Investments, tenth edition

 Americas 

 Argentina peso .2012 

4.9709 

1.1

 Brazil real 

.5012  1.9954     

–2.6

 Canada dollar  

.9939  1.0062 

1.4

 Chile peso 

.002112  473.60      

–1.2 

 

Colombia peso 

.0005618  1780.00      

0.7

 Ecuador US dollar 

 1 

1 

unch

 Mexico peso .0783 

12.7679 

–0.7

 

Peru new sol 

.3905 

2.561 

0.6

 Uruguay peso 

.05182  19.2990 

1.0

 Venezuela b. fuerte  .229885  4.3500  unch

 Middle East/Africa 

 Bahrain dinar 2.6531 

.3769 

–0.1

 Eqypt pound .1502 

6.6558 

4.7

  Israel shekel  

.2684  3.7259 

–0.2

  Jordan dinar 

1.4111 

.7087 

–0.2

 

Kuwait dinar 

3.5503 

.2817 

0.1

 

Lebanon pound        .0006649   1503.95  0.1

  Saudi Arabia riyal .2666 3.7504 unch

  

South Africa rand 

.1099  9.1021 

7.6

  UAE dirham 

.2722  3.6732 

unch

 WSJ Dollar Index   71.04    0.07     0.09     0.82

 Country/currency

 U.S.-dollar foreign-exchange rates in late New York trading

Currencies

Sources: ICAP plc., WSJ Market Data Group

Asia-Pacific

Australian dollar 1.0417 .9600 

–0.2

      1-mos forward 

1.0395 

.9620 

–0.3

      3-mos forward 

1.0349 

.9663 

–0.2

      6-mos forward 

1.0282 

.9726 

–0.2

China yuan  

.1607 6.2226

 –0.1

Hong Kong dollar 

.1289 7.7572

 0.1

India rupee  

.01850 54.055

 –1.7

Indonesia rupiah  .0001033 9676 0.4

Japan yen 

.011007 90.85

 4.7

      1-mos forward 

.011009 

90.83 

4.5

      3-mos forward 

.011014 

90.79 

4.5

      6-mos forward 

.011024 

90.71 

4.5

Malaysia ringgit .3284 

3.0450 

–0.4

New Zealand dollar  .8340  1.1990  –0.7

Pakistan rupee  

.01022  97.845 

0.6

Philippines peso 

.0244  40.936 

–0.2

Singapore dollar 

.8077  1.2380 

1.4

South Korea won  .0009158  1091.92  2.6

Taiwan dollar 

.03390  29.500 

1.6

Thailand baht  

.03345  29.896 

–2.2

Vietnam dong 

.00004798 

20840 

 

0.3

 Europe 

  Czech Rep. koruna .05238  19.091  0.4

 Denmark krone .1803 

5.5448 

–1.9

 Euro area euro  

1.3455 

.7432 

–1.9

 Hungary forint 

.004521  221.21 

0.2

 

Norway krone 

.1807  5.5328 

–0.6

 

Poland zloty  

.3204 

3.1207 

0.9

 Russia ruble .03314 

30.178 

–1.0

  

Sweden krona .1558 

6.4197 

–1.3

  Switzerland franc  1.0796 

.9263 

1.2

    1-mos forward 

1.0799 

.9260 

1.2

    3-mos forward 

1.0806 

.9254 

1.3

    6-mos forward 

1.0819 

.9243 

1.3

Turkey lira 

.5640 1.7729 

–0.6

UK pound 

1.5694 .6372

 3.5

    1-mos forward 

1.5692 

.6373 

3.4

    3-mos forward 

1.5687 

.6375 

3.4

    6-mos forward 

1.5681 

.6377 

3.4

in US$

per US$

US$ vs.

YTD chg

(%)

Mon

 Country/currency

in US$

per US$

US$ vs.

YTD chg

(%)

Mon

Close    Net Chg   %ChgYTD%Chg

January 25, 2013

 Figure 23.1 

Spot and forward exchange rates  

 Source:  The Wall Street Journal online,  January 25, 2013. Reprinted by permission 

of  The Wall Street Journal,  © 2013 Dow Jones & Company, Inc. All rights reserved 

worldwide. 

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  C H A P T E R  

2 3

  Futures, Swaps, and Risk Management 

801

number of dollars needed to purchase a given unit of 

foreign currency. In  Figure  23.1 , both spot and forward 

exchange rates are listed for various delivery dates.   

