THE INSTITUTE OF ACCOUNTANCY ARUSHA
DAR ES SALAAM CAMPUS
MODULE: FINANCIAL RISK MANAGEMENT
PROGRAMME:
MSC -FI
ACADEMIC YEAR: 2021/2022
REVIEW QUESTIONS
SET ONE
QUESTION ONE
: [Foreign Exchange Trading]
The following spot rates are observed in the foreign exchange market:
______________________________________________________________________________
________Currency
Units Required to Buy One US Dollar
Britain (Pound)
0.62
Japan (Yen)
140.0
Europe (Euro)
0.90
______________________________________________________________________________
________
On the basis of this information, compute to the nearest second decimal the number of
(a)
British pounds that can be acquired for Us $ 100
(b)
Euros that can be acquired for U.S $ 40
(c)
U.S dollar that 200 Euros can buy
(d)
U.S dollars that 1,000 Japanese yen will buy
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QUESTION TWO
[Forward Differentials]
Given below are spot and forward rates expressed in U.S dollars per unit of the Euro and ₤
Rates
€
Spot
30-days forward
60-days forward
90-days forward
180-days forward
₤
1.5393
1.5406
1.5425
1.5431
1.5478
1.6030
1.6006
1.6000
1.5945
1.5859
Required:
1. Is the 90 day forward € quoted at a discount or at a premium?
2. Is the 90- day forward contract in pound trading at a discount or at a premium?
3. Relative to the pound is the 180 – day forward dollar quoted at a discount?
4. Relative to the Euro is the 90 – day forward dollar quoted at a discount?
QUESTION THREE
: [Swap Rates and Outright Rate Quotations]
The following quotes are received for spot, one month, three month and six month Euro (€) and
Pound sterling (₤):
Spot
₤:
€:
$2.0015 – 30
$1.6963 – 68
One Month
Three
Six Month
19 – 17
4–6
26 – 22
9 – 14
42 – 35
25 – 38
Required:
Convert the above swap rates in outright rates.
QUESTION FOUR
[Foreign Exchange Trading]
You are given the following information about currency rates for pound sterling spot and forward.
Currency
Spot
1 Month Forward
3 month Forward
US (Dollar)
1.5200 - 1.5210
0.32 - 0.27c pm
0.89 - 0.84 c pm
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Canada (Dollar)
1.8630 - 1.8640
0.30 - 0.20c pm
0.90 – 0.80 c pm
Kenya (KES)
24.05¼ - 28.06¼
2⅜ - 1 ⅞c pm
6¾ - 6¼ c pm
Tanzania (TZS)
2072.20 - 2079.30
10 - 20c dis
45 - 55c dis
Required:
Calculate the cost or value in pounds to a customer who wishes to:
(a)
buy US $ 1400 one month forward from his bank
(b)
buy Canadian $ 25,000 spot
(c)
buy TZS 75,000 three months forward
(d)
sell KES 28,000 one month forward
(e)
sell TZS 20,000 three months forward
(f)
sell C$ 6,000 one month forward
QUESTION FIVE
: [Cross Rates]
(a)
The $/DM exchange rate is DM 1 = $ 0.35, and the DM/FF exchange rate is FF1 = DM 0.31.
What is the FF/$ exchange rate?
(b)
You are given the following quotes:
Australian dollar
A$ 1.3806/US $
Danish Krone Dkr 6.4680/US $.
How many Australian dollars can you exchange for one krone?
(c)
The TZS/€ exchange rate is TZS1400 = 1€, and the £/TZS exchange rate is : £ 0.0004 =
TZS1. What is the €/£ exchange rate?
QUESTION SIX
[Cross Rates and Triangular Arbitrage]
(a)
The following exchange rates are available:
Dutch guilders (f1) per US dollar fl
1.9025/US $
Canadian dollar per US dollar
C$
1.2646/US $
Dutch guilders per Canadian dollar
fl
1.5214/C $
Are there any opportunities for market arbitrage? Show how a Dutch investor with fl
1000,000 can benefit from the possible arbitrage between the three markets.
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(b)
Assuming no transaction costs, suppose: £1 = $ 2.4110 in New York, $ = FF 3.997 in Paris,
and FF1 = £ 0.1088 in London. How would you take profitable advantage of these rates?
QUESTION SEVEN
[Cross Rates in the Presence of Bid-Ask Spread]
(a)
Suppose the direct quote for sterling in New York is 1.7110-5. What is the direct quote for
dollars in London?
