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international financial management 14th

Questions and Answers of International Financial Management 14th

1. Plot the nominal and real values of the euro over the past 10 years using the European Central Bank data.
2. How closely correlated are changes in the real and nominal values of the euro over this period? That is, do the real and nominal exchange rates tend to move together?
3. By how much has the euro changed in real terms over this period?
4. By how much has the euro changed in nominal terms over this period?
5. Plot the following exchange rates over the past five years: euro/yen, U.S. dollar/euro, and euro/British pound. Are these exchange rates closely correlated with one another? You can use foreign
6. Based on your review of several recent currency interventions, what reasons were given by the monetary authorities for these interventions? How much money was expended during these interventions?
7. Based on your review of The Economist, the Wall Street Journal, the South China Morning Post, and The Financial Times, which countries are currently having currency problems? What are the causes
7. Historically, Spain has had high inflation and has seen its peseta continuously depreciate. In 1989, however, Spain joined the EMS and pegged the peseta to the Deutschmark. According to a Spanish
1. During the currency crisis of September 1992, the Bank of England borrowed 33 billion Deutschmarks (DM)from the Bundesbank when a British pound was worth DM 2.78, or $1.912. It sold these DM in
2. Suppose the central rates within the ERM for the French franc (FF) and Deutschmark (DM) are FF 6.90403:ECU 1 and DM 2.05853:ECU 1, respectively.(a) What is the cross-exchange rate between the
3. A Dutch company exporting to France had 3 million French francs (FF) due in 90 days. Suppose that the spot exchange rate against the Dutch guilder (DFl) was FF1 = DFl 0.3291.(a) Under the exchange
1. Plot the U.S. dollar value of the euro since its inception.How has the euro fared in the past year?
2. What explanations have been given for the decline of the euro in the first three years of its existence?
3. What are the objectives of the ECB? What policy tradeoffs does the ECB have to consider?
4. According to the IMF, what are its main purposes?
5. What proposals have been made by the IMF to reduce the incidence and severity of international financial crises?
3. Suppose the rupiah-U.S. dollar exchange rate is fixed, but Indonesian prices are rising faster than U.S. prices.Is the Indonesian rupiah appreciating or depreciating in real terms?
4. Comment on the following statement. “It makes sense to borrow during times of high inflation because you can repay the loan in cheaper money.”
5. Which is likely to be higher, a 150% ruble return in Russia or a 15% U.S. dollar return in the United States?
6. The interest rate in the UK is 12%; in Switzerland it is 5%. What are possible reasons for this interest rate differential? What is the most likely reason?
9. What factors might lead to persistent covered interest arbitrage opportunities among countries?10. In early 1989, Japanese interest rates were about 4 percentage points below U.S. rates. The wide
11. In 2000, Eurozone interest rates were below those of the US. By 2001, this had reversed. At the same time, the euro fell against the U.S. dollar. What might explain the divergent trends in
14. British government bonds, or gilts, currently are paying higher interest rates than comparable U.S. Treasury bonds. Suppose the Bank of England eases the money supply to drive down interest
1. From base price levels of 100 in 2000, Japanese and U.S. price levels in 2003 stood at 102 and 106, respectively.(a) If the 2000 Japanese yen-U.S. dollar exchange rate was ¥130, what should the
2. Two countries, the United States and the United Kingdom, produce only one good, wheat. Suppose the price of wheat is $3.25 in the United States and is £1.35 in England.(a) According to the law of
3. If expected inflation is 100% and the real required return is 5%, what should the nominal interest rate be according to the Fisher effect?
6. Suppose that in Japan the interest rate is 8% and inflation is expected to be 3%. Meanwhile, the expected inflation rate in France is 12%, and the UK interest rate is 14%. To the nearest whole
7. Chase Econometrics has just published projected inflation rates for the United States and the Eurozone for the next five years. U.S. inflation is expected to be 10% per year, and Eurozone
8. During 1995, the Mexican peso exchange rate rose from Mex$5.33∕US$ toMex $7.64∕US$. At the same time, U.S. inflation was approximately 3% in contrast to Mexican inflation of about 48.7%.(a) By
9. Suppose three-year deposit rates on Eurodollars and Eurofrancs (Swiss) are 12% and 7%, respectively. If the current spot rate for the Swiss franc is SFr 2.51∕$, what is the spot rate implied by
10. Assume that the interest rate is 16% on British pounds and 7% on euros. At the same time, inflation is running at an annual rate of 3% in the Eurozone and 9% in the UK.(a) If the euro is selling
11. Suppose the Eurosterling rate is 15% and the Eurodollar rate is 11.5%. What is the forward premium on the U.S. dollar? Explain.
