fOREX MCQs

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Date: 28 July 2020

VIRTUAL COACHING CLASSES


ORGANISED BY BOS, ICAI

CA FINAL LEVEL
PAPER : FOREIGN EXCHANGE EXPOSURE AND
RISK MANAGEMENT

Faculty: Parvesh Aghi

© The Institute of Chartered Accountants of India


BASIC
CONCEPTS
MCQ’S

2
1

■ Direct and indirect quotes are ………….. of each other

A. Reciprocals
B. Proportionate
C. Equal
D. Unequal

Monday, Septe © The Institute of Chartered Accountants of India 3


1

■ Direct and indirect quotes are ………….. of each other

A. Reciprocals
B. Proportionate
C. Equal
D. Unequal

Monday, Septe © The Institute of Chartered Accountants of India 4


2

■ Direct quotation is when the one unit of foreign currency is


expressed in terms of …………….
A. American terms
B. cross currency
C. domestic currency
D. European terms

Monday, Septe © The Institute of Chartered Accountants of India 5


2

■ Direct quotation is when the one unit of foreign currency is


expressed in terms of …………….
A. American terms
B. cross currency
C. domestic currency
D. European terms

Monday, Septe © The Institute of Chartered Accountants of India 6


3

■ Indirect quotation is when one unit of domestic currency us


expressed in terms of…………………

A. American terms
B. cross currency
C. Foreign currency
D. European terms

Monday, Septe © The Institute of Chartered Accountants of India 7


3

■ Indirect quotation is when one unit of domestic currency us


expressed in terms of ……………………..

A. American terms
B. cross currency
C. Foreign currency
D. European terms

Monday, Septe © The Institute of Chartered Accountants of India 8


4

■ Bid is the price at which the dealer is willing to ………. another


currency

A. Sell
B. Buy
C. Hold
D. Dispose

Monday, Septe © The Institute of Chartered Accountants of India 9


4

■ Bid is the price at which the dealer is willing to ………. another


currency

A. Sell
B. Buy
C. Hold
D. Dispose

Monday, Septe © The Institute of Chartered Accountants of India 10


5

■ The ask or offer is the rate at which he is willing to ……….. another


currency
A. Sell
B. Buy
C. Hold
D. Dispose

Monday, Septe © The Institute of Chartered Accountants of India 11


5

■ The ask or offer is the rate at which he is willing to ……….. another


currency
A. Sell
B. Buy
C. Hold
D. Dispose

Monday, Septe © The Institute of Chartered Accountants of India 12


6

■ John is an American traveller visiting Europe. The cost of purchasing euros at the
airport is EUR 1 = USD 1.20 / USD 1.30 , George wants to buy EUR 15,000 , how
many dollars he has to pay to the dealer .
A. USD 13000
B. USD 19,500
C. USD 18,000
D. USD 15,000

Monday, Septe © The Institute of Chartered Accountants of India 13


6

■ John is an American traveller visiting Europe. The cost of purchasing euros at the
airport is EUR 1 = USD 1.20 / USD 1.30 , George wants to buy EUR 15,000 , how
many dollars he has to pay to the dealer .
A. USD 13000
B. USD 19,500
C. USD 18,000
D. USD 15,000

Monday, Septe © The Institute of Chartered Accountants of India 14


7

■ John is an American traveller returning from Europe. The cost of purchasing


euros at the airport is EUR 1 = USD 1.20 / USD 1.30 , George wants to sell EUR
3,000 , how many dollars he will get from the dealer
A. USD 5,000
B. USD 3,600
C. USD 3,900
D. USD 3,000

Monday, Septe © The Institute of Chartered Accountants of India 15


7

■ John is an American traveller returning from Europe. The cost of purchasing


euros at the airport is EUR 1 = USD 1.20 / USD 1.30 , George wants to sell EUR
3,000 , how many dollars he will get from the dealer
A. USD 5,000
B. USD 3,600
C. USD 3,900
D. USD 3,000

Monday, Septe © The Institute of Chartered Accountants of India 16


8

■ The exchange rates expressed by any currency pair that does not involve the …….
are called cross rates

