FORE School of Management, New Delhi

Post Graduate Diploma in Management (FMG-29/IMG-14_/FM-03_/BDA-01 /FPM-01)

Mid Term Examination Term- 4 (2021-2022)
Course Name: International Financial System

Time: 1.5 Hours Max Marks: 100

Instructions: a. This question paper contains 2 Pages
b. Possession and use of cell phone is prohibited
c. Only Non-Programmable calculator can be used
d. Be brief and to the point in the response
e. State assumptions made, if any
f. Answer all questions
g. Marks are indicated in the right hand parenthesis against
each question.

Q1 (a). Does India and China follow the same exchange rate regime? Name the regime or regimes
followed by the two countries and describe its features. [10 Marks]

(b). Give your opinion on how exchange rate regime followed by Thailand became one of the
causes of Asian Financial Crisis of 1997. [10 Marks]

Q2 (a). As of July 15, 2020, the exchange rate between the U.S. dollar and Brazilian Real is
USD/BRL: 0.1911. The consensus forecast for the U.S. and Brazil’s inflation rates for the next 1-
year period is 2.5% and 8.4%, respectively. What would you forecast the exchange rate to be at
around July 15, 2021? Which currency is expected to witness a depreciation and why? Explain the
theoretical rationale. [10 +5 Marks]

(b). A bank is quoting the following exchange rates against the dollar for the Swiss franc (CHF)
and the Australian dollar:

USD/CHF = 1.5960/70

AUD/USD: 0.5805/10

An Australian firm asks the bank for an AUD/CHF quote. What cross-rate would the bank quote?
What would be the CHD/AUD quote? Calculate both bid and ask rates. [10 + 5 Marks]
Q3. Suppose that the spot exchange rate is INR/USD: 71 and the three-month forward exchange
rate is INR 73.10/USD. The three-month interest rate is 4% per annum in the U.S. and 10% per
annum in India.

a. Calculate interest rate differential and (annualized) forward premium or discount (i.e., forward
rate differential) and comment on interest rate parity (IRP). [5 marks]

b. Show how the investor can profit from covered interest arbitrage. How much would be the
arbitrage profit in terms of US dollars? [15 marks]

c. Assume that the investor wants to realize profit in terms of Indian Rupees (INR). Show the
covered arbitrage process and determine the arbitrage profit in INR. [5 marks]

d. What should be the interest rate in India for the IRP to hold? [5 marks]

Q4 (a). Write a short note on Balance of Payments Account. What explain the worsening of a
country’s trade deficit following the currency depreciation? [5+ 6 Marks]

(b). Explain in which accounts and how the following transactions will be recorded in India’s
Balance of Payment- [3 Marks each]

i. An Indian textile manufacturer exports cotton shirts worth Japanese Yen (JPY) 5000, to an
importer in Japan. The Japanese importer uses his account balance at the State Bank of India to
pay Indian manufacturer.

ii. An American electrical equipment manufacturer sets up a manufacturing facility in Rajasthan,

undertaking an investment of USD 1 million.

iii. An Indian company acquires 25% equity share capital of a Belgium based IT company.