12. Suppose the spot rates for the euro, British pound, and Swiss franc are $1.52, $2.01, and $0.98, respectively.The associated 90-day interest rates (annualized)are 8%, 16%, and 4%; the U.S. 90-day
1. Using data from the OECD, compare the most recent PPP exchange rates for the euro, British pound, and Japanese yen, with their nominal exchange rates. What differences do you observe? What
2. Using OECD data, plot the PPP exchange rates for the British pound, Japanese yen, Australian dollar, and Korean won. Have these PPP exchange rates gone up or down over time? What accounts for the
3. Find the 90-day interest rates from the Financial Times website for the U.S. dollar, Japanese yen, euro, Polish zloty, Russian ruble, and British pound. Are the yield differentials on these
4. Examine forecasts from www.tradingeconomics.com for the British pound, Japanese yen, Russian ruble, and euro.(a) Which of these currencies are forecast to appreciate and which to depreciate?(b)
5. How have forward premiums and discounts relative to the U.S. dollar changed over annual intervals during the past five years for the Japanese yen, British pound, and euro? Use beginning-of-year
1. In a freely floating exchange rate system, if the current account is running a deficit, what are the consequences for the nation’s balance on financial account and its overall balance of
2. .(a) As the value of the euro rises, what is likely to happen to the Eurozone balance on its current account?Explain.(b) What is likely to happen to the value of the U.S.dollar as the U.S.
3. Suppose Lufthansa, the German airline, buys$400 million worth of Boeing jets in 2010 and is financed by the U.S. Eximbank with a five-year loan that has no principal or interest payments due until
4. .(a) What happens to Argentina’s ability to repay its foreign loans if the United States restricts imports of Argentinian agricultural produce?(b) Suppose Brazil starts welcoming foreign
5. China’s overall saving rate is now nearly 50% of GDP, the highest in the world. China’s domestic investment rate, at 43%, is also high, but not as high as its saving rate. What do these facts
8. Suppose the trade imbalances of the second decade of the 21st century largely disappear during the next decade. What is likely to happen to the huge global capital flows that currently exist? What
1. How would each of the following transactions show up on the Eurozone balance-of-payments accounts?(a) Payment of €100 million in welfare benefits to Eurozone citizens living in Costa Rica(b) A
2. Set up the double-entry accounts showing the appropriate debits and credits associated with the following transactions:(a) Bollore Group, a French agribusiness, exports€80 million of soybeans to
4. The following transactions (expressed in € billions)take place during a year. Calculate the Eurozone merchandise-trade, current-account, financial-account, and official reserves balances.(a) The
5. During the Reagan era, 1981–1988, the U.S. current account moved from a tiny surplus to a large deficit. The following table provides U.S. macroeconomic data for that period.(a) Based on these
1. Which countries are the major customers for Eurozone of goods and services? Which countries are the major exporters of goods and services to the Eurozone?
2. Examine the Eurozone of payments over the past year.(a) What is the current-account balance, the financial-account balance, the capital-account balance, and the official reserves balance?(b) How
3. Based on historical data from the European Central Bank, what is the relationship between Eurozone trade balances and economic growth in the Eurozone?
4. What is the historical relationship between Eurozone trade balances and the value of the euro?
5. Select a country and analyze that country’s balance of payments for 8 to 12 years, subject to availability of data. You can find such data by using the Google search engine (at www.google.com)
6. For the country selected in exercise 5, analyze the exchange rate against the euro and/or U.S. dollar during the same period.(a) Is there any observable relationship between the
1. What are some indicators of country risk? Of country health?
5. Figure 6.7 describes some economic changes that have been instituted by Mexico.(a) What are the likely consequences of those changes?(b) Who are the winners and the losers from these economic
6. Many antipoverty activists believe that what keeps incomes and living standards from rising as fast in the developing world as they have in the developed world is an international conspiracy of
2. Between 1981 and 1987, direct foreign investment in the ThirdWorld plunged by more than 50%. TheWorld Bank was concerned about this decline and wanted to correct it by improving the investment
3. In the early 1990s, China decided that by 2000 it would boost its electricity-generating capacity by more than half. To do that, it planned on foreigners’ investing at least US$20 billion of the
5. The president of Malawi has asked you for advice on the likely economic consequences of the following five policies designed to improve Malawi’s economic environment.Describe the consequences of
1. Which country risk factors do Fitch, Moody’s, and Standard& Poor’s emphasize?
2. Pick a country (e.g., Australia, South Korea). Which is the general assessment of country risk of your chosen country? Has it increased or decreased over the past year? Which factors caused this
1. Answer the following questions using the data in Figure 7.5.(a) How many Swiss francs can you get for one euro?(b) How many euros can you get for one Swiss franc?
1. The $/€ exchange rate is €1 = $1.45, and the €/SFr exchange rate is SFr1 = €0.71. What is the SFr/$exchange rate?
2. Suppose the direct quote for the British pound in New York is 1.9110–5.(a) How much would £500,000 cost in New York?(b) What is the direct quote for U.S. dollars in London?
3. Banks acting for some of their clients have some discretion as to when they conduct the foreign exchange transactions on their behalf. Suppose that a client asks to transact €4 million at a rate
4. An investor wishes to buy euros spot (at $1.3908) and sell euros forward for 180 days (at $1.3996).(a) What is the swap rate on euros?(b) What is the forward premium or discount on 180-day euros?
