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Exchange Rate Calculations: Exercise 1

The document provides solutions to 6 exercises on calculating foreign exchange rates based on rate quotations provided. The exercises involve identifying currencies in a quote, determining buy and sell rates, calculating reciprocal rates, finding arbitrage opportunities, and determining two-way spot rates from given market quotes. Key details covered include bid-offer spreads, calculating cross rates from two currency pairs, and expressing buy and sell rates for different currency combinations.

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Rohit Aggarwal
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82 views3 pages

Exchange Rate Calculations: Exercise 1

The document provides solutions to 6 exercises on calculating foreign exchange rates based on rate quotations provided. The exercises involve identifying currencies in a quote, determining buy and sell rates, calculating reciprocal rates, finding arbitrage opportunities, and determining two-way spot rates from given market quotes. Key details covered include bid-offer spreads, calculating cross rates from two currency pairs, and expressing buy and sell rates for different currency combinations.

Uploaded by

Rohit Aggarwal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Exchange Rate Calculations

Exercise 1
A rate quotation is given as USD / CHF 1.3090 / 95.
1) What are the two currencies involved?
2) Is the rate being quoted as USD per CHF or CHF per USD?
3) At what rate will the bank giving the quote buy USD?
4) At what rate will it sell USD?
5) How much is the bid-offer spread?

Solution to Exercise 1
The two currencies involved are US dollars and Swiss francs.
The rate is being quoted as CHF per USD or CHF price of 1 USD.
The bank will buy 1 USD at 1.3090 CHF.
The bank will sell 1 USD at 1.3095 CHF.
The bid-offer spread is 5 pips or 0.0005 CHF.

Exercise 2
The following are two quotes from two different banks –
Bank A - GBP / USD Spot – 1.7280 / 85.
Bank B – GBP / USD Spot – 1.7287 / 92.
Examine if there is an arbitrage opportunity to make riskless profit without any
investment? If so, how?

Solution to Exercise 2
Bank A is selling GBP for USD 1.7285 while Bank B is willing to buy GBP at the rate of USD
1.7287.
Hence, one can buy GBP from Bank A and sell to Bank B, making a riskless profit of USD
0.0002 per GBP without any investment.
This is known as Single Point Arbitrage.

Exercise 3
The following quotation appears on the screen -
EUR / USD Spot 1.2070 .
Calculate the reciprocal quote for USD / EUR.

Solution to Exercise 3

1 / 1.2070 is 0.8285.
This is the rate for 1 EUR against USD. If 1 euro is equal to USD 1.2070, then , 1 USD will be
equal to 0.8285 euro.
Exercise 4
On a given day, the following are the market quotes –
GBP / USD Spot 1.8680
USD / JPY Spot 105.70
USD / INR Spot 43.80
Calculate the spot rates for
JPY / INR
GBP / INR
GBP / JPY
Solution to Exercise 4
1) 1 USD = 105.70 JPY as well as 1 USD = 43.80 INR.
Hence , 105.70 JPY = 43.80 INR
Hence 1 JPY = 43.80/ 105.70 INR = 0.4144 INR.
2) 1GBP = 1.8680 USD and 1 USD = 43.80 INR.
Hence, 1 GBP = 1.8680 X 43.80 = 81.82 INR.
3) 1GBP = 1.8680 USD and 1 USD = 105.70 JPY.
Hence, 1GBP = 1.8680 X 105.70 = 197.45 JPY.

Exercise 5
On a given day, the market quotes are as under –
GBP / USD Spot 1.8680 / 90.
USD / JPY Spot 105.70 / 80.
USD / INR Spot 43.80 / 82.
Calculate the two-way spot rates for -
JPY / INR
GBP / INR
GBP /JPY.

Solution to Exercise 5
The rates can be calculated from any point of view – maker of price or facer of price. The
answer is the same. The resultant two-way price must have the maximum spread possible
from the given exchange rates.
1) JPY / INR = 0.4140 / 46.
Buy JPY / Sell INR Sell JPY / BUY INR
The rate for Buy JPY / Sell INR The rate for Sell JPY / Buy INR
will be the cross of will be the cross of
Buy JPY against USD and sell Sell JPY against USD and BUY
INR against USD. INR against USD.
Being maker of price it would take Being maker of price it would give
More JPY for each dollar – 105.80. less JPY for each dollar – 105.70.
And give less INR for each dollar – And take more INR for each dollar-
43.80 43.82
Hence the rate is 43.80/105.80 = 0.4140. Hence the rate is 43.82/105.70=0.4146

GBP / INR = 81.82 / 90.


Buy GBP / Sell INR Sell GBP / Buy INR
The rate for Buy GBP/Sell INR The rate of Sell GBP/Buy INR
Will be the cross of will be the cross of
Buy GBP against USD and sell Sell GBP against USD and Buy
INR against USD. Buy INR against USD.
Being maker of price it would Being maker of price, it would
Give less USD for each GBP- take more USD for each GBP
1.8680. it gives – 1.8690.
And give less INR for each dollar- And take more INR for each
43.80. dollar – 43.82.
Hence the rate is 43.80 X 1.8680 Hence the rate will be
= 81.82. 43.82 X 1.8690 = 81.90.

GBP / JPY = 197.45 / 74.


Buy GBP / Sell JPY Sell GBP / Buy JPY
The rate for Buy GBP/Sell JPY The rate for Sell GBP/Buy JPY
Will be the cross of will be the cross of
Buy GBP against USD and sell Sell GBP against USD and buy
JPY against USD. JPY against USD.
Being a maker of price, it would Being the maker of price, it
Give less USD for each GBP- would take more USD for each
1.8680. GBP it gives – 1.8690.
And give less JPY for each dollar- And take more JPY for each
105.70. dollar- 105.80.
Hence the rate will be Hence the rate will be
105.70 X 1.8680 = 197.45. 105.80 X 1.8690 = 197.74.

Exercise 6
In each of the following cases, please give the two rates expressed for buying and selling –
1) USD / JPY = 105.70 / 80.
2) USD /JPY = 105.95 / 05.
3) GBP / USD = 1.8695 / 02.
4) USD / INR = 43.9950 / 50.

Solution to Exercise 6
In a two-way spot price, the RHS is always greater than the LHS. The two rates are,
therefore,
1) 105.70 and 105.80.
2) 105.95 and 106.05.
3) 1.8695 and 1.8702.
4) 43.9950 and 44.0050.

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