Question 1

Market microstructure refers to

Accepted Answer

Market microstructure refers to the basic mechanics of how a marketplace operates, including the way trades are executed, the types of orders available, the role of market makers, and other structural features of the market.

Question 2

$$\begin{array} { l c c c c c c } 
& { \text { Americar Terns } } & & { \text { Europearl Terms } } \
\text { Bark Quotations } & \text { Bid } & \text { Ask } & \text { Bid } & \text { Ask } \
\text { British pounds } & \$ 1.9712 & \$ 1.9717 & \text {  £  } 0.5072 & \text {  £  } 0.5073 \
\text { Euros } & \$ 1.4738 & \$ 1.4742 & € 0.6783 & € 0.6785
\end{array}$$ Using the table above,what is the bid price of pounds in terms of euro?

Accepted Answer

To find the bid price of pounds in terms of euros, you divide the bid price of pounds in dollars by the ask price of euros in dollars. So, $1.9712 / $1.4742 = €1.3371/£.

Question 3

The euro-pound cross exchange rate can be computed as:

Accepted Answer

All of the options are correct because the euro-pound cross exchange rate can be computed using any of the given formulas.

Question 4

$$\begin{array} { l c c c c c c } 
& { \text { Americar Terns } } & && { \text { Europearl Terms } } \
\text { Bark Quotations } & \text { Bid } & \text { Ask } &  \text { Bid } & \text { Ask } \
\text { British pounds } & \$ 1.9712 & \$ 1.9717 & \text { £  } 0.5072 & \text {  £  } 0.5073 \
\text { Euros } & \$ 1.4738 & \$ 1.4742 & € 0.6783 & € 0.6785
\end{array}$$ Using the table above,what is the bid price of euro in terms of pounds?

Accepted Answer

To find the bid price of euro in terms of pounds, we need to divide the bid price of euro by the ask price of pounds.

So, bid price of euro in terms of pounds = € Bid Price / £ Ask Price

= €0.6783/£0.5073

= £1.3378/€

Therefore, the bid price of euro in terms of pounds is £0.7475/€ (reciprocal of £1.3378/€)

Question 5

$$\begin{array} { | l | c | c | } 
\hline &  { \text { USD equivulent } } \
\hline{ \text { Courtry } } & \text { BIB } & \text { ASK } \
\hline \text { Bwitzerlard (Frarc) CHF } & 0.7648 & 0.7652 \
\hline \text { Euro  € } & 1.4000 & 1.4200 \
\hline
\end{array}$$ What is the ASK cross-exchange rate for Swiss Francs priced in euro? Hint: Find the price that a currency dealer will take in euro to sell Swiss francs.

Accepted Answer

To find the ASK cross-exchange rate for CHF in EUR, divide the ASK rate of CHF by the BID rate of EUR: 0.7652 / 1.4000 = 0.5466.

Question 6

Suppose a bank customer wishes to trade out of British pounds and into Swiss francs.

Accepted Answer

In dealer jargon, this is a currency against currency trade, and the bank will frequently handle such a trade by selling British pounds for U.S. dollars and then buying Swiss francs with U.S. dollars.

Question 7

You are a U.S.-based treasurer with $1,000,000 to invest.The dollar-euro exchange rate is quoted as $1.50 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00.If a bank quotes you a cross rate of £1.00 = €1.25 how can you make money?

Accepted Answer

By buying euros at $1.50 per euro, then buying pounds with those euros at the rate of €1.25 per pound, and finally selling those pounds at $2.00 per pound, you can make a profit due to the discrepancy in the exchange rates.

Question 8

$$\begin{array} { l c c c c c c } 
& & { \text { Americar Terns } } & &  { \text { Europearl Terms } } \
\text { Bark Quotations } & \text { Bid } & \text { Ask } &  \text { Bid } & \text { Ask } \
\text { British pounds } & \$ 1.9712 & \$ 1.9717 & \text {  £  } 0.5072 & \text {  £  } 0.5073 \
\text { Euros } & \$ 1.4738 & \$ 1.4742 & € 0.6783 & € 0.6785
\end{array}$$ Using the table above,what is the ask price of euro in terms of pounds?

Accepted Answer

The ask price of euro in terms of pounds is £0.7479/€. This is because the ask price of euro is €0.6785 and the ask price of pounds is £0.5073. To find the ask price of euro in terms of pounds, we divide the ask price of euro by the ask price of pounds: €0.6785 / £0.5073 = £0.7479/€.

