Chap # 02 PDF

CHAPTER-2 Toes Interest Rates and Foreign Exchange Rates ee Ten Is a basic fact of life which we must bear in mind: You never get enything for nothing. When you acquire a house, you have to give money in exchange. When you acquire a Treasury bill, you must also give money in exchange. When you operate in the money and foreign exchange markets, you are always giving and taking every time that you enter into a transaction. In this chapter we shall discuss how the price, or rate of exchange, in this giving and taking is expressed. As in any other market, prices in the money market and the foreign exchange market depend on whether one is buying or selling. Traders in these markets always provide two prices: the one at which they are willing to buy and the one at which theyare willing to sell. Actually, this is one of the ways in which traders in these merkets make a profit. However, in this chapter, we shall talk about market rates in general, leaving our discussion of the complications involved in bid and offer rates until Chapter 4. RATES IN THE MONEY MARKET. Prices in the money market are usually expressed in terms of percentage rates of interest. These rates measure the cost or return associated with the use of money for a specified period of time. For example, in a loan of $100, if the lender receives $108 at the end of the year, the $8 represents an 8 percent annual interest rate on the money. In physical terms, the Jender gives up currency in exchange ili coat able ‘Scanned with CamScannerHANGE AND MONEY MARKETS 20+ FOREIGN F for a piece of financial paper that establishes that the borrowe) w !! return the principal of the loan, $100, plus the specified rate of inte - est, 8 percent per annum.' In reading interest rate quotations, one must be careful to unders!anc the period of time involved. The figure 8 percent alone does not convey the necessary information to evaluate the cost of money. Usually, these yates are expressed on a per annum basis. However, sometimes a rale will apply to a period of time different from a year. For example, :n countries with high interest rate levels, interest rates are often quoted ay, 2 percent per month. Obviously, any rate applicable for any period of time can be converted toa per annum basis. ‘Thus, a 2 percent per month rale is equivalent fo 24 percent (2 percent x 42 months) per annum. Whatever the unit of time involved, the irepor- tant fact to remember is that if one wants to compare interest raies among themselves or with other percentage returns, all the numbers must be based on the same unit of time, usualiy per annum. Otherwise, one will reach erroneous conclusions. ‘The alternative to interest rates quoted for a specific period of tiv. such as per annum, per quarter, or per month, is a flat interest rat example, 4 percent Mat of $100 is $4. In this calculation the tite facior dlocs not play a role. The 4 percent Mat is always simply 4 percent of the amiount in question. Of course, itis possible to convert a flat interes: rie into a per annum interest rate. For example, if the flat charge of 4 percent covers a two-month period, then 4 percent flat would be equal to 24 percent per annum, On the other hand, per annum interest rates may be converted into flat interest rates. A charge of 10 percent per ennum covering two years would be equal to a 20 percent flat rate. ‘The price paid for the use of funds can be paid either at the beginning, at the end, er at intervals during the life of the loan When the interest payment takes place at the beginning of the transaction. the interest is paid cn a discounted basis. For example, @ one-year loan of $100 (the principal amount) at 6 percent per annum is discounted if the borrower receives only $92 at the beginning of the aoe et eaaacly an obligation tv pay $100 at the end of weatniniay er pa dieibe pire tanibeat is received in its entirety at the riod, the loan is spiel eine et Suly/alithe endef the, Joe ra eae ike Bagaer wauld usual forces of arbutrage effectively segmented the pit 22.) upval controls imp! has prevailin developed § funds into the ed to the were confin' Euromarks dec reased < market in We: ¢ frustrated by tic from the the capil foreign market. (9 ces IN POLITICAL RISK mrTPRE affects Burorales as opposed to domestic associated with the specific ne more factor that tioned before. a Thig ss fe poittical or SO hore the Burocurrency is deposited. As me posit with & branch of an American bank in Switzerland saterest rate than it would if the deposit were kept with same bank ina less stable country. 