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Afu 08504 - If - Forex Market - TQ

The document contains 19 tutorial questions related to foreign exchange markets. The questions cover topics such as defining foreign exchange markets and exchange rates, identifying factors affecting exchange rates, describing market participants, explaining forward contracts and differentials, discussing triangular arbitrage, computing exchange rates and currency conversions, and calculating forward premiums and discounts. The questions involve calculations using given spot and forward exchange rate quotes.

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Abdulkarim Hamisi Kufakunoga
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309 views4 pages

Afu 08504 - If - Forex Market - TQ

The document contains 19 tutorial questions related to foreign exchange markets. The questions cover topics such as defining foreign exchange markets and exchange rates, identifying factors affecting exchange rates, describing market participants, explaining forward contracts and differentials, discussing triangular arbitrage, computing exchange rates and currency conversions, and calculating forward premiums and discounts. The questions involve calculations using given spot and forward exchange rate quotes.

Uploaded by

Abdulkarim Hamisi Kufakunoga
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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THE INSTITUTE OF FINANCE MANAGEMENT

INSTITUTE OF FINANCE MANAGEMENT CHUO CHA USIMAMIZI WA FEDHA

BACC III, BBF III , BEF III & BAIT III


2022 - 2023
AFU 08504: INTERNATIONAL FINANCE

THE ECONOMICS OF FOREIGN EXCHANGE MARKET


TUTORIAL QUESTIONS
______________________________________________________________________________
TQ1. Provide a precise definition of the market for foreign exchange.

TQ2. What does the term foreign exchange rate mean? Briefly identify the factors affecting foreign
exchange rate.

TQ3. Who are the market participants in the foreign exchange market and what is the difference
between the retail or client market and the wholesale or interbank market for foreign
exchange?

TQ4. What is meant by a currency trading at a discount or at a premium in the forward market?

TQ5. What is triangular arbitrage? What is a condition that will give rise to a triangular arbitrage
opportunity?

TQ6. Why is the profit from triangular arbitrage riskless?

TQ7. What is a forward contract and what do the terms premium and discount mean in this
context?

TQ8. Define a Point. When do we say that the points are rising and when do we classify points as
being falling?

TQ.9 What are the principal uses/functions of the foreign exchange market?

TQ10. Four concepts: appreciation, depreciation, revaluation, and devaluation are all related to
changing the value of a currency. Provide a concise definition of each.
2 | Page

TQ11: [Currency Trading]


The following spot rates are observed in the foreign exchange market:
Currency Units Required to Buy One TZS
Kenya (KES) 0.15
Uganda (UGS) 3.45
Zambia (ZK) 6.75
Malawi (MK) 5.85

Required:

On the basis of this information, compute to the nearest second decimal the number of
(a) TZS that can be acquired for UGS25,000
(b) MK that can be acquired for TZS30,000,000
(c) UGS dollar that TZS9,000,000 can buy
(d) KES that TZS200,000 will buy

TQ12: [Forward Differentials]


Given below are spot and forward rates expressed in TZS per unit of the KES and UGS
Rates Kenyan Shilling (KES) Ugandan Shilling (UGS)
Spot 15.60 0.30
30-days forward 16.10 0.25
60-days forward 16.40 0.50
90-days forward 16.90 0.59
180-days forward 17.80 0.58

Required:
1. Is the 90 day forward KES quoted at a discount or at a premium?
2. Is the 90- day forward contract in UGS trading at a discount or at a premium?
3. Relative to the UGS is the 180 – day forward TZS quoted at a discount?
4. Relative to the TZS is the 90 – day forward KES quoted at a discount?
Compute the forward premium or discount in each of the above cases.