 The forward quotations listed in  Figure  23.1  apply to 

rolling delivery in 30, 90, or 180 days. Thus tomorrow’s 

forward listings will apply to a maturity date 1 day later 

than today’s listing. In contrast, the futures contracts in 

 Figure 23.2  mature on only four dates each year, in March, 

June, September, and December.  

  Interest Rate Parity 

 

As is true of stocks and stock futures, there is a spot-

futures exchange rate relationship that will prevail in well-

functioning markets. Should this so-called  

  interest  rate 

parity relationship    be violated, arbitrageurs will be able 

to make risk-free profits in foreign exchange markets with 

zero-net-investment. Their actions will force futures and spot 

exchange rate back into alignment. Another term for interest 

rate parity is the    covered interest arbitrage relationship.      

 We can illustrate the interest rate parity theorem by using two currencies, the U.S. dollar 

and the British (U.K.) pound. Call  E  

0

  the current exchange rate between the two curren-

cies, that is,  E  

0

  dollars are required to purchase one pound.  F  

0

 , the forward price, is the 

number of dollars agreed to today for purchase of one pound at time  T.  Call the risk-free 

rates in the United States and United Kingdom  r  

US

  and  r  

UK

 ,  respectively. 

 The interest rate parity theorem then states that the proper relationship between  E  

0

  

and  F  

0

   is   

 

F

0

5 E

0

 

¢

1

1 r

US

1

1 r

UK

≤

T

 

 (23.1)   

 For example, if  r  

US

   5  .04 and  r  

UK

   5  .05 annually, while  E  

0

   5  $2 per pound, then the 

proper futures price for a 1-year contract would be   

$2.00

a

1.04

1.05

b 5 $1.981 per pound  

 Consider the intuition behind Equation 23.1. If  r  

US

  is less than  r  

UK

 , money invested in 

the United States will grow at a slower rate than money invested in the United Kingdom. 

If this is so, why wouldn’t all investors decide to invest their money in the United Kingdom? 

One important reason why not is that the dollar may be appreciating relative to the pound. 

Although dollar investments in the United States grow slower than pound investments in 

the United Kingdom, each dollar may be worth more pounds in the forward market than 

in the spot market. Such a forward premium can exactly offset the advantage of the higher 

U.K. interest rate. 

 To complete the argument, we ask how an appreciating dollar would show up in Equation 

23.1. If the dollar is appreciating, fewer dollars are required to purchase each pound, and the 

forward exchange rate  F  

0

  (in dollars per pound) will be less than  E  

0

 , the current exchange 

rate. This is exactly what Equation 23.1 tells us: When  r  

US

  is less than  r  

UK

 ,   F  

0

  must be 

less than  E  

0

 . The forward premium of the dollar embodied in the ratio of  F  

0

  to  E  

0

   exactly 

compensates for the difference in interest rates available in the two countries. Of course, the 

argument also works in reverse: If  r  

US

  is greater than  r  

UK

 , then  F  

0

  is greater than  E  

0

 .  

Japanese Yen(CME)-¥12,500,000; $ per 100¥

March 1.0675 

1.0854 1.0672  1.0777 .0086 217,367

June 1.0687 

1.0861 1.0683 1.0785 .0086  2,320

Canadian Dollar (CME)-CAD 100,000; $ per CAD

March 1.0016 

1.0021  .9954  .9964 

2.0047 131,433

June .9994 

.9998 .9939 .9944 

2.0047 4,071

British Pound (CME)-£62,500; $ per £ 

March 1.5711 

1.5842 1.5707  1.5794 .0086 165,688

June 1.5699 

1.5817 1.5697 1.5787 .0086 

457

Swiss Franc (CME)-CHF125,000; $ per CHF

March 1.0888 

1.0929 1.0886  1.0907 .0008  41,574

June 1.0913 

1.0924 1.0912 1.0919 .0008 

73

Open

Settle

Chg

Open

interest

High  hi  lo      low

Contract

 Figure 23.2 

Foreign exchange futures  

 Source:  The Wall Street Journal,  February 11, 2013. 

Reprinted by permission of  The Wall Street Journal,  

© 2013 Dow Jones & Company, Inc. All rights reserved 

worldwide. 

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802 

P A R T   V I

  Options, Futures, and Other Derivatives

 To generalize the strategy in Example 23.1: