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Illustrations For Practice

1) The document provides examples and explanations of foreign exchange concepts including spot rates, forward rates, swap rates, arbitrage opportunities, and forward contracts. 2) Specific examples calculate profit/loss on forward contracts based on actual exchange rates, determine swap points, and identify arbitrage opportunities between different currency pairs and markets. 3) The document also demonstrates how to calculate forward premiums or discounts on currencies based on the difference between spot and forward rates over various time periods.

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Dhruvi Agarwal
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92 views3 pages

Illustrations For Practice

1) The document provides examples and explanations of foreign exchange concepts including spot rates, forward rates, swap rates, arbitrage opportunities, and forward contracts. 2) Specific examples calculate profit/loss on forward contracts based on actual exchange rates, determine swap points, and identify arbitrage opportunities between different currency pairs and markets. 3) The document also demonstrates how to calculate forward premiums or discounts on currencies based on the difference between spot and forward rates over various time periods.

Uploaded by

Dhruvi Agarwal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Illustrations for practice:

Spot price and quotation: (Currency and country)

1 USD = 85 INR
1 INR = 43 CHF
0.82 GBP = 1 USD

Base currency / rate convention:

USD/GBP – 0.880/ 0.895


INR /LKR – 4.44/ 4.55
GBP/INR – 81.00/82.00

If an entity wants to sell INR and Buy LKR which rate to be used
If an entity wants to sell GBP and Buy USD which rate to be used
If an entity wants to buy INR and sell LKR which rate to be used
If an entity wants to buy GBP and Sell INR which rate to be used

Forward Rate / Profit or loss:

SR (01-01-2022) - 1 USD = 81 INR


FR – 6 months (30-06-2022) – 1 USD = 84
Assume the actual rate on 30-06-2022 is INR 83 and INR 86. Find the gain or loss for this contract.

Swap Margin / points:

USD/CHF Spot: 1.4265/1.4275 Forward 3 months: 1.4277/1.4288


Find the Swap points or Swap margin.

USD/CHF Spot: 1.4265/1.4275 1 month swap: 0.0015/0.0008


What is the forward rate?

Forward Contract – Profit or loss:

A French company exports goods to US worth USD 124,000 under Letter of Credit for 90 days. Current
exchange rates are:
Eur 5.70 = 1 USD
If USD is to get strengthened by 5% what would be the transaction gain or loss in Euro?
If it weakens by 5% what is the impact?

A Indian company imports goods from US worth USD 100,000 180 days credit. Current exchange rates
are:
INR 50 = 1 USD
If INR is to get strengthened by 5% what would be the transaction gain or loss in Euro?
If it weakens by 5% what is the impact?
Two-point Arbitrage:
Two-point arbitrage concerns two currencies in two geographically separated markets.

Example 1:
SR ￡1 = $1.55 in London and
SR ￡1 = $1.60 in New York
If you have $ 1,000,000, is there any arbitrage profit possible?

The sale of dollars in London would have strengthened sterling and pushed the value of the pound
above $1.55. At the same time, the sale of sterling in New York would have caused sterling to weaken
there, pushing its value below $1.60. The action of arbitrageurs would bring the rates of exchange in
the two centres together. In long run arbitrage profit is not possible.

If there is transaction costs, there arbitrage profit may not be possible.

Example 2:
SR ￡1 = $1.5495 – 1.5505 in London and
SR ￡1 = $1.5995 – 1.6005 in NY and

a. Convert indirect quote to direct quote.


b. If you have ￡ 1,000,000, is there any arbitrage profit possible?

Example 3:
Spot Rate (Switzerland) 1$ = CHF 1.3689 – 1.3695
Spot Rate (USA) 1CHF = $ 0.7090 – 0.7236
You have 1 million CHF. What amount of profit you can make from arbitrage?

Cross rate Arbitrage or three-way arbitrage:

In three point arbitrage, we will first sell available currency in one market, convert to different
currency and finally reconvert to the same currency in different markets

Example 1:
Followings are the spot exchange rates quoted at three different forex markets:

USD/INR 48.30 in Mumbai


GBP/INR 77.52 in London
GBP/USD 1.6231 in new York

The arbitrageur has USD1,00,00,000. Assuming that there are no transaction costs, explain
whether there is any arbitrage gain possible from the quoted spot exchange rates.
Example 2:
In NY USD 1 = CHF 1.6639 – 1.6646 – (i) [CHF/USD]
In London USD 1 = Euro 0.9682 – 0.9686 – (ii) [Euro/USD]
In Australia Euro 1 = CHF 1.6410 – 1.6423 – (iii) [CHF/Euro]

Assume we have with $ 1 million, how we can make profit.

Example 3:
A British citizen holding GBP 5 Million looking for triangular arbitration in the following markets and
quote:
INR/USD: 0.0132/0.0134 Mumbai
INR/GBP: 0.0120/0.0125 London
USD/GBP: 0.9031/0.9034 New York

Show both the paths.

Example 4:
India Silk Limited, an established exporter of silk materials, has a surplus of US$ 20 million as on 31st
May 2015. The banker of the company informs the following exchange rates that are quoted at three
different forex markets:
GBP/ INR 99.10 at London
USD/ INR 64.10 at Mumbai
USD/ GBP 0.65 at New York
Assuming that there are no transaction costs, advice the company howto avail the arbitrage gain from
the above quoted spot exchange rates.
Hint – Mumbai – London – New York

Forward Contracts – Premium or Discount:

Example 1:
Spot rate of EUR to USD is 0.716. Six month forward rate of EUR is 0.742. What is the forward premium
or discount on EUR on annual basis.

Example 2:
Spot rate of AUD to USD is 0.786. Three month forward rate of AUD is 0.772. What is the forward
premium or discount on AUD on 6 months and on annual basis.

Example 3:
RIL has purchased machinery worth US$5,00,000 from the US which is payable in 3 months time. RIL
expects that the frame will weaken over a period. He has asked his banker for forward exchange cover.
The rates existing at the time are:

What is the INR equivalent payable after 3 months?

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