Questions of IF

Unit 1 Spot Exchange Market

Why do you think international finance is necessary for the multinational corporation? 

What is international finance? How is international financial management different from domestic financial management?                                                                                 

What is the difference between the retail or client market and the wholesale or interbank market for exchange market?

What do you mean by a spot exchange market? Who are the participants of spot exchange market?

Unit 2 Forward and Future Exchange Markets

What do you mean by forward exchange rate? Why does forward rate differ from spot rate?                                                                                      

What are the major differences between currency forward and futures contract? Explain.  

What is foreign exchange rate? Explain determinants of exchange rates?

What is currency option? How do American options differ from European options?

Unit 3 Balance of Payments

Define Balance of payment. Give a brief account of components of Balance of Payment.

Why would it be useful to examine a country’s balance-of-payment data?         

What is a current-account surplus?

What is a capital-account deficit?

Unit 4 International Parity Conditions

What do you mean purchasing power parity? Explain the absolute and relative purchasing power parity.   

What is purchasing power parity? Explain the reasons for departure from purchasing power parity.

What is interest rate parity? Explain the reasons for violation of interest parity conditions.

What do you mean Law of one price?

Unit 5 Foreign exchange risk and exposures

What do you mean by foreign exchange risk exposure? Explain the various hedging techniques available to manage foreign exchange risk.

What is meant by “operating exposure”?

What happens to an importer’s total revenue and cost after a devaluation of the importer’s currency? Explain 

What happens to an exporter’
s total revenue and cost after a devaluation of the exporter’s currency? Explain

What happens to an importer’s total revenue and cost after a revaluation of the importer’s currency? Explain

What happens to an exporter’s total revenue and cost after a revaluation of the exporter’s currency? Explain

Unit 6 International trade, instruments and institutions

Explain the functions of Major institutions regulating international trade.

Explain the different forms of financing international trade.

What is letter of credit? How letter of credit works? What are the different documents in letter of credit? Explain.

Unit 7 Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI)

What is foreign direct investment? What are the hindrances of poor inflow of foreign direct investment in Nepal?

What is foreign direct investment? What are the prospects of foreign direct investment in Nepal?

Explain the motives of foreign direct investment.

Explain the contribution of FDI in Nepalese economy.

What is foreign portfolio investment?

Write short notes:

Currency swap 

Spot rate

Forward rate

Bid-ask spread 

Operating exposure

 Letter of credit

Cross-exchange rate

Customer draft and wire transfer

Latin American Crisis

East Asian Crisis

Numerical Problems

1. Assume the exchange rate between Japanese yen and US dollar is ¥ 120.87 per US dollar and the exchange rate between British pound and US dollar is $1.5398 per pound. What is the cross rate of yen per pound.

2. A currency trader observes that in the spot exchange market, one U.S. dollar can be exchanged for 4.0828 Israeli shekel or for 111.23 Japanese yen.  What is the cross rate between the yen and the shekel; that is how many yen would you receive for every shekel exchanged?                                                                                                                       

3. The following rates appear in the foreign exchange market:

	Spot rate	2 month forward
Re/$	Rs.48.80 – 49.05	Rs.49.50 – 50.00

(a)     How many dollars should a firm sell to get Rs.49.50 million after two months?

(b)     How many rupees dose the firm require to pay to obtain US $200,000 in the spot market?

(c)     Assume the firm has US $50,000. How many rupees does the firm obtain in exchange for the US $?

(d)     Are forward rates at premium or discount? Determine the percentage also.

4. Consider the NPR/USD exchange rate of 72.01 – 72.61.                                                    

(i) What is the cost of buying NPR 100,000?

(ii) What is the cost of buying USD 1,000?

(iii) How much do you receive from the selling USD 1,000?

(iv) How much do you receive from selling NPR 100,000?

(v) Calculate the percentage bid-ask spread.

5. Compute the outright forward quotation from the following swap quotation.                            

Spot	30-day swap	90-day swap	180 day swap
1.4780 – 85	19 – 17	55 – 50	95 – 85

6. Compute the outright forward quotation from the following swap quotation.

Spot	1.5267 – 72
One-Month	32 – 30
Three-Month	57 – 54
Six-Month	145 – 138

7. A watch cost $110 in the USA and the same watch is selling at Rs.7823.75 in Nepal. What is the exchange rate between Nepalese currency and US dollar, using purchasing power parity?

