1. As a currency trader, you have obtained the following quotes from Citigroup\'
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Question
1. As a currency trader, you have obtained the following quotes from Citigroup's FX dealer: S/BE Bid 1.6250 1.6273 1.6311 Ask 1.6265 1.6298 1.6341 spot 3-m f a) Using the bid quotes above, is the 3-month forward at a premium or discount relative to the spot? By how much (in annualized percentage terms)? b) Compute the exchange rates between the S and Bf in European terms 2. The current exchange rate between the euro and the US S is $1.1825/. If the euro has declined by 4% over the last l year, what was the exchange rate 1 year ago? 3. The current exchange rate between the euro and the US S is $1.1825/E. If the euro is expected to appreciate by 5% over the next 6 months, what is the expected exchange rate in six months? 4. Given the following quotes, find if there is an arbitrage opportunity: $1.0825/E, 0.2649/MR, MR3.7750/S. (MR represents Malaysian Ringgit) Is there an opportunity to make arbitrage profits from these rates? If there is an arbitrage opportunity, find the arbitrage profits assuming you have S5 million to invest 5. Given S0.6725/AUD and $1.4500/E, find the exchange rate AUD/E. 6. Given S1.3100/ and 0.8700/t, find the exchange rate E/SExplanation / Answer
1 a Annualised - (Forward/Spot - 1)*12/3 ((1.6311/1.6250) - 1)*12/3 1.50% Using the Bid quote 3-month forward pound is at discount by 1.50% b Bid Ask Spot 0.615385 0.614817 1/1.6250 1/1.6265 1-m f 0.614515 0.613572 1/1.6273 1/1.6298 3-m f 0.613083 0.611958 1/1.6311 1/1.6341 2 Forward/Spot - 1 = Annualised 1.1825/Spot - 1 = 0.04 1.1825/Spot = 1.04 1.1825/1.04 = Spot 1.137019 Spot The exchange rate 1 year ago was $ 1.1370/Euro 3 Forward/Spot - 1 = Annualised (Forward/1.1825- 1)*12/6 = 0.05 2 forward/1.1825 - 2 = 0.05 2 forward/1.1825 = 2.05 2 forward = 2.4241 Forward Rate = 1.2121 The expected exchange rate is $ 1.2121/Euro 4 1 Euro - $ 1.0825 1 MR = Euro 0.2649 MR/$ MR/Euro*Euro/$ 1/0.2649*(1/1.0825) 1/0.286754 3.487307 1 USD = MR 3.4873 1 USD = MR 3.7750 Yes, there is an arbitrage opportunity available from these rates If we have $ 5 million to invest, Step 1 : Sell dollars for MR = 5*3.775 = 18.875 Step 2 : Sell MR for Euro = Euro 4.999988 Step 3 : Sell Euro for $ 4.999988*1.0825 = 5.412 Arbritrage Profit = (5.412-5) 0.412 million 5 1 AUD = $ 0.6725 1 POUND = $1.4500 1 Pound = ? AUD AUD/USD * POUND/USD 1/0.6725*1/1.4500 1.4870/1.45 1.02551 Exchange Rate is 1.02551 6 1 Euro = $ 1.31 1 POUND = Euro 0.8700 USD/EURO * EURO/POUND 1.31/1*1/0.87 1.5057 Pound/$ = 1/1.5057 0.6641
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