FIN2 101 BUSINESS FINANCE II MODULE 11-INTERNATIONAL FINANCIAL MANAGEMENT QUESTION 1 What is foreign EXChANGe? What is an EXCHANGE rATE? What is the FOREIGN EXCHANGE MARKET QUESTION 2 An Australian newspaper displays the following information -RETAIL MARKET buv/sell AUDI= USD0.5461/0.5421 a) Is this a director an indirECT quote? b) What is the relationship between a direct and an indirect quote? c) Is the AUd usually quoted directly or ind irectly? d) Explain what the spread represents How much is the spread? QUESTION 3 a) Ifone AUD=USD0. 5720, what is the value of one USD? b fone Y= nzd. 2100. what is the value of one nzd? c) If one MYr= SARO0057, what is the value of one SAR? d) If one CAD= AUD 1.0002, what is the value of one AUD? QUESTION 4 Define a spot transaction. Define a forward transaction QUESTION 5 Using the information in Question 2 a) IfI wanted to buy aUd 1 million, how much USD would I sell? b) IfI wanted to buy USD 50 million, how much AUD would I sell?
October 2003 FIN2101 BUSINESS FINANCE II MODULE 11 -INTERNATIONAL FINANCIAL MANAGEMENT QUESTION 1 What is FOREIGN EXCHANGE? What is an EXCHANGE RATE? What is the FOREIGN EXCHANGE MARKET? QUESTION 2 An Australian newspaper displays the following information: ------------RETAIL MARKET------------ buy/sell AUD 1= USD 0.5461/0.5421 a) Is this a DIRECT or an INDIRECT quote? b) What is the relationship between a direct and an indirect quote? c) Is the AUD usually quoted directly or indirectly? d) Explain what the spread represents. e) How much is the spread? QUESTION 3 a) If one AUD = USD0.5720, what is the value of one USD? b) If one ¥ = NZD 3.2100, what is the value of one NZD? c) If one MYR = SAR0.0057, what is the value of one SAR? d) If one CAD = AUD 1.0002, what is the value of one AUD? QUESTION 4 Define a SPOT transaction. Define a FORWARD transaction. QUESTION 5 Using the information in Question 2: a) If I wanted to buy AUD 1 million, how much USD would I sell? b) If I wanted to buy USD 50 million, how much AUD would I sell?
QUESTION 6 You observe the following information on exchange rates AUD1=￥8673/8500 1) If I wanted to buy y 100 million, how much AUD would I sell? b) IfI wanted to buy aUd 5 million, how much y would I sell? QUESTION 7 The bank gives you the following quote Spot AUD/USD0.5240-50 12-16 6 month 20-17 a) What is the SPOT SPREAD? b What are the 3 and 6 month OUTRIGHTFORWARD RATES? c) How does the outright forward rate differ from the forward rate? d) Is the aud at a premiumor discount in the 3 mnth forward market? 6 mnth forward market? e) You are an Australian exporter expecting USD I million in 3 months time. Minimise your oreign exchange risk You are an austral ian importer required to pay USD I million in 6 months time. Minimise your foreign exchange risk QUESTION 8 A foreign exchange trader quotes the rate USD0.5815/20=AUDI a) What is the bid-ask spread? b) What will it cost you in AUD to buy USD I million? c) How much in AUD will you receive if you sell USD 2.5 million?
October 2003 QUESTION 6 You observe the following information on exchange rates: AUD 1 = ¥ 86.73/85.00 a) If I wanted to buy ¥ 100 million, how much AUD would I sell? b) If I wanted to buy AUD 5 million, how much ¥ would I sell? QUESTION 7 The bank gives you the following quote: Spot AUD / USD 0.5240-50 3 month 12-16 6 month 20-17 a) What is the SPOT SPREAD? b) What are the 3 and 6 month OUTRIGHT FORWARD RATES? c) How does the outright forward rate differ from the forward rate? d) Is the AUD at a PREMIUM or DISCOUNT in the: - 3 mnth forward market? - 6 mnth forward market? e) You are an Australian exporter expecting USD 1 million in 3 months time. Minimise your foreign exchange risk. f) You are an Australian importer required to pay USD 1 million in 6 months time. Minimise your foreign exchange risk. QUESTION 8 A foreign exchange trader quotes the rate USD0.5815/20 = AUD1. a) What is the bid-ask spread? b) What will it cost you in AUD to buy USD 1 million? c) How much in AUD will you receive if you sell USD 2.5 million?
