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Exercise

The document discusses foreign exchange rates and transactions involving different currencies. It provides exchange rate quotes for various currency pairs and examples of customers buying and selling currencies. It also includes examples of companies hedging foreign currency receivables and payables using options, forwards, and money market hedges.

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20 views2 pages

Exercise

The document discusses foreign exchange rates and transactions involving different currencies. It provides exchange rate quotes for various currency pairs and examples of customers buying and selling currencies. It also includes examples of companies hedging foreign currency receivables and payables using options, forwards, and money market hedges.

Uploaded by

tramvnqs170004
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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CHAPTER 4 – FOREIGN EXCHANGE RATE

1. Suppose the ACB bank is quoting the exchange rate as follow:


USD/VND: 25,450 – 65 GBP/USD: 1.6568 – 00 AUD/USD: 0.7894 – 24
USD/JPY: 115.90 – 00 EUR/USD: 1.2670 – 82
List the exchange rate that will be applied for customer when the customer:
a. Buy USD in exchange for VND
b. Sell EUR for USD
c. Sell USD for EUR
d. Sell JPY for USD
e. Sell GBP for USD
f. Sell USD for AUD
2. Suppose on May 15th 2024, VCB quotes the exchange rate as follows:
USD/VND: 25,150 – 65 USD/CHF: 1.2541 – 11 GBP/USD: 1.7651 – 91
EUR/USD: 1.2248 – 98 AUD/USD: 0.7681 - 27
Determine the exchange rate and the amount when customer performs a transaction as
specified below:
a. Customer A buy 20,000 GBP in exchange for CHF
b. Customer B buy 28,000 EUR in exchange for VND
c. Customer C sell 40,000 AUD for VND
d. Customer D buy 30,000 GBP in exchange for AUD.

3. ABC sold a supercomputer to the MCK Institute in Germany on credit and invoiced €10
million payable in six months. Currently, the six-month forward exchange rate is $1.11/€
and the foreign exchange adviser for ABC predicts that the spot rate is likely to be $1.06/€
in six months.

a. What is the expected gain/loss from a forward hedge?


b. If you were the financial manager of ABC, would you recommend hedging this euro
receivable? Why or why not?
c. Suppose the foreign exchange adviser predicts that the future spot rate will be the same
as the forward exchange rate quoted today. Would you recommend hedging in this
case? Why or why not?
d. Suppose now that the future spot exchange rate is forecast to be $1.18/€. Would you
recommend hedging? Why or why not?

4. R&D company purchased a call option on British pounds for $.02 per unit. The strike price
was $1.45, and the spot rate at the time the option was exercised was $1.46. Assume there
are 31,250 units in a British pound option. What was R&D’s net profit on this option?
5. AND Institute purchased a put option on British pounds for $.04 per unit. The strike price
was $1.80, and the spot rate at the time the pound option was exercised was $1.59. Assume
there are 31,250 units in a British pound option. What was AND’s net profit on the options?
6. IBM purchased computer chips from NEC, a Japanese electronics concern, and was billed
¥250 million payable in three months. Currently, the spot exchange rate is ¥105/$ and the
three-month forward rate is ¥100/$. The three-month money market interest rate is 8
percent per annum in the United States and 7 percent per annum in Japan. The management
of IBM decided to use a money market hedge to deal with this yen account payable.

a. Explain the process of a money market hedge and compute the dollar cost of meeting the
yen obligation.
b. Conduct a cash flow analysis of the money market hedge.

7. Boeing just signed a contract to sell a Boeing 737 aircraft to Air France. Air France will be
billed €20 million which is payable in one year. The current spot exchange rate is $1.05/€
and the one-year forward rate is $1.10/€. The annual interest rate is 6.0% in the U.S. and
5.0% in France. Boeing is concerned with the volatile exchange rate between the dollar
and the euro and would like to hedge exchange exposure.
(a) It is considering two hedging alternatives: sell the euro proceeds from the sale forward
or borrow euros from Credit Lyonnaise against the euro receivable. Which alternative
would you recommend? Why?
(b) Other things being equal, at what forward exchange rate would Boeing be indifferent
between the two hedging methods?

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