Q.1) The current exchange rate between US dollar and Euro is $1.1/Euro. [As the amount expressed is in US $ (per €) here US $ is home currency and € is foreign currency]. Interest rate in the US and Euro region is 5% and 6% respectively. What is exchange rate expected after 6 months?
(Ans.: 1.09466. Hence, Euro depreciates. Dollar is at premium)
Q.2) Exchange Rates:
35.9010/$ (6 months)
$ 7% per annum
12% per annum
Workout arbitrage possibilities.
(Ans.: Rs. 1583 on investment of Rs. 1 million)
Q.3) Currency Units:
E.g. Currency $: 0.6650/DM (Spot)
Currency $: 0.6700/ DM (3-months)
DM: 7.00% per annum
Currency $: 9.00% per annum
Calculate arbitrage gain possible from the above data. (Mumbai University, April, 2002)
(Ans.: Formula 1 – Positive Borrow Home. Invest foreign Gain 2,650 CAD an investment of 1 million CAD. Formula 2 – Negative Reject)
Q.4) Spot rate is /$ 39. Interest Rate in India is 8% per annum. Interest rate in US is 5% per annum. Calculate possible 6-months forward rate as per international Fischer Effect.
(Ans.: F = 39.5707 /$)
Q.5) The following table shows interest rates for $ and FFr. The spot exchange rate 7.05 FFr per dollar (All the percentage rates are annualized).
Dollar interest rate 11.5%
France interest rate 19.5%
Find 3 months forward rate.
(Ans.: Forward rate as per interest rate parity theory would be FFr 7.1871/$)
Q.6) Exchange Rates:
CHF 1.3829 per $ (Spot)
CHF 1.3849 per $ (3 months)
$ 4 per cent per annum
CHF 5 per cent per annum
Workout the arbitrage possibilities.
(Ans.: Formula I – Negative. Formula II- Positive, 1038 foreign currency/$1,038 Gain on million)
Q.7) Exchange Rates:
Can $: 0.665/DM (Spot)
Can $: 0.670/DM (3 months)
DM: 7.00% per annum
Can $: 9.00% per annum
Calculate the arbitrage gain possible from the above data. (Mumbai University, April 2002)
(Ans.: Formula I – Positive, Can$ 2,650 on million. Formula II- Negative)
Q.8) From the following data calculate the possibilities of a gain/loss in arbitrage.
Spots rate FFR 6.00
6 months forward rate FFR 6.0020 = $ 1
Annualized interest rate on 6 months US $ = 5%
Annualized interest rate 6 months Fr = 8%. (Mumbai University, May 2004)
(Ans.: Formula I – Negative. Formula II- Positive, 14,653)
FISHER EFFECT (CIP):
Q.9) SGD 2.0749/EUR spot in Euroland interest rate 2.24% p.a. for 6 months.
SGD 2.0622/EUR 6 month Forward.
Compute annual interest rate in Singapore for 6 months to ensure no arbitrage possibilities.
Q.10) The spot rate in Canada for British Pound is CAD 2.2646/GBP. Forward rate for 3 months is CAD 2.2520/GBP. Interest rates in Canada are 2.64% per annum for 3 months. Find interest rates in Britain to avoid any arbitrage possibilities.
Q.11) If spot rate in Japan for US$ is ¥ 111.04/$. Japan interest rates are 0.052% p.a. and US interest rates are 2.11% p.a. Find 9 month forward rate as per CIP.
(Ans.: ¥ 109.35/$)
Q.12) Spot rate for US Dollar is Rupee 50. Interest Rate in India is 11% per annum and in US of A it is 6% per annum. Calculate 3 month and 6 month forward rates.
(Ans.: 50.6158 and 51.2136)
Q.13) 1 GBP = USD 1.6400 Spot and 6 months forward rate is 1 GBP = USD 1.6480. Find interest rate in Britain if interest in US of A is 5%; as per international fischer effect.