AFW 3331 2008 S1 QUESTIONS.pdf

OFFICE USE ONLY

Monash University Semester One Examination 2008 Faculty of Business and Economics Department of Accounting and Finance EXAM CODES:

AFF3331/AFW3331

TITLE OF PAPER:

INTERNATIONAL BANKING AND FINANCE

EXAM DURATION:

3 hours

READING TIME:

10 minutes

THIS PAPER IS FOR STUDENTS STUDYING AT: (office use only - tick where applicable)  Berwick

 Clayton

 Peninsula

 Distance Education

 Open Learning

 Caulfield

 Gippsland

Sunway

 Enhancement Studies  Other (specify)

During an exam, you must not have in your possession, a book, notes, paper, calculator, pencil case, mobile phone or any other material/item which has not been authorised for the exam or specifically permitted as noted below. Any material or item on your desk, chair or person will be deemed to be in your possession. You are reminded that possession of unauthorised materials in an exam is a disciplinable offence under Monash Statute 4.1. AUTHORISED MATERIALS  YES

CALCULATORS

 NO

(Permitted calculators: Citizen SRT-135, Casio FX82MS scientific calculator, the Casio FX82AU scientific calculator, and Sharp EL-735 financial calculator, or calculators with an 'approved for use' Faculty label)

OPEN BOOK SPECIFICALLY PERMITTED ITEMS if yes, items permitted are:

 YES  YES

 NO  NO

This paper consists of four (4) sections printed on seven (7) pages. Students must pass this paper in order to pass this unit. Section A = 30%; Section B =10%; Section C = 30%; Section D = 30%; Total =100% which represents 60% of the total assessment for the unit. PLEASE CHECK YOUR PAPER BEFORE COMMENCING. THIS IS A FINAL PAPER.

STUDENT ID: …………………………...

DESK NUMBER: …………………….

THIS EXAMINATION PAPER MUST BE INSERTED INTO THE ANSWER BOOK AT THE COMPLETION OF THE PAPER. NO EXAMINATION PAPERS SHOULD BE REMOVED FROM THE EXAMINATION ROOM

AFF3331- s1 2008 .doc

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AFF3331 INTERNATIONAL BANKING AND FINANCE

Section A (30 marks) Answer ALL questions. Each question is worth 2 marks. Record your answers on the FIRST page of your answer booklet. DO NOT record your answers on this paper.

1.

A country that regulates the rate at which its currency is exchanged for all other currencies is considered to have a __________ exchange rate system. (a) volatile (b) floating or flexible (c) fixed or managed (d) spot

2.

Under the gold standard of currency exchange that existed from 1879 to 1914, an ounce of gold cost $20.67 in U.S. dollars and £4.2474 in British pounds. Therefore, the exchange rate of pounds per dollar under this fixed exchange regime was (a) £48665/$ (b) £22050/$ (c) £02055/$ (d) $02055/£

3.

A small economy country whose GDP is heavily dependent on trade with the United States could use a (an) __________ exchange rate regime to minimize the risk to their economy that could arise due to unfavorable changes in the exchange rate. (a) pegged exchange rate with the Euro (b) pegged exchange rate with the USD (c) independent floating (d) currency board

4.

The relationship between the percentage change in the spot exchange rate over time and the differential between comparable interest rates in different national capital markets is known as __________. (a) absolute PPP (b) the international Fisher Effect (c) relative PPP (d) Fisher Effect

This space has been left blank

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AFF3331 INTERNATIONAL BANKING AND FINANCE 5.

Other things equal, and assuming efficient markets, if a Honda Accord costs $18, 365 in the U.S. then at an exchange rate of $1.43/£, the Honda Accord should cost __________ in Great Britain. (a) 11,343£ (b) 12,843£ (c) 12,873£ (d) 12,183£

6.

What was the forward premium on the pound if the spot rate on January 20, 2005 was ₤0.5156$ and the 180 day forward rate was ₤0.5000/$? (a) 6.24% (b) 3.12% (c) 1.56% (d) 6.05%

7.

When categorizing investments for the financial account component of the balance of payments the __________ is an investment where the investor has no control whereas the __________ is an investment where the investor has control over the asset. (a) portfolio investment; direct investment (b) direct investment; indirect investment (c) portfolio investment; indirect investment (d) direct investment; portfolio investment

8.

Which of the following would NOT be considered a direct investment either into or from the United States? (a) The purchase of U.S. Treasury (debt) securities. (b) Ford Motor Company building an assembly plant in Mexico. (c) Honda of Japan building a manufacturing plant in Alabama. (d) Intel purchasing a chip manufacturing plant in Thailand.

9.

Under the gold standard of currency exchange that existed from 1879 to 1914, an ounce of gold cost $20.67 in U.S. dollars and £4.2474 in British pounds. Therefore, the exchange rate of pounds per dollar under this fixed exchange regime was (a) £4.8665/$. (b) £0.2055/$. (c) always changing because the price of gold was always changing. (d) £0.8665/$.

