Leonard N. Stern School of Business

Solution to Foreign Exchange Assignments

in Global Financial Markets

by Ian H. Giddy Stern School of Business, New York University

(Part of the course International Financial Management)


2.7 The Parfumerie


2.9 NatWest


2.10 Mitsubishi Bank


2.12 AT&T's Swiss Liability

(a) Forward hedge. That is, at the 100-day forward rate of SF2.4651, AT&T will pay $20,283,976 in 100 days.

(b) Money-market hedge. Borrow U.S. $ today, convert into Swissies at spot (2.50/$) and reinvest Swiss francs (at 6 percent) in 100-day maturity securities. To have exactly SFr 50 million available in 100 days, calculate backwards:

50,000,000 = [2.50x] +[100/365*6%*2.50x]

Solving for x, $19,676,550 is needed today. So in 100 days, AT&T will have to repay the principal plus interest of (100/365*12%)*$19,676,550 = $646,900. The total is $20,323,450. The forward is cheaper.

The implication: covered-interest parity does not hold.


3.7 Finding the Forward

F / S (Yen/$) = (1 + IEuroYen) / (1 + IEuro$)

F = S (1 +IEuroYen) / (1 + IEuro$)

= 130 (1 + 7.5%/2) / (1 + 10%/2)

= 128.452


Try more worked-out problems
Return to the course outline, International Financial Management.



Ian H. Giddy, Professor of Finance
New York University Salomon Center Stern School of Business
44 West 4th Street, New York 10012
Tel 212 998-0704 Fax 212 995-4220

Go to Giddy's Web Portal Contact Ian Giddy at ian.giddy@nyu.edu