International Finance Exercises

I. Foreign Exchange Market Locational Arbitrage Paris Interbank market: EUR/USD 1.2548/1.2552 London Interbank market: EUR/USD 1.2543/1.2546 =(1.2548-1.2546)*10000000= USD 2,000

I. Foreign Exchange Market Triangular Arbitrage EUR/USD 1.3000 EUR/CZK 28.490 USD/CZK 21.900 =10000000*28.49/21.9/1.3= EUR 10,007,024.94

I. Foreign Exchange Market Triangular Arbitrage EUR/USD 1.2900/1.2980 EUR/CZK 28.150/28.200 USD/CZK 21.900/21.930 =10000000*1.29*21.9/28.2= EUR 10,018,085.11

I. Foreign Exchange Market Currency Speculations Assume you expect Euro to appreciate from EUR/USD 1.40 to 1.47 in 60 days. What is your expected profit from the speculation if your borrowing capacity is 10 MEUR or 14 MUSD and annualized interest rates are as follows: EUR 4.00% - 4.30% USD 3.00% - 3.25% Not relevant

II. Currency Derivatives – FX Forwards Covered Interest Arbitrage Spot rate EUR/USD 1.3500 Interest rate USD 8 % p.a. Interest rate EUR 4 % p.a. 3-month Forward rate 1.3600 (1.36/1.35) is lower than (1.02/1.01), thus I borow EUR: Profit = Gain - Cost =10,000,000*1.35*(1.02)/1.36-10000000*(1.01)=EUR 25,000

II. Currency Derivatives – FX Forwards Covered Interest Arbitrage Spot rate EUR/USD 1.2500 – 1.2700 Interest rate USD 4.00% - 6.00% p.a. Interest rate EUR 2.00% - 4.00% p.a. 6-month Forward rate 1.3100 – 1.3400 (1.31/1.27) is higher than (1.03/1.01), thus I will borrow USD: Cost: 13,000,000*(1.03) = USD 13,390,000 Gain: 13,000,000*(1/1.17)*(1.01)*1.31 = USD 13,543,543 Profit: USD 153,543.3

II. Currency Derivatives – FX Forwards Non Deliverable Forward Contracts Spot rate: EUR/PHP 70.7660 Contracted 6-month rate: EUR/PHP 72.6431 Reference spot rate in 6 months: EUR/PHP 73.7712 Compute a net payment resulting from the contract for the buyer of EUR 100,000. =(73.7712-72.6431)*100000=PHP 112,810