7 he difference in the siturtons of the two countries makes it necessary for the s stable country to pay @ premium over the rate paid Switzerland. Ther rates, verergn risk ceuntry W) US. deine dG carne « hw a braack of 1 politica branch in the les: by the branch Revolving Euroterm Loans THEIR NATURE d in the Eurocurrency markets are essentially thy = ones sed in the domestic money markets. However, ther, ee ee oh particle which is most popular in th revolving Eurroterm loan. Unde thi SO ea bonkegre somal funds available for a numb Sa Gepally Pronger then 5 See een er of years, usually not longer than five ¢ gees errs interest rate charged on this lo.a is set for thre actual rate charged is Sark period the sets or ee ea Ra (uB0%) ie ee up over the London Ir ierbank Offered Ra ‘or example, if LIBOR is 6 percent at ‘1 t me of the initial “tak The instruments use = 0.4375 Wl Thus, the answer to the ori rate of dollars per G the French Newspaj Swer that was obt ginal question as to what is the erman marks, given the information in Per, is $0.4375/DM. This is the same an - ‘ained earlier, Price and Volume Quotations Thi of, QUoting fore ICE Quotatio, reign exchay erates; called the currency for mas fem. Unde nge rates just discussed is c ‘der This focal oer M, Prices are quote S Currency, for example, pone Such as 1, 100, on 000 waits of f temains Unchanged, : S per " ae fi tency a0 the price * and foreign cu . ie a a ii in local currency ne? fluctuations are reflected,in chens’ Unit size of foreign currency. ‘Scanned with CamScannerTon ee ae eee The British, however, do not have the price quotation system, instead, they use the volume quotation system. In this system the even unit which does not change is £1, and the value of foreign currencies is expressed through the amount (volume) of a given foreign currency that is required to purchase £1. For example, assume the rate for U.S. dollars against pound sterling is $2.40 per pound. In the United States this represents a price quotation because the value of an even umount of foreign currency, such as one pound sterling, is expressed in local currency, as US$2.40. However, in London an even amount of local currency, such as one pound sterling, is equal to a variable amount of foreign currency, that is, US$2.40. If this rate moves from $2.40 to $2.30 per pound, people in the United States will say, “The pound went down," because the value of the pound decreased from US$2.40 to US$2.30. At the same time people in England will say, “The dollar went up,” because it now takes only USS2.30 to purchase £1. Let's clarify the distinction between the two quotation systems through an example from the supermarket. The price of tomatoes may be $0.28 for a pound one day, or 4 pounds for USS1 another day. The firs! price is a price quotation because changes in the price would be indicated by an increase or decrease in the $0.28. The price of 4 pounds per USS1 is clearly a volume quotation because, if the price were to change, for example by increasing 25 percent, the volume would move to 3 pounds per dollar. (See Exhibit 2.6.) Before the 1S. dollar moved into its position as the most frequently used currency for international trade, this position was held by the pound sterling. It is probably for that reason that the British adopted the volume quotation system. This system expresses rates in terms that are readily understood by local traders outside Britain. Because of the prominence of the U.S. dollar in the world today, it would probably be desirable for the United States to adopt the volume quotation system for tlie same reason. The professionals in the international departments of large banks and in the treasury departments of multinational companies already follow the major European currencies in European terms, that {sin volume quotations in the United States. The reason is convenience ns eoeeeeen the form in which it is provided by the subsidiar- representatives in Europe, where most of the’ action for these currencies occurs. f At this point, itis important to warn the reader to try to avoid the term uy in the context