A. Euros
B. Pounds
C. US dollar
D. Rupees

Monday, Septe © The Institute of Chartered Accountants of India 17


8

■ The exchange rates expressed by any currency pair that does not involve the …….
are called cross rates

A. Euros
B. Pounds
C. US dollar
D. Rupees

Monday, Septe © The Institute of Chartered Accountants of India 18


9

■ Spot EUR/USD is quoted at a bid price of 1.0213 and an ask price of 1.0219. The
difference is USD 0.0006 equal to 6 ……….
A. Pips
B. Swaps
C. Cents
D. Points

Monday, Septe © The Institute of Chartered Accountants of India 19


9

■ Spot EUR/USD is quoted at a bid price of 1.0213 and an ask price of 1.0219. The
difference is USD 0.0006 equal to 6 ……….
A. Pips
B. Swaps
C. Cents
D. Points

Monday, Septe © The Institute of Chartered Accountants of India 20


10

■ In June 2020, one U.S. dollar traded on the foreign exchange market for about .94
swiss francs. Therefore, one swiss franc would have purchased about
■ (a) 2.10 U.S. dollars.
■ (b) 1.10 U.S. dollars.
■ (c) 0.91 U.S. dollars.
■ (d) 1.063 U.S. dollars.

Monday, Septe © The Institute of Chartered Accountants of India 21


10

■ In June 2020, one U.S. dollar traded on the foreign exchange market for about .94
swiss francs. Therefore, one swiss franc would have purchased about
■ (a) 2.10 U.S. dollars.
■ (b) 1.10 U.S. dollars.
■ (c) 0.91 U.S. dollars.
■ (d) 1.07 U.S. dollars.

■ Answer d

Monday, Septe © The Institute of Chartered Accountants of India 22


11

■ In June 2020, one U.S. dollar traded on the foreign exchange market for about
1.47 Canadian dollars. Therefore, one Canadian dollar would have purchased
about
■ (a) 2.30 U.S. dollars.
■ (b) 1.15 U.S. dollars.
■ (c) 0.67 U.S. dollars.
■ (d) 0.56 U.S. dollars.

Monday, Septe © The Institute of Chartered Accountants of India 23


11

■ In June 2020, one U.S. dollar traded on the foreign exchange market for about
1.46 Canadian dollars. Therefore, one Canadian dollar would have purchased
about
■ (a) 1.30 U.S. dollars.
■ (b) 1.75 U.S. dollars.
■ (c) 0.68 U.S. dollars.
■ (d) 0.87 U.S. dollars.

■ Answer c

Monday, Septe © The Institute of Chartered Accountants of India 24


12

■ Given : If 1 $ = Rs 74.93 & 1 € = $ 1.14 Calculate the cross rate for euros in
rupee terms
A. 85
B. 85.42
C. 85.10
D. 86

Monday, Septe © The Institute of Chartered Accountants of India 25


12

■ Given : If 1 $ = Rs 74.93 & 1 € = $ 1.14 Calculate the cross rate for euros in
rupee terms
A. 85
B. 85.42
C. 85.10
D. 86

Monday, Septe © The Institute of Chartered Accountants of India 26


13

■ if 1 SGD = Rs 53.91 , find how many Singapore dollars we get by selling 1,00,000
Rupees ?
A. 1854.94
B. 153,91,000
C. 1,00,000
D. 1800

Monday, Septe © The Institute of Chartered Accountants of India 27


13

■ if 1 SGD = Rs 53.91 , find how many Singapore dollars we get by selling 1,00,000
Rupees ?
A. 1854.94
B. 153,91,000
C. 1,00,000
D. 1800

Monday, Septe © The Institute of Chartered Accountants of India 28


14

The immediate (two-day) exchange of one currency for another is a


(a) forward transaction.
(b) spot transaction.
(c) money transaction.
(d) exchange transaction.
(e) daily transaction.

Monday, Septe © The Institute of Chartered Accountants of India 29


14

The immediate (two-day) exchange of one currency for another is a


(a) forward transaction.
(b) spot transaction.
(c) money transaction.
(d) exchange transaction.
(e) daily transaction.

