Final Examination Semester 3 / Year 2007

Transcription

1 Southern College Kolej Selatan 南方学院 Final Examination Semester 3 / Year 2007 COURSE : INTERNATIONAL FINANCE COURSE CODE : FINE3033 TIME : 2 1/2 HOURS DEPARTMENT : COMMERCE CLASS : IB05-C LECTURER : KAN YOKE YUE Student s ID : Batch No. : Notes to candidates: 1) The question paper consist 8 pages and two sections. 2) Section A: Answer ALL questions from Section A Section B: Answer any THREE of the four questions. 3) Return the question paper with your answer booklet.

2 Section A (20 Multiple Choice Questions) Answer all the questions (20 Questions x 2 marks = 40 marks) 1. Under the gold standard of currency exchange that existed from 1879 to 1914, an ounce of gold cost $20.67 in U.S. dollars and in British pounds. Therefore, the exchange rate of pounds per dollar under this fixed exchange regime was (a) /$. (b) /$. (c) always changing because the price of gold was always changing. (d) unknown because there is not enough information to answer this question 2. In January 2002, the Argentine Peso changed in value from Peso1.00/$ to Peso1.40/$, thus, the Argentine Peso against the U.S. dollar. (a) strengthened (b) weakened (c) remained neutral (d) All of the above 3. Other things equal, and assuming efficient markets, if a Honda Accord costs $18,365 in the U.S. then at an exchange rate of $1.43/, the Honda Accord should cost in Great Britain. (a) 26,262 (b) 18,365 (c) 12,843 (d) 9, Which of the following is necessary for the calculation of the forward rate? (a) the spot rate (b) the foreign currency deposit rate (c) the home currency deposit rate (d) All of the above 5. Assume a nominal interest rate on one-year U.S. Treasury Bills of 4.60% and a real rate of interest of 2.50%. Using the Fisher Effect Equation, what is the approximate expected rate of inflation in the U.S. over the next year? (a) 2.10% (b) 2.05% (c) 2.00% (d) 1.90% Page 1 of 8

3 6. According to the international Fisher Effect, if an investor purchases a five-year U.S. bond that has an annual interest rate of 5% rather than a comparable British bond that has an annual interest rate of 6%, then the investor must be expecting the to at a rate of at least 1% per year over the next 5 years. (a) British pound; appreciate (b) British pound; revalue (c) U.S. dollar; appreciate (d) U.S. dollar; depreciate 7. The current U.S. dollar-yen spot rate is 125 /$. If the 90-day forward exchange rate is 127 /$ then the yen is selling at a per annum of. (a) premium; 1.57% (b) premium; 6.30% (c) discount; 1.57% (d) discount; 6.30% 8. When the spot and forward exchange markets are not in equilibrium as described by interest rate parity, the potential for riskless arbitrage profit exists. This is called. (a) covered interest arbitrage (CIA) (b) interest rate parity (c) the Fisher Effect (d) dancing on the head of a pin 9. Howard borrows 5,000,000 for 6 months at an annual rate of.60% and uses the proceeds to invest in the U.S. money market at an annual rate of 4.50%. If the spot rate today is 115/$ and the spot rate in 6 months is 113/$ Howard s net proceeds will be: (a) 104,130 (b) $8,587 (c) $921 (d) 8, A transaction in the foreign exchange market requires delivery of foreign exchange at some future date. (a) spot (b) forward (c) swap (d) currency Page 2 of 8

4 11. The following is an example of an American term foreign exchange quote. (a) $20/ (b) 0.85 /$ (c) 100 / (d) None of the above 12. If the direct quote for a U.S. investor for British pounds is $1.78/, then the indirect quote for the U.S. investor would be and the direct quote for the British investor would be. (a) 0.562/$; 0.562/$ (b) $0.562/ ; 0.562/$ (c) 1.78/ ; 0.562/$ (d) 0.562/$; $1.78/ 13. Peter Simpson thinks that the U.K. pound will cost $1.75/ in six months. A 6-month currency futures contract is available today at a rate of $1.77/. If Peter was to speculate in the currency futures market, and his expectations are correct, which of the following strategies would earn him a profit? (a) Sell a pound currency futures contract. (b) Buy a pound currency futures contract. (c) Sell pounds today. (d) Sell pounds in six months. 14. A foreign currency option gives the holder the right to a foreign currency whereas a foreign currency option gives the holder the right to an option. (a) call, buy, put, sell (b) call, sell, put, buy (c) put, hold, call, release (d) None of the above 15. Other things equal, the the strike price of a call option, the call option premium. (a) lower; lower (b) higher; higher (c) lower; higher (d) None of the above Page 3 of 8