of the foreign exchange mark i purchase. Th e range market and, instead, to use us, one can avoid potential confusion with the loose man- ner in which the term “buy” has bee: d by bi ibed terete n used by banks, as described, in ‘Scanned with CamScannerAap ae OREIGN EXCHANGE AND MONEY & w-r ae paice ir VOLUME QUOTATIONS COMPARED ae Price Volume Quotation Quotation 28¢ Ib 41b'$1.00 a 35¢ Ib 3ib $1.00 nerease PROBLEMS Computation of a Per Annum Rate from a Monthly Interest Rate PROULEM 22 ‘\ manufacturer needs to borrow money for six months. Bank A quotes 1.3 percent per month, Bank B quotes 17 percent per annum. Both banks will collect the amount of interest due at the end of each calendar quarter and at the end of the loan period. Which bank should the manufacturer choose? : ANSWER Borrowing from bank A at 1.5 Percent per month equals 18 percent per eae X 1.5 = 18%). This ig more expensive than borrowing from Ke i 17 percent per annum, Therefore, the manufacturer should a oe one B at 17 percent Per annum. : p . oMmon unit of tine we” | to translate the two interest rates to # ime. The us) i A ear, OF Per annum, abbreviated ae ‘nu ear Anerestyale loreney PROBLEM 22 Bank A offers a loan at 25 percent rh 22 percent Per annum, Which bank Offers the eae mn pei Boffe z ‘Scanned with CamScannerI Q NTEREST RATES AND FORRIGN EXCHANGE RATES+39 ANSWER Bank A offers a rate of 30 erce! is cheaper than bank B’ Percent per annum (12 x 2.5 = 30% p.a.) which 8 32 percent per annum. Computation of a Per Annum Rate from a Flat Rate PROBLEM 23 Bank A pays 6 percent flat for four months on a deposit. Bank B pays 20 percent per annum. In which bank would you invest? (Interests are payable at the end of each calendar quarter and at the end of the transaction.) : . . ANSWER Bank A's 6 percent flat for four months equals 18 percent per annum (% X 12 = 18%). This is less attractive than investing with bank B at 20 percent per annum. I would-invest with bank B at 20 percent per annum. J a) PRODLEM 2.4 Bank A charges 15 percent flat for nine months. Bank B charges 21 percent per annum. From what bank would you borrow? . ANSWER I would borrow from bank A at 15 percent flat which equals 20-percent per annum (*% X 12 = 20%). ‘This is cheaper than borrowing from bank B at 21 percent per annum. PROBLEM 25 Bank A offers 24 per three per annum, Which interest rate is higher, interest payments? cent flat for three years. Bank B offers 8.5 percent assuming equal timing for ANSWER Bank B's 8.5 percent per annum is higher because that equals 25.5 percent flat (3 X-8.5.= 25.5%). ‘Scanned with CamScannerWANGE AND MONEY MARKETS Borrowing on a Discounted Basis versus @ Balloon Situation jo: PROBLEM 2.6 i Ms iscount for a one-year loan. harges 12 percent per annum disc a H ahorges 43 percent per annum with interest payable at the end of the one-year period. From whom would you borrow? ANSWER We must first bring the t 12 percent per annum dis wo rates to a common time unit. Let us convert count to an effective interest rate. If we borrow from bank A at 12 percent per annum discount, the bank will withhold $12 on every $100 lent. We get, in effect, $88 and pay back after one year the principal amount of $88 plus $12 interest. That equals 13.64 percent per annum on an effective basis ('%o X 100 = 13.64%).glhen, bank B's effective rate of 13 percent per annum is better. PROBLEM Bank A charges 14 percent per annum discount. Bank B charges 15 percent per unnum with an interest-balloon payment. Which rate is higher over a six-month period? ANSWER A 14 percent per annum discount equals 7 percent discount for six months, This cquals an effective interest rate of 7.53 percent per annum hs X 100 = 7.53%). A 15 percent per annum with an interest balloon equals 7.5 percent for six months. Therefore, bank A's 14 percent per annum discount is slightly higher than 15 percent per annum. Effective Interest Rate aftcr Compounding PROBLEM 2.8 What is the effective interest rate received for six months on a deposit with an interest rate of 12 percent per annum which compounds monthly? Assume a $100 time deposit, ANSWER: pea otareal earned over six months is $6.15. The $6.15 earned over six tail t equals $12.30 earned over twelve months. Therefore, the effec- interest rate is 12.30 percent per annum. (See Table 24.), ‘Scanned with CamScannerTABLE 