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Answer Scheme OCT 2009 Question 1 a) 1980s and 1990s: Strong economic growth Stability of ringgit Malaysia moving

ing into manufacturing and industrialized era ate 1990s and early !000 199" financial crisis #orld economic recession in !000 $ !001 and !00%&!008 Shortage of 'uality human ca(ital in Malaysia )ressure on cost wages* increased com(etition from +hina* ,ndia and elsewhere b) i) - !0 . !/18 0 19/1"23 19/1"23 4 2/92 0 5M26/3! ii) 7o* since it is e4(ensive in ,stanbul by 5M6/30 82/ $ 26/30) as com(ared to Malaysia 9es* since it is chea(er in ,stanbul by 16/83 816 $ 9/1") as com(ared to :ermany/ Question ! a) ;ny four : -rading on an <4change instead of over the counter Standardized amount.contract =i4ed maturities )ayment of margins >> )lease refer to te4t boo? Mazila yang 5M1%/

b) i) )harmali* being the e4(orter who will be receiving @ritish (ounds is afraid that the (ound will wea?en relative to the dollar/ ,f the com(any does nothing to hedge* it could e4(erience a large loss when it sells its receivables in the s(ot mar?et in Actober/

ii) B600*000 4 1/6!9! 0 CSD"%2*%00

iii) -he com(any needs to sell (ounds and so needs to hedge using the (ut o(tion for (ounds/ -herefore )harmali needs to buy (ut o(tion on (ound/

iv) <ach contract is B31*!60 * so for B600*000E B600*000 . B31*!60 0 1% contracts/

v) B31*!60 4 1% 4 0/0!!8 0 CSD11*200

vi) B600*000 4 CSD1/6!60 0 CSD "%!*600 CSD "%!*600 & CSD11*200 0 CSD "61*100 Question 3

a) -he factors are:

i) +ontinued trade liberalization and economic integration such as trade bloc?* =-; amongst member countries* #-A* :;-ii) <mergence of globalized financial mar?ets iii) arge scale (rivatization of government&owned enter(rises iv) Digitalization and advancement of borderless businesses o((ortunity through ,+- and internet facilities

b) i) Affer.;s? rate : 5M6"0*!60 . !/2%33 0 S:D !31*298/20

ii) @id rate : 1 2!0*000 4 6/03!3 0 5M!*113*6%%

iii) Ane month bid 5M.S:D : !/26%6 F 0/0010 0 !/26"6 S:D 300*000 4 !/26"6 0 5M"3"*!60

iv) 6/0200 F 86/0200 4 0/0! 4 3.1!) 0 6/0%6!

5M%60*600 . 6/0%6! 0 1 1!8*2!6/33

v) )ercentage s(read 5M.1 'uotation :

;s? $ @id . ;s? 4 100 6/0200 $ 6/03!3 4 100 0 0/163G 6/0200

Question 2

a) -here can be 3 reasons a((arent arbitrage o((ortunities might not result in ris?less (rofits : Default ris?* e4change rate ris? and (olitical ris?/

i/ ii/

Default ris? is the credit ris? that one of the counter(arties may fail to honor its contracts/ +autions must be e4ercise in order not to suffer losses/ <4change rate ris?s are e4ercised by governments to interfere in the trading of its currencies in turbulent times which cause the a((earance of an arbitrage o((ortunity that really does not e4ist/ )olitical ris?s when governments encounter difficulty in ma?ing scheduled (ayments or instability in its country which closes down businesses/ #hen any of these ha((en* trading of currencies sto((ed and all outstanding contracts were settled or closed out/

iii/

b)

i) <4(ected future s(ot rate according to ,5):

81 F rhc) 0 81 F rfc) et /e0

1/08 4 1/%0 0 1/1! 4 et /et 0 CSD1/62!9

ii) Since the e4(ected future s(ot rate 81/62!9) is not e'ual to the forward rate 81/63)* arbitrage o((ortunity e4ists/ 81/63 $ 1/%0 . 1/%0) 4 3%0.3%0 4 100 0 & 2/38G H 8G & 1!G & 2G

iii) 81 F rhc) 0 81 F rfc) et /e0

81 F 0/08) 0 81 F 0/1!) 1/63 1/%0 1/08 I 1/0"

@orrow from CJ 8 foreign) and invest in CS 8home)

iv) T = 0 @orrow B10m K 1!G +onvert to CSD K 1/%0 ,nvest CSD K 8G T=1 5eturn from investment 8CSD1%m 4 1/08)

GBP 10m 810m) 0

USD

1%m 81%m)

1"*!80*000

+onvert to (ound 8CSD1"/!8m . 1/63) )ay borrowings K 1!G 8B10m 41/1!) 7et (rofit 11*!00*000 GBP 94,118 0 11*!92*118 81"*!80*000)

