Suppose the Swiss Franc is currently traded at SFR 1.40/$. The British Pound is traded at GBP 1.39/$. Ignoring transaction costs: a. Determine the SFR/GBP exchange rate consistent with these direct quotations. b. Suppose the SFR/GBP cross rate in the market was at SFR 1.05/GBP.

Suppose the Swiss Franc is currently traded at SFR 1.40/$. The British Pound is traded at GBP 1.39/$. Ignoring transaction costs: a. Determine the SFR/GBP exchange rate consistent with these direct quotations. b. Suppose the SFR/GBP cross rate in the market was at SFR 1.05/GBP.

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter9: Forecasting Exchange Rates

Section: Chapter Questions

Problem 1BIC

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Concept explainers

Instruments of Foreign Exchange Market

Foreign exchange is a worldwide market in which one nation’s currency is converted into another nation’s currency. In further terms, exchanging of nations currency with foreign currencies. Foreign exchange happens at a specified rate which is termed the foreign exchange rate. The exchange rates are not constant continuously changing as they are derived by market forces of supply and demand. Widely used foreign currencies are the United States- dollar, Euro, Japanese Yen, British pound, and Australian dollar. US- dollar is the most denominated foreign currency. The Euro to US dollar is a widely used currency pair in the forex market as these two currencies represent the world’s enormous economy. Forex trade is simple as exchanging currencies at the bank. The main players of forex markets are the central banks, financial institutions, intermediaries, investments banks, and other banks. Central Bank is the supreme player who decides the currency value of their own nation on the forex market. Mostly foreign exchange-traded at FX market (forex market) when tourists’ visits a foreign country, import, and export happens between two countries.

Question

Suppose the Swiss Franc is currently traded at SFR 1.40/$. The British Pound is traded at GBP 1.39/$. Ignoring transaction costs:
a. Determine the SFR/GBP exchange rate consistent with these direct quotations.
b. Suppose the SFR/GBP cross rate in the market was at SFR 1.05/GBP. Is there any arbitrage opportunity?
c. How would you take advantage of any arbitrage situation?

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