International Finance FINAL EXAM 2015 NAME Please print your name neatly 1. A British businessman has just completed transactions in America and Italy. He is now holding $250,000 and 250,000 and wants to convert to British pounds. His currency dealer provides this quotation USD/EURO 1.140020 GBP/USD 0.620050 Assuming no other fees, what are his proceeds from conversion? (20 points) 250,000 $1.1400 = $285,000 1.00 $535,000 0.6200 $1.00 = 331,700.00 2. Find the value today in dollars to the party paying dollars of a 5-year old swap with 5 years remaining maturity. The swap calls for exchanging interest only on 10m at 5% for $15m at 3%. Semiannual payments. The last payment was yesterday. Today's exchange rate is $1.15 and the AAA rate in the U.S. is 2% and 2.5% in the euro zone. The yield curve is flat. (20 points) Value the swap as a portfolio of two bonds: long a euro-denominated bond and short a dollar-denominated bond. N I/Y CPT PV PMT FV 10 2.5% 2,336,381.48 250,000 = 10m x .05 / 2 0 NOT 10m since this is an interest only swap The dollar value of this bond is 2,336,381.48 x $1.15 = $2,686,838.70 1.00 The dollar-denominated bond is similarly easy to value: N I/Y CPT PV PMT FV 10 2.0% $2,131,043.52 $225,000 = $15m x .03 / 2 $0 NOT $15m since this is an interest only swap Value of the swap to the party paying dollars is $555,795.18 =$2,686,838.70 $2,131,043.52 1 3. Suppose that you are a euro-based investor who one year ago bought 100 shares of PepsiCo (PEP) at $83.50 per share. On the day your trade cleared your exchange rate was $1.0525/1.00. One year later you sold your shares for $94.44 per share. On the day your second trade cleared you faced the exchange rate of $1.1398/ a) Calculate the profit (or loss) from this investment in euro. (10 points) At the beginning of the year 100 shares of PEP cost $8,350: $83.50 / share x 100 shares = $8,350 1.00 For a euro based investor that costs 7,933.49 = $8,350 x $1.0525 At the end of the year those 100 shares of PEP are worth $9,444 $94.44/share x 100 shares = $9,444 1.00 In euro that's worth 8,285.66 = $9,444 x $1.1398 Net gain = 352.17 b) Calculate the holding period return on this investment in euro terms (5 points) 352.17 4.44% = 7,933.49 c) Calculate how much of this movement is due to the exchange rate movement. (5 points) In euro terms the exchange rate fell by 7.66%: 1.00 1.00 fallling from 0.9501/$1 = $1.0525 to 0.8773/$1 = $1.1398 -7.66% = 0.8773/$1 0.9501/$ 0.9501/$ In dollar terms, PEP rose by 13.10%: 13.10% = $94.44 $83.40 $83.50 You can check your work: (0.9234)(1.1310) = 1.0444 which represents a 4.44% gain in euro terms. 2 4. Your firm is a U.K.-based EXporter of bicycles. AS AN EXPORTER, YOU ARE SELLING BICYCLES AND PAID IN EURO. You have SOLD an order to a French customer for 8,000,000 worth of bicycles. Payment (in euro) is due in three (3) months' time. Your firm wants to hedge the receivable into pounds Sterling. (As wonderful as the U.S. dollar is, your British firm does not want to hedge into dollars.) Country Britain (Pound) (10,000) 1 Month Forward 3 Months Forward 6 Months Forward 12 Months Forward Euro (10,000) 1 Month Forward 3 Months Forward 6 Months Forward 12 Months Forward U.S. $ Equivalent Bid Ask $1.90 $1.95 $1.91 $1.96 $1.58 $1.60 $2.00 $2.05 $2.12 $2.50 $1.30 $1.32 $1.28 $1.28 $1.25 $1.25 $1.22 $1.22 $1.20 $1.20 You should be able to hedge both imports and exports. Zero points for an importer's hedge for an exporter SFr $ Interest Rates (APR) Borrowing Lending 3% 2% 5% 4% 6% 5% a) Detail a strategy using FUTURES