8. Suppose price of the rice is US $4 per kg in US and GBP 2.5 in UK and spot exchange rate ($/£) is 1.70, then what should be the dollar equivalent price of rice in UK if PPP holds?  

9. Thailand and South Korea are running annual inflation rates of 5 percent and 7 percent respectively. The current spot exchange rate is won 18.50/Baht. What should be the value of the Thai baht in one year?

10. Assume the interest rate parity holds the 90-day security yields 15% p.a. in USA and 16% p.a. in UK. The spot rate between pound and dollar is $1.65 per pound.

a)       What is the 90-day forward exchange rate?

b)       Is the 90-day forward exchange rate trading at a premium or discount? 

11. A put option on Australian dollars with a strike price of $0.80 is purchased by a speculator for a premium of $0.02. If the Australian dollar’s spot rate is $0.74 on the expiration date, should the speculator exercise the option on this date or let the option expire? What is the net profit per unit to the speculator? What is the net profit per unit to the seller of this put option?

12. A call option on Canadian dollars with a strike price of $0.60 is purchased by a speculator for a premium of $0.06 per unit. Assume there are 50,000 units in this option contract. If the Canadian dollar’s spot rate is $0.65 at the time the option is exercised, what is the net profit per unit to the speculator? What is the net profit for one contract? What would the spot rate need to be at the time the option is exercised for the speculator to bread even? What is the net profit per unit to the seller of this option?

13. If you have bought a call option at a strike price of Rs.110 per pound and if the   market price of pound at maturity is Rs.108 per dollar, would you exercise the option? Explain why or why not. Why are options attractive to investors as compared to forward contract? Elucidate.             

14. Jamey is a speculator who buys a British pound call option with a strike price of $1.40 and a December settlement date. The current spot price as of that date is about $1.38. Jamey pays a premium of $0.015 per unit of the call option assume there are no brokerage fees. Just before the expiration date, the spot rate of the British pound reaches $1.43. At this time Jamey exercises the call option. Assume one option contract specifies 31250 units. What is the net profit per unit to the speculator? What is the net profit for one contract?

15. The current spot exchange rate is $1.55/£ and three-month forward rate is $1.50/£. On the basis of your analysis of the exchange rate, you are pretty confident that the spot exchange rate will be $1.52/£ in three months. Assume that you would like to buy or sell £1,000,000.

i. What actions do you need to take to speculate in the forward market? What is the expected dollar profit from speculation?

ii. What would be your speculative profit in dollar terms if the spot exchange rate actually turns out to be $1.46/£?                  

16. A television costs $1000 in the U.K. The same television costs Rs.73,540 in Nepal.   If purchasing power parity holds, what is the spot exchange rate between U. S. dollar and Nepalese Rs.                                                                                                                            

17. Currently, the spot rate is $1.50/£ and the three-month forward exchange rate $1.52/£. The three-month interest rate is 8.0 percent per annum in the U.S. and 5.8 percent per annum in the U.K. Assume that you can borrow as much as $1,500,000 or £1,000,000.

i. Determine whether interest rate parity is currently holding.

ii. If IRP is not holding, how would you carry out covered interest arbitrage? Show all the steps and determine the arbitrage profit.

18. A financial manager of a French company has FF 25 million that she can invest for one year. She is considering the possibility of either investing in France where a 1-year investment yields an interest rate of 9 percent or in Germany where a 1-year investment produces an interest rate of 12 percent. The current exchange rate is: DM 3.35/FF. Calculate the 1-year forward exchange rate that will make the financial manager indifferent between investing and in France or Germany.

19. The current spot exchange rate between US dollar and Indian rupees is: INR40.11/US$, and the 1-year forward rate is: INR43.52/US$. The expected inflation rate in India is 8.5 percent. What is the expected inflation rate in US?                          

20. Suppose that Aviva has contracted to sell 100 pairs of jeans per year to Britain at $24 per pair and to buy 200 yards of denim from Britain in this same period for £2 per yard. Suppose that 2 yards of denim are required per pair and that the labor cost for each pair is $8. Suppose that at the time of contracting the exchange rate is S($/£) = 1.5 and that the dollar is then devalued to S($/£) = $2. The elasticity of demand for Aviva jeans in Britain is -2 and that after the contract expire Aviva raises the price of jeans to $25 per pair.

1. What are the gains/losses from transaction exposure on payables and receivables?

2. What are the gains/losses from the extra competitiveness of Aviva’s jeans, that is, from operating exposure?