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International Finance-NMIMS Solution Sep 2020

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International Finance

NMIMS Solution Sep 2020

Q1. You are given the following interest rates.

 Rs.$
3- months12%6%
6-month11.5%5.5%
9-month11%5.0%

 

The 3-month forward rate is Rs. 75/$. Calculate the 3-month forward rate 6-months from now.

Q2. Suppose that the exchange rate for U.S. $1 for another currency is such that U.S. $1 = 3.5 ARS (Argentine pesos). Further suppose that if the exchange rate remains the same, you will receive a 25% return on your investment in ARS currency over the next year’s period. As an investor, you are aware of the volatility in Argentina’s currency exchange so sudden movements are expected.

If the exchange rate were to change such that $1 = 50 ARS, what return do you expect on the investment? If the exchange rate were to change such that $1 = 2 ARS, what return do you expect on the investment?

 

Q3. Groucho Marx, as Governor of Freedonia’s central bank, has problems. He sees the value of his currency, the FDK, under constant attack from Rosor, a wealthy mutual-fund manager.

Apparently, Rosor believes that the FDK will soon devalue from GBP 1.000 to 0.950.

  • Currently, both GBP and FDK interest rates are 6% p.a. By how much should Groucho change the one-year interest rate so as to stabilize the spot rate even if Rosor expects a spot rate of 0.950 in one year? Ignore the risk premium—that is, take 0.950 to be the certainty equivalent.
  • If the interest-rate hike also affects Rosor’s expectations about the future spot rate, in which direction would this be? Taking into account also this second-round effect, would Groucho have to increase the rate by more than your first calculation, or by less?

 

Previous Sem of June NMIMS Assignments

 

Q1. CQS Plc is a UK company that sells goods solely within UK. CQS plc has recently tried a foreign supplier in Netherland for the first time and need to pay €250,000 to the supplier in six months’ time. You as financial manager are concerned that the cost of these supplies may rise in Pound Sterling terms and has decided to hedge the currency risk of this account payable. The following information has been provided by the company’s bank:

Spot rate (€ per £): 1·998 ± 0·002

Six months’ forward rate (€ per £): 1·979 ± 0·004

Money market rates available to CQS plc:

BorrowingDeposit
One-year Pound Sterling interest rates:6·1%5·4%
One-year Euro interest rates:4·0%3·5%

Assuming CQS plc has no surplus cash at the present time you are required to evaluate whether a money market hedge, a forward market hedge or a lead payment should be used to hedge the foreign account payable.

Q2. On 30th June 2009 when a forward contract matured for execution you are asked by an importer customer to extend the validity of the forward sale contract for US$ 10,000 for a further period of three months.

Contracted Rate US$1 = Rs.41.87

The US Dollar quoted on 30.6.2009

Spot Rs. 40.4800/Rs. 40.4900

Premium July 0.1100/0.1300

Premium August 0.2300/0.2500

Premium September 0.3500/0.3750

Calculate the cost for your customer in respect of the extension of the forward contract.

Rupee values to be rounded off to the nearest Rupee.

Margin 0.080% for Buying Rate

Margin 0.25% for Selling Rate

Q3. Wenden Co is a Dutch-based company which has the following expected transactions.

One month: Expected receipt of £2,40,000

One month: Expected payment of £1,40,000

Three months: Expected receipts of £3,00,000

 

The finance manager has collected the following information:

Spot rate (£ per €): 1.7820 ± 0.0002

One month forward rate (£ per €): 1.7829 ± 0.0003

Three months forward rate (£ per €): 1.7846 ± 0.0004

Money market rates for Wenden Co:

BorrowingDeposit
One year Euro interest rate:4.9%4.6%
One year Sterling interest rate:5.4%5.1%

Assume that it is now 1 April.

Required:

  1. Calculate the expected Euro receipts in one month and in three months using the forward market. (5 Marks)
  2. Calculate the expected Euro receipts in three months using a money-market hedge and recommend whether a forward market hedge or a money market hedge should be used.

 

Previous Year NMIMS Solution

International Finance-NMIMS Solution-June 19

Q1. Exchange rates can be explained by different underlying theories. Explain briefly any three of these theories, along with mathematical formulas, where applicable. (10 Marks)

Q2. There are short term and long term fluctuations in Exchange rates, and various factors are responsible for this. Explain the eight factors and whether they contribute to long or short term fluctuations. (10 Marks)

Q3. An exporter has Eur 10 million receivable in 3 months, and is in a dilemma whether to book forward contract to sell Euro or to sell Eur-INR 3 month futures.

  1. Explain to him in a tabular form the characteristics and differences between Forward and Futures. (5 Marks)
  2. Then with an example (assume 3 months forward and futures rate of Eur/INR 79) explain the cash flows in either situation. (5 Marks)

 


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