(b)
Suppose the spot quote on the EURO in New York is $ 1.3302-10, and the spot quote on
the £ is $ 1.9180-90
 What is the direct spot quote for the £ in Frankfurt?
 Compute the percentage bid-ask spreads on the £ and the EURO.
(c)
Suppose the : £ is quoted in Dar es Salaam at
Buying
Selling
TZS2510
TZS2600
while the EURO is quoted at
Buying
Selling
TZS1400
TZS1440
What is the direct quote for the £ in Frankfurt?
QUESTION EIGHT
a) Alawi Company Ltd., an importer based in Tanzania, is planning to import a multipurpose machine
from South Africa at a cost of ZAR5,000,000. The company can avail loans at 18% interest per
annum with which it can import the machine. However there is an offer from the Durban branch of a
Tanzanian based bank extending credit of 180 days at 2% per annum against the opening of an
irrevocable letter of credit. Other information is as follows:
Current exchange rate
180 days forward rate
TAS/ZAR
TAS/ZAR
50 - 55
48 - 50
Commission charges for letters of credit are at 2% for 12 months. No interest is charged on
commission charges. Should Alawi Company Ltd. decide to accept the offer, a forward market cover
can be taken for the purchase or sale of the ZAR at the end of the credit period.
REQUIRED:
Advise whether the offer from the foreign branch should be accepted. (8 Marks)
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QUESTION NINE
A commercial bank in Dar es Salaam, Tanzania, provided the following foreign exchange quotes on
30th April, 2006.
TZS/£
£/Euro
TZS/US$
Spot
2404 – 2420
0.4852 – 0.4892
1050 – 1060
1 Year Forward
2456 – 2474
0.4956 – 0.4966
1200 – 1260
REQUIRED:
(i)
(ii)
(iii)
How many TZS will the bank pay to purchase one Euro one year forward from a
customer?
Determine the one year forward percentage bid-ask spread on the £ against the
US$
Calculate the spot and one year forward mid-prices for the £ against the Euro and
determine the one year forward premium or discount on the Euro against the £.
QUESTION TEN
(a) Mango Enterprises Ltd. (MEL) is an import-export company based in Dar Es Salaam. On
February 28th, the company contracted to buy 1,500 tons maize from Malawi at a price of
Kwacha 11,820 per ton. MEL has arranged that shipment of the product will be made directly
to a customer in Uganda who has bought the maize at Ushs. 4620 per ton. Of the total
quantity, 500 tons will be shipped during March and the balance by the end of April. Payment
to the suppliers is to be made immediately on shipment, whilst one month credit from the
date of shipment is allowed to the Ugandan customer. Assume MEL arranges with its bank
to cover these transactions in Tshs. on the forward exchange market for which the exchange
rates as at 28th February being those given below:
Kwacha
Spot
1 month forward
2 months forward
3 months forward
Ushs.
1.0745 -1.0775
3.84- 3.88
5½ - 10½ c dis
2½ - 1½ c premium
7½ - 17½ c dis
4 – 3 c premium
10.6 – 25 c dis
6½ - 5½ c premium
The bank charges an exchange commission of Tshs. 10,000 on each transaction.
Required: Calculate the profit or loss MEL will make on the transaction
(b) A foreign exchange dealer provided the following quotations for the South-African Rand
(SAR) against the Tanzanian shilling (TZS) on the 31st September 2004:
TZS/SAR Spot
50 – 55
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Three Months Forward
2 – 7 dis.
Required:
(i) Calculate the percentage bid-ask spread on the three month forward TZS
(ii) Calculate the profit made by the dealer in purchasing and selling SAR1,000,000 three month
forward.
(iii) Using the spot and forward offer prices calculate the forward premium/discount on the
SAR
QUESTION ELEVEN
(a) Define a Forward Exchange Contract and explain the following terms
i)
Par
ii)
Discount
iii)
Premium
in relation to the forward exchange contracts
(b) Given the following market rates expressed in European terms of other currency’s units per
US Dollar:
US$:Lit Spot
1,890.00 – 1,892.00
One Month Forward
1,894.25 – 1,897.50
US$:Dfl Spot
3.4582 – 3.4600
One Month Forward
3.4530 – 3.4553
Required:
Calculate the Forward Cross Rate for buying and selling Italian Lire (Lit) against the Dutch Guilders
(Dfl.)
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