fbe436 hw5


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Unformatted text preview: UNIVERSITY OF SOUTHERN CALIFORNIA Marshall School of Business INTERNATIONAL FINANCIAL MANAGEMENT FBE 436 Aris Protopapadakis 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 B C () () () () () a. b. c. d. e. Yields 5.50% 6.20% 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) 90 180 0.9864 0.9732 0.9847 0.9699 0.9821 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. Risk Factor RM - Rf SMB HLM Coefficient 1.2250 0.7830 0.2256 P-Value 0.000 0.030 0.550 Risk Premium 6.50% 1.60% 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. (1) Trace through the transactions required for an unsterilized and a sterilized intervention. (2) If the CB’s FX reserves were in ¥, how would this sequence change? Assets Gov Securities Foreign Securities Gold Liabilities 1,100 High Powered Money 80 Other Liabilities 35 Equity 1,215 1,050 120 45 1,215 3 ...
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This note was uploaded on 01/16/2010 for the course FBE 436 at USC.

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