1. (Weight 30%) a). Derivative transaction can be carried out for the following purposes: trading (speculation), hedging, and yield enhancement. Give an example of the purposeful derivatives transaction for yield enhancement. b). PT Emarty Indonesia has just issued 5 years USD Eurobonds semi-annually with a floating rate of 6 month LIBOR + 2.50%. Financial Manager of the company estimates that the USD interest rate will increase in the following 5 years. For that reasons the manager has entered into IRS transaction with the following terms and conditions: PT Emarty Indonesia as 6% fixed rate payer Bank West Fargo as floating rate payer 6 month LIBOR + 2.00% Question: What is PT Emarty Indonesia net interest cost of borrowing after the hedging transaction? c). An importer businessman is faced with a choice for hedging against the risk of strengthening USD exchange rate against IDR. He has a choice between doing an outright currency forward transaction or a plain vanilla USD call option. Using charts please show the risk and reward for short and long currency forward and compared them to both short and long USD call options. d). The current condition of the foreign exchange market is as follows: o Spot USD/IDR 14.500 14.525 Meanwhile, the current prices in the money market are as follows: o Interest rate of 3 month USD deposit is 2.00 2.50% pa.

1. (Weight 30%) a). Derivative transaction can be carried out for the following purposes: trading (speculation), hedging, and yield enhancement. Give an example of the purposeful derivatives transaction for yield enhancement. b). PT Emarty Indonesia has just issued 5 years USD Eurobonds semi-annually with a floating rate of 6 month LIBOR + 2.50%. Financial Manager of the company estimates that the USD interest rate will increase in the following 5 years. For that reasons the manager has entered into IRS transaction with the following terms and conditions: PT Emarty Indonesia as 6% fixed rate payer Bank West Fargo as floating rate payer 6 month LIBOR + 2.00% Question: What is PT Emarty Indonesia net interest cost of borrowing after the hedging transaction? c). An importer businessman is faced with a choice for hedging against the risk of strengthening USD exchange rate against IDR. He has a choice between doing an outright currency forward transaction or a plain vanilla USD call option. Using charts please show the risk and reward for short and long currency forward and compared them to both short and long USD call options. The current condition of the foreign exchange market is as follows: o Spot USD/IDR 14.500 14.525 Meanwhile, the current prices in the money market are as follows: o Interest rate of 3 month USD deposit is 2.00 2.50% pa.