contracts that will hedge your exchange rate risk INTO BRITISH POUNDS. You must clearly state what amount of which currency you are selling or buying at what price. Give me the trading orders (long, short how many contracts) that you would give your broker. (10 points) 6 students out of 9 (67%) got part a) right Write your answer here. These next 2 lines are worth 10 points: Go LONG 625 3-month 10,000 futures contracts. Go SHORT in 800 3-month 10,000 futures contracts. The number of contracts is important, as is the \"short\" and \"long\a ler rm [a a U [Lab of , bicycles. m" ma \""111 \"f \"Smut (ar-m)-ied ' " " .,._. \"Willem-aw .. "II-.5113\"? Ir': '1 -'-I-l"n.: ' =' _-:_'_{...-\\.'_. .'r..- III-lulu (Faun-:1} mama " ":"hpm 2- I-'H- . I I- Munlh Forward SMFnrward I. .9801] .mgmnrd/ % I I: Manthl Fun-ward 21 I I Earn EIJSJIBG 1.4?!\" 1 Month Femani I A'.' .- 3 Man hefarwerd 1.4900 '3 12 Month: Fenian! 1.51%? - ' a} Detail a strategy using futures contract: that will hedge;- hew mam.r contracts of what type {long or short on ' l . . ints Write your answer here- h} Dulluie a :-.:trateg1.r using spat exchange rates - " " exnhange rate risk. Your answer dues nut require 5 uinta 1i'r'rite your answer here. \fInternational Finance Test 1 2014 K NAME E Y Please print your name neatly 1 A U.S. multinational firm wishes to reduce their banking costs and thus decides to net their intra-company cash flows. They have subsidiary operations in Italy, Switzerland, and Britain. The face the following exchange rates: 1.00 = $1.65 1.00 = $1.30 SFr 1.00 = $0.90 Simplify the following set of intra company cash flows for this U.S. multinational Step 1: convert all cash flows to USD $72 in $68 out $135 SFr150 $132 $100 $100 SFr150 $105 80 75 75 $105 $132 80 $135 $100 $100 $56 out $52 in Step 2: Use Bilateral Netting Step 3: Use Multilateral Netting $72 in $68 out $27 $52 in $68 $68 out $3 $5 $35 $72 in $56 out $52 $56 out $52 in TAKE YOUR TIME AND WORK CAREFULLY (10 points) Your answers are worth zero points if they do not include currency symbols ($, )! 1 2 An Italian businessman has just completed transactions in America and England. He is now holding $500,000 and 250,000 and wants to convert to euro. His currency dealer provides this quotation EURO/USD 0.800020 GBP/USD 0.6000250 Assuming no other fees, what are his proceeds from conversion? (10 points) Give retail customer the worst price. Watch the currency algebra! 250,000 ($500,000 + $400,000) 3 $1 = $400,000 0.6250 0.8000 $1 = 720,000 Find the ASK (not bid) spot cross rate between the euro and the pound expressed as 1.XXXX/ (that is, find out how many euro a dealer will charge for one British pound). Please use 4 decimal places in your answer. The current spot rates are: EURO/USD 0.800020 GBP/USD 0.720025 (10 points) To find this ask cross rate, imagine starting with euro, then buying USD with euro at the dealer asking price for USD then selling dollars to the dealer for pounds at the dealer bid price $1.0000 1 0.8020 4 .7200 $1.0000 1.1139 = 1.0000 Find the bid (not ask) 1-year FORWARD direct rate between the U.S. dollar and the euro expressed as $1.XXXX/ that makes a retail customer indifferent between using a money market hedge and a forward market hedge. Please use 4 decimal places in your answer. Bid Ask Borrowing Lending S0($/) $1.2500 = 1.00 $1.2505 = 1.00 i$ 6.0% 6.08% F360($/) i 2.0% 3.0% (20 points) Compare selling 1m forward to the dealer at his forward bid to borrowing the present value of 1m at the euro zone borrowing rate, selling that at the spot bid