Hello, can you figure out questions 1-6. Thank you.

NAME: _______________________ INTERNATIONAL FINANCE FIN-3551 FALL 2015 SECTION: _____ ROW: _____ SEAT # FROM YOUR LEFT: _____ PRACTICE FINAL #2 Please answer all of the following questions (total of 7 questions). Explain your answers and show your work where calculations are required. The allocated points for each question are given in parentheses (total points 105). For the \"Multiple Choice\" question (Question 7), please circle the upper-case letter corresponding to the one best alternative or the one closest to your answer. 1. (10 points) Why might a purely domestic firm (all sales and production costs paid in U.S. dollars) be subject to foreign exchange exposure even though it does not have any foreign currency cash flows? Suppose the firm operates in a competitive market. ____________________________________________________________________________________________________________ ____________________________________________________________________________________________________________ ____________________________________________________________________________________________________________ ____________________________________________________________________________________________________________ 2. (10 points) What might motivate central banks or governments to intervene with currency exchange rates? ____________________________________________________________________________________________________________ ____________________________________________________________________________________________________________ ____________________________________________________________________________________________________________ ____________________________________________________________________________________________________________ 3. A foreign exchange trader faces the following quotes: Spot rate (/) 3-month forward rate (/) 3-month Japanese yen interest rate (annualized) 3-month European euro interest rate (annualized) 148.0 149.0 2.2% 4.4% a. (15 points) The trader has a credit line to borrow up to either 30,000 or 4,440,000 (its yen equivalent) at these rates for the purpose of investing in a covered interest arbitrage (CIA). Analyze, compute, and evaluate the profit potential. ____________________________________________________________________________________________________________ ____________________________________________________________________________________________________________ ____________________________________________________________________________________________________________ ____________________________________________________________________________________________________________ b. (10 points) If instead, this trader wants to implement an uncovered interest arbitrage (UIA) strategy, what steps would he or she take? Would this trade be profitable if the realized spot rates in 3 months would be 147.0/? ____________________________________________________________________________________________________________ ____________________________________________________________________________________________________________ ____________________________________________________________________________________________________________ ____________________________________________________________________________________________________________ NAME: _______________________ 4. SECTION: _____ ROW: _____ SEAT # FROM YOUR LEFT: _____ (25 points) A U.S based company bought supplies from a French seller. The purchase created a \"payable\" of 400,000 due in 4 months. The following quotes are available to the company: Current spot rate ($/) 4-month forward rate ($/) Eurodollar (annualized) interest rate Euro (annualized) interest rate 1.23 dollar per euro 1.25 dollar per euro 2.5% 3.6% Suggest at least two alternative ways to fully hedge the exchange rate risk of the payable, and calculate which seems more preferable if the company uses a Weighted Average Cost of Capital (WACC) rate of 13.5% to discount future cash flows. ____________________________________________________________________________________________________________ ____________________________________________________________________________________________________________ ____________________________________________________________________________________________________________ ____________________________________________________________________________________________________________ ____________________________________________________________________________________________________________ ____________________________________________________________________________________________________________ 5. A U.S. based company borrowed 22 Million from the only willing lender: a European bank. The loan will be repaid in in one year, with 14% interest. The exchange rate at the time the loan was made was 0.81 per $. However, the exchange rate is expected to change to 0.85 per $ over the next year. The company estimates that its stock has a domestic beta of 1.80 against a domestic market portfolio (whose expected return is 6.5% per year), and an international beta of 0.90 against a global market portfolio with expected return of 7.5% per year. a. (6 points) What is the dollar-cost of debt? (the cost of debt rate in dollar terms) ____________________________________________________________________________________________________________ ____________________________________________________________________________________________________________ ____________________________________________________________________________________________________________ ____________________________________________________________________________________________________________ b. (6 points) Calculate the company's cost of equity for both domestic-CAPM and International CAPM (ICAPM), if the risk free rate is 1.5%. ____________________________________________________________________________________________________________ ____________________________________________________________________________________________________________ ____________________________________________________________________________________________________________ ____________________________________________________________________________________________________________ c. (6 points) Using the effective cost of debt (dollar cost) and the ICAPM cost of equity, what is the company's Weighted Average Cost of Capital (WACC) assuming marginal corporate tax rate of 38% and debt to equity (D/E) ratio of 1.0? ____________________________________________________________________________________________________________ ____________________________________________________________________________________________________________ ____________________________________________________________________________________________________________ ____________________________________________________________________________________________________________ NAME: _______________________ SECTION: _____ 6. (12 points) Briefly define only 3 of the following 6 terms: 1) Translation Exposure 2) Natural Hedge 3) Free Floating Exchange Rate Regime 4) A Future Contract 5) LIBOR 6) Interest Rate Swap ROW: _____ SEAT # FROM YOUR LEFT: _____ ____________________________________________________________________________________________________________ ____________________________________________________________________________________________________________ ____________________________________________________________________________________________________________ ____________________________________________________________________________________________________________ ____________________________________________________________________________________________________________ ____________________________________________________________________________________________________________ ____________________________________________________________________________________________________________ ____________________________________________________________________________________________________________ 7. (5 points) Which of the following is a factor that the Euro zone countries should consider when deciding whether or not to offer Greece a bail-out package? [circle the closest answer] (A) The concern that European banks and financial institutions hold substantial amounts of Greek debt in their investment portfolios and thus would suffer severe losses leading to a snowball effect of further defaults. (B) The financial markets of the Eurozone countries are intertwined and highly susceptible to financial contagion. (C) Moral hazard and the concern that a bail-out might create a precedence in which other countries will expect to also be bailed-out in the future. (D) All of the above. Appendix - Formula Keys Fisher Effect: 1 + = (1 + )(1 + ) Weighted Average Cost of Capital (WACC): = + (1 ) Capital Assets Pricing Model (CAPM): = + = Purchasing Power Parity (PPP): (for any two currencies j and k) ( , ) = + ( , ) ( , ) = 1+ 1+ Interest Rate Parity (IRP): (for any two currencies j and k) ,+( ,) ( ,) = 1+ 1+