Question 6 a) ;do(tion of <uro eliminates the ris? of currency fluctuations and facilitates cross border (rice com(arison/ -hus* encourage the flow of trade and investment among member countries/ -his would bring integration of <uro(eLs ca(ital* labour* commodity mar?ets and more efficient allocation of resources within the region as a whole/ b) Direct 'uote gives the (rice of home currencies in terms of one unit of foreign currency/ ,ndirect 'uote gives the (rice of foreign currencies in terms of one unit of home currency/ -o determine the 'uote in Direct or ,ndirect terms* when the rates are given in either 'uotation* we Must do the reci(rocal of the rates and would give the 'uotation in the terms that we want to determine/ c) i) CS 0I N+ * Malaysia 0I =+ +hange 8+) 0 0 0 +hfc 0 0 0 +hc 0 0 0 et $ e0 . e0 80/3000 $ 0/!"9%) . 0/!"9% 0/0"!9% 5hfc 81 F c)81 $ t) F c 0/0%3 81 F 0/0"!9%)81 $ 0/!8) F 0/0"!9% 1!/1%G 5hc 81 $ t) F ct 0/0"6 81 $ 0/!8) F 80/0"!9% 4 0/!8) 11/03G

CS com(any should borrow in home country because the cost is chea(er/ ii) 81 F rhc) 81 F rfc) 0 et e0

81 F 0/0"6) 81 F 0/0%3)

etOO 0/!"9% et

CSD0/!8!8.5M 0

Question % a) +ountertrade refers to a variety of barter li?e techni'ues used to e4change goods and services without the use of cash/ <4am(les are counter (urchase and offset/ +ountries with limited currency reserves often use countertrade to (romote foreign trade or attract ?ey industries/ +om(anies from industrialized countries (artici(ate in countertrade to gain a foothold in develo(ing mar?ets ad to diversify their o(erations/ b) i) Nold @; until maturity =P of @; ess: ;cce(tance fee 86m 4 0/01 4 3.1!) ;mount received in 3 months CSD6*000*000 CSD 1!*600 OOOOOOOOOOOO CSD2*98"*600

;mount received in 5M 5M a((reciate by 0/6G* so 3/8!10 4 0.9950 0 3/8019 8 3 months forward) {1 0.005 CSD2*98"*600 4 3/8019 0 5M18*9%1*9"%/!6 ii) Sell.discount the @; =P of @; ess: ;cce(tance fee 86m 4 0/01 4 3.1!) Discount fee 86m 4 0/0%6 4 3.1!) +ommission fee 86m 4 0/001) ;mount received now CSD6*000*000 CSD 1!*600

CSD 81*!60 CSD 6*000 CSD2*901*!60

;mount received in 5M CSD2*901*!60 4 3/8!10 0 5M18*"!"*%"%/!6

iii) )P of hold until maturity )P )P 0 0 0 =P . 81 F r) 5M18*9%1*9"%/!6 . 81 F 0/08.2) 5M18*690*1"!/"9

+om(are ii) and iii) Sara&Sinar should sell.discount the @; at once instead of holding it until maturity since he will receive an e4tra of !"1#$,50#.4% 85M18*"!"*%"%/!6 & 5M18*690*1"!/"9)/

Question " a) )re&shi(ment ris? $ faces by im(orter such as delay in (roduction and shi(mentE and face e4(orter such as buyer cancel order/ During shi(ment $ face by both (arties such as shi( sin?s* catches fire* theft* etc )ost&shi(ment $ face by e4(orter such as im(orter delays (ayment or goes ban?ru(t/ b) @uy in s(ot mar?et 3 months later: <4(ected future s(ot rate* e1 /e1 0 0 e0 4 81 F rhc) . 81 F rfc) 6/91"0 4 81 F 0/0%.2) 81 F 0/08.2) 0 5M6/8880

+osts to buy B in future s(ot mar?et : B!60*000 4 6/8880 0 5M1*2"!*000

B&' (n )*rw+r, m+r-e. .*,+': +osts B!60*000 4 6/""82 0 5M1*222*%00

"*ne' "+r-e. /e,0e : ;cct )ayable : @orrow from N+ and ,nvest in =+

,nvest =+:

)P

0 0

=P. 81 F r) B!60*000 81 F 0/08.2)

B!26*098/02

@orrow N+:

B!26*098/02 4 6/91"0 0 5M 1*260*!26/10

;fter 3 months* (ay borrowings

5M 1*260*!26/10 4 81 F 0/0%.2) 0 5M1*2"1*998/"8

Dec(s(*n1 =orward mar?et hedging is the best o(tion because it has the lowest cost 5M1*222*%00