Question

Exercises on Foreign Exchange Mechanics

Exchange Rates: New York Closing Snapshot Direct Quote ($/FC)

Euro	$1.3821/Euro
Hungary forint	$0.005749/Forint
Poland zloty	$0.4125/Zloyt

Q1 The foreign exchange rates from WSJ are given above. Answer the following questions:

a. You are going to Germany for vacation and your budget is $5,000. How many euros can you buy with $5,000?

b. How many U.S. dollars can you buy with euro 5,000

c. How many zlotys can you buy with U.S. $1?

d.         The price of U.S. $1 in forint is-------?

2. Assume that the buying rate for U.S. dollars spot in Australia is A$1.8550.

a) What would you expect the price of the A$ to be in the United States?

b) If the A$ is quoted in New York at $0.5360, how would the market react?

3. If the Swiss franc (SF) is selling for DG (Dutch guilder) 0.4699 in Amsterdam and the

Dutch Guilder (DG) for SF2.1280 in Switzerland, how should the market react and why?

Answer 1

01) $5000 Dollars = 5000/1.3821 $5000 Dollars = 3617.68 Euros Euros 5000 6910.50 US Dollars 1 US$ 1/.4125 Zloyt 1 US$ 2.42 Zloyt 1 US$ 1/.005749 1 US$ 173.94 Forint 02) 1A$ 1/1.8550 1 A$ 0.5391 US$ If A$ is quoted at $0.5360, then there will be an arbitrage opportunity and more demand for A$ will arise in the market and the arbitrage would go away 1 SF 0.4699 DG Thus, 1 DG 2.128 SF The value of DG quoted in Switzerland is also same and hence there would be no arbitrage