Financial statistics 金融统计代写- FINS 1612 homework questions for Tutorial
时间:2020-11-20

FINS 1612 homework questions for Tutorial 8 (week 9)

Chapter 15

End-chapter essay questions:

5 Many developed economies operate within a floating exchange rate regime.
Where a country has a floating exchange rate, identify and discuss the
circumstances in which the central bank of that country might conduct
transactions in the FX market.

The central banks of nation-states enter the FX markets periodically, for one
or other of the following reasons:
• to acquire foreign currency to pay for their government's purchases of
imports, such as defense equipment, and to pay interest on, or to redeem,
the government’s overseas borrowings.
• to change the composition of the central bank’s holdings of foreign
currencies as part of its management of official reserve assets. Official
reserve assets are central bank’s holdings of foreign currencies, gold and
international drawing rights
• to influence the exchange rate. Central bank intervention in the FX
market would not exist if the value of a currency was determined purely
by market forces, that is, a so-called clean float. However, central banks
may, at times, be significant buyers or sellers of a currency where it
considers the exchange rate is moving too rapidly and is trading well
outside rates that can be supported by economic fundamentals. If the
goal is to slow down an appreciation of the exchange rate, the central
bank will sell its local currency. In another example, if the Reserve Bank
wished to support the AUD to stop it depreciating and perhaps assist it to
appreciate, it would buy AUD and sell foreign currency.


7 Outline the features of the main types of contracts that are created in the FX
markets, distinguishing between short-dated, spot and forward transactions.
• An FX transaction is described by its value date, that is, the day that the
currency is delivered and settlement is made.
• Spot transactions—the FX contract value date is two business days from
the date of the initial order. The exchange rate is determined today, but
delivery occurs in two business days. For example, a company places an
order with an FX dealer to buy USD1 million at a rate of AUD/USD1.3032
on a Tuesday, then the dealer will deliver USD1 million on the Thursday
and the company will pay AUD767 341.93 also on the Thursday.
• Forward transactions—the FX contract value date occurs at a specified
date beyond the spot date, for example an order to sell EUR in three
months. Again, the exchange rate is set today that will apply at spot plus
three months. If today is 24 March then the 3-month forward value date
will be 26 June, providing that is a business day (if not, the date will be
moved forward to the next business day).
• tod transactions—an FX contract with settlement and delivery today.
• tom transactions—an FX contract with settlement and delivery
tomorrow.

10 An FX dealer is quoting spot USD/SGD1.2750–56.

a. explain from the perspective of the dealer what the FX quote indicates.

• The price maker FX dealer will buy USD1 for SGD1.2750. For the party
that has entered into the FX contract with the dealer they will sell USD1
and receive SGD1.2750
• Also, the dealer will sell USD1 for SGD1.2756; the customer will receive
USD1 and pay the dealer SGD1.2756
• The dealer will make a margin of 6 points between its bid and offer
transactions.

b. transpose the quotation.
The USD/SGD1.2750–56 is a direct quote; the USD is the base currency
14. It is possible to transpose the direct quote to an indirect quote
(SGD/USD)
15. Rule: reverse then invert.
USD/SGD1.2750–1.2756
Reverse the bid/offer prices
1.2756–1.2750
take the inverse, that is, divide both numbers into 1
SGD/USD0.7839–0.7843

11 A men’s fashion label in the UK is exporting goods to Denmark. In order to
ascertain the firm’s exposure to foreign exchange risk, the company needs to
calculate the GBP/DKK cross-rate. An FX dealer quotes the following rates:

USD/DKK 5.4031–37
USD/GBP 0.6063–69
Calculate the GBP/DKK cross-rate.

• Crossing two direct FX quotations:
• place the currency that is to become the unit of the quotation first
• divide opposite bid and offer rates, that is:
• to obtain the bid rate: divide the base currency offer into the terms
currency bid
• to obtain the offer rate: divide the base currency bid into the terms
currency offer.
• Therefore, place the USD/DKK quote first:
USD/DKK 5.4031–37USD/GBP 0.6063–69
To determine the GBP/DKK cross rate:
5.4031/0.6069 = 8.9028
5.4037/0.6063 = 8.9126

GBP/DKK 8.9028-9126
12 A Swiss manufacturer generates receipts in USD from its exports of
chocolate to America. At the same time, the company imports cocoa from
Nigeria, incurring commitments in NGN (naira). Rates are quoted at:

USD/NGN 162.2520–29
CHF/USD 1.1310–19

Calculate the CHF/NGN cross-rate.


• It is possible to use two methods to calculate this cross-rate; first
transpose the CHF/USD rate to a direct USD/CHF rate and then use the
two direct quote method (see question 11). Alternatively, use the direct
and indirect quote method.
• Crossing a direct and an indirect FX quotation:
• to obtain the bid rate—multiply the two bid rates
• to obtain the offer rate—multiply the two offer rates.
• To determine the CHF/NGN cross rate:
165.2520 × 1.1310 = 183.5070
162.2529 × 1.1319 = 183.6988

CHF/NGN 183.50-69

13 A German importer has entered into a contract under which it will require
payment in GBP in one month. The company is concerned at its exposure to
foreign exchange risk and decides to enter into a forward exchange contract
with its bank. Given the following (simplified) data, calculate the forward rate
offered by the bank. Both countries use a 365-day year; assume 30-day
contract.

