Background Mark Tan is a Singapore based importer of industrial machinery and equipment He is the MD of a family run business and is part of the 3rd generation of owners Over the last 50 years, his family has grown the business to become one of the top local firms in the field The annual sales runs into the hundreds of millions of SGD Marks firm has witnessed several crises over the years including the Asian Financial Crisis (1997 8), Dot com crisis (2000 1), Terrorist Attacks (Sep 11, 2001), Global Financial Crisis (2008 11) and now the latest the global Covid 19 pandemic Despite various challenges, prudent financial management and a keen eye on international finance have enabled the firm to weather many storms Mark and his team are aware that to ensure smooth operations of the business, they must track the international currency markets 24x7 to minimize risk and capitalize on any possibilities to gain from risk less opportunities Carefully read the following scenarios and answer the associated questions Scenario 1 Mark receives an order for Euro 25 million worth of machinery from one of his clients in Singapore The specific equipment is manufactured and exported from Germany Mark has mostly imported machines from China, Korea and Japan, and occasionally from Austria but never Germany He inquires and identifies a German exporter Gunther who is willing to do business with Mark Gunther can supply the machines in 120 days and expects payment on delivery in Euro 1) What are the risks Mark faces in entering this deal with Gunther Give details 2) How can Mark mitigate the SGD Euro exchange rate risk Explain what he should do Will he make a profit or loss on the exchange conversion Clearly show your calculations by using the following information Assume the spot rate S1 today is SGD 1 45 1 Euro and the forward rate today for payment 120 days down the road F120 is SGD 1 46 1 Euro There are anticipations that the SGD will depreciate by 2 against the Euro in the next 120 days Scenario 2 Marks firm has built up a reserve of SGD 100 million over the years a percentage from after tax profits He is keen to use this fund to scan the global FX environment and make prudent and riskless investments that can return a positive profit in less than 12 months He has received the following information Japanese Yen Money Market Interest Rate 2 per annum (or 1 for 180 days) USD Money Market Interest Rate 4 per annum (or 2 for 180 days) S1 Spot SGD1 35 1USD S2 Spot Yen106 1USD F1801 Forward rate 180 days down the road SGD 1 34 1 USD F1802 Forward rate 180 days down the road Yen 104 1 USD Clearly show your calculations and assumptions for the following 1) Assume Mark is willing to invest SGD 100 million for 180 days What should he do to take advantage of the information 2) What is his profit (or loss) in USD 3) What is his profit (or loss) in SGD 4) Mark had funds of SGD 100 million to play with Assume he does not want to use these funds and is willing to borrow USD in the international market If he borrows USD 100 million how would your answer to Q (2) and (3) change Scenario 3 Mark Tan is keen to consider opening a new division in his firm to deal with FX Trading He wants to understand more about currency trading What are the characteristics that are common to the major trading currencies e g USD, GBP, Euro, Yen, AUD, CAD, CHF etc Why are investors keen to invest in these currencies If Mark starts off with a SGD 100 million fund how should he apportion this fund among the different currencies What opportunities should he look out for

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Background Mark Tan is a Singapore based importer of industrial machinery and equipment. He is the MD of a family run business and is part

Background

Mark Tan is a Singapore based importer of industrial machinery and equipment. He is the MD of a family run business and is part of the 3rd generation of owners. Over the last 50 years, his family has grown the business to become one of the top local firms in the field. The annual sales runs into the hundreds of millions of SGD.

Marks firm has witnessed several crises over the years -- including the Asian Financial Crisis (1997- 8), Dot.com crisis (2000-1), Terrorist Attacks (Sep 11, 2001), Global Financial Crisis (2008-11) and now the latest the global Covid-19 pandemic. Despite various challenges, prudent financial management and a keen eye on international finance have enabled the firm to weather many storms. Mark and his team are aware that to ensure smooth operations of the business, they must track the international currency markets 24x7 to minimize risk and capitalize on any possibilities to gain from risk-less opportunities.

Carefully read the following scenarios and answer the associated questions.

Scenario 1

Mark receives an order for Euro 25 million worth of machinery from one of his clients in Singapore. The specific equipment is manufactured and exported from Germany. Mark has mostly imported machines from China, Korea and Japan, and occasionally from Austria but never Germany. He inquires and identifies a German exporter Gunther -- who is willing to do business with Mark. Gunther can supply the machines in 120 days and expects payment on delivery in Euro.

1) What are the risks Mark faces in entering this deal with Gunther? Give details.
2) How can Mark mitigate the SGD / Euro exchange rate risk?

Explain what he should do? Will he make a profit or loss on the exchange conversion? Clearly show your calculations by using the following information:

Assume the spot rate S1 today is SGD 1.45 = 1 Euro and the forward rate today for payment 120 days down the road F120 is SGD 1.46 = 1 Euro. There are anticipations that the SGD will depreciate by 2 % against the Euro in the next 120 days.

Scenario 2

Marks firm has built up a reserve of SGD 100 million over the years a percentage from after tax profits. He is keen to use this fund to scan the global FX environment and make prudent and riskless investments that can return a positive profit in less than 12 months. He has received the following information: -

Japanese Yen Money Market Interest Rate = 2 % per annum (or 1% for 180 days) USD Money Market Interest Rate = 4 % per annum (or 2% for 180 days) S1 =Spot=SGD1.35=1USD S2 =Spot=Yen106=1USD

F1801 = Forward rate 180 days down the road = SGD 1.34 = 1 USD F1802 = Forward rate 180 days down the road = Yen 104 = 1 USD

Clearly show your calculations and assumptions for the following: -

1) Assume Mark is willing to invest SGD 100 million for 180 days. What should he do to take advantage of the information?
2) What is his profit (or loss) in USD?
3) What is his profit (or loss) in SGD?
4) Mark had funds of SGD 100 million to play with. Assume he does not want to use these

funds and is willing to borrow USD in the international market. If he borrows USD 100 million how would your answer to Q (2) and (3) change?

Scenario 3

Mark Tan is keen to consider opening a new division in his firm to deal with FX Trading. He wants to understand more about currency trading.

What are the characteristics that are common to the major trading currencies e.g. USD, GBP, Euro, Yen, AUD, CAD, CHF etc.? Why are investors keen to invest in these currencies?

If Mark starts off with a SGD 100 million fund -- how should he apportion this fund among the different currencies? What opportunities should he look out for?