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Answers Guide to Tutorial Questions - The Foreign Exchange Market

1. Which of the following is a characteristic of the foreign exchange market as a perfect market? a. The volume of daily turnover is low b. A large number of buyers and sellers operate in the market c. There is limited access to information d. The products are heterogenous 2. Which of the following does NOT describe the objective of the participant in foreign exchange (FX) market? a. An exporter who aims to reduce or eliminate FX risks b. An importer who tries to obtain riskless short-term loans c. A central bank tries to smooth out exchange rate fluctuations d. An investor who tries to make profits by speculating on the open positions 3. A foreign exchange transaction consists of the following sequential process: a. Decision making; Price discovery; Execution; Settlement; and Position keeping b. Price discovery; Decision making; Execution; Settlement; and Position keeping c. Decision making; Execution; Price discovery; Settlement; and Position keeping d. Decision making; Execution; Settlement; Price discovery; and Position keeping 4. If JPY/AUD exchange rate rose from 68.50 to 69.72, then the rise is equal to: a. 12,200 points b. 1,220 points c. 122 points d. 1.22 points 1/100 of a cent = one basis point / one point / fourth decimal / 0.0001 Hence, 697,200 - 685,000 = 12,200 points 5. Which of the following statements is NOT true? a. Forward value date can be fixed on a term of either number of days, weeks or months after the spot value date b. Only the buyers can specify the forward value date c. The forward value date cannot be less than 2 business days after the contract date d. The period preceding the forward value date is calculated from the spot value date

6. Suppose that the CHF/GBP spot rate is 0.6963-0.6968, you have been quoted 63-68, 4-6, 9-14, 25-38. Which of the following is true? a. The spot rate quoted is applicable to round amounts of GBP 4-6 million, 9-14 million or 25-38 million b. The last 3 numbers are the movements of spot rates at different time intervals during the day c. The outright rates at 30-day, 60-day and 90-day are 0.6967-0.6974, 0.69720.6982 and 0.6988-0.7006 d. The spot rates are applicable to specific times of the day: 8am, 11am, 2pm and 5pm For Questions 7-9, you are given the following exchange rates: EUR/USD

0.9395/0.9681

AUD/USD

1.7624/1.7864

JPY/AUD

65.91/67.71

7. What is the cross OFFER/ASK rate for JPY/USD? a. 119.3321 b. 120.9571 c. 37.9030 d. 36.8954 Sa(JPY/USD) = Sa(JPY/AUD) / Sb(USD/AUD) = 67.71 / (1/1.7864) = 120.96 8. What is the cross BID rate for EUR/AUD? a. 1.6558 b. 0.5331 c. 0.5259 d. 1.6783 Sb(EUR/AUD) = Sb(EUR/USD) / Sa(AUD/USD) = 0.9395 / 1.7864 = 0.5259 9. What is the mid rate for JPY/AUD and the bid-offer spread (in points)? a. mid-rate = 66.81 and bid-offer spread = 1.8 points b. mid-rate = -66.81 and bid-offer spread = 0.018 points c. mid-rate = 66.81 and bid-offer spread = 18,000 points d. mid-rate = 180 and bid-offer spread = 66.81 points (67.71 + 65.91) / 2 = 66.81, bid-ask spread = 67.71 - 65.91 = 1.8 or 18,000 points

10. Dealer A quotes 0.9395/0.9662 for the EUR/USD exchange rate to Dealer B. The price (in U.S. dollars) at which B can buy one unit of the Euro is: a. 0.9395 b. 0.9662 c. 1.0350 d. 1.0644 Price in USD = USD/EUR, 1/0.9395 = 1.0644 For Questions 11-13, suppose Dealer A quoted you the following spot and forward exchange rates: AUD/USD Spot

1.7624-1.7685

30-day

10-20

90-day

50-40

11. At 30-day, 1 US dollar can be bought at the rate of: a. AUD 1.7634 b. AUD 0.5671 c. AUD 1.7705 d. AUD 0.5648 12. What is the outright bid and offer/ask rates for (AUD/USD) at 90-day? a. 1.7674-1.7725 b. 1.7574-1.7645 c. 1.7684-1.7745 d. 1.7564-1.7625 13. If you agree to sell USD 200,000 to Dealer A in 90 days, it means you will get in exchange: a. AUD 353,480 b. AUD 351,480 c. AUD 352,900 d. AUD 354,500

14. Dealer A quotes 66.12/67.71 for the JPY/AUD exchange rate to Dealer B. What is: (a) the price at which A is willing to buy the Australian dollar? (b) the price at which A is willing to buy the Japanese yen?

(c) the price at which B can buy the Australian dollar? (d) the price at which B can buy the Japanese yen? (e) the price at which A is willing to sell the Australian dollar? (f) the price at which A is willing to sell the Japanese yen? (g) the price at which B can sell the Australian dollar? (h) the price at which B can sell the Japanese yen? Solution (a) The price at which A is willing to buy the Australian dollar is A’s bid rate, which is (1AUD=66.12 JPY). (b) The price at which A is willing to buy the Japanese yen is the price at which A is willing to sell the Australian dollar, which is (1AUD=67.71JPY). Alternatively, the price at which A is willing to buy the Japanese yen (1 JPY) is (1JPY=1/ 67.71 AUD). (c) The price at which B can buy the Australian dollar is A’s offer rate, which is (1AUD=67.71 JPY). (d) The price at which B can buy the Japanese yen is the price at which B can sell the Australian dollar, which is (1AUD= 66.12JPY). Alternatively, the price at which B can buy the Japanese yen (1 JPY) is (1JPY=1/ 66.12 AUD). (e) The price at which A is willing to sell the Australian dollar is A’s offer rate, which is (1AUD=67.71 JPY). (f) The price at which A is willing to sell the Japanese yen is the price at which A is willing to buy the Australian dollar, which is (1AUD=66.12 JPY). Alternatively, the price at which A is willing to sell the Japanese yen is (1JPY=1/66.12 AUD). (g) The price at which B can sell the Australian dollar is A’s bid rate, which is (1AUD=66.12 JPY). (h) The price at which B can sell the Japanese yen is the price at which B can buy the Australian dollar, which is (1 AUD=67.71 JPY). Alternatively, the price at which B can sell the Japanese yen is (1JPY=1/67.71 AUD).

Dealer (market maker’s perspective)

66.12

66.71

Buy AUD Sell JPY

Sell AUD Buy JPY

Market taker’s perspective Sell AUD Buy JPY

Buy AUD Sell JPY

15. The following exchange rates are quoted: USD/AUD 0.5674 JPY/AUD 70.43 GBP/AUD 0.3891 EUR/AUD 0.6075 Calculate the following cross rates: JPY/USD, GBP/USD, EUR/USD, JPY/GBP, JPY/EUR and EUR/GBP. Solution JPY/USD = 124.13 GBP/USD = 0.6859 EUR/USD = 1.0707 JPY/GBP = 181.01 JPY/EUR = 115.93 EUR/GBP = 1.5613...