and investing that result for one year at the USD lending rate. The future value of the second alternative is $1,300,000: 1,000,000 $1.2500 $1,300,000 = 1.0608 1.02 1.00 So the 1-year forward bid that makes a customer indifferent between money market and forward $1,300,000 $1.3000 = 1,000,000 1.00 2 5 Consider the balance sheets of Bank A and Bank B. Bank A is in London, Bank B is in New York. The current exchange rate is 1.00 = $1.25. Show the correct balances in each account if a currency trader employed at Bank A buys 160,000 from a currency trader at bank B for $200,000 using its correspondent relationship with Bank B. Bank A (Mil n) 000s Assets Liab l ties and Equity OLD NEW OLD NE B's $ $900 $1,100 deposit at B 500 660 deposit B's $300 0 160 $ deposit at B $500 deposit Cash in the Other 200 200 Liabilities 300 300 Vault Owner's 320 320 Other Assets 400 400 Equity Total Liabilities 1,500 1,500 1,500 Total Assets 1,500 & Equity $200k 160k Bank B (NYC) 000s Asset Liab lities and Equity OLD NEW OLD NEW $ deposit at A's $900 $1,100 deposit 500 660 A deposit at A's $ 0 160 $500 $300 A deposit Cash in the Other $200 $200 Liabilities $200 $200 Vault Other Owners $00 $600 Equity $575 $575 Assets Total Total Liabilities $1,900 $1,900 Assets & Equity $1,900 $1,900 Fill out the 14 blank spaces above. YOU MUST USE CURRENCY SYMBOLS! or $ ! Your answers are worth less points if they do not include currency symbols ($, )! 10 points 3 5 Your firm is a U.K.-based IMporter of bicycles. Spanish bicycles. AS AN IMPORTER, YOU ARE BUYING BICYCLES AND PAYING IN EURO. You have placed an order with a Spanish supplier for 1,000,000 worth of bicycles. Payment (in euro) is due in 6 (six) months. Your firm wants to hedge the payable into pounds. (As wonderful as the U.S. dollar is, you do not want to hedge into dollars.) Country U.S. $ Equivalent Bid Ask $1.80 $1.95 $1.91 $1.96 $1.94 $1.99 $2.00 $2.05 $2.12 $2.50 $1.15 $1.20 $1.17 $1.18 $1.19 $1.20 $1.22 $1.25 $1.26 $1.27 Britain (Pound) 1 Month Forward 3 Months Forward 6 Months Forward 12 Months Forward euro 1 Month Forward 3 Months Forward 6 Months Forward 12 Months Forward Interest (lend%borrow %) 3.6%4.0% 8.08%8.25% Sfr 5.0%5.25% $ 6.0%6.25% a) Detail a strategy using forward contracts that will hedge your exchange rate risk INTO BRITISH POUNDS. You must clearly state what amount of which currency you are selling or buying at what price. Give me the trading orders. (10 points) There are two trades to make. Write your answer here. BUY 1,000,000 forward at the 6-month ASK price of $1.25/ SELL 562,500 at the 6-month forward BID price of $2.00/. b) Estimate the receipt in pounds in 6 months of the strategy that you offered in part a). (10 points) Zero points for answers using spot rates or wrong bid/ask! No exceptions! 1,000,000 x $1.25 1.0 x 1.00 $2.00 = 562,500 c) Outline a strategy using spot exchange rates and borrowing or lending that that will hedge your exchange rate risk. Your answer does not require numbers, it requires a sentence. (10 points) Write your answer here. Buy the present value of the payable at today's spot ask. To finance that USD denominated purchase sell the pound value of that dollar value at the spot bid d) Estimate the pound-denominated future value of the strategy that you offered in part c). Use the LIBOR interest rate convention. (10 points) Zero points for answers using forward rates or wrong bid/ask! No exceptions! Write your answer here. Using the numbers from the table we have: 1,000,000 x 1.02 $1.20 x 1.0 1.00 $1.80 X 1.0404= 680,000 4