Question 1 a
Explain the difference between traditional currency symbols and ISO 4217 codes. Include a table comparing the 2 codes with the Australian dollar as the unit currency and each of the US dollar, UK pounds, European euros, Chinese yuan and New Zealand dollars as the price currency or quote currency. (Length 200 words) (Conceptual Problem)
Question 1 b
SMU Corp. has future receivables of 4,000,000 New Zealand dollars (NZ$) in one year. It must decide whether to use options or a money market hedge to hedge this position. Use any of the following information to make the decision. Verify your answer by determining the estimate (or probability distribution) of dollar revenue to be received in one year for each type of hedge.
Spot rate of NZ$ = $.54
One year call option: Exercise price = $.50; premium = $.07
One year put option: Exercise price = $.52; premium = $.03
|
U.S. |
New Zealand |
| One year deposit rate |
9%
|
6% |
| One year borrowing rate |
11
|
8 |
|
Rate |
Probability |
| Forecasted spot rate of NZ$ |
$.50
|
20% |
|
.51
|
50 |
|
.53 |
30 |
(Analysis of Business Situation)
Question 2 a
Compare the ways a Multinational Corporation (MNC) manages economic exposure with the ways it manages transaction exposure. (Length 200 words) (Communicate Financial Analysis)
Question 2 b
Laguna Co. (a U.S. firm) will be receiving 4 million British pounds in one year. It will need to make a payment of 3 million Polish zloty in one year. It has no other exchange rate risk at this time. However, it needs to buy supplies and can purchase them from Switzerland, Hong Kong, Canada, or Ecuador. Another alternative is that it could also purchase one-fourth of the supplies from each of the 4 countries mentioned in the previous sentence. The supplies will be invoiced in the currency of the country where they are imported from. Laguna Co. believes that none of the sources of the imports would provide a clear cost advantage. As of today, the dollar cost of these supplies would be about $6 million regardless of the source that will provide the supplies.
British pound = $1.80
Swiss franc = $.60
Polish zloty = $.30
Hong Kong dollar = $.14
Canadian dollar = $.60
The movements of the pound and the Swiss franc and the Polish zloty against the dollar are highly correlated. The Hong Kong dollar is tied to the U.S. dollar and you expect that it will continue to be tied to the dollar. The movements in the value of Canadian dollar against the U.S. dollar are not correlated with the movements of other currencies. Ecuador uses the U.S. dollar as its local currency.
Which alternative should Laguna Co. select in order to minimise its overall exchange rate risk?
(Analysis of Business Situation)
Question 3 a
Find the rate of inflation in Australia for calendar year 2015 and the rate of inflation in New Zealand for the same year. Calculate the percentage change in the value of the AUD with respect to the NZD. Did the currency change in the direction and by the magnitude that you would have expected according to Purchasing Power Parity (PPP)? If not, offer possible reasons for this discrepancy. (Length 200 words) (Quantitative and Conceptual Problem)
Question 3 b
Beth Miller does not believe that the international Fisher effect (IFE) holds. Current one-year interest rates in Europe are 5 percent, while one-year interest rates in the U.S. are 3 percent. Beth converts $100,000 to euros and invests them in Germany. One year later, she converts the euros back to dollars. The current spot rate of the euro is $1.10.
i. According to the IFE, what should the spot rate of the euro in one year be?
ii. If the spot rate of the euro in one year is $1.00, what is Beth's percentage return from her strategy?
iii. If the spot rate of the euro in one year is $1.08, what is Beth's percentage return from her strategy?
iv. What must the spot rate of the euro be in one year for Beth's strategy to be successful?
(Quantitative Problem)
Question 4 a
What advantage do currency options offer that are not available with futures or forward contracts? (Length 200 words)(Conceptual Problem)
Question 4 b
The spot rate of the New Zealand dollar is $.77. A call option on New Zealand dollars with a one-year expiration date has an exercise price of $.78 and a premium of $.04. A put option on New Zealand dollars at the money with a one-year expiration date has a premium of $.03. You expect that the New Zealand dollar's spot rate will decline over time and will be $.71 in one year.
i. Today, Dawn purchased call options on New Zealand dollars with a one-year expiration date. Estimate the profit or loss per unit at the end of one year. [Assume that the options would be exercised on the expiration date or not at all.]
ii. Today, Mark sold put options on New Zealand dollars at the money with a one-year expiration date. Estimate the profit or loss per unit for Mark at the end of one year. [Assume that the options would be exercised on the expiration date or not at all.]
(Show all workings used to make your estimates.)
(Quantitative Problem)
Question 5 a
Which international financial markets are most important to a firm that consistently needs short term funds? Which international markets enable MNCs to obtain long-term funding? (Length 200 words) (Communicate Financial Analysis)
Question 5 b
Sambuka, Inc. can issue bonds in either U.S. dollars or in Swiss francs. Dollar-denominated bonds would have a coupon rate of 15 percent; Swiss franc-denominated bonds would have a coupon rate of 12 percent. Assuming that Sambuka can issue bonds worth $10,000,000 in either currency, that the current exchange rate of the Swiss franc is $.70, and that the forecasted exchange rate of the franc in each of the next three years is $.75, what is the annual cost of financing for the franc-denominated bonds? Which type of bond should Sambuka issue? (Show all workings used to derive your answer)
(Analysis of Business Situation)