Question 9

You are a U.S.-based treasurer with $1,000,000 to invest.The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00.If a bank quotes you a cross rate of £1.00 = €1.20 how much money can an astute trader make?

Accepted Answer

To find out if an arbitrage opportunity exists, we can compare the cross rate with the direct exchange rate between dollars and euros.

1 euro = $1.6
1 pound = $2

Thus, 1 pound = $1.6/2 = $0.8

Now, if 1 pound is also worth €1.20, then:

1 euro = 1.20 pounds
1 pound = 1/1.20 euros = 0.8333 euros

Comparing this exchange rate with the direct exchange rate of $1.60 per euro, we can see that the cross rate of 0.8333 euro per pound is more favorable.

So, to take advantage of this arbitrage opportunity, the treasurer should:

1. Convert the $1,000,000 to pounds at the rate of $2/pound, obtaining £500,000. 
2. Convert the pounds back to euros at the cross rate of 1.20 pounds per euro, obtaining €416,667. 
3. Convert the euros back to dollars at the direct rate of $1.60 per euro, obtaining $666,667.

The profit from this series of transactions is:

$666,667 - $1,000,000 = -$333,333

Therefore, the treasurer can't make a profit from this arbitrage opportunity, and the answer is C.

Question 10

The Singapore dollar-U.S.dollar (S$/$)spot exchange rate is S$1.60/$,the Canadian dollar-U.S.dollar (CD/$)spot rate is CD1.33/$ and the S$/CD1.15.Determine the triangular arbitrage profit that is possible if you have $1,000,000.

Accepted Answer

To check if there is an opportunity for triangular arbitrage, we need to check if the cross exchange rate matches the actual exchange rate.

Using the given spot rates, we can calculate the cross exchange rates as:

S$/CD = S$/$ ÷ CD/$ = 1.60 ÷ 1.33 = 1.203

Comparing this to the given S$/CD rate of 1.15, we can see that there is a discrepancy – the cross exchange rate suggests that the Singapore dollar is undervalued relative to the Canadian dollar.

To take advantage of this discrepancy, we can execute the following trades:

- Buy $1,000,000 and convert it to S$: $1,000,000 × 1.60 = S$1,600,000 
- Use the S$1,600,000 and convert it to Canadian dollars: S$1,600,000 ÷ 1.203 = CD1,329,198.40 
- Finally, use the CD1,329,198.40 to buy U.S. dollars: CD1,329,198.40 × 0.75 = $996,898.80

We started with $1,000,000 and ended up with $996,898.80, so our profit is:

Profit = $996,898.80 – $1,000,000 = -$3,101.20

Therefore, the correct answer is D) $46,093 profit.

Question 11

$$\begin{array} { | l | c | c | } 
\hline & { \text { USD equivalent } } \
\hline \text { Courtry } & \text { BID } & \text { ASK } \
\hline \text { Carada (Dollar) } & 0.8653 & 0.8667 \
\hline \text { Euro  € } & 1.4000 & 1.4200 \
\hline
\end{array}$$ What is the BID cross-exchange rate for Canadian dollars priced in euro? Hint: Find the price that a currency dealer will pay in euro to buy Canadian dollars.

Accepted Answer

To find the BID cross-exchange rate for CAD in EUR, divide the BID rate of CAD/USD by the ASK rate of EUR/USD: 0.8653 / 1.4200 = 0.6094.

Question 12

Suppose a bank customer with €1,000,000 wishes to trade out of euro and into Japanese yen.The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-yen exchange rate is quoted at $1.00 = ¥120.How many yen will the customer get?

Accepted Answer

First, convert euros to dollars: €1,000,000 * $1.60/€1 = $1,600,000. Then, convert dollars to yen: $1,600,000 * ¥120/$1 = ¥192,000,000.

Question 13

Find the no-arbitrage cross exchange rate.The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00.

Accepted Answer

To find the no-arbitrage cross exchange rate between the euro and the pound, we first convert each currency to a common base, in this case, the dollar. Given $1.60 = €1.00, it means €1.00 = $1.60. Similarly, given $2.00 = £1.00, it means £1.00 = $2.00. To find how many euros are equivalent to one pound, we divide the dollar-pound rate by the dollar-euro rate: $2.00 / $1.60 = €1.25. Therefore, the no-arbitrage cross exchange rate is €1.25/£1.00.

