Topic One Up Three Questions

By Stewart Mbegu (ECA, BAF, MBA- Finance, CPA T)
FREE NOTES AT http/idianaconsultancy.blogsport.com

Q1.The following are the quotation at KCB Bank in Kenya and Tanzania branch today
CURRENCY TANZANIA SHILLING KENYA SHILLING
Bid ask Bid ask

USD 1610/- TSHS 1620/- TSHS 160/- KSHS 170/- TSHS
GBP 2200/- TSHS 2400/- TSHS 220/- KSHS 240/- KSHS
€ 2500/- TSHS 2600/- TSHS 250/- KSHS 260/- TSHS
. REQUIRED: Answer the following questions by mentioning either BID or ASK and
its price
A)
i) At what price a customer selling Kenya shilling 1,000/= for GBP
complete his transaction
ii) At what price a customer buying Tanzania shilling 30,000/= for USD
complete his transaction
iii) At what price a customer selling USD 2,000/= in Kenya complete his
transaction
iv) At what price a customer buying GBP 4,000/= in Tanzania complete
his transaction
v) At what price the Bank buying euro in Tanzania and Kenya
(10 marks)
b) i) A Kenyan exporter is receiving €500 from Germany;

calculate the amount will a Kenyan exporter is receive in Kenya
shilling.
ii) A Tanzanian importer from china is paying his import
7000USD through the KCB Bank; calculate the amount in Tshs a
Tanzanian importer from china is paying at the bank (10 marks)
c) Calculate cross rate of Tshs in terms of Kshs (5marks)
A1. A)
i) ask 240
ii) bid 1610/- TSHS
iii) bid 160/- KSHS
iv) ask 2400/- TSHS
v) 2600/- TSHS in tzs and 260/- ksh
B) i) 500 x 250= 125,000/ ksh
ii) 7000 x 1610 = 11,270,000/=
C) kshs/tshs = 9.4706 – 10.1250
Q2. From a Frenchman's point of view, which of each pair of quotes is the direct quote? Which
is the indirect quote?
(a) FRF/GBP 9; GBP/FRF 0.11.
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(b) USD/FRF 0.17; FRF/USD 5.9.
(c) FRF/BEF 0.17; BEF/FRF 5.9.
A2. (a) direct; indirect.
(b) indirect; direct.
(c) direct; indirect.
Q3. You are given the following spot quote: DEM/CAD 2.2035–2.2070.
(a) The above quote is for which currency?
(b) What is the bid price for DEM in terms of the CAD?
A3. (a) DEM/CAD equals the number of DEM per 1 CAD; therefore, the above quote is for
CAD in terms of German marks.
(b) The bid price for DEM in terms of CAD is CAD/DEM 1/2.2070 = 0.453.
Q4. You read in your newspaper that yesterday's spot quote was CAD/GBP 1.60–1.65.
(a) This is a quote for which currency?
(b) What is the ask rate for CAD?
(c) What is the bid rate for GBP?
A4. (a) This is a quote for GBP in terms of CAD.
(b) The ask rate for CAD is 1/1.60 = 0.625.
(c) The bid rate for GBP is 1.60.
Q5. A bank quotes the following rates. Compute the DEM/JPY bid cross rate (that is, the
bank's rate for buying JPY).
Bid Ask
DEM/CAD 1.3 1.32
CAD/JPY 0.01 0.012
A5. Synthetic [DEM/JPY]bid = [DEM/CAD]bid [CAD/JPY]bid = 1.3 0.01 = 0.013.
1-2 Exercises + Solutions International Financial Markets and the Firm
Q6. A bank quotes the following rates: CHF/USD 2.5110–2.5140 and JPY/USD 245–246.
What is the minimum JPY/CHF bid and the maximum ask cross rate that the bank would
quote?
A6. First calculate the JPY/CHF bid rate, the rate at which the bank buys CHF for JPY.
Doing the calculations in two parts, we have:
1. The bank sells JPY, and it buys USD at JPY/USD 245.
2. The bank sells USD, and it buys CHF at CHF/USD 2.5140.
Thus the rate is: JPY/USD 245
CHF/USD 2.5140 = JPY/CHF bid 97.4543.
The JPY/CHF ask rate is the rate at which the bank sells CHF for JPY.
1. The bank sells CHF, buys USD at CHF/USD 2.5110.
2. The bank sells USD, buys JPY at JPY/USD 246.
Thus the rate is JPY/USD 246
CHF/USD 2.5110 = JPY/CHF ask 97.9689.