FIN210I BUSINESS FINANCE I SOLUTIONS TO TUTORIAL QUESTIONS MODULE 11-INTERNATIONAL FINANCIAL MANAGEMENT
October 2003 FIN2101 BUSINESS FINANCE II SOLUTIONS TO TUTORIAL QUESTIONS MODULE 11 -INTERNATIONAL FINANCIAL MANAGEMENT
QUESTION 1 Foreign exchange consists of all the ways and means by which the rights to wealth in one country's currency may be converted into rights to the wealth in terms of the currency of another country An exchange rate is the price of one currency in terms of another There is gle foreign exchange market place, unl ike the stock or futures markets, ie there is no"floor trading"as such. Transactions are carried out by telephone, telex and computer by licensed dealers and later confirmed by documentation It should be noted that the foreign exchange market is a highly in tegrated global market where currencies are traded somewhere every hour of the day The foreign exchange market has two tiers- the interbank(wholesale)market and the client (retail) market It is also worth mentioning the advantage found in Australia's time zone. As the foreign exchange market in Australia is centred in Sydney and Melbourne, it enjoys an advantage over other markets in the Asia/Pacific region insofar as our early and late trad ing overlaps with late New York and early European trading respectively. Australia effectively bridges the world's two largest foreign exchange markets QUESTION 2 Students should recognise the difference between the retail and wholesale foreign exchange markets, which is basically the size of the transaction, small v large The direct quote is when we express another currency in terms of our own 18312/1.8447 The indirect quote is when one of our dollars is expressed in US cents 0.54610.5421 This then is an IndireCt quote b) The relationship between the two quotes is simply the inverse(1/). It might pay to use some extra examples such as AUDl/USD0.461=(1/0.5461)= USD I/AUD18312=(1/1.8312)=0.5461 etc, making the point that changing from direct to indirect and back is simply the application of the inverse function
October 2003 QUESTION 1 Foreign exchange consists of all the ways and means by which the rights to wealth in one country's currency may be converted into rights to the wealth in terms of the currency of another country. An exchange rate is the price of one currency in terms of another. There is no single foreign exchange market place, unlike the stock or futures markets, ie there is no "floor trading" as such. Transactions are carried out by telephone, telex and computer by licensed dealers and later confirmed by documentation. It should be noted that the foreign exchange market is a highly integrated global market where currencies are traded somewhere every hour of the day. The foreign exchange market has two tiers - the interbank (wholesale) market and the client (retail) market. It is also worth mentioning the advantage found in Australia's time zone. As the foreign exchange market in Australia is centred in Sydney and Melbourne, it enjoys an advantage over other markets in the Asia/Pacific region insofar as our early and late trading overlaps with late New York and early European trading respectively. Australia effectively bridges the world's two largest foreign exchange markets. QUESTION 2 Students should recognise the difference between the retail and wholesale foreign exchange markets, which is basically the size of the transaction, small v large. a) The direct quote is when we express another currency in terms of our own: 1.8312/1.8447 The indirect quote is when one of our dollars is expressed in US cents: 0.5461/0.5421 This then is an INDIRECT quote. b) The relationship between the two quotes is simply the inverse (1/x). It might pay to use some extra examples such as: AUD 1/USD 0.5461=(1/0.5461)=USD 1/AUD 1.8312=(1/1.8312)=0.5461 etc, making the point that changing from direct to indirect and back is simply the application of the inverse function
QUESTION 2 (Continued) e) The AUd is usually quoted indirectly d The spread is the difference between the BID and OFFEr quotes, and represents the dealers profit ( BUY LOW, SELL HIGH) e) The spread is as follows 0.54(61)-0.54(21)=40 points( or pips) The 0.54 is the " big figure"and need not be quoted over the phone as the dealers can assume that the other party knows what this is at the time QUESTION 3 a) USD/AUD 1.7483 b)NZD/￥0.3115 ) SAR/MYR 175.44 d) AUD/CAD 0.9998 QUESTION 4 Spot transaction- if a currency is bought or sold"spot ", it is settled within two(2) business days If I million AUD is sold on Friday to a bank, then USD equivalent will be cred ited to the sellers account the following tuesday Forward transaction-settlement occurs 3 or more business days after the date on which the contract is made QUESTION 5 It should be stressed that the bank will buy low and sell high, thus making a profit a) The bank will sell lAUD for 0.5461USD. I will therefore need to sell USD 546 100 to be able to buy aud 1 million b) The bank will buy lAUD for 0.5421USD. I will need to sell AUD 92 233 905(USD 50m/0.5421) to enable me to buy USD 50 million