Monday, Septe © The Institute of Chartered Accountants of India 30


15

■ Today 1 euro can be purchased for $1.13. This is the


■ (a) spot exchange rate.
■ (b) forward exchange rate.
■ (c) fixed exchange rate.
■ (d) money exchange rate.
■ (e) financial exchange rate.

Monday, Septe © The Institute of Chartered Accountants of India 31


15

■ Today 1 euro can be purchased for $1.13. This is the


■ (a) spot exchange rate.
■ (b) forward exchange rate.
■ (c) fixed exchange rate.
■ (d) money exchange rate.
■ (e) financial exchange rate.

Monday, Septe © The Institute of Chartered Accountants of India 32


16

■ In an agreement to exchange dollars for euros in three months at a price of $0.90


per euro, the price is the
■ (a) spot exchange rate.
■ (b) money exchange rate.
■ (c) forward exchange rate.
■ (d) monthly exchange rate.
■ (e) fixed exchange rate.

Monday, Septe © The Institute of Chartered Accountants of India 33


16

■ In an agreement to exchange dollars for euros in three months at a price of $0.90


per euro, the price is the
■ (a) spot exchange rate.
■ (b) money exchange rate.
■ (c) forward exchange rate.
■ (d) monthly exchange rate.
■ (e) fixed exchange rate.

Monday, Septe © The Institute of Chartered Accountants of India 34


17

■ When the value of the British pound changes from $1.25 to $1.50, then

■ (a) the pound has appreciated and the dollar has appreciated.
■ (b) the pound has depreciated and the dollar has appreciated.
■ (c) the pound has appreciated and the dollar has depreciated.
■ (d) the pound has depreciated and the dollar has depreciated.

Monday, Septe © The Institute of Chartered Accountants of India 35


17

■ When the value of the British pound changes from $1.25 to $1.50, then

■ (a) the pound has appreciated and the dollar has appreciated.
■ (b) the pound has depreciated and the dollar has appreciated.
■ (c) the pound has appreciated and the dollar has depreciated.
■ (d) the pound has depreciated and the dollar has depreciated.
■ Answer: C

Monday, Septe © The Institute of Chartered Accountants of India 36


18

■ In April 2020, one U.S. dollar traded on the foreign exchange market for about 75
Indian rupees. Thus, one Indian rupee would have purchased about
■ (a) 0.030 U.S. dollars.
■ (b) 0.013 U.S. dollars.
■ (c) 0.200 U.S. dollars.
■ (d) 2.000 U.S. dollars.

Monday, Septe © The Institute of Chartered Accountants of India 37


18

■ In April 2020, one U.S. dollar traded on the foreign exchange market for about 75
Indian rupees. Thus, one Indian rupee would have purchased about
■ (a) 0.030 U.S. dollars.
■ (b) 0.013 U.S. dollars.
■ (c) 0.200 U.S. dollars.
■ (d) 2.000 U.S. dollars.

Monday, Septe © The Institute of Chartered Accountants of India 38


19

■ If the British pound appreciates from $0.50 to $0.75 per U.S. dollar, the dollar
depreciates from _____ to _____ pounds per dollar.
■ (a) 2; 2.5
■ (b) 2; 1.33
■ (c) 2; 1.5
■ (d) 2; 1.25

Monday, Septe © The Institute of Chartered Accountants of India 39


19

■ If the British pound appreciates from $0.50 to $0.75 per U.S. dollar, the dollar
depreciates from _____ to _____ pounds per dollar.
■ (a) 2; 2.5
■ (b) 2; 1.33
■ (c) 2; 1.5
■ (d) 2; 1.25
■ Answer: B

Monday, Septe © The Institute of Chartered Accountants of India 40


20

£1 = US$1.2679 is a direct quotation of the exchange rate of


sterling.
A. True
B. False

Monday, Septe © The Institute of Chartered Accountants of India 41


20

£1 = US$1.2679 is a direct quotation of the exchange rate of


sterling.
A. True
B. False

Answer : False

Monday, Septe © The Institute of Chartered Accountants of India 42


21

■ In India exchange rates for foreign currencies other than US dollar are calculated as
A. Cross rates
B. European terms
C. TT buying rate
D. Indirect rates

