INTERNATIONAL FINANCIAL MANAGEMENT (FIN 542)

SEMESTER JANUARY APRIL 2011

Quest!" 1
(a)
It would be useful to examine a countrys BOP for at least two reasons. First, BOP provides
detailed information about te supply and demand of te countrys currency. !econd, BOP data
can be used to evaluate te performance of te country in international economic competition.
For example, if a country is experiencin" perennial BOP deficits, it may si"nal tat te countrys
industries lac# competitiveness.
($ mar#s)
(b)

(i) %otal option premium & (.'$)($''') & (!)*$'. (+)
,ed"in" via call option on !F at exercise rate of )'.-./!F
!ince you are "oin" to buy !F$,''', you expect to spend (!)0,*'' ((!)'.-.x$,''').
(*)
%us, te total expected cost of buyin" !F$,''' will be te sum of (!)0,*'' and
(!)*$' & (!)0,.$' (*)
(ii) ('.-0)($,''') & (!)0,+$' (*)
(iii) (!)0,+$' & $,'''x 1 (!)*$', were x represents te brea#2even future spot rate.
(+)
0+$' & $'''x 1 *$'
0+$' 2*$' & $'''x
*3''/$''' & x & (!)'.$4'' (*)
O5
6lternatively, we can ta#e into consideration for anoter answer
Forward & Options
(!)'.-3 & (!)'.-. 1 (!)'.'$
c) If te ban# 7e"ara switces to an easy monetary policy, te value of rin""it will drop as
fears of inflation rise. !ort term 8alaysia interest rates will fall but ten will rise as
investors see# to protect temselves from i"er anticipated inflation.
9on" term rates will probably rise immediately because of fears of future inflation.
,owever, if te "rowt in te money supply stimulated te economy to "row more rapidly
tan it oterwise would, te value of te 5in""it would rise and so real interest rates.
1
($ mar#s)
Quest!" 2
(a)
+) :ifficult to mana"e economy were 87; ave extensive investment (e". 6ustralia and
;anada). %is is due to 87;s ave external sources of finance tat blunt te local monetary
policy.
*) 8a#e te forei"n excan"e mar#et volatile. %is can be done to te movin" of funds from one
place to anoter by see#in" better yields
0) %ey can defy political direction of teir own "overnment or te forei"n "overnment
.) %ey can concentrate s#ill <ob at ome ot menial <ob abroad
$) 87; can also manipulate prices and spread forei"n culture
(- mar#s)
(b)
!tep +
(ft =e')/e' x 0-'/n x+'' & r2rf
(+.*>33 = +.*$'')/+.*$'' x 0-'/3' x+'' & $.-? 2 $..?
. .
3.$-? @ '.'$?
%erefore ;overed Interest 6rbitra"e exist
(*m)
ii) !tep *
(+1r) & (+1rf)f+/eo
(+ 1 '.'$-/.) & (+ 1 '.'$./.)+.*>33/+.*$''
+.'+. +.'0>>
Borrow from ,; and invest in F;
(*m)
iii)
(!) A mar#s
% & '
Borrow (! B$.-?/.
;onvert to A B(!+.*$
Invest A B $..?/.
Cnter contract to sell A 0 mt forward
B (!+.*>33 / A
+m
(+m) 4'','''
(4'',''')
+
+
% & 0 mont
5eceive A investment proceed
;onvert to (! B (! +.*>33/ A Pay
(! loan D+m x (+ 1 '.'$-/.)E
+,'0>,>.*.3*
+,'+.,'''
4+',4''
(4+',4'')
*
*
*
;I6 Profit *0,>.*.3* *
(+' mar#s)
2
Quest!" #
(a)
,ed"in" transaction exposure by a forward contract is acieved by sellin" or buyin" forei"n
currency receivables or payables forward. On te oter and, money mar#et ed"e is acieved
by borrowin" or lendin" te present value of forei"n currency receivables or payables, tereby
creatin" offsettin" forei"n currency positions. If te interest rate parity is oldin", te two ed"in"
metods are eFuivalent.
(- mar#s)
(b)
6 futures contract is an excan"e2traded instrument wit standardiGed features specifyin"
contract siGe and delivery date. Futures contracts are mar#ed2to2mar#et daily to reflect can"es
in te settlement price. :elivery is seldom made in a futures mar#et. 5ater a reversin" trade is
made to close out a lon" or sort position.
(* mar#s)
(c)
Forward mar#et ,ed"eH
I0$,''' x +...++ & (!)$',.04.$'
(0 mar#s)
8oney 8ar#et ,ed"eH
6cct Payable H Borrow ,;, Invest F;
Invest F; J FKLL
(+ 1 r)
I0$,'''
( + 1 '.'4/.)
I0.,0+0.>0
(0 mar#s)
Borrow ,;J
I0.,0+0.>0 x +..3++ & (!$+,+-$.*'
(* mar#s)
;ost of borrowin" in 0 mont
(!$+,+-$.*' x ( + 1 '.'.*/.) & (!$+,>'*..0
(0 mar#s)
%erefore, sould use forward mar#et to reduce cost of payment
(+ mar#)
Quest!" 4
3
(a)
Cconomic exposure can be mana"ed trou"H
+) Balancin" te sensitivity of revenues and expenses to excan"e rate volatility
*) :iversifyin" te companies operation, sales, and location of te production facilities and te
sources of raw materials.
0) :iversifyin" te companys financin" base. ;ompany can switc its financin" sources wose
costs is lower. %ey also can ta#e advanta"e of unexpected interest differentials by mix of
borrowed currencies wit mix in receivables. %erefore it can reduce its default ris#.
(- mar#s)
(b)
i) e + & *.>4.' ( +1 '.'$$)/(+1'.'4)
& 58 *.>+3-
(0 mar#s)
ii) ; & (e+ =e')/ e'
& (*.>-.' = *.>4.')/ *.>4.'
& 2 '.''>*
(* mar#s)
6fter tax ,; loan
& rc(+2t) 1 (tc)
& '.'$$ (+2'.*$) 1 ('.*$)(2'.''>*)
& '.'03$ or 0.3$?
(0 mar#s)