October 2003 QUESTION 2 (Continued) c) The AUD is usually quoted indirectly. d) The spread is the difference between the BID and OFFER quotes, and represents the dealer’s profit (BUY LOW, SELL HIGH). e) The spread is as follows: 0.54(61) - 0.54(21) = 40 points (or pips) The 0.54 is the "big figure" and need not be quoted over the phone as the dealers can assume that the other party knows what this is at the time. QUESTION 3 a) USD/AUD 1.7483 b) NZD/¥ 0.3115 c) SAR/MYR 175.44 d) AUD/CAD 0.9998 QUESTION 4 Spot transaction - if a currency is bought or sold "spot", it is settled within two (2) business days. If 1 million AUD is sold on Friday to a bank, then USD equivalent will be credited to the seller's account the following Tuesday. Forward transaction - settlement occurs 3 or more business days after the date on which the contract is made. QUESTION 5 It should be stressed that the bank will buy low and sell high, thus making a profit. a) The bank will sell 1AUD for 0.5461USD. I will therefore need to sell USD 546 100 to be able to buy AUD 1 million. b) The bank will buy 1AUD for 0.5421USD. I will need to sell AUD 92 233 905 (USD 50m/0.5421) to enable me to buy USD 50 million
QUESTION 6 Again, remember that the bank will buy low and sell high The bank will buy 1 AUD for Y85.00. I will therefore need to sell AUD1 176 471 ￥100m/85.00) to be able to buy￥l00 million bank will sell 1 AUD for 486. 73. which means that i will need to sell y433 650 000 in order to buy aud 5 million QUESTION 7 a) The spot spread is 10 points b) 12-16 is a forward rate. When it is added to the"big figure", it becomes an outright forward rate I use the rules. Ascending. Add Descend ing, Deduct 3 mnth 0.5252-0.5266 6 mnth 0.5220-0.5233 c) The outright rate includes the"big fig d To determine whether a currency is at a forward premium or a discount, we need to look at whether the unit currency is worth more or less in the forward market. If the AUD is worth more in the forward market, it is at a premium. Conversely, if it is worth less in the forward market. it is at a discount In this example, the AUd is at a premium in the 3-month forward market and at a discount in the 6-month forward market Note: If the aUd is at a premium, the USd must be at a discount, and if the aud is at a discount, the Usd must be at a premium
October 2003 QUESTION 6 Again, remember that the bank will buy low and sell high. a) The bank will buy 1 AUD for ¥85.00. I will therefore need to sell AUD1 176 471 (¥100m/85.00) to be able to buy ¥100 million. b) The bank will sell 1 AUD for ¥86.73, which means that I will need to sell ¥433 650 000 in order to buy AUD 5 million. QUESTION 7 a) The spot spread is 10 points. b) 12-16 is a forward rate. When it is added to the "big figure", it becomes an outright forward rate. I use the rules: Ascending, Add. Descending, Deduct. 3 mnth: 0.5252-0.5266 6 mnth: 0.5220-0.5233 c) The outright rate includes the "big figure". d) To determine whether a currency is at a forward premium or a discount, we need to look at whether the unit currency is worth more or less in the forward market. If the AUD is worth more in the forward market, it is at a premium. Conversely, if it is worth less in the forward market, it is at a discount. In this example, the AUD is at a premium in the 3-month forward market and at a discount in the 6-month forward market. Note: If the AUD is at a premium, the USD must be at a discount, and if the AUD is at a discount, the USD must be at a premium
QUESTION 7 (Continued) 9) All that is required is that the student lock into a forward rate and remove the uncertainty of the future AUD receipts This is called a forward exchange market hedge also covered ("perfect"or square") since no residual foreign exchange risk exists, ie funds to be received are matched by funds to be paid Simply sell USD forward at 0.5266 giving $1898975. This would reduce your exposure since you make your future receipt certain Why use 0.5266? For an indirect quote AUDl/USD0.5252-0.5266 means that the bank will at 5252 buy AUD or sell USD at 5266 sell AUD or buy USD f You will need buy USD 1 million in 6 months time and therefore, will need to sell aUD To minimise the foreign exchange risk, you should sell AUD forward at 0.5220. The amount to be sold is aud1 915 709 QUESTION 8 The spread is 5 points b) The quote is given from a dealer's perspective regard ing how much the dealer will buy and sell AUD for. If you are buying USD, you are selling AUD, therefore the dealer will be buying AUD. You must therefore look at the bid rate of USD0. 5815/ l. Cost=AUD 1719690 c) You are sell ing USD and, therefore, buying AUD. The dealer, on the other hand, is selling AUD so you need to use the offer rate of USDo. 5820/AUDI Cost=$4 295 533
October 2003 QUESTION 7 (Continued) e) All that is required is that the student lock into a forward rate and remove the uncertainty of the future AUD receipts. This is called a forward exchange market hedge. It is also covered ("perfect" or "square") since no residual foreign exchange risk exists, ie funds to be received are matched by funds to be paid. Simply sell USD forward at 0.5266 giving $1 898 975. This would reduce your exposure since you make your future receipt certain. Why use 0.5266? For an indirect quote: AUD 1/USD 0.5252-0.5266 means that the bank will: at 5252 buy AUD or sell USD at 5266 sell AUD or buy USD. f) You will need buy USD 1 million in 6 months time and, therefore, will need to sell AUD. To minimise the foreign exchange risk, you should sell AUD forward at 0.5220. The amount to be sold is AUD 1 915 709. QUESTION 8 a) The spread is 5 points. b) The quote is given from a dealer’s perspective regarding how much the dealer will buy and sell AUD for. If you are buying USD, you are selling AUD, therefore the dealer will be buying AUD. You must therefore look at the bid rate of USD0.5815/AUD1. Cost = AUD 1 719 690. c) You are selling USD and, therefore, buying AUD. The dealer, on the other hand, is selling AUD so you need to use the offer rate of USD0.5820/AUD1. Cost = $4 295 533