2. Using Exhibit 4.4, calculate the one-, three-, and six-month forward cross-exchange rates between the Canadian dollar and the Swiss franc using the most current quotations. State the forward cross-rates in “Canadian” terms.
     
    Solution: The formulas we want to use are:
    FN(CD/SF) = FN($/SF)/FN($/CD)
    or
    FN(CD/SF) = FN(CD/$)/FN(SF/$).
    We will use the top formula that uses American term forward exchange rates.
    F1(CD/SF) = .6660/.6350 = 1.0488
    F3(CD/SF) = .6670/.6337 = 1.0525
    F6(CD/SF) = .6684/.6315 = 1.0584
    3. Restate the following one-, three-, and six-month outright forward European term bid-ask quotes in forward points.
    Spot      1.3431-1.3436
    One-Month    1.3432-1.3442
    Three-Month    1.3448-1.3463
    Six-Month    1.3488-1.3508
    Solution:
    One-Month    01-06
    Three-Month    17-27
    Six-Month    57-72
     
    4. Using the spot and outright forward quotes in problem 3, determine the corresponding bid-ask spreads in points.
     
    Solution:
    Spot      5
    One-Month    10
    Three-Month    15
    Six-Month    20
    9.  The current spot exchange rate is $1.55/ £ and the three-month forward rate is $1.50/£. Based on your analysis of the exchange rate, you are pretty confident that the spot exchange rate will be $1.52/£ in three months. Assume that you would like to buy or sell £1,000,000.
     
    a.  What actions do you need to take to speculate in the forward market? What is the expected dollar profit from speculation?
     
    b.  What would be your speculative profit in dollar terms if the spot exchange rate actually turns out to be $1.46/£.
     

     
     
     
    Solution:
     
    a.  If you believe the spot exchange rate will be $1.52/£ in three months, you should buy £1,000,000 forward for $1.50/£. Your expected profit will be:
    $20,000 = £1,000,000 x ($1.52 -$1.50).
     
    b.  If the spot exchange rate actually turns out to be $1.46/£ in three months, your loss from the long position will be:
    -$40,000 = £1,000,000 x ($1.46 -$1.50).
     

    10.  Omni Advisors, an international pension fund manager, plans to sell equities denominated in Swiss Francs (CHF) and purchase an equivalent amount of equities denominated in South African Rands (ZAR).      
    Omni will realize net proceeds of 3 million CHF at the end of 30 days and wants to eliminate the risk that the ZAR will appreciate relative to the CHF during this 30-day period. The following exhibit shows current exchange rates between the ZAR, CHF, and the U.S. dollar (USD).
     
    Currency Exchange Rates
     
    ZAR/USD
    ZAR/USD
    CHF/USD
    CHF/USD
    Maturity
    Bid
    Ask
    Bid
    Ask
    Spot
    6.2681
    6.2789
    1.5282
    1.5343
    30-day
    6.2538
    6.2641
    1.5226
    1.5285
    90-day
    6.2104
    6.2200
    1.5058
    1.5115

     
    a.  Describe the currency transaction that Omni should undertake to eliminate currency risk over the 30-day period.
     
    b.  Calculate the following:
    • The CHF/ZAR cross-currency rate Omni would use in valuing the Swiss equity portfolio.
         • The current value of Omni’s Swiss equity portfolio in ZAR.
    • The annualized forward premium or discount at which the ZAR is trading versus the CHF.
     
     
    CFA Guideline Answer:
     

    a.  To eliminate the currency risk arising from the possibility that ZAR will appreciate against the CHF over the next 30-day period, Omni should sell 30-day forward CHF against 30-day forward ZAR delivery (sell 30-day forward CHF against USD and buy 30-day forward ZAR against USD).
     
    b.  The calculations are as follows:
     
         • Using the currency cross rates of two forward foreign currencies and three currencies         (CHF, ZAR, USD), the exchange would be as follows:
          --30 day forward CHF are sold for USD. Dollars are bought at the forward selling         price of CHF1.5285 = $1 (done at ask side because going from currency into         dollars)
          --30 day forward ZAR are purchased for USD. Dollars are simultaneously sold to         purchase ZAR at the rate of 6.2538 = $1 (done at the bid side because going from         dollars into currency)
          --For every 1.5285 CHF held, 6.2538 ZAR are received; thus the cross currency rate is         1.5285 CHF/6.2538 ZAR = 0.244411398.
     
         • At the time of execution of the forward contracts, the value of the 3 million CHF         equity portfolio would be 3,000,000 CHF/0.244411398 = 12,274,386.65 ZAR.
         • To calculate the annualized premium or discount of the ZAR against the CHF requires         comparison of the spot selling exchange rate to the forward selling price of CHF for         ZAR.
     
           Spot rate = 1.5343 CHF/6.2681 ZAR = 0.244779120
           30 day forward ask rate 1.5285 CHF/6.2538 ZAR = 0.244411398
           The premium/discount formula is:
             [(forward rate – spot rate) / spot rate] x (360 / # day contract) =
             [(0.244411398 – 0.24477912) / 0.24477912] x (360 / 30) =
             -1.8027126 % = -1.80% discount ZAR to CHF
     

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