Unformatted text preview: UNIVERSITY OF SOUTHERN CALIFORNIA
Marshall School of Business
INTERNATIONAL FINANCIAL MANAGEMENT
PROBLEM SET # 4: Multiple Choice Questions:
4.1 A German investor has DM 500,000 to invest for 1 year in US securities. One-year US
Treasury bills offer a yield of 5% while German Treasury bills offer only 3%. What is
the realized return on the investment after one year?
e. 4.2 2%
We can’t say without additional information. A Japanese investor buys one-year US Treasury bills with a yield of 5%. The current FX
rate is 120 ¥/$. What is the return on the investment if the exchange rate is 140 at the end
of the year?
e. 4.3 5.00%
-11.11% Assume that the current $/€ spot exchange rate is 0.8900 while a one month $/€ forward
contract is quoted as 0.8891.
e. The dollar is trading at a forward premium, the EUR at a forward discount.
The dollar is trading at a forward premium, the EUR at a forward premium.
The dollar is trading at a forward discount the EUR at a forward premium.
The dollar is trading at a forward discount the EUR at a forward discount.
We can’t say without additional information. 1 FBE 436
Problem Set #4 4.4 Assume that the current MXP/$ spot exchange rate is 10 while the corresponding six and
twelve month forward rates are 11 and 12. The $ is trading at a
e. 4.5 forward premium for the six month contract, a discount for the twelve month
forward discount for the six month contract, a premium for the twelve month
forward discount for both forward contracts.
forward premium for both forward contracts.
We can’t say without additional information. A US wine producer sells her whole production in Brazil every fall. It is now spring and
the price of the next shipment has been fixed in Brazilian Real (BRL). To secure the $
revenue of her next wine shipment she will,
e. 4.6 Sell BRL forward.
Buy BRL forward.
Do nothing and wait.
Buy BRL spot.
None of the above. When covered interest rate parity holds
e. 4.7 there is no forward arbitrage opportunity.
forward exchange rates are always above spot exchange rates.
forward exchange rates are always below spot exchange rates.
forward exchange rate are always equal to spot exchange rates.
none of the above. According to the Uncovered Interest Rate Parity if the market expects an appreciation of
the US$ against both the DM and the ¥, and a depreciation of the DM against the ¥ in the
short run, then the short term interest rates can be ranked as
e. iJPY < iDEM < iUSD.
iJPY < iUSD < iDEM.
iUSD < iJPY < iDEM.
iUSD < iDEM < iJPY.
iDEM < iJPY < iUSD. 2 FBE 436
Problem Set #4 4.8 The September Swiss Franc (SFR) futures contract at the IMM is trading at 0.6939
$/SFR while the current spot rate is 0.6809. The standard contract size is SFR 125,000.
AT&T has a net debt of SFR 10,000,000 spot (short position) and wishes to eliminate all
risk. To do so AT&T will
e. buy more than 80 futures contracts.
buy 80 futures contracts.
buy less than 80 futures contracts.
sell 80 futures contracts.
none of the above. 4.9
Assets bearing fixed interest are not subject to FX risk if uncovered IRPT holds. Note:
“UIRPT holds” means that the actual FX rate varies randomly around the value predicted by the
a. because interest rate differentials compensate for the expected depreciation of the FX
b. since the forward contract part of IRPT automatically hedges the FX exposure.
c. because in this case the cost of forward cover is zero.
d. only if the home and foreign interest rates are equal.
e. none of the above. 3 FBE 436
Problem Set #4 Problem #4.1:
Suppose that the ¥ and Canadian $ spot and forward were quoted as follows: ¥x100
0.6470 Forward 30
0.6468 Forward 90
0.6455 Compute forward the premia or discounts for the Canadian $ and the Japanese ¥. What
do you think the 180 day forward premia would look like? Problem #4.2:
You have the following information:
iUS(90) = 15%, iUK(90) = 16%, S ($/£) = 2.00, F(90) = 1.995.