Monday, Septe © The Institute of Chartered Accountants of India 43


21

■ In India exchange rates for foreign currencies other than US dollar are calculated as
A. Cross rates
B. European terms
C. TT buying rate
D. Indirect rates

Monday, Septe © The Institute of Chartered Accountants of India 44


22

■ The difference in the bid rate and the ask rate in the interbank quotation is called
■ A. swap points
■ B. Margin.
■ C. Spread.
■ D. Auction

Monday, Septe © The Institute of Chartered Accountants of India 45


22

■ The difference in the bid rate and the ask rate in the interbank quotation is called
■ A. swap points
■ B. Margin.
■ C. Spread.
■ D. Auction
■ ANSWER: C

Monday, Septe © The Institute of Chartered Accountants of India 46


23

■ Almost all direct quotations of exchange rates involve the US


dollar.
■ Yes
■ No

Monday, Septe © The Institute of Chartered Accountants of India 47


23

■ Almost all direct quotations of exchange rates involve the US


dollar.
■ Yes
■ No

Monday, Septe © The Institute of Chartered Accountants of India 48


24

■ The euro is:


A. a currency, the value of which is determined by demand and supply.
B. a currency that is only traded offshore
C. a weighted average of the currencies of EU member countries
D. the currency of EU member countries.

Monday, Septe © The Institute of Chartered Accountants of India 49


24

■ The euro is:


A. a currency, the value of which is determined by demand and supply.
B. a currency that is only traded offshore
C. a weighted average of the currencies of EU member countries
D. the currency of EU member countries.

Monday, Septe © The Institute of Chartered Accountants of India 50


25 Mansi : Write 75 instead of 43

Monday, Septe © The Institute of Chartered Accountants of India 51


FORWARD
CONTRACT & RATES
BASICS
MCQ’S
Monday, September 07 © The Institute of Chartered Accountants of India 52
1
■ In the inter-bank market spot rate is Rs 75.5900 /6900 per US$ and exchange
margin is 0.10% , then the spot merchant rates are likely to be ( without rounding
off)

A. 75.5144 / 75.7657
B. 75.7657 / 75.5144
C. 75.5155 / 75.6143
D. 75.5144/ 75.900

Monday, Septe © The Institute of Chartered Accountants of India 53


1

■ In the inter-bank market spot rate is Rs 75.5900 /6900 per US$ and exchange
margin is 0.10% , then the spot merchant rates are likely to be ( without rounding
off)

A. 75.5144 / 75.7657
B. 75.7657 / 75.5144
C. 75.6655 / 75.6143

Monday, Septe © The Institute of Chartered Accountants of India 54


2

A. Hedging is used by corporates to:

B. Decrease the variability of expected cash flows


C. Decrease the variability of income tax paid
D. Increase the variability of income tax paid
E. Increase the variability of forecasted fund flows

Monday, Septe © The Institute of Chartered Accountants of India 55


2

■ Hedging is used by corporates to:

A. Decrease the variability of expected cash flows


B. Decrease the variability of income tax paid
C. Increase the variability of income tax paid
D. Increase the variability of forecasted fund flows

Monday, Septe © The Institute of Chartered Accountants of India 56


3

■ Which of the following is not a type of foreign exchange


exposure?
A. Economic exposure
B. Translation exposure
C. Transaction exposure
D. Income tax exposure

Monday, Septe © The Institute of Chartered Accountants of India 57


3

■ Which of the following is not a type of foreign exchange exposure?