2.1 Computation of Effective Interest Rate after Compounding . Interest reinvested Earnings on Interest collected at 12% p.a. reinvested income ‘After one month / For five months $0.05 ‘After two months x For four months $0.04 After three months . For three months $0.03 After four months x For two months : $0.02 After five months . For one month $0.01 After six months . Ss - Effect of Regulations (Reserve Requirements) on Eurorates PROBLEM 2.9 Assume a domestic interest rate of 10 percent per annum in country A and 15 percent per annum in country B. Non-interest-bearing reserve requirement in both countries is 4 percent of deposits. What should the break-even Eurorates for each country's currency be? ANSWER i ‘In the absence of controls on flows of capital and other restrictions affecting costs, the Eurorate would equal the all-in cost of money in the domestic market. J Banks in country A pay 10 percent on a 100-unit deposit, but they actually have only 96 units available. Therefore, the real cost of domestic deposits In country A is 10 percent paid on 96 available units. This is equivalent to 10.42 percent ('% X 100 = 10.42%). In country B, with an interest rate in the domestic market of 15 percent, the Eurorate would be 15.63 percent ("%m X 100 = 15.63%). That is, 4 percent reserves with a 10 percent interest rate equals 0.42 percent pér annum, or 42 basis points. The same 4 percent reserves with a 15 percent interest rate equals 0.63 percent per annum, or 63 basis - points. The cost of reserve requirements rises with higher interest rates. PROBLEM 2.10 Assume a domestic interest rate of 10 percent per annum. The reserve requirement initially is 4 percent and then it increases to 8 percent. ‘Scanned with CamScannerAD VORNIGN EXCUANOE AND MONEY ManKKOD What would the Burorates for the siven currency be before and after the change in reserve requirement? ANSWER The 4 percent reserve requirement increases the to 10.42 percent ("om X 100 = 10.42%), or 42 basi ment of 8 percent in reserves the cost of funds j (%a X 100 = 10.87%), or 67 basis points, Cost of 10 percent funds 8 points. With a require. increases to 10.87 Percent Computation of the Cost of Revolving Euroloans PROBLEM 2.11 Assume a company borrows for three years on a revolving with six interest periods of six months each. The markup over LIBOR is 1 Percent. The six LIBORs for each period are’ shown in Table 2.2, Then the effective lending rates for each period cun be calculated by adding the markup to (av various LIBORs. ) ANSWER We can see from-Table 2.2 that the markup over LIBOR remained unchanged and therefore averages 1 percent over the three years. The averages for LIBORs and the effective rates are 10.67 percent and 11.67 percent respectively. TABLE 2.2 Computing the Cost of Revolving Euroloans Date LIBOR* Markup Effective rate .00% 10.00% At take-down 9.00% z . Gio After six months 12.00 a ee After twelve months 14.50 0 12.00 «After eightcen months 11,00 a 9.00 After Avoaniy teseeetet om a 050 er thirty months . . ae ae rates 10.67% 1.00% 7 ‘Scanned with CamScannerINTEREST RATES AND FOREIG RXCHANGE RaAtSS Expression of Quotes in U.S. Terms ard Reciprocal Terms PROBLEM 2.12 An importer in the United States must settle his payables to Japan, Germany, France, Hong Kong, and Mexico. He receives for each currency two quotes: one quote from his local bank in Chicago and one quote from-a bank, in each of the five.other countries. (See Table 2.3.) TABLE 23 Quotes from U.S. and Foreign Banks ee Quotes from U.S. bank Quotes from foreign bank —— 'US$0.4760 = ¥100 ; ¥210.00 = US$1 US$52.64 = 'DM100—_* DM1.90 = US$1 US$22.23 = FF100 FF4,50 = US$1 US$19.60 = HK$100 4 HK$5.10 = US$1 US$4.17 = Mex$100 Mex$24.00 = USS1 Which earenclen should the importer purchase in uh) United States and which ones abroad? ANSWER To facilitate comparisons, the U.S. importer should express the quotes for each currency in the same terms, let's say U.S. terms, as presented in Table 2.4. TABLE 24 Most Favorable Rates for Importer Quotes from foreign bank Rate most favorable Quotes from U.S. bank converted to U.S. terms to importer US$0.4760 = ¥100 US$0.4762 = Y100 US$0.4760, U.S. bank US$52.64 = DM100 US$52.63 = DM100 —_US$5z.63, Foreign bank Uss22.23 = F100 US$22.22 = FFI00 —-US$22.22, Foreign bank USS19.60 = HK$100—_US$19.61 = HK$100 —_US$19.60, US, bank