The assignment content discusses various exchange rate-related problems, including calculating bid and ask rates, identifying arbitrage opportunities, and determining effective exchange rates. It also explores implied cross rates and transactions costs, providing solutions to each problem through step-by-step calculations.
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Answer 1:It is to be noted that Bid rate will be consider as relevant while purchasing a foreign currency. So for buying 5000 Mixican pesos ,following amount of Dollar need to be spend = 5000 Mexican pepos/ 12.9 (Bid Rate per USD ) = 5000/12.9 = 387.60 USD Answer 2 A)Why was Mr. Stein better off exchanging $200 than $50? Answer 1 : It is to be noted that selling multiple times the same currency will take more transaction cost and hence it is viable to sell of 200USA B)Why do you think the credit card exchange rate was better than any rate he got while in France? Answer 2: It is to be noted that credit card helps to pay off only those amount which require as expense It does not result in transaction cost for selling and purchasing the currency under which expenditure need to be done Answer 3 A)Compute S(US$/ask C$) and S(US$/bid C$). S(US$/ask C$) = 1/1.235 = 0.8097 $(US/Bid C $) =1/1.2400 = 0.8064 A)Compute the percentage bid-ask spread for S(US$/C$). Bid Ask Spread =( .8097-0.8064)/.8097 = .41% Answer 4 Ans.Yes there exists an arbitrage opportunity. It can be done in following steps: 1)Sell 121.25 yen to Bank A and buy 1 USD 2)Sell this dollar for 121.30 yen at Bank B The arbitrage takes place when the ask price of one bank is lower than bid price of another.
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Answer 5: Effective exchange rateis the exchange rate of the domestic currency vis-à-vis other A)Compute the effective exchange rate for the U.S. dollar versus the trade-weighted average of its three trading partners in each of the three years. [Hint: First transform each bilateral exchange rate into an index number, where year 1 = 100.Then take the weighted average in each year.] NumberWeightYear 1Year 2Year 3 partner 10.52.51.252.751.37531.5 Partner 20.31504513841.413540.5 Partner 30.2244.8306275.4 Effective exchange51.0548.77547.4 B)Over the three year period, the dollar appreciated against partner #1 but depreciated against partner #2.Why does the effective exchange rate show an overall appreciation? It is to be noted that as the Partner 1 has major weigh of 0.50 .The dollar appreciated against partner 1 which has higher weight and hence overall effective exchange rate shows appreciation. Answer 6 A)Calculation showing implied cross rate for S(Yen/SF). =(Yen/$ ) /(Sf/$) = Yen/$ *$/Sf = Yen/Sf = 108.46/1.72 =63.058 B)Assume you are a U.S. arbitrageur.You have $100 and would like to take your profits in dollars.List the three transactions that you would undertake to make profits; i.e., indicate what is bought and what is sold in each transaction. 1.Selling 100 USD and Purchasing SF with 100 USD 2.Selling 172 SF and Purchasing Yen with 172 SF
3.Selling 11180 Yen in US C)Calculate how many dollars you have at the end of the three transactions described in (B). 1.Selling 100 USD and Purchasing SF with 100 USD = 100*1.72 =172 SF 2.Selling 172 SF and Purchasing Yen with 172 SF = 172 *65 =11180 Yen 3.Selling 11180 Yen in US= 11180/108.46 = 103.0795 At the end f three transactions I will have 103.0795 USD D)What is the effect of the transactions in part (B) on the three direct exchange rates? Indicate whether each of the following rises, falls or stays the same: S(SF/$)= Stays S(Yen/$)= Stays S(Yen/SF)= Rises E)Suppose there are transactions costs and that the direct bid and ask prices are given by: S(SF/$ bid) = 1.71S(SF/$ ask) = 1.73 S(Yen/$ bid) = 108.40S(Yen/$ ask) = 108.52 S(Yen/SF bid) = 64.50S(Yen/SF ask) = 65.50 If you start with $100 and do the transactions you described in (B), how many dollars will you have in the end? 1.Selling 100 USD and purchasing SF = 100*1.71 = 171 SF 2. Selling 171 SF for purchasing Yen= 171SF *64.5 = 11029.5 3. Selling 11029.5 Yen in US= 11029.5/108.4 = 101.74 At the end of transaction I will have 101.74 USD