Hello, if you have any need, please feel free to consult us, this is my wechat: wx91due
BUSI4439
A LEVEL 4 MODULE, EXAMPLE PAPER
INTERNATIONAL FINANCE
SECTION A
Answer only ONE of the two questions
Question 1: A Collection of Short Essay Questions
a) What are the main reasons that central banks and treasuries enter the foreign exchange markets, and in what important ways are they different from other foreign exchange participants? [15 marks]
b) Discuss why must a country’s currency value needs to be either revalued or devalued? [15 marks]
c) Discuss the benefits and costs of currency devaluation? Please use a real- world example to support your answer. [20 marks] [Total: 50 marks]
Question 2: A Collection of Short Essay Questions
a) Since the 1970s it has been difficult for central banks alone to engage in direct intervention to alter the value of their domestic currency. Identify and explain at least two other activities in which a central bank could engage to alter the value of their domestic. Please support your answer with a real-world example. [15 marks]
b) Suppose Czech Republic is heavily reliant on tourism. The tourism industry has been hitting hard by the current COVID-19 pandemic. If its touristic places of interest, infrastructure, safety, etc. have not changed, what could the Czech Republic do in the foreign exchange market to attract more tourists to the country? [15 marks]
c) How would its rivals (neighboring tourism-dependent countries, e.g. Slovakia, Poland, Hungary, etc.) are likely to react? [10 marks]
d) How would currency speculators react? [10 marks] [Total: 50 marks]
Section B
Answer only ONE of the two questions
Question 3
Rus Neft, the national oil company of Russia, is a large, sophisticated, and active participant in both the currency and petrochemical markets.
Although it is a Russian company, it operates within the global oil market. Ana Kirilenkova is a currency trader for Rus Neft, and has immediate use of either $5 million (or the Russian ruble equivalent). She is faced with the following market rates, and she would like to make arbitrage profit in the coming 90 days.
Spot exchange rate (RUB/$): 73.3103
3-month forward rate (RUB/$): 71.9055
U.S. dollar 3-month interest rate: 7.250%
Russian ruble 3-month interest rate: 5.500%
a) Explain is it possible for Ana to make arbitrage based on the above information. (Please show your reasoning and proof). If yes, what kind of arbitrage strategy Ana can use and why? [5 marks]
b) Show the detailed steps of the arbitrage strategy and calculate the arbitrage profit. Is this strategy risk free and why? [10 marks]
c) Suppose there is a fix income security carrying the same risk as the arbitrage strategy and the maturity is 90 days as well, with the annualized return of 5%. If Ana can investment the $5 million in that product as well, how should she choose between this two? [10 marks]
d) Suppose Ana can use 10 million EUR to make another arbitrage by using the following market rate. If she expects the exchange rate to stay very close to the spot rate, explain the possibility of making arbitrage profit.
(Please show your reasoning and proof). If yes, what kind of arbitrage can she perform this time and why?
Spot rate (RUB/€): 86.81
90-day forward rate (RUB/€): 86.50
Expected spot rate in 90 days (RUB/€): 86.79 90-day EUR interest rate: 6.000%
90-day RUB interest rate: 4.600% [5 marks]
e) Show the detailed steps of the arbitrage strategy and calculate the arbitrage profit. Is this strategy risk free and why? (You may explain your answer with numerical examples) [15 marks]
f) If Ana is a very conservative investor and highly risk averse, which arbitrage of the above two she would prefer and why? [5 marks] [Total: 50 marks]
Question 4
Wellington Inc., U.K.-based manufacturer of industrial equipment, just acquired 100% shares of a publicly listed company in South Korea that produces semiconductors. The agreed price of this acquisition was Won 700 million. Won 200 million has already been paid, and the remaining Won is due in six months. The current spot rate is Won1,616/£, and the 6-month forward rate is Won1,575/£ . The six-month Korean won interest rate is 15% per annum, the six-month UK dollar rate is 3.5 % per annum. Wellington can invest at these interest rates, or borrow at 2% per annum above those rates. A six-month call option on won with a 1,550/£ strike rate has a 3.6% premium, while the six-month put option at the same strike rate has a 2% premium. Wellington's weighted average cost of capital (WACC) is 11.25%. Used the above information, please answer the following questions.
a) If Wellington choose to remain uncovered without implementing any
hedging strategies, what are the possible outcomes? (Please answer this question with numerical examples) [5 marks]
b) If Wellington choose to hedge the transaction exposure by foreign exchange forward, what is the outcome? [5 marks]
c) If Wellington choose the money market hedging, what is the payoff? [10 marks]
d) If Wellington can use foreign currency options to hedge the foreign exchange risk, what are the possible outcomes? (Please use numerical examples to support your answer) [10 marks]
e) Determine the break-even rate between forward and money market hedging and explain your result. [5 marks]
f) Show the trading range for the pound that defines the breakeven points for the option hedging compared with the other strategies and explain the results. (Please show the upper bound and lower bound of the exchange rate) [10 marks]
g) Based on all the strategies above, what is your recommendation? Please explain your reason. [5 marks] [Total: 50 marks]