Note: the bid rate is less than the ask rate, as it should be.
Q7. A bank is currently quoting the spot rates of DEM/USD 3.2446–3.2456 and BEF/USD 65.30–
65.40. What is the lower bound on the bank's bid rate for the BEF in terms of DEM?
A7. DEM/BEF bid rate is the rate at which the bank buys BEF for DEM.
1. The bank sells DEM, and it buys USD at DEM/USD 3.2446.
2. The bank sells USD, and it buys BEF at BEF/USD 65.40.
Thus, the rate is: DEM/USD 3.2446
BEF/USD 65.40 = DEM/BEFbid 0.0496.
Q8. Suppose that an umbrella costs USD 20 in Atlanta, and the USD/CAD exchange is 0.75.
How many CAD do you need to buy the umbrella in Atlanta?
A8. CAD/USD USD/umbrella = USD/umbrella
USD/CAD = 20
0.75 = CAD 26.67.
Q9. Given the bid-ask quotes for JPY/GBP 160–180, at what rate will:
(a) Mr. Smith purchase GBP?
(b) Mr. Brown sell GBP?
(c) Mrs. Green purchase JPY?
(d) Mrs. Jones sell JPY?
A9. (a) JPY/GBP 180; (b) JPY/GBP 160; (c) JPY/GBP 160 or GBP/JPY 0.00625; (d)
JPY/GBP 180 or GBP/JPY 0.00556.
10Q. From the following table of currency quotation answer the following question
1Dollar 1Euro 1Pound 1Swiss Franc

Canadian dollar 1.5326 1.4400 2.2362 0.9790
Japanese yen 124.48 116.96 181.63 79.515
Mexico peso 9.7410 9.1526 14.213 6.2223
U.K. Pound .68540 .6440 — .4378
Euro 1.06430 — 1.5529 .67984
U.S.D — .9396 1.4591 .63877
i. Find The cross exchange rate of euro in terms of Swiss franc

ii. calculate The yen cost of purchasing 100 British pounds
iii. calculate the exchange rate of Mexico peso in terms Japanese yen
iv. from the table of quotation which is the strongest currency in the market
v. Is the market consistence in its quotation? Support your answer

10A. I) 0.6798 ii) 18,163 y iii)0.07825 iv) U.K. Pound v) is not consistence
eg. cross rate between cross exchange rate between the euro and Swiss franc is not
consistence in its quotation on table
11Q. Explain the concept of triangular arbitrage and the necessary condition for it to take
place (5 marks)
This is the quote in the financial market today in New Zealand by three banks
Quoted Price
Value of Canadian dollar in U.S. dollars $.100 Beal Bank
Value of New Zealand dollar in U.S. dollars $.40 Yardley Bank
Value of Canadian dollar in New Zealand dollars NZ$3.05 STD Bank
`REQUIRED: Given this information,
i.
Is triangular arbitrage possible? (5 marks)
ii.
If so, explain the steps involved in location arbitrage, (5 marks)
iii.
Compute the profit from this arbitrage if you had $1,000,000 to use. (5
marks)
What market forces would occur to eliminate any further possibilities of triangular arbitrage? (5
marks)
11A. A) Triangular Arbitrage

The process of converting one currency to another, converting it again to a third currency and,
finally, converting it back to the original currency within a short time span. This opportunity for risk
less profit arises when the currency's exchange rates do not exactly match up. Triangular arbitrage
opportunities do not happen very often and when they do, they only last for a matter of seconds.
Traders that take advantage of this type of arbitrage opportunity usually have advanced computer
equipment and/or programs to automate the process. Simply, triangular arbitrage process involves
the following steps:-
❖ •Acquiring the domestic currency

❖ •Exchange the domestic currency for the common currency
❖ •Convert the obtained units of the common currency into the second (other) currency
B)
i. Is triangular arbitrage possible?
Yes (5 marks)
ii. If so, explain the steps involved in location arbitrage,
Start buying Canadian dollar using U.S. dollars then New Zealand dollars finally back to U.S. dollars
(5 marks)
iii. the profit from this arbitrage if you had $1,000,000 is 220,000 (5 marks)

iv. What market forces would occur to eliminate any further possibilities of
triangular arbitrage demand and supply? (5 marks)
12Q.


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By Stewart Mbegu (ECA, BAF, MBA- Finance, CPA T)

FREE NOTES AT http/idianaconsultancy.blogsport.com

Bid ask Bid ask

b) i) A Kenyan exporter is receiving €500 from Germany;

By Stewart Mbegu (ECA, BAF, MBA- Finance, CPA T)

1Dollar 1Euro 1Pound 1Swiss Franc

i. Find The cross exchange rate of euro in terms of Swiss franc

By Stewart Mbegu (ECA, BAF, MBA- Finance, CPA T)

11A. A) Triangular Arbitrage

❖ •Acquiring the domestic currency

By Stewart Mbegu (ECA, BAF, MBA- Finance, CPA T)

By Stewart Mbegu (ECA, BAF, MBA- Finance, CPA T)

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