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Unformatted text preview: UNIVERSITY OF SOUTHERN CALIFORNIA
Marshall School of Business
INTERNATIONAL FINANCIAL MANAGEMENT
PROBLEM SET # 5: Multiple Choice Questions:
M5.7 (7.12a) The above table shows the annualized yield for pure discount bonds and the
associated prices. Which line includes an incorrect entry? A
7.30% Line A is incorrect.
Line B is incorrect.
Line C is incorrect.
Lines A and C are incorrect.
All three lines are correct. Prices & Maturity (days)
0.9648 FBE 436
Problem Set #5 Problem #5.1:
Discuss the similarities and differences between a Currency Board and Dollarization. In terms
of their different economic impacts, market credibility and feasibility. Problem #5.2:
Describe the “fatal flaw” of fixed FX regimes. Why do countries often peg their FX rates
anyway? Problem #5.3:
• What is an interest rate swap? • What is a currency swap? • What is the difference between a currency swap and parallel loans? • What is the difference between a currency swap and an appropriate series of forward
contracts? Problem #5.4:
Barthez Ltd. can borrow Euros at 6.25% and $s at 7.45%; it is a European company that needs to
have $ debt in its Balance sheet.
Beasley Inc. can borrow $s at 7.00% and Euros at 6.75%; it is a US company that would like to
incur some Euro debt. Could these firms profitably enter into a swap arrangement –the current
FX is 1.15 $/€?
Hint: Compute the cost of borrowing $100 worth of each of the currencies for each company
and compare the total costs of borrowing on their own versus swapping. Problem #5.5:
You purchased a WEBS one year ago, for 500,000 fc. It current value is 600,000 fc.
When you purchased the WEBS, the local 1-year interest rate was 15.0%, the FX rate was
0.6522 $/fc, and the local CPI was 120.0.
Now, the FX rate is 0.5336, and the CPI is 134.4. What was your return in local currency, your
real return in the local currency, and your return in $s? 2 FBE 436
Problem Set #5 Problem #5.6:
You estimate an APT regression on the total returns of Owen Inc. The table below shows the
estimates with their significance levels, as well as estimates of the factor risk premia: What is
the expected return for Owen Inc.? The current short and long term T Bill and Bond rates are
3.8% and 4.6%, respectively.
RM - Rf
0.550 Risk Premium
4.10% Problem #5.7 (optional):
Note: There was no numerical example for FX operations provided in class because of time
constraints. Try your hand at working this out from the information in class and in the text.
The CB of Erehwon is contemplating a $15 billion FX operation in $s to support its depreciating
currency. Below is the CB’s Balance Sheet.
Trace through the transactions required for an unsterilized and a sterilized
If the CB’s FX reserves were in ¥, how would this sequence change?
1,100 High Powered Money
80 Other Liabilities
1,215 3 ...
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This note was uploaded on 01/16/2010 for the course FBE 436 at USC.