Exam 1 Review

Exam 1 Review - Topic: Sample Questions & Answers...

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Topic : Sample Questions & Answers
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Topic: Spot Rate Arbitrage Q1.You are a recent graduate of this international finance course and work for the FX arbitrage desk at Citigroup. Your boss asks you to check the competitive FX quotes in the US$/Euro market. Deutsche Bank, London US$ 1.1855-58/Euro Barclays Bank, New York US$ 1.1856-60/Euro Chase, Frankfurt US$ 1.1859-61/Euro A1. You should purchase a Euro at US$ 1.1858 from Deutsche Bank, London and sell it at US$ 1.1859 to Chase, Frankfurt, for a profit of US$ 0.0001.
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Topic: Cross Rates Q2. A U.S. multinational has an Australian subsidiary that declares a dividend in Australian Dollars. Simultaneously the CFO wishes to inject funds into the multinational’s subsidiary in Japan. The CFO calls two international banks and obtains the following FX quotes: 1. BARCLAYS, TOKYO (QUOTES ALL CURRENCIES VERSUS THE US$ ONLY) US$ / A$ .7400 - .7410 (DIRECT TERMS) YEN / US$ 100.10 – 100.20 (INDIRECT TERMS) 2. CITIBANK, SYDNEY (QUOTES CROSS RATES) YEN/A$ 74.05 – 74.15 a) What buy and sell transaction does the CFO need to undertake? b) With which bank should the CFO deal? c) What is the best rate the CFO can obtain?
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A2.a) The CFO is a seller of Australian $ and a buyer of Japanese Yen b)The CFO should deal with Barclays, Tokyo Why? US$ .7400/A$ x Yen 100.10 = Yen 74.074/A$ c) The best rate the CFO can obtain is to be a seller of A$ versus Yen at the cross rate of Yen 74.074/A$, rather than with Citibank, Sydney at Yen 74.05/A$
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Topic : Integration of FX and Money Markets Q3. In your first job after graduation, your employer T-Bird Corporation is a major exporter of basketballs to Switzerland. Your boss wishes to hedge T- Bird’s FX risk by selling your 3 month SF account receivable in the 3 month forward FX market. Your Bank gives you the following SF/US$ (Indirect terms) rates:
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Exam 1 Review - Topic: Sample Questions & Answers...

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