Essay about Assignment 1 Solutions

1066 Words Apr 30th, 2015 5 Pages
The Chinese University of Hong Kong
CUHK Business School
FINA3020 International Finance

Assignment 1

Question 1
Hang Seng Bank quotes bid-ask rates of USD/EUR 1.3005 – 1.3007 and JPY/USD 104.30 –
104.40. What would be Hang Seng Bank’s direct asking price of JPY/EUR?
The cross-rate of JPY/EUR can be achieved by:

JPY JPY USD


EUR USD EUR
The synthetic ask is the highest product:
/ EUR
/USD
/ EUR
Synthetic StJPY
 StJPY
 StUSD
, ask
, ask
, ask

 104.40 1.3007
 135.7931

Question 2
A bank is quoting the following exchange rates against the dollar for the Swiss franc and the
Australian dollar:
CHF/USD = 1.5960 – 70
AUD/USD = 1.7225 – 35
A Swiss firm asks the bank for a CHF/AUD quote. What cross-rate would the bank quote?
In
…show more content…
The following exhibit shows current exchange rates between the ZAR, CHF, and the USD.
ZAR/USD
Maturity
Spot
30-day
90-day

Bid
6.2681
6.2538
6.2104

CHF/USD
Ask
6.2789
6.2641
6.2200

Bid
1.5282
1.5226
1.5058

Ask
1.5343
1.5285
1.5115

(a) Describe the currency transaction that Omni should undertake to eliminate currency risk over the 30-day period.
To eliminate the currency risk arising from the possibility that ZAR will appreciate against the CHF over the next 30-day period, Omni should sell 30-day forward CHF against 30-day forward ZAR delivery (sell 30-day forward CHF against USD and buy 30day forward ZAR against USD).
(b) Calculate the CHF/ZAR cross-currency rate Omni would use in valuing the Swiss equity portfolio. Using the currency cross rates of two forward foreign currencies and three currencies
(CHF, ZAR, USD), the exchange would be as follows:
30 day forward CHF are sold for USD. Dollars are bought at the forward selling price of CHF/USD 1.5285 (done at ask side because going from currency into dollars).
30 day forward ZAR are purchased for USD. Dollars are simultaneously sold to purchase ZAR at the rate of ZAR/USD 6.2538 (done at the bid side because going dollars into currency).
For every CHF 1.5285 held, ZAR 6.2538 are received; thus the cross currency rate is
CHF/ZAR 0.244411398.

(c) Calculate the current value of Omni’s Swiss equity portfolio in ZAR.
At the time of execution of the forward contracts, the

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