International Finance Problems Essay

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PROBLEMS 1. Mississippi Mud Pies, Inc. needs to buy 1,000,000 Swiss francs (CHF) to pay its Swiss chocolate supplier. Its banker quotes bid–ask rates of CHF1.3990–1.4000/USD. What will be the dollar cost of the CHF1,000,000? 
Answer: The bank’s bid rate is CHF1.3990/$. That is the price at which the bank is willing to buy $1 in return for CHF1.3990. The bank sells dollars at its ask price CHF1.4000/$.
Mississippi Mud Pies must sell dollars to the bank to buy CHF. Therefore Mississippi Mud Pies will receive the bank’s bid rate of CHF1.3990/$. 
The dollar cost of CHF1 million is consequently
CHF 1 million / CHF1.399/$ = $714,796 2. If the Japanese yen–U.S. dollar exchange rate is ¥104.30/$, and it takes 25.15 Thai bahts to …show more content…

What would be Deutsche Bank’s direct asking price for yen (€/¥)? 
Answer: The direct asking price of euro per yen (€/¥) is the price at which the bank will sell yen for euros. The bank would want this to be the same as the price at which it sells euros for dollars (the bank’s ask price) times the price at which it sells dollars for yen. This latter price is the reciprocal of the price at which the bank buys dollars for yen, which is the bank’s bid price of yen per dollar. Thus, the ask price of euros per yen should be 
€0.9855/$ [1 / (¥104.30/$)] = € 0.009449/¥
2 Chapter 2: The Foreign Exchange Market 5. Western Mining of Australia has called Mitsubishi Tokyo Financial to get its opinion about the Japanese yen–Australian dollar exchange rate. The current rate is ¥67.72/A$, and Mitsubishi thinks the Australian dollar will weaken by 5% over the next year. What is Mitsubishi’s forecast of the future exchange rate? 
Answer: If the Australian dollar weakens by 5% over the next year, it will take 5% fewer Japanese yen to purchase the Australian dollar. Thus, the forecast is 
¥67.72/A$ (1 – 0.05) = ¥64.334/A$ 6. Consider the following spot and forward rates for the yen–euro exchange rates: 
Is the euro at a forward premium or discount? What are the magnitudes of the forward premiums or discounts when quoted in percentage per annum for a 360-day year? 
Answer: The forward rates of yen per euro are lower than the spot rates.

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