2. Given the following information, what are the NZD/SGD currency against currency bid-ask quotations?

Solution: Equation 5.12 from the text implies Sb(NZD/SGD) = Sb($/SGD) x Sb(NZD/$) = .6135 x 1.3751= .8436. The reciprocal, 1/Sb(NZD/SGD) = Sa(SGD/NZD) = 1.1854. Analogously, it is implied that Sa(NZD/SGD) = Sa($/SGD) x Sa(NZD/$) = .6140 x 1.3765 = .8452. The reciprocal, 1/Sa(NZD/SGD) =Sb(SGD/NZD) = 1.1832. Thus, the NZD/SGD bid-ask spread is NZD0.8436-NZD0.8452 and the SGD/NZD spread is SGD1.1832-SGD1.1854. 4. Solution: $1,700 + [($1.3140 - $1.3126) + ($1.3126 - $1.3133) + ($1.3133 - $1.3049)] x EUR125,000 = $2,837.50, where EUR125,000 is the contractual size of one EUR contract. 5. a. If you believe the spot exchange rate will be $1.92/ in three months, you should buy 1,000,000 forward for $1.90/. Your expected profit will be: $20,000 = 1,000,000 x ($1.92 -$1.90). b. If the spot exchange rate actually turns out to be $1.86/ in three months, your loss from the long position will be: -$40,000 = 1,000,000 x ($1.86 -$1.90). 6. Solution: (a) Expected gain($) = 10,000,000(1.10 1.05)= 10,000,000(.05)= $500,000. (b) I would recommend hedging because Cray Research can increase the expected dollar receipt by $500,000 and also eliminate the exchange risk. (c) Since I eliminate risk without sacrificing dollar receipt, I still would recommend hedging. 7. Solution: (a). Lets first compute the PV of 250 million, i.e., 250m/1.0175 = 245,700,245.70 So if the above yen amount is invested today at the Japanese interest rate for three months, the maturity value will be exactly equal to 25 million which is the amount of payable. To buy the above yen amount today, it will cost: $2,340,002.34 = 245,700,245.70/105. The dollar cost of meeting this yen obligation is $2,340,002.34 as of today.

8. Solution: Total option premium = (.05)(5000) = $250. In three months, $250 is worth $253.75 =$250(1.015). At the expected future spot rate of $0.63/SF, which is less than the exercise price, you dont expect to exercise options. Rather, you expect to buy Swiss franc at $0.63/SF. Since you are going to buy SF5,000, you expect to spend $3,150 (=.63x5,000). Thus, the total expected cost of buying SF5,000 will be the sum of $3,150 and $253.75, i.e., $3,403.75. (b) $3,150 = (.63)(5,000). (c) $3,150 = 5,000x + 253.75, where x represents the break-even future spot rate. Solving for x, we obtain x = $0.57925/SF. Note that at the break-even future spot rate, options will not be exercised.

12. Solution: One-Month 01-06 Three-Month 17-27 Six-Month 57-72