1. International Finance
Exercises

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

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

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

5. 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% %
USD 3.00% %
Not relevant

6. II. Currency Derivatives – FX Forwards
Covered Interest Arbitrage
Spot rate EUR/USD
Interest rate USD 8 % p.a.
Interest rate EUR 4 % p.a.
3-month Forward rate
(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)/ *(1.01)=EUR 25,000

7. II. Currency Derivatives – FX Forwards
Covered Interest Arbitrage
Spot rate EUR/USD –
Interest rate USD % % p.a.
Interest rate EUR % % p.a.
6-month Forward rate –
(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

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