US$4.17 = Mex$100 _US$4.1666 = Mex$100° US$4.1666, Foreign bank ‘Scanned with CamScanneras FOREIGN EXG NNN” ¢ United States purchases the five foreign curren- he “lower” number of the two rates he obtained lower-number rate in this case also is the most e importer is in the United States, where : oted in U.S. dollars. That is what we call US. terms under the price quotation system. If we would express the five identified “lower” rates in the terms of the respective five countries we would find that they look like the “higher” rates. But in spite of how they look, they continue to be the most favorable rates for the U.S. importer. . The U.S. importer might make a “mental switch” in that he thinks as follows: In the price quotation system the exchange rate in foreign terms expresses in foreign currency (/ocal currency in that particular country) the value of US$1 (foreign currency in that particular country). The people in, let us say, France do not think about purchasing French francs against dollars, but rather they think about selling U.S. dollars against French francs. And this selling of U.S. dollars against French francs they try to do at the highest rate for U.S. dollars which gives them the most French francs. In USS. terms the importer will purchase foreign currencies at the lowest U.S. dollar prices. In foreign terms he will sell U.S. dollars at the highest foreign currency prices. eas . The importer in thi cies at the rate with U for each currency. The advantageous rate because th reign currency prices are qui PROBLEM 2.13 ~ 7 An exporter in the United States must-sell foreign currencies received from exports to Switzerland, Canada, Venezuela, Saudi Arabia, and Singapore. She receives the quotes listed in Table 2.5. TABLE 2.5 Quotes from U.S. and Foreign a Banks ? Quotes from U.S. bank Quotes from foreign bank ll cl a alibi A USS58.83 = SwFi00 SwF1.70 = US$1 ‘USS86.95 = Can$100 Can$1.15 = USS$1 US$23.32 = B100 B4.29 = US$1 US$29.84 = SR100 SR3.35 = US$1 US$47.62 = S$100 $2.10 = US$1 ‘Scanned with CamScannerINTEREST RATES AND FOREIGN EXCHANGE RATES: 49 | ANSWER + I, U.S. terms the exporter will sell foreign currencies at the higher U.S. dollar prices. In foreign terms she will purchase U.S. dollars at the lower foreign currency prices. TABLE 26 Most Favorable Rate for Exporter Quotes from foreign bank — Rate most favorable Quotes from U.S. bank converted to U.S. terms to exporter ——— = ————— US$58.83 = SwF100 ‘USS5B.! SwF100 US$58.83, U.S. bank us$s0.95 = Can$100 US$86.9565 = Can$100 US$86.9565, Foreign bank US$23.32 = B100 US$23.31 = B100 US$23.32, U.S. bank US$29.84 = SR100 USS29.8! SR100 US$29.85, Foreign bank US$47.62 = $100 USS47.6190 = S$100 US$47.62, U.S. bank —_ eee Did the Value of a Currency Go Up or Down? PROBLEM 2.14 Below are several exchange rates as they were quoted on 2 consecutive days. Indicate what currency values went up and which ones went , down from the previous day's values. ANSWER TABLE 2.7 Increase and Decrease in Currency Values ooo Currency Currency -today today Previous day Today higher lower US$s2.60 = DM100 US$52.61 = DM100 DM uss . SwF1.70 = USS1. Swi1.71 = US$1 US$ Swi Mex$20.60 = Can$i Mex$21,00 = Can$i Cans Mex$ DM1.15 = SwF1 DM1.14 = SwF1 DM SwF SRO.6S = HKS§t SRO.6G = HKS1 HK$ SR ‘Y¥46 = FFL Y45 = FFI . Y FF US$240 = £1 ~ - USS241 = 11 | & USS Ptai05 = R1 Ptai08 = Ri R Pta EMRE ENTE A CRE RE eth Scanned with CamScannerE TS 40 FOREIGN EXCHANGE AND MONEY MARKE Computation of Cross Rates PROBLEM 2.15 = ; A German exporter who sells to Switzerland must sell Swiss francs and pur:hase German marks. The following market rates are given: SwF1.75 = USS1_ DM1.95 = USS1 SwFs9.77 = DM100 - Option 1 is to sell Swiss francs against dollars at SwF1.75 per $1 and to purchase German marks against dollars at DM1.95 per $1. Option 2 is to scll Swiss francs against.German marks at the direct cross rate of SwF89.77 per DM100. What should he do? ANSWER The German exporter must determine the cross-rate equivalent of deal- ing in dollars against Swiss francs at 1.75 and against German marks at 1,95 and then compare the result with the given cross rate of 89.77. The given cross rate is in Swiss terms. Therefore the cross rate to be calculated rust also be in Swiss terms, so that the two rates are.compara- ble. In order to get a rate in Swiss terms the chain