or is there an arbitrage opportunity:
USD:JPY
Bank A 121.15-121.25
Bank B 121.30-121.35
Bank C 121.15-121.35

f) At certain point euro is quoted as EUR:USD = 1.1610-1.1615 and Swiss Franc is quoted as USD:CHF = 1.4100-1.4120
What is the implicit EUR:CHF quotation?

g)
$:SFr = 1.5960-70
$:AUD = 1.8225-35

Australian firm asked the bank for A$:SFr quote. What cross rate would the bank have quoted?

Explanation / Answer

Ans a) Current exchange rate = 1.45

If exchnage rate changes to 1.51 then we can say that GBP appricated and bank bank will lose .06*5 Million pounds = 300000 pounds

Ans b) Cross exchange rate

1) Euro: SFr = 0.9119 * 1.5971 = 1.4564

2) Euro:Yen = 0.9119 * 128.17 = 116.88

3) SFr:Yen = 128.17/1.5971 = 80.2517

Ans c) These qoutes are giving bid ask spread. This generally tells the sperad between bid and ask ans also what will be the buy price and sell price.

and d) Bid ask spread also tells how much liquidity and demand for the currecy with respect to other currency. In case of brithish pound bid ask sperad will be less in comparision to polish zloty because brithish pound is highly traded in comparision to polish zloty but if one compare these spread with Euro then it will be little higher.

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