10. The price of one country’s currency in units of another currency or commodity is the __________. (a) foreign interest rate (b) foreign currency exchange rate (c) par value (d) international rate

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AFF3331 INTERNATIONAL BANKING AND FINANCE

11. You check the CNN web site and find that the Japanese yen is trading at a rate of 130 yen per dollar. This rate of exchange is typically referred to as the __________. (a) forward rate (b) par rate (c) spot rate (d) cross rate 12. All exchange-traded options are settled through a clearing house but over-the-counter

options are not and are thus subject to greater __________ risk. (a) exchange rate (b) country (c) counterparty (d) none of the above 13. Andrea Cujoli is a currency speculator who enjoys “betting” on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$ and the 6-month forward rate is ¥128.53/$. Andrea thinks the yen will move to ¥128.00/$ in the next six months. If Andrea’s expectations are correct, then she could profit in the forward market by __________ and then __________. (a) there is not enough information to answer the question (b) buying yen for ¥128.00/$, selling yen at ¥128.53/$ (c) buying yen for ¥128.53/$, selling yen at ¥128.00/$ (d) she could not profit in the forward market 14. A basis point is __________. (a) 1.00% (b) 0.10% (c) 10.00% (d) 0.01% 15. LIBOR is an acronym for (a) Latest Interest Being Offered Rate (b) Large International Bank Offered Rate (c) Least Interest Bearing: Official Rate (d) London Interbank Offered Rate

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AFF3331 INTERNATIONAL BANKING AND FINANCE

Section B (10 marks) Short answer questions: (5 × 2 marks) Briefly describe the following in your own words (answer any 5). (a) (b) (c) (d) (e) (f)

Currency Board Target Zone Exchange Rate System Long, Short and Square Position in FX Market Relative PPP Foreign Bond Translation Exposure

Section C (30 marks) Written discussion questions (answer ALL questions in this section) Question 1 (a)

Explain the differences among transaction, operating, and translation exposure.

(b)

Does foreign currency exchange hedging both reduce risk and increase expected value? Explain, and list several arguments in favor of currency risk management and several against. (5 + 5 = 10 marks)

Question 2 (a) Compare and contrast foreign currency future options and futures. Identify situations when

you may prefer one vs. the other when speculating on foreign exchange. (b) Define spot, forward, and swap transactions in the foreign exchange market and give an example of how each could be used. (5 + 5 = 10 marks)

Question 3 Defined each of this term and explain how they are related to each other: i. PPP (Purchasing Power Parity) ii. FE (Fisher Effect) iii. IFE (International Fisher Effects) iv. IRP (Interest rate Parity) (10 marks) .

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AFF3331 INTERNATIONAL BANKING AND FINANCE

Section D (30 marks) Answer ALL questions in this section Question 1 Suppose today's exchange rate is $0.62/DM. The 6-month interest rates on dollars and DM are 6% and 3%, respectively. The 6-month forward rate is $0.6185. A foreign exchange advisory service has predicted that the DM will appreciate to $0.64 within six months. (a)

How would you use forward contracts to profit in the above situation?

(b)

How would you use money market instruments (borrowing and lending) to profit?

(c)

Which alternatives (forward contracts or money market instruments) would you prefer? Why? (4 + 4 + 2 = 10 marks)

Question 2 Two countries, Australia and England, produce only one good, wheat. Suppose the price of wheat is A$5.25 in Australia and £1.35 in England. (a)

According to the law of one price, what should the A$/£ spot exchange rate be? (i.e. A$ per British Pound).

(b)

Suppose the price of wheat over the next year is expected to rise to A$5.50 in Australia and to £1.60 in England, what should the one year $/£ forward rate be?

(c)

If the Australian government imposes a tariff of A$1.20 per bushel on wheat imported from England, what is the maximum possible change in the spot exchange rate that could occur? (3 + 3 + 4 = 10 marks)

Question 3 Part A An importer based in Austria that imports kangaroo meat from Australia wishes to buy Australian dollars (A$) with Austrian Schilling (ATS). The following rates are quoted: In Austria US$ 1 = ATS 15.2650 – 15.2660 In Melbourne A$ 1 = ATS 8.9750 – 8.9830 In Sydney A$ 1 = US$ 0.5875 – 0.5885 In Hong Kong ATS 1 = A$ 0.1110 – 0.1115 a)

Determine the best Australian dollar against Austrian Schilling rate (i.e. express one unit of A$ in terms of ATS) at which one may buy Australian dollar with Austrian Schilling

b)

Evaluate at this rate the cost in Austrian Schilling of buying 5,000 kg of the premium kangaroo meat that cost A$12 per kilo. (3 + 2½ = 5½ marks)

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Part B Complete the following exchange-rate matrix, quoting the US dollar as unit currency. Assume that there are no transaction costs. Currency Purchased Currency

$

£

Sfr

¥

1

2.0

0.6

0.005

Sold $ £

1

Sfr

1

¥

1 (4½ marks)

END OF EXAMINATION

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