5. Credit Suisse quotes spot and 90-day forward rates on the Swiss franc against the U.S. dollar of $0.7957–60, 8–13.(a) What are the outright 90-day forward rates that Credit Suisse is
6. Suppose BASF receives quotes of $0.009369–71 for the Japanese yen and $0.03675–6 for the Taiwan dollar(NT$).(a) How many U.S. dollars will BASF receive from the sale of ¥50 million?(b) What
7. Suppose the euro is quoted at 0.6064–80 against the U.S. dollar in London and the British pound s is quoted at 1.6244–59 against the U.S. dollar in Frankfurt.(a) Is there a profitable
8. As a foreign exchange trader at Sumitomo Bank, you have a customer who would like spot and 30-day forward Japanese yen quotes on Australian dollars. Current market rates are Spot
10. On checking the Telerate screen, you see the following exchange rate and interest rate quotes:Currency 90-day interest rates(annualized) Spot rates 90-day forward rates U.S. Dollar
1. Find the latest quotes for the euro, British pound, and Japanese yen. By how much did these currencies rise or fall against the U.S. dollar in the last day?
2. Have emerging market currencies generally risen or fallen in the past day?
3. What was the volume of forward contracts traded in the past year? You can use data from the BIS Annual Report to answer this question.
4. Find the currency cross rates provided by Bloomberg for the euro/British pound and euro/Japanese yen. Using these rates, calculate what the British pound/Japanese yen cross rate should be. Compare
1. On April 1, the spot price of the British pound was US$1.86 and the price of the June futures contract was$1.85. During April the British pound appreciated, so that by May 1 itwas selling for
1. On Monday morning, an investor takes a long position in a British pounds futures contract that matures on Wednesday afternoon. The agreed-upon price is US$1.78 for £62,500. At the close of
3. Suppose that Dell buys a Swiss franc futures contract(contract size is SFr 125,000) at a price of US$0.83. If the spot rate for the Swiss franc at the date of settlement is SFr 1 = $0.8250, what
5. Deutsche Bank sells a call option on euros (contract size is €500,000) at a premium of $0.04 per euro. If the exercise price is US$0.91 and the spot price of the euro at date of expiration is
6. Suppose you buy three June euro call options with a 90 strike price at a price of 2.3 (¢/€).(a) What would be your total U.S. dollar cost for these calls, ignoring broker fees?(b) After holding
7. A trader executes a “bear spread” on the Japanese yen consisting of a long 103 March put and a short 101 March put.(a) If the price of the 103 put is 2.81(100ths of ¢ / ¥), while the price
8. Apex Corporation must pay its Japanese supplier ¥125 million in three months. It is thinking of buying 20 yen call options (contract size is ¥12.50 million) at a strike price of US$0.00800 in
1. What currency futures contracts are currently being traded on the CME? Which currencies have exchange-traded options?
2. Have currency futures prices generally risen or fallen in the past day?
3. What currency options contracts are currently traded on the PHLX?
4. What are the implied volatilities of the euro and the Japanese yen over the past week and month? Are implied volatilities generally higher or lower for longer maturity contracts? Explain.
1. Assume that the spot price of the British pound is US$1.55, the 30-day annualized British pounds interest rate is 10%, the 30-day annualized U.S. dollar interest rate is 8.5%, and the annualized
2. Suppose the spot price of the Japanese yen is US$0.0109, the three-month annualized Japanese yen interest rate is 3%, the three-month annualized U.S. dollar interest rate is 6%, and the annualized
1. Suppose that the premium on March 20 on a June 20 Japanese yen put option is 0.0514 cents per yen at a strike price of US$0.0077. The forward rate for June 20 is ¥1 = $0.00787 and the quarterly
2. On June 25, the call premium on a December 25 contract is 6.65 cents per British pound at a strike price of$1.81/£. The 180-day (annualized) interest rate is 7.5%in London and 4.75% in New York.
2. What is a currency swap?
3. Comment on the following statement. “In order for one party to a swap to benefit, the other party must lose.”
5. Explain how Thales can use a forward rate agreement to lock in the cost of a one-year €25 million loan to be taken out in six months. Alternatively, explain how Thales can lock in the interest
1. Dell Computers wants to borrow pounds, and Virgin Airlines wants to borrow U.S. dollars. Because Dell is better known in the United States, it can borrow on its own U.S. dollars at 7% and British
2. In May 1988,Walt Disney Productions sold to Japanese investors a 20-year stream of projected yen royalties from Tokyo Disneyland. The present value of that stream of royalties, discounted at 6%
3. Suppose that Thaleswould like to borrowfixed-rate yen, whereas Korea Development Bank (KDB) would like to borrow floating-rate U.S. dollars. Thales can borrow fixed-rate yen at 4.5% or
4. At time t, Airbus borrows ¥12.8 billion at an interest rate of 1.2%, paid semiannually, for a period of two years. It then enters into a two-year Japanese yen/U.S.dollar swap with Deutsche Bank
1. What were the volumes of interest and currency swaps during the past year? How do these figures compare to those from the previous year?
2. What risk factors associated with swaps does the ISDA discuss on its website?

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