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:
AUD 1 = ￥ 86.73/85.00
If I wanted to buy ￥ 100 million,how much AUD would I sell?
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?
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 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)
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 ￥85.00,I will therefore need to sell AUD1 176 471 (￥100m/85.00) to be able to buy ￥100 million.
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)
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.
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.
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:
AUD 1 = ￥ 86.73/85.00
If I wanted to buy ￥ 100 million,how much AUD would I sell?
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?
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 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)
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 ￥85.00,I will therefore need to sell AUD1 176 471 (￥100m/85.00) to be able to buy ￥100 million.
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)
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.
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.