A. Economic exposure
B. Translation exposure
C. Transaction exposure
D. Income tax exposure

Monday, Septe © The Institute of Chartered Accountants of India 58


4

■ If the price on a future date is higher, then the currency is said to be


at ………..
A. forward premium
B. Forward discount

Monday, Septe © The Institute of Chartered Accountants of India 59


4

■ If the price on a future date is higher, then the currency is said to be at ………..
A. forward premium
B. Forward discount

Monday, Septe © The Institute of Chartered Accountants of India 60


5

■ If the forward rate is less than the existing spot rate, it


contains a …….
A. Discount
B. premium

Monday, Septe © The Institute of Chartered Accountants of India 61


5

■ If the forward rate is less than the existing spot rate, it contains a …….
A. Discount
B. premium

Monday, Septe © The Institute of Chartered Accountants of India 62


6

■ The currency which carries lower interest rate is always at a


…………..versus the other currency
A. premium
B. discount

Monday, Septe © The Institute of Chartered Accountants of India 63


6

■ The currency which carries lower interest rate is always at a …………..versus the other currency
A. premium
B. discount

Monday, Septe © The Institute of Chartered Accountants of India 64


7

■ Interbank exchange rates are …………which are applicable to


transaction among…….
a) wholesale rates , banks
b) retail rates , retail customers
c) wholesale rates , customers
d) Wholesale rates , merchants

Monday, Septe © The Institute of Chartered Accountants of India 65


7

■ Interbank exchange rates are …………which are applicable to transaction among…….


a) wholesale rates , banks
b) retail rates , retail customers
c) wholesale rates , customers
d) Wholesale rates , merchants

Monday, Septe © The Institute of Chartered Accountants of India 66


8

■ The spot rate is the rate paid for delivery within ……. business days after the
day the transaction takes place
A. Two
B. Three
C. One
D. Seven

Monday, Septe © The Institute of Chartered Accountants of India 67


8

■ The spot rate is the rate paid for delivery within ……. business days after the day the transaction
takes place
A. Two
B. Three
C. One
D. Seven

Monday, Septe © The Institute of Chartered Accountants of India 68


9

■ The major benefit of a currency forward is that its terms are


………..and can be …………..to a particular amount and for any
maturity or delivery period
A. not standardized , tailored
B. fixed , tailored
C. Standardised , not tailored
D. Fixed , not tailored

Monday, Septe © The Institute of Chartered Accountants of India 69


9

■ The major benefit of a currency forward is that its terms are ………..and can be
…………..to a particular amount and for any maturity or delivery period
A. not standardized , tailored
B. fixed , tailored
C. Standardised , not tailored
D. Fixed , not tailored

Monday, Septe © The Institute of Chartered Accountants of India 70


10

■ FOREIGN Currency exposure can be avoided by


A. Entering into forward contracts
B. Buying at spot rates
C. Arbitrage
D. None of the above

Monday, Septe © The Institute of Chartered Accountants of India 71


10

■ FOREIGN Currency exposure can be avoided by


A. Entering into forward contracts
B. Buying at spot rates
C. arbitrage
D. None of the above

Monday, Septe © The Institute of Chartered Accountants of India 72


11

■ The exchange rates quoted by an authorised dealer to its customers


known as
A. Inter bank rates
B. Merchant rates
C. Commercial rates
D. Wholesale rates

Monday, Septe © The Institute of Chartered Accountants of India 73


11

■ The exchange rates quoted by an authorised dealer to its customers known as


A. Inter bank rates
B. Merchant rates
C. Commercial rates
D. Wholesale rates

Monday, Septe © The Institute of Chartered Accountants of India 74


12

■ When is a foreign currency most likely trading at a forward premium?


A. When the forward rate expressed in the domestic currency is below
the spot rate
B. When the forward rate expressed in the foreign/domestic currency is
in equilibrium
C. When the forward rate expressed in the domestic currency is above
the spot rate

Monday, Septe © The Institute of Chartered Accountants of India 75


12

■ When is a foreign currency most likely trading at a forward premium?


■ A. When the forward rate expressed in the domestic currency is below the spot rate
■ B. When the forward rate expressed in the foreign/domestic currency is in equilibrium
■ C. When the forward rate expressed in the domestic currency is above the spot rate

■ Answer c

Monday, Septe © The Institute of Chartered Accountants of India 76


EXCHANGE RATE
DETERMINATION
MCQ’S

Monday, September 07 © The Institute of Chartered Accountants of India 77


1

■ The _____ states that exchange rates between any two currencies
will adjust to reflect changes in the price levels of the two
countries.
■ (a) theory of purchasing power parity
■ (b) law of one price
■ (c) theory of money neutrality
■ (d) quantity theory of money

