FINAL EXAMINATION

INTERNATIONAL FINANCE MANAGEMENT

Students are allowed to use the materials when doing the test.
Students submit work (file .pdf or .doc) on LMS before 07AM OCT 21st 2024

Student Name:----------------------------------------------------------------------------------------------

MSSV:--------------------------------------------------------------------------------------------------------

QUESTION 1. Student fill in the blank below and solve the problem (04 POINT).

The 1-year deposit and lending interest rate in New York is............. %/year; in London
is..............%/year.
Spot Rate 1GBP = USD 1.2440 - 1.2470
The 1 year forward rate 1GBP = USD 1.1810 – 1.1880
The price of GBP on a 1-year Future contract is 1GBP = USD 1.2640.

I.1. Is GBP in premium (in comparision to USD) and the 1-year deposit and lending
interest rate in New York must be higher than in London? (01 POINT).

a. Yes, GBP is in premium (in comparision to USD, 1 year) and the 1-year deposit and lending
interest rate in New York must be higher than in London
b. No, GBP is in discount (in comparision to USD, 1 year) and the 1-year deposit and lending
interest rate in New York must be lower than in London
c. Yes, GBP is in premium (in comparision to USD, 1 year) and the 1-year deposit and lending
interest rate in New York must be lower than in London
d. No, GBP is in discount (in comparision to USD, 1 year) and the 1-year deposit and lending
interest rate in New York must be higher than in London

To determine if GBP is at a premium or discount compared to USD, and to check the interest
rate relationship, we need to compare the spot rate with the forward rate.

Spot rate (mid-point): (1.2440 + 1.2470) / 2 = 1.2455 USD/GBP Forward rate (mid-point):
(1.1810 + 1.1880) / 2 = 1.1845 USD/GBP

Since the forward rate is lower than the spot rate, GBP is at a discount compared to USD.

We're given that the interest rate in New York (USD) is 4% and in London (GBP) is 3%. This
aligns with the interest rate parity theory, as the currency with the higher interest rate (USD)
should appreciate against the currency with the lower interest rate (GBP).

Therefore, the correct answer is: d. No, GBP is in discount (in comparison to USD, 1 year) and
the 1-year deposit and lending interest rate in New York must be higher than in London

I.2. Is there an arbitrage opportunity and we can compute it? Explain your answer. (01
POINT).

a. Yes, there is an arbitrage opportunity and we can compute it

b. No, there is not an arbitrage opportunity and we can compute it
c. No, there is not an arbitrage opportunity and we can not compute it
d. Yes, there is an arbitrage opportunity but we can not compute it
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I.3. Should an American exporter who will receive £2 million within the next 1 year hedge
this payment by using the 1 year forward contract (s) if this exporter makes decisions
based on the theory of interest rate parity? (01 POINT).

a. Yes, he should hedge this payment by using an 1-year forward contract

b. Yes, he should hedge this payment by using 32 1-year standardized forward contracts
c. No, he should not hedge this payment by using an 1-year forward contract
d. No, he should not hedge this payment by using 32 1-year standardized forward contracts

I.4. Should an American importer who will pay £3 million within the next 1 year hedge this
payment by using an 1 year forward contract if this importer makes decisions based on the
theory of interest rate parity (01 POINT).

a. Yes, he should hedge this payment by using an 1-year forward contract

b. Yes, he should hedge this payment by using 32 1-year standardized forward contracts
c. No, he should not hedge this payment by using an 1-year forward contract
d. No, he should not hedge this payment by using 32 1-year standardized forward contracts

II.1. Student fill in the blank below and solve the problem (01 POINT).

Assume today’s settlement price on a CME EUR futures contract is $1.3140/EUR. You
have a short position in one contract. Your performance bond account currently (your
Future Account) has a balance of $1,700.
The next three days’ settlement prices are $........, $........ and $.........
Calculate the changes in the performance bond account from daily marking-to-market and
the balance of the performance bond account after the third day.

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II.2. Do problem II.1 again assuming you have a long position in the futures contract. (01
POINT).
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III. Student fill in the blank below and solve the problem (04 POINT).

An investor is considering the purchase of five three-month Japanese yen call options with a striking
price of ……..cents per 100 yen. The premium is …….cents per 100 yen. The spot price is ..........cents
per 100 yen and the 90-day forward rate is 95.71 cents.
The investor believes the yen will appreciate to $1.00 per 100 yen over the next three months. As the
investor’s assistant, you have been asked to prepare the following:

1. Graph the call option cash flow schedule. (01 POINT).

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2. Determine the investor’s profit if the yen appreciates to $1.00/100 yen. (01 POINT).

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3. Determine the investor’s profit if the yen only appreciates to the forward rate. (01 POINT).
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4. Determine the future spot price at which the speculator will only break even.
Suggested Solution to the Options Speculator. (01 POINT).
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IV. BONUS QUESTION (01 POINT)

Suggest (Graph and Draw the profit table) an option strategy for a strongly decrease (but
may also increase) in the price of The Japanese Yen (in comparison to USD) in next 3
months.