Foreign Exchange Market and Arbitrage Process:
1. Suppose that the Brazilian Real is quoted at R 0.99551.0076/US$ and the Thai Baht is quoted at B25.25133986/US$. What is the direct quote for the real in Bangkok? Note that a direct quote is the home currency price of a foreign currency.
2. (a) Consider the following quotations of the spot and forward swap rates of the Swiss francs and pounds sterling published in the Financial Times on a specific date:

Spot

30day

90day

180day

£

$2.001530

1917

2622

4235

SFr

$0.696368

46

914

2538

Required: Calculate the outright rates of the currencies showing the bidask spread in percentage for both the spot and forward rates.
(b) Consider the following exchange rates in the spot and forward exchange markets.

Spot

180day

£

$2.001530

4235

SFr

$0.696368

2538

Required: Calculate the bid and ask SFr cross rates for both the spot and 180day forward pounds sterling. Calculate the forward premium (or discount) on buying the pounds sterling.
Note: You can obtain either direct or indirect quotations of the Sfr for pounds sterling.
3. The covered interest parity condition states that the rates of return on dollar deposits and "covered" foreign deposits must be the same. Let F_{$/€} be the one year forward price of euros in terms of dollars, R_{$ }be the dollar interest rate, R_{€ }be the euro interest rate, and that the current eurodollar exchange rate is denoted by E_{$/€}.
Required:
(a) Show the covered return on euro deposit and the condition of covered interest parity (CIP). How does the CIP condition change in the presence of transaction costs (ρ)?
(b) If everyone in the world pays a tax of T percent on interest earnings and T percent on any capital gains due to exchange rate changes. How would such a tax alter the analysis of the interest parity condition?
(c) Assume that the current eurodollar exchange rate (E_{$/€}) is $1.05 per euro and the oneyear forward price of euro in terms of dollars (F_{$/€}) is $1.113. Further suppose that the dollar interest rate (R_{$}) is 10 percent and the euro interest rate (R_{€}) is 5 percent. Calculate the covered return on euro deposits and comment on whether the covered interest parity hold in this case?
(d) The interest rate in the US is 10% per annum; in Japan, the comparable rate is 7%. The spot rate for the yen is $0.003800. If the covered interest parity holds, what is the 90day forward rate in the presence of a 0.25% transaction costs?