The End of Empire



Prof. Stefano Mazzotta McGill Management

International Finance I

BCom FINE 482. Winter 2003

First Midterm Exam: March 5th, 2003

Last Name:

First Name:

Student ID Number:

Seat Number

Preliminaries

Remove all other paper from your desk except for your formula sheet. Under the

Faculty of Management policy, you are not allowed to use a calculator that can store text.

Any programs you have entered must be erased before the exam starts. This exam is

subject to McGill University’s honor code. Violators will be prosecuted.

Explain carefully when answering each question. Show all relevant calculations in the

space provided under each question. Use the back of each page for extra space and for

scrap paper

.

Question 1

The following quotes for the spot GBP/CAD exchange rare are available in Toronto:

- Royal Bank 0.4043-0.4048

- Bank of Montreal 42-49

- National Bank 0.4039-0.4042

a. Are these direct or indirect quotes?

b. How much do pay each bank if you want to buy 1,000 GBP?

c. Can you make money by arbitrage, and if so, how much?

a. These quotes are given in Canada so they are indirect: it is the foreign currency price of

home currency. 2 pts including 1 for the explanation

b. If you want to buy GBP, you have to pay (CAD/GBP)ask= 1/(GBP/CAD)bid to the

banks. Respectively: C$2473.40; C$2474.00; C$2475.90. 3 pts

c. Royal Bank’s and National Bank’s quotes do not overlap, so there is an arbitrage

opportunity: As a Canadian, buy GBP from Royal Bank at 1/0.4043=2.4743 CAD/GBP

and sell them to National Bank at 1/0.4042=2.4740 CAD/GBP; it gives a profit of

C$0.0006 per GBP. 3 pts (1 for there is an arbitrage, 1 for the arbitrage itself, 1 the profit)

If you already have GBP, you can instead buy CAD at 0.4042 GBP/CAD from National

Bank and sell them to Royal Bank at 0.4043 GBP/CAD; it gives a profit of 0.0001 GBP

per CAD. Or 3 pts, including 1 for mentioning you need GBP to do it.

+1 extra point for noting that quotes do not overlap

Question 2

You can buy or sell at the following exchange rates: 74.50 YEN/CHF; 1.28 CHF/USD;

100.00 YEN/USD. You have 100,000 USD available. Can you make money by arbitrage,

and if so, how much?

Using cross-rates:

(YEN/USD)=(YEN/CHF)(CHF/USD)= 74.50×1.28 = 95.36 ................
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