TQ13: [Forward Differentials]


Given below are spot and forward quotations for the US$ against the Tanzanian shilling (TZS).
Spot Rate: US$: TZS 1560 – 1572
1 Month Forward: 5 – 8 dis.
3 Months forward 9 – 3 pm
45 Days Forward 7 – 5 pm
Assume a 365 Day Year

Required:

1. One month forward percentage bid-ask spread on the US$


2. 45 Days forward percentage bid-ask spread on the TZS
3. Three month forward premium or discount on the US$
4. One month forward premium or discount on the TZS
3 | Page

TQ14: [Swap Rates and Outright Rate Quotations]


The following quotes are received for spot, one month, three month and six month Euro (€) and
Pound sterling (₤):

Spot One Month Three Six Month


₤: $2.0015 – 30 19 – 17 26 – 22 42 – 35

€: $1.6963 – 68 4–6 9 – 14 25 – 38

Required: Convert the above swap rates in outright rates.

TQ15: [Foreign Exchange Trading]


You are given the following information about currency rates for pound sterling spot and forward.

Currency Spot 1 Month Forward 3 month Forward

US (Dollar) 1.5200 - 1.5210 0.32 - 0.27c pm 0.89 - 0.84 c pm

Kenya (KES) 24.05¼ - 28.06¼ 2⅜ - 1 ⅞c pm 6¾ - 6¼ c pm

Tanzania (TZS) 2072.20 - 2079.30 10 - 20c dis 45 - 55c dis

Required:
Calculate the cost or value in pounds to a customer who wishes to:
(a) buy US $ 1400 one month forward from his bank
(b) sell KES 28,000 one month forward
(c) sell TZS 20,000 three months forward

TQ16: [Cross Rates and Triangular Arbitrage]

1. The TZS/US$ exchange rate is TZS1500 = US$1, and the UGS/TZS exchange rate is TZS1 =
UGS3.50. What is the UGS/US$ exchange rate?

2. The following exchange rates are available:


TZS per US$ TZS1650/US$
Canadian dollar per US dollar C $1.2646/US $
TZS per Canadian Dollar TZS1390/C$

Required
Are there any opportunities for market arbitrage? Show how a Tanzanian arbitrageur can benefit
from the possible arbitrage between the three markets.

(3) Assuming no transaction costs, suppose: £1 = US$ 2.4110 in New York, US$ = TZS 1,400 in
Tanzania, and TZS2300 = £1 in London. How would you take profitable advantage of these
rates?
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TQ17: [Cross Rates in the Presence of Bid-Ask Spread]


(a) Suppose the direct quote for sterling in New York is 1.7110-5. What is the direct quote for
dollars in London?
(b) Suppose the spot quote on the EURO in New York is $ 1.3302-10, and the spot quote on the £
is $ 1.9180-90
 What is the direct spot quote for the £ in Frankfurt?
 Compute the percentage bid-ask spreads on the £ and the EURO.

TQ18: [Cross Rates and Foreign Exchange Trading]


A commercial bank in Dar es Salaam, Tanzania, provided the following foreign exchange quotes on
30th April, 2006.
TZS/£ £/Euro TZS/US$
Spot 2404 – 2420 0.4852 – 0.4892 1050 – 1060
1 Year Forward 2456 – 2474 0.4956 – 0.4966 1200 – 1260
REQUIRED:
(i) How many TZS will the bank pay to purchase one Euro one year forward from a
customer?
(ii) Determine the one year forward percentage bid-ask spread on the £ against the US$.
(iii) Calculate the spot and one year forward mid-prices for the £ against the Euro and
determine the one year forward premium or discount on the Euro against the £.

STQ19: [Cross Rates and Foreign Exchange Trading]


A foreign exchange dealer provided the following quotations for the South-African Rand (SAR)
against the Tanzanian shilling (TZS) on the 31st September 2004:

TZS/SAR Spot 50 – 55
Three Months Forward 2 – 7 dis.

Required:

(i) Calculate the percentage bid-ask spread on the three month forward TZS

(ii) Calculate the profit made by the dealer in purchasing and selling SAR1, 000,000 three month
forward.

(iii) Using the spot and forward offer prices calculate the forward premium/discount on the
SAR

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