Exchange rates

Homework #3 (Due: March 7)

This homework is for investigation of the triangular parity. Follow the guidance in the below and

provide your answers for all requirements. You can type your work with a word processor or

hand-write your answer on the following pages.

Go to the website of a forex forum, where you can find the daily data of various foreign exchange

rates (http://www.global-view.com/forex-trading-tools/forex-history/index.html).

We need the close quotes of EUR/USD, USD/JPY, and EUR/JPY (click the boxes in the upper part).

Then, obtain monthly data from January 2018 to June 2018 (you can download an excel file, then

remove data for May, which are spurious, so you would have a 3 x 5 table).

Based on your data, (for every month) explain how much USDs we need to pay for 1 euro and 1

Japanese yen and how much EURs we need to pay for 1 JPY.

I.e., For EUR and JPY, you need to provide direct quotes for U.S. investors, for exchange rate

between EUR and JPY, you need to show direct quotes for euro zone investors.

(Your answer would be (e.g.) paying 1.24 USDs for 1 EUR in January, etc.)

For every month, compute the exchange rates of EUR/JPY, USD/JPY, and EUR/USD by using the

triangular parity (Do not directly copy the numbers in the given data / Use the other rates).

Then, compute difference between actual (data-given) exchange rates and parity-implied

exchange rates (i.e., actual number – implied number). In addition, compute the percentage

difference of them. (i.e., (actual – implied) / actual x 100, here take the absolute values for the

numerators).

Using the information based on your computation, evaluate the triangular parity. If you find that

the implied exchange rates are not perfectly the same as the given data, provide the possible

reasons.

From your exchange rates that are computed using the triangular parity, select a month with the

largest difference. Using the U.S dollars and euro, propose an arbitrage strategy with the possible

profits. How the (net) demands for EUR, JPY, and USD changes due to your arbitrage transactions?

Based on the changes in demands, how the exchange rates will change?

HAND write your answers!!

(You can fill in the blanks on the sample answer sheet.)

Sample answer sheet

< Downloaded data: Copy and paste data as downloaded >

EUR/USD USD/JPY EUR/JPY

January

February

March

April

June

< Direct quote for U.S. investor >

For exchange rates for EUR and JPY, this part asks you to provide the direct quotes for euro zone

investors. Be careful about numerators and denominators in the first row.

USD/EUR USD/JPY EUR/JPY

January

February

March

April

June

< Triangular parity implied FX >

Provide how to compute the triangular parity implied exchange rates (cross rates).

Implied EUR/JPY Implied USD/JPY Implied EUR/USD

January

February

March

April

June

< Difference >

USD/EUR USD/JPY EUR/JPY % USD/EUR % USD/JPY % EUR/JPY

January

February

March

April

June

Evaluate the triangular parity.

< Example of arbitrage trading and profit >