questions are in the document

questions are in the document

FINC 540 International Finance Quiz 2 Name: _______________________________ Fall 2015 1. (25 Points) A British investor owns a portfolio of U.S. stocks worth US $20 million. The current spot rate and one-month forward exchange rates are 0.66/$. Interest rates are equal in both countries. The investor sells forward $15 million to hedge currency risk because he is concerned about the outcome of the US elections. A week later, the US stock portfolio has gone up to $21,200,000, and the spot and forward exchange rates are now 0.56/$. a. Find out R* or return in home or domestic currency. 1 b. Find out the hedged returns, RH. 2 2. (20 points) You would like to protect your portfolio of French equity against a downward movement of the French stock market. a. What are the relative advantages of stock index futures and swaps? b. Which one would you prefer and why? 3. (20 points) An American investor believes that the dollar will depreciate and buys one call option on the euro at an exercise price of 110 cents per euro. The option premium is 1 cent per euro, or $625 per contract of 62,500 euros (Philadelphia): a. For what range of exchange rates should the investor exercise the call option at expiration? 3 b. For what range of exchange rates will the investor realize a net profit, taking the original cost into account? c. If the investor had purchased a put with the same exercise price and premium, instead of a call, how would you answer the previous two questions? 4. (20 points) You are a U.S. investor consider investing in Switzerland. The world market risk premium is estimated at 5 percent, the Euro offers a 1 percent risk premium, and the current risk-free rates are equal to 4percent in dollars and 3 percent in francs. In other words, you expect the Euro to appreciate against the dollar by an amount equal to the interest -rate differential plus the currency risk premium, or a total of 2 percent. You believe that the following equilibrium model (ICAPM) is appropriate for your investment analysis: E(Ri)= Rf + 1 X RPw + 2 X RP 4 Where all returns are measured in dollars, RPw is the risk premium on the world index, and RP is the risk premium on the Euro. Your broker provides you with the following estimates and forecasted returns. Stock A Stock B Stock C Stock D Forecasted return (in euro) 0.08 0.09 0.11 0.07 World beta (1) 1 1 1.2 1.4 Dollar currency exposure (2) 1 0 0.5 -0.5 a) What should be the expected dollar returns on the four stocks, according to the ICAPM? b) Which stocks would you recommend buying or selling? 5 5. (15 points) An international bank loaned money to an emerging country a few aweeks ago. Because of the nonpayment of interest due on the loan, the bank is now negotiating with the borrower to exchange the loan for Brady bonds. The Brady bonds that would be issued would be either par bonds or discount bonds, with the same time to maturity. a) Would both types of bonds, par and discount, provide debt reduction to the emerging country? b) Would both types of bonds, par and discount, have lower coupon amount than the original? 6 c) Of the two types of bonds being considered, which one would have lower coupon amount? 7