Monday, Septe © The Institute of Chartered Accountants of India 78


1

■ The _____ states that exchange rates between any two currencies will adjust to reflect
changes in the price levels of the two countries.
■ (a) theory of purchasing power parity
■ (b) law of one price
■ (c) theory of money neutrality
■ (d) quantity theory of money

■ Answer: A

Monday, Septe © The Institute of Chartered Accountants of India 79


2

■ According to the interest parity condition, if the domestic interest rate is 12


percent and the foreign interest rate is 10 percent, then
A. the expected appreciation of the foreign currency must be 4 percent.
B. the expected appreciation of the foreign currency must be 2 percent.
C. the expected depreciation of the foreign currency must be 2 percent.
D. the expected depreciation of the foreign currency must be 4 percent

Monday, Septe © The Institute of Chartered Accountants of India 80


2

■ According to the interest parity condition, if the domestic interest rate is 12 percent and
the foreign interest rate is 10 percent, then
■ (a) the expected appreciation of the foreign currency must be 4 percent.
■ (b) the expected appreciation of the foreign currency must be 2 percent.
■ (c) the expected depreciation of the foreign currency must be 2 percent.
■ (d) the expected depreciation of the foreign currency must be 4 percent
■ Answer: B

Monday, Septe © The Institute of Chartered Accountants of India 81


3

■ The exchange exposure that does not lead to changes in cash flow is
■ A. transaction exposure
■ B. translation exposure
■ C. Economic exposure
■ D. none of the above

Monday, Septe © The Institute of Chartered Accountants of India 82


3

■ The exchange exposure that does not lead to changes in cash flow is
■ A. transaction exposure
■ B. translation exposure
■ C. Economic exposure
■ D. none of the above
■ ANSWER: B

Monday, Septe © The Institute of Chartered Accountants of India 83


4

■ Bank maintains foreign currency accounts known as ……..accounts with banks aboard
A. Vostro
B. Nostro
C. Loro
D. current

Monday, Septe © The Institute of Chartered Accountants of India 84


4

■ Bank maintains foreign currency accounts known as ……..accounts with banks aboard
A. Vostro
B. Nostro
C. Loro
D. current

Monday, Septe © The Institute of Chartered Accountants of India 85


5

■ The term Loro accounts means …….


A. Your accounts with us
B. Our account with you
C. Their account with you
D. Their account with us

Monday, Septe © The Institute of Chartered Accountants of India 86


5

■ The term Loro accounts means …….


A. Your accounts with us
B. Our account with you
C. Their account with you
D. Their account with us

Monday, Septe © The Institute of Chartered Accountants of India 87


1

■ An Australian importer has an obligation to pay ¥1,000,000,000 in 3 months’ time.


Calculate the cost in Australian dollars if the expected spot rate at maturity is A$1 = ¥
65.20/65.30.

Monday, Septe © The Institute of Chartered Accountants of India 88


■ A New Zealand exporter is due to receive US$4,560,000 in 2 months. The exporter
considers the alternatives of remaining unhedged and selling the US dollars spot upon
receiving them, or hedging by forward selling the US dollar receipts.
■ Spot rate NZ$1 = US$0.4200 0.4205
■ 2 month NZ$ 3.75 3.85% p.a. (62/365)
■ 2 month US$ 2.65 2.75% p.a. (62/360)
(a) Calculate the forward rate at which the exporter could hedge.
(b) If the expectation is that in 2 months’ time the spot rate will be NZ$1 =
US$0.41/4550, should the exporter hedge or remain unhedged?
(c) Calculate the break-even rate between being hedged and unhedged?

