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International Finance NMIMS Apr 19

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International Finance NMIMS Apr 19

Note: You must edit approx 10-20 percent answer for avoid copy case.

Q1. You are given the following interest rates.

 – Rs. \$ 3- months 15% 6% 6-month 14.5% 5.5% 9-month 14% 5.0%

The 3-month forward rate is Rs. 36/\$. Calculate the 3-month forward rate 6-months from now. (10 Marks)

Q2. ABC Ltd. is planning to import a multi-purpose machine from Japan at a cost of 3400 lakhs yen. The company can avail loan at 18% interest per annum compounded quarterly with which it can import the machine. However there is an offer from Tokyo branch of an India based bank extending credit of 180 days at 2% per annum against opening of an irrevocable letter of credit. Other information:-

Present exchange rate Rs. 100 = 340 yen

180 days forward rate Rs. 100 = 345 yen

Commission charges for letter of credit at 2% per 12 months.

Advise whether the offer from the foreign branch should be accepted? (10 Marks)

3A) Suppose the spot rate is \$ 0.20/FF. The US one-year rate is 6%. The forward rate is \$0.1923/What is the current one-year French interest rate that will satisfy the Interest Rate Parity? Suppose the one-year French interest rate is 12% instead. What kind of arbitrage would you perform to take advantage of this opportunity? (5 Marks)

3B) Assume that the Citibank trading room is dealing on the following quotations Spot

Sterling = \$1.5000, Euro-Sterling interest rate (6-months) = 11.00% p.a. Euro-\$ interest rate (6-months) = 6.00% p.a. and that Barclays Bank is quoting Forward Sterling (6-months) at \$1.4550.

Describe the transactions you would make to earn risk-free covered interest arbitrage profits? How much profit would you expect to make? (5 Marks)

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