EUR/GBP (spot): 0.8260–67
One-month German interest rate: 4.75% p.a.
One-month UK interest rate: 3.25% p.a.

1. The quote is from the perspective of the dealer relative to the base
currency.
2. The importer needs to buy GBP therefore it will sell EUR to the dealer.
The dealer is therefore buying EUR, so need to use the bid rate.

[1 + ( × contract days/days in year)]
[1 + ( × contract days/days in year)]

where:
= spot rate
= interest rate of base currency
= interest rate of terms currency

Therefore, based on the above data:
0.8260
[1 + (0.0325 × 30/365)]
[1 + (0.0475 × 30/365)]

= 0.8260 (1.00267/1.0039)
= /0.8250




Chapter 16

End-chapter essay questions:

3 Under a floating exchange rate regime, the exchange rate will always adjust so
that the demand for, and the supply of, a currency in the FX market will be
equal.

a. Having regard to this statement, describe the mechanisms through which
equilibrium is maintained in the event of a change in the demand or supply
curves.

• Given the data in the diagram below, the equilibrium exchange rate based
on the supply and demand curves is AUD/USD1.0225
• This is the exchange rate that is sustainable over time, assuming there is
no change in factors influencing the supply and demand curves.
• Any other exchange rate is not sustainable; for example, at a rate of
AUD/USD0.9820 the quantity of AUD demanded is 25 billion, but the
quantity supplied is only 15 billion.
• There is an excess demand for the AUD.
• The FX dealers would not be able to meet the demands of their clients.
• Their clients would have to instruct their dealers to offer a higher price.
• The effect of the higher price is twofold; first, as the price of the AUD is
bid up the quantity supplied would increase; second, some who
demanded the AUD at 0.9820 would withdraw from the market as the
exchange rate appreciates. The combined effect is that the increase in the
price reduces the excess demand.
• The price would continue to be bid up to a rate of 1.0225 at which point
there is no pressure in the marketplace for the price to change further.
• This conclusion stands only while the demand and supply curves remain
where they are.
• Factors that determine the positions of the curves change through time.
• With changes in these variables, and thus in the positions of the curves,
the equilibrium exchange rate will change.
• Variables that may affect the positions of the demand and supply curves
include the relative inflation rates, relative national income growth,
relative interest rates, exchange rate expectations and central bank or
government intervention.

b. Draw a diagram showing the appropriate demand and supply curves.



5 Draw a chart and explain in words what is expected to happen to the Indian
rupee demand and supply curves (USD/INR) if there is a forecast increase in
India’s inflation rate while the inflation rate remains stable in the USA.
o Purchasing power parity contends that exchange rates will adjust to ensure
prices on the same goods are equal between countries.

o A sustained surge in Indian inflation will increase the costs of local goods
o USA demand for the Indian goods would fall
o Therefore there would be a reduction in the demand for the Indian rupee
o The demand curve would move from D0 to D1
Value of Indian
Rupee against USD
o At the same time Indian would seek relatively cheaper goods from overseas
o The supply of the INR would increase as importers purchased the USD
o The supply curve would move from S0 to S1

6 Draw a chart and explain in words what is expected to happen to the New
Zealand dollar demand and supply curves (USD/NZD) if there is a forecast
increase in New Zealand’s national income relative to a stable growth rate in
the USA.












• New Zealand’s demand for imports would increase
• Increase in supply of NZD in order to purchase USD to pay for imports
• The supply curve would move from S0 to S1
• With USA national income unchanged the USA demand for New Zealand
goods, and thus the NZD, will remain unchanged
• The demand curve is therefore unchanged
• The net effect is a depreciation in the NZD
However, it is just an analysis in the short term.
In the long-term, we also need to consider investment and other issues.


Value of NZD against
USD
14 Briefly outline the basic contention of the purchasing power parity theory of
exchange rate determination.
• PPP theory contends that exchange rates, in a floating exchange rate
regime, will adjust to ensure prices on the same goods and services are
equal between countries.
• PPP theory has been used to determine whether or not various currencies
are appropriately valued in FX markets; e.g., under PPP if the price of a
product in the UK increases by 3%, but remains unchanged in NZ, the NZD
should appreciate by 3%. If the NZD did not appreciate by that amount it is
undervalued, and market participants would expect it to appreciate.
• While PPP sounds rational, in practice PPP, as a theory of exchange rate
determination, provides reasonable results only in the long run.
• PPP does not appear to be very useful in explaining movements in
exchange rates where the periods under consideration are as short as a few
months or even a few years.

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