iii) 6fter tax F; loan
& rfc( +1c)(+2t) 1c
& '.'4 (+2'.''>*)(+2'.*$) 1 (2'.''>*)
& '.'$*. or $.*.?
(. mar#s)
iv) Ocean Bi" sould coose borrowin" in rin""it loan because it is low.
(* mar#s)
Quest!" 5
(a)
%e company as eliminated excan"e rate ris# and credit ris#, but it as not eliminated all. %e
company as converted its (!: receivables into a fixed amount of rin""it to be received in te
future wic is set in nominal terms, but it does not #now wat te purcasin" power of tose
rin""it will be, tereby, incurrin" inflation ris#. 8oreover political ris# is not ta#en into
consideration
($ mar#s)
(b)
i) 6cc 5ec = 6cc Payable
I*$',''' 2 I$',''' & I*'','''
%ransaction exposure (acc receivable) & I*'',''' (* mar#s)
ii) Forward mar#et ed"e
6mount received & *'',''' x ..>$'' & 58 3$','''
(* mar#s)
4
8oney mar#et ed"eH
6cct 5eceivable H Borrow in F; J Invest in ,;
Borrow in F; H
PK & *'',''' /(+1'.+) & I+4+,4+4.+4
(* mar#s)
Invest in 58H
+4+,4+4.+4 x 58 ..4-*+ & 58 44.,'+4.+4
(* mar#s)
T $ 0 % RM
Borrow B +'? +4+,4+4.+4 (+)
;onvert to 58 B 58..4-*+ (+4+,4+4.+4) 44.,'+4.+4 (+)
Invest B +*? (44.,'+4.+4)
'
'
T $ 1&'
5eturn from investment B +*? 33',+''.0- (+)
(44.,'+4.+4 x +.'+*)
5eceive payment from buyer *'',''' (+)
Pay borrowin"s B +'? (*'',''') ((((((((
%otal amount received ' ))0*100+#, (*)
;oose ed"in" te 6ccount 5eceivable in 8oney mar#et since it "ives i"er return .
(+ mar#)
(%otal & +$ mar#s)
Quest!" ,
(a)
i. 584'','''/$..+>$ & I+.>,--3.$3
(* mar#s)
ii. 0.$44$ 1 '.''.' & 0.$3*$
58*.$m/0.$3*$ & (!)-3$,43..**
(. mar#s)
iii. $..+.$ = '.''** & $..+*0
I>$''' x $..+*0 & 58.'$,3**.$'
(. mar#s)
iv. bid & $..+.$/0.$44$ & +.$'44
6s# & $..+>$/0.$4>0 & +.$+'*
(* mar#s)
(b)
;ountertrade is wen "oods and services are excan"e for "oods and services between two
parties were part or no monetary payment is involved.
5
(* mar#s)
6dvanta"es of ;ountertradeH
+) ;ountertrade enables members of cartels to undercut an a"reed on price witout formally
doin" so
*) It reduces te ris# face by country tat contracts for a new manufacturin" facility
:isadvanta"esH
+) Moods ta#en in countertrade are usually undesirable
*) %radin" details are difficult to wor# out
(+.$ mar#s x . & - mar#s)
(*' mar#s)
6