Monday, Septe © The Institute of Chartered Accountants of India 89


Solution

■ The exporter needs to buy NZ$ at the bank’s forward offer rate.
■ Forward offer rate
■ s 0.4205 Bank buys NZ$ spot to cover its forward sale to the importer
■ r C 3.75% Bank lends NZ$ at the market bid rate
■ rT 2.75% Bank borrows US$ at the market offer rate
■ t 62/365 and 62/360

Monday, Septe © The Institute of Chartered Accountants of India 90


question

■ You have just graduated from the University of Florida and are leaving on a whirlwind tour
to see some friends. You wish to spend usd 1,000 each in Germany, New Zealand, and Great
Britain (usd 3,000 in total). Your bank offers you the following bid-ask quotes: usd/eur
1.304-1.305, usd/nzd 0.67­0.69, and usd/gbp 1.90-1.95.
■ (a) If you accept these quotes, how many eur, nzd, and gbp do you have at departure?
■ (b) If you return with eur 300, nzd 1,000, and gbp 75, and the exchange rates are unchanged,
how many usd do you have?
■ (c) Suppose that instead of selling your remaining eur 300 once you return home, you want
to sell them in Great Britain. At the train station, you are offered gbp/eur 0.66-0.68, while a
bank three blocks from the station offers gbp/eur 0.665-0.675. At what rate are you willing
to sell your eur 300? How many gbp will you receive?

Monday, Septe © The Institute of Chartered Accountants of India 91


■ (a) eur 884.56; nzd 1,449.27; gbp 512.82.
■ (b) 301.3 + 670 + 142.5 = usd 1113.8.
■ (c) You will sell at gbp/eur 0.665; you will receive gbp 199.5.

Monday, Septe © The Institute of Chartered Accountants of India 92


Question

■ Abitibi Bank quotes jpy/eur 155-165, and Bathurst Bank quotes eur/jpy 0.0059­0.0063.
■ (a) Are these quotes identical?
■ (b) If not, is there a possibility for shopping around or arbitrage?
■ (c) If there is an arbitrage opportunity, how would you profit from it?

Monday, Septe © The Institute of Chartered Accountants of India 93


■ (a) No, Abitibi Bank’s quotes imply eur/jpy 0.0061 - 0.0065.
■ (b) Since both rates quoted by Abitibi exceed those offered by Bathurst, there is an
arbitrage opportunity.
■ (c) Buy jpy from Bathurst Bank at eur/jpy 0.0063 and sell them to Abitibi Bank at
eur/jpy 0.0061. Equivalently, buy eur from Abitibi at 165 and sell them to Bathurst at
158.7302.

Monday, Septe © The Institute of Chartered Accountants of India 94


Question 6

■ Citi Bank quotes JPY/ USD 105-106.5, and Honk Kong Bank
quotes USD/JPY 0.0090-­0.0093.
(a) Are these quotes identical?
(b) If not, is there a possibility of arbitrage?
(c) If there is an arbitrage opportunity, how would you profit from
it?

Monday, Septe © The Institute of Chartered Accountants of India 95


Solution

■ (a) No, Citi Bank’s quotes imply USD/ JPY 0.00939 - 0.00952.
(HKB USD/JPY 0.0090-­0.0093. )
■ (b) Since both rates quoted by Citi Bank exceed those offered by
Hong Kong Bank, there is an arbitrage opportunity.
■ (c) Buy JPY from Hong Kong Bank at USD/JPY 0.0093 and sell
them to Citi Bank at USD /JPY 0.00939.
■ Equivalently, buy USD from Citi Bank at 106.5 and sell them to
Honk Kong at 107.5269 . ( HKB : JPY / USD 107.52 -111.11)

Monday, Septe © The Institute of Chartered Accountants of India 96


Solution

■ Given : Citi Bank quotes JPY/ USD 105-106.5, and Honk Kong Bank quotes
USD/JPY 0.0090-­0.0093.
■ (a) No, Citi Bank’s quotes imply USD/ JPY 0.00939 - 0.00952. (HK USD/JPY
0.0090-­0.0093. )
■ (b) Since both rates quoted by Citi Bank exceed those offered by Honk Kong Bank,
there is an arbitrage opportunity.
■ (c) Buy JPY from Hong Kong Bank at USD/JPY 0.0093 and sell them to Citi Bank at
USD /JPY 0.00939.
■ Equivalently, buy USD from Citi Bank at 106.5 and sell them to Honk Kong at
107.5269 . ( HKB : JPY / USD 107.52 -111.11)

Monday, Septe © The Institute of Chartered Accountants of India 97

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