Assignment

1. The Wall Street Journal reported the following spot and forward rates for the Swiss franc ($/SF) in June for 2009:

Spot.............................. $ 0.8466
30-day forward................. 0.8504
90-day forward................. 0.8540
180-day forward............... 0.8587

a.) Was the Swiss franc selling at a discount or premium in the forward market?

b.) What was the 30-day forward premium (or discount)?

c.) What was the 90-day forward premium (or discount)?

d.) Suppose you executed a 90-day forward contract to exchange 100,000 Swiss francs into U.S. Dollars. How many francs will the Swiss bank deliver in six months to get the U.S. dollars?

e.) Assume a Swiss bank entered into a 180-day forward contract with Citicorp to buy $100,000. How many francs will the Swiss bank deliver in six months to get the U.S. dollars.

2. Suppose a Polish zloty is selling for $0.3399 and a British pound is selling for $1.448. What is the exchange rate (cross rate) of the Polish zloty to the British pound? That is, how many Polish zlotys are equal to a British pound?

5. An investor in the United States bought a one-year Singapore security valued at 150,000 Singapore dollars. The U.S. dollar equivalent was $100,000. The Singapore security earned 15 percent during the year but the Singapore dollar depreciated 5 cents against the U.S. dollar during the same time period ($0.67/SD to $0.62/SD). After transferring the funds back to the United States, what was the investor's return on his $100,000? Determine the total ending value of the Singapore investment in Singapore dollars and then translate this value to U.S. dollars by multiplying by $0.62. Then compute the return on the $100,000.

7. You are the vice-president of finance for Exploratory Resources, headquartered in Houston, Texas. In January 2010, your firm's Canadian subsidiary obtained a six-month loan of 100,000 Canadian dollars from a bank in Houston to finance the acquisition of a titanium mine in Quebec province. The loan will also be repaid in Canadian dollars. At the time of the loan, the spot exchange rate was U.S. $0.8990/Canadian dollar and the Canadian currency was selling at a discount in the forward market. The June 2010 contract (Face value = $100,000 per contract) was quoted at U.S. $0.8920/Canadian dollar.

a.) Explain how the Houston bank could lose on this transaction assuming no hedging.

b.) If the bank does hedge with the forward contract, what is the maximum amount it can lose?