5 16. A occurs when two business firms in separate countries arrange to borrow each other s currency for a specified period of time. (a) natural hedge loan (b) forward loan (c) currency switch loan (d) back-to-back loan 17. If the European subsidiary of a U.S. firm has net exposed assets of 500,000, and the euro drops in value from $1/ to $.90/ the U.S. firm has an accounting. (a) gain of $50,000 (b) loss of $50,000 (c) gain of $450,000 (d) loss of 450, Which of the following firms would NOT bear risk caused by accounting exposure? (a) A U.S. based manufacturing firm with a fully owned subsidiary that generates earnings in Japan. The subsidiary always keeps and reinvests the earnings. (b) A U.S. based retailer with a fully owned subsidiary in Canada that generates losses in Canada that the parent firm occasionally covers. (c) A U.S. based firm with a subsidiary in Britain that occasionally remits earnings to the parent firm. (d) All of the above are subject to accounting exposure. 19. The practice of purchasing accounts receivable at a discount is known as (a) receivable discounting. (b) factoring. (c) securitization. (d) forfeiting. 20. A is issued to the exporter by a common carrier transporting the merchandise. (a) commercial invoice (b) banker s acceptance (c) packing list (d) bill of lading Page 4 of 8

6 Section B (Essay Questions) Answer any THREE or the four questions. Question 1 (a) Explain four major reasons why U.S. companies prefer to place their direct foreign investment in China. (8 marks) (b) What are the potential barriers that U.S. companies could face in investing in China? (6 marks) (c) Compare the difference between (i) Factoring (ii) Forfaiting (6 marks) (Total: 20 marks) Page 5 of 8

7 Question 2 (a) Compare the difference between locational arbitrage and triangular arbitrage. (6 marks) (b) Assume the following information: John has $1,000,000 to invest Current spot rate of pound = $ day forward rate of pound = $ month deposit rate in U.S. = 3% 3-month deposit rate in U.K. = 4% (i) (ii) If John uses covered interest arbitrage for a 90-day investment, what will be the amount of U.S. dollars he will have after 90 days? Explain in detail how he can perform the covered interest arbitrage. Calculate the forward rate that would prevent investor from performing arbitrage activity. (10 marks) (c) Nominal interest rates in Cyprus are 7%, while nominal interest rates in the U.S. are 5%. The spot rate for the Cyprus pound (CYP) is $1.50. According to the international Fisher effect (IFE), what is the level of exchange rate Cyprus pound should adjust to? (Total: 20 marks) Page 6 of 8

8 Question 3 (a) What are the common techniques used in hedging transaction exposure? (b) Samsong Inc. needs 1,000,000 in 1 month period to pay its supplier in German. Samsong can earn 6 percent annualized on a German security. The current spot rate for the euro is $1.10. Samsong can borrow funds in the U.S. at an annualized interest rate of 9 percent. If Samsong uses a money market hedge to hedge the foreign exchange exposure.. How much should it borrow in the US? What is the effective exchange rate for the euro incurred by Samsong in the money market hedge? Explain in details the steps involved and show all your calculation. (16 marks) (Total: 20 marks) Page 7 of 8

9 Question 4 INTERNATIONAL FINANCE (a) Compare and contrast the foreign bond and Eurobond. (b) Assume that the Malaysia inflation rate becomes high relative to Singapore inflation. Other things being equal, Explain how should this affect the equilibrium value of the Singapore dollar? (c) In a bank, there are two quotation on the exchange rate board for Japanese Yen. $ $ Which quotation is the bank s bid rate? Calculate the bid-ask percentage spread. (d) Richard purchased a call option on British pounds for $.03 per unit. The strike price was $1.58 and the spot rate at the time the option was exercised was $1.42. Assume there are 31,250 units in a British pound option. What was Richard s net profit on this option? (e) Angel purchased a put option on British pounds for $.03 per unit. The strike price was $1.76 and the spot rate at the time the pound option was exercised was $1.50. Assume there are 31,250 units in a British pound option. What was Angel s net profit on the option? (Total: 20 marks) 000 Page 8 of 8