must begin with the question: Ilow many Swiss francs equal DM100? ? SwF DM100 DM1.95 . | US$1 US$1_—~ [:SwF1.75 100X 1% 1.75 _ 175 — 99.74 ‘ 185 Xi 195 : SwF89.74 = DM100 going through U.S. dollars The German exporter must now determine which rata is more attractive! the one in the market of SwF89.77 = 'DM100, or the derived rate of SwFa9.74 = DM100. He must purchase German marks against Swiss francs, and he can best do that at the derived rate of SwF08.74, that is, by going through ‘dollars. " ? PROBLEM 2:16 Assume the following market scenario: ~ ‘Scanned with CamScanner. Ff RATES: 47 INTEREST RATES AND FORFIGN EXGHANG FF3.95 = US$1 DM1.70 = US$1 a. What is’ the exchange raie for French francs in German terms? . b. What is the exchange rate for German marks in French terms? ‘ANSWER ; a. ?7DM FF100 FF3.95 US$1 US$1 DM1.70 100 X.1X 1.70 = 170 — 43,0300 3.95 X 1 3.95 DM43.04 = FF100 b 7 FF DM100 DM1.70 | US$1 US$1 FF3.95 100 X 1X 3.95 = 395 — 232.3529 - 1.70 X 1 70 FF232.35 = DM100 Nore: It does not make any difference wlicther one opcrates with DM1 or with DM100 in an exchange rate, as long as the corresponding deci- mals are correct. The advantage of a larger unit is that there are fewer positions following the decimal point. Most people find that casier to Tead. PROBLEM 2.17 A Canadian businessman Is on an airplane and realizes that he forgot to buy some cognac in the duty free shop at the airport. Fortunately cognac is sold on the plane. Our businessman wishes to buy a bottle of Camus'Napoleon brandy, for which pricos are Indicated in the airline magazine.in many different currencies. He happens to have in his purse “six different currericies for the equivalent of roughly Can$s0 in each _ Surrency, certainly enough to buy some brandy. The currencies he has Scanned with CamScanner40> FOREIGN EXCHANGE ANDO MONEY MARKETS iss francs, pounds, and Hong s, yen, German marks, Swiss , dam The exchange rates quoted in that day's newspaper and ibe gia prices listed in the airline magazine are as follows: Exchange rates Cognac prices —Exchonge rales Gognac prices 210 = USS1.00 Y5,500.00 , DM1.95 = USS1.00 DM43.00 - . SwF1.75 = USS1.00 SwF40.00 , £1.00 = USS2.35 £10.50 liKss.10 = USS1.00 HK$115.00 Can$1.15 = USS1.00 US$24.00 Our friend would like to find out in which of the six currencies he should pay, so that he has the lowest cost expressed in Canadian dollars. What should he do? ANSWER, Our friend must convert first the six different foreign currency quotes into Canadian dollars. He can then determine which foreign currency requires the least amount of Canadian dollars to buy the cognac at the price in that currency. For the conversion of the various foreign currency quotes into Canadian dollars he needs the cross rates between those six currencies and the Canadian dollar. He will then multiply the cross rate by the amount of foreign currency required to purchase the cognac. The result shows the cost in Canadian dollars. a. Conversion of yen quote into Canadian terms: ? Cans _ | ¥100 : yao | USst uSSs1 Can$1.15 f 100 x 1 a ee = 28 = Cans 0.5478 = v100 Cognac price in yen: ¥5,500 = 55 x 0.5476 = Can$30.12 ‘Scanned with CamScannerINTEREST RATES AND FOREIGN EXCHANGE RATES - 49 b. Conversion of German matk quote into Canadian terms: ? Can$ DM1 DM1.95 | US$1 US$1 Cans 1x1 1: = Can$o: = EI Can$0.5897 = DM1 Cognac price in German marks: DM43 = 43 x 0.5897 = Can$25.36 c. Conversion of Swiss franc quote into Canadian terms: ? Can$ SwF1 SwF1.75 | US$1 USS$1 Can$1.15 A1xX1X 115 = 115 — Cang$0.6571 = SwF1 175 X1 175 Cognac price in Swiss francs: SwF40 = 40 X 0.6571 = Can$26.28 . d. Conversion of pound quote into Ganadian terms: ? Can$ £1 £1 US$2.35 uss1 Can$1.15 1x 235 X 115 = Can$2.7025 = £1 1x1 Cognac price in pounds: £10.50 = 10.50 X 2.7025 = Can$28.38 ‘Scanned with CamScanner50- FOREIGN EXCHANGE AND MONEY MARKETS e. Conversion of long Kong dollar quote into Canadian terms: ¢ Can$ HIK$1 HK$5.10 | USS1 US$1 Can$1.15 1x1X 115 — 115 — Can$0.2255 = HK$1 5.10 X 1 5.1 Cognac price in Hong Kong dollars: HK$115 = 115 X 0.2255 = Can$25.93 f. Cognac price in U.S. dollars: USS24 = 24 X 1.15 = Can$27.60 Conclusion: Our friend should buy the cognac for DM43 because that requires only Can$25.36, less than paying in any other currency. 7 Scanned with CamScanner

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