Interest rates are 90-day annualized.
d) Where would you invest?
Where would you borrow?
How would you arbitrage?
What is the profit of interest arbitrage per $ borrowed? Note: Do not use approximate formulae. Problem #4.3:
Derive a table similar to the first table below but where all covered yields are computed
from the £ sterling point of view. This requires computing appropriate cross spot and forward
rates (remember that the £ “year” is 365 days).
9.20 9.20 iUK
11.88 Covered Yields (for U.S. investor)
9.37 4 Toronto
0.8333 FBE 436
Problem Set #4 Problem #4.4:
Given the following information calculate the implied Forward rate for 90 and 180 days.
The eurocurrency rates are, DM 8.0%, $ 5.5% for 90 days, 9.0%, 6.0% for 180 days, and the
spot rate is 1.7100 DM/$. Problem #4.5:
JBC company has a known cash payment of SF50,000,000 to be made to a Swiss supplier in 100
days. The company wishes to fix or lock-in the nominal $ price of this payment using currently
available rates. The spot rate available to the company is 2.50SF/$, the forward rate for maturity
in 100 days is 2.465SF/$, and JBC faces a $ interest rate of 12.0% and an SF interest of 6.0%.
Given this information what is the smallest $ price that JBC can lock in with certainty for its
50,000,000 SF debt? Explain the procedure that the company will have to follow to obtain this
price. 5 FBE 436
Problem Set #4 Problem #4.6:
The near futures MXP contract (500,000 MXP) experiences the daily history shown below. If
the initial margin is $2,293, and the maintenance margin is $1,376, calculate when and how
much the holder experiences margin calls. Date Futures Prices $ Value 1-Nov 10.90000 $45,871.56 2-Nov 10.93815 $45,711.57 3-Nov 10.99284 $45,484.15 6-Nov 10.92688 $45,758.70 7-Nov 11.17274 $44,751.79 8-Nov 11.28447 $44,308.70 9-Nov 11.11520 $44,983.45 10-Nov 11.20968 $44,604.31 13-Nov 11.43387 $43,729.72 14-Nov 11.57680 $43,189.85 15-Nov 11.51891 $43,406.88 16-Nov 11.69169 $42,765.40 17-Nov 11.63324 Gains/Losses $42,980.30 Margin Calls:
Amounts: 6 Margin Margin
Call FBE 436
Problem Set #4 Problem (Old #2.5) #4.7:
On February 28, Delta Airlines is trying to decide how to go about hedging €50,000,000 in ticket
sales for 6 months. It faces the following market information:
Spot Rate ($/€)
Forward Rate (180 days)
Futures Price (Sept)
€ borrowing rate
€ deposit rate
$ borrowing rate
$ deposit rate
Call (Sept –on the money)
Put (Sept –on the money) 1.1800
$0.0870 Note: An “on the money” option has an exercise price at the current FX rate.
The face value of an option is ½ that of the corresponding futures contract.
Delta expects the $/€ rate to be 1.17 in 6 months.
(a) (b) What should Delta do in order to hedge this position,
(i) using the forward market,
(ii) using the futures market,
(iii) using a money market hedge,
(iv) using options?
Suppose in 6 months the $/€ became 1.1900 $/€. What did the ex-post hedging costs turn
out to be? 7 FBE 436
Problem Set #4 Problem (Old #4.7) #4.8:
Calculate the missing values in the table below:
Maturity 90 (days) U.S. U.K. Spot
6.130% U.S. /$ 7.000% U.K. /& 4.600% Germany 1.000% Forward 1 1 1.58600 Spot Forward 0.72410 Canada U.S.
1 U.K. Japan
Spot France Forward 0.01198 France 7.500% Spot Japan 8.000% Forward Germany Germany Spot Canada Forward 0.20602 Japan Spot Forward 0.73540 France Canada 1
1 8 1 ...
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This note was uploaded on 01/16/2010 for the course FBE 436 at USC.