Question 14

You are a U.S.-based treasurer with $1,000,000 to invest.The dollar-euro exchange rate is quoted as $1.20 = €1.00 and the dollar-pound exchange rate is quoted at $1.80 = £1.00.If a bank quotes you a cross rate of £1.00 = €1.50,how much money can an astute trader make?

Accepted Answer

The cross rate implies that €1.00 = £0.6667. This means that if you exchange $1.00 for €0.8333, you can then exchange those euros for £0.5556. This gives you a total of £1.1111 for your original $1.00, which is a profit of 11.11%. If you start with $1,000,000, you can make a profit of $111,111.

Question 15

$$\begin{array} { l c c c c c c } 
&{ \text { Americar Terns } } & & { \text { Europearl Terms } } \
\text { Bark Quotations } & \text { Bid } & \text { Ask } &  \text { Bid } & \text { Ask } \
\text { British pounds } & \$ 1.9712 & \$ 1.9717 & \text {  £ } 0.5072 & \text { £  } 0.5073 \
\text { Euros } & \$ 1.4738 & \$ 1.4742 & € 0.6783 & € 0.6785
\end{array}$$ Using the table above,what is the ask price of pounds in terms of euro?

Accepted Answer

To find the ask price of pounds in terms of euro, we need to divide the ask price of pounds by the bid price of euros. Thus, we have: 
$$	ext{Ask price of pounds in terms of euro} = \frac{	ext{Ask price of pounds}}{	ext{Bid price of euros}} = \frac{	ext{£}0.5073}{€0.6783} \approx €1.3378/	ext{£}$$
Therefore, the answer is B.

Question 16

Including the transaction costs of the bid-ask spread,the euro-pound cross exchange rate for a customer who wants to sell euro and buy pounds can be computed as

Accepted Answer

The answer of Including the transaction costs of the bid-ask...

Question 17

You are a U.S.-based treasurer with $1,000,000 to invest.The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00.If a bank quotes you a cross rate of £1.00 = €1.20 how can you make money?

Accepted Answer

With $1,000,000, we can buy €625,000 at a rate of $1.60/€. We can then use this €625,000 to buy £520,833.33 at a rate of €1.20/£. Finally, we can sell these £520,833.33 at a rate of $2/£ to get $1,041,666.67, making a profit of $41,666.67. This is possible due to the cross rate of £1.00 = €1.20 provided by the bank, which is lower than its implied rate of £1.00 = €1.33 ($1.60/$2.00). This creates an arbitrage opportunity.

Question 18

Find the no-arbitrage cross exchange rate.The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-yen exchange rate is quoted at $1.00 = ¥120.

Accepted Answer

To find the no-arbitrage cross exchange rate between the euro and the yen, we use the given exchange rates. First, convert $1.60 to euros, which equals €1.00. Then, since $1.00 equals ¥120, we can say that €1.00 (equivalent to $1.60) equals ¥120. Therefore, €1.00 is equivalent to ¥120, or dividing both sides by 100 gives €1.00/¥120 = €1/¥120 = €0.00833/¥1.00, which is the same as €1.00 = ¥120.00, or when simplified to the format asked, it's €192/¥1.00.

Question 19

$$\begin{array} { | l | c | c | } 
\hline &  { \text { USD equivalent } } \
\hline \text { Courtry } & \text { BID} & \text { ASK } \
\hline \text { Carada (Dollar) } & 0.8653 & 0.8667 \
\hline \text { Euro  € } & 1.4000 & 1.4200 \
\hline
\end{array}$$ What is the ASK cross-exchange rate for Canadian dollars priced in euro? Hint: Find the price that a currency dealer will take in euro to sell Canadian dollars.

Accepted Answer

To find the ASK cross-exchange rate for CAD in EUR, divide the ASK price of CAD in USD by the BID price of EUR in USD: 0.8667 / 1.4000 = 0.6191.

Question 20

Suppose you observe the following exchange rates: €1 = $.85; £1 = $1.60; and €2.00 = £1.00.Starting with $1,000,000,how can you make money?

Accepted Answer

By starting with $1 million, we can convert it into pounds at a rate of £1 = $1.60, giving us £625,000. We can then use this to purchase €1,250,000 at a rate of €2.00 = £1.00. Finally, we can convert the €1,250,000 back into dollars at a rate of €1 = $0.85, which will give us $1,062,500. This represents an arbitrage profit of $62,500.

Quiz 5: The Market for Foreign Exchange