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e The University of the South Pacific

Faculty of Business and Economics

SCHOOL OF ACCOUNTING & FINANCE

FM303: INTERNATIONAL FINANCE

FINAL EXAM PAPER- SEMESTER 1, 2019

MODE OF STUDY: FACE-TO-FACE & BLENDED

Time allowed: 3 hours

Total Mark on Paper = 100 marks

Weight 50% of coursework

DO NOT OPEN THE QUESTION PAPER UNTIL INSTRUCTED TO DO SO

BY THE CHIEF INVIGILATOR
Number of Pages
Number of Questions
Instructions to Candidates
..
INSTRUCTIONS
3
9
• This exam has TWO (2) sections: SECTION A and
SECTIONB.
• There are four (4) pages including the cover page and
the multiple choice answer grid.
• Section A has Five (5) Questions. All questions are
compulsory in this section
• Section B has Four (4) questions. You are required to
answer ANY TWO (2) only.
• Clearly present your answers for questions. Partial
marks will be given for incorrect but well-presented
answers.
• The examination is worth 50% of your overall mark .
The minimum exam mark is 20/50.
• You are allowed to use a silent, non-programmable
calculator.

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Section A. Answer ALL Questions in this Section.

Question 1 (10 marks)

You are given the following information:
Quantity of exports 500
Domestic currency price of exports 10
Exchange rate (d/f) 1.20

1. Calculate the foreign currency and domestic currency values of exports. [4

marks]
11. What will happen if the exchange rate falls to 0.90, assuming that the value of
the elasticity of demand for exports is -0.2? [6 marks]

Question 2 (15 marks)

Assume that Australia trades mostly with two countries only, the United States and the
United Kingdom, and that 70% of the trade is conducted with the United States, 25% with
the United Kingdom, and 5% with the rest of the world. The exchange rates of the
Australian dollar at two points in time, 0 and 1, are as follows:

Exchange Rate Period 0 Period 1

AUD/USD 1.3541 1.7724
AUD/GBP 2.1533 2.5692

1. Calculate the exchange rates in indirect quotation from an Australian

perspective.
11. Calculate the percentage rates of depreciation or appreciation of the Australian
dollar against the two currencies. Comment on your results.
111. Calculate the exchange rate relatives, using Period O as a base period.
1v. Calculate an unweighted effective exchange rate index, using Period Oas a base
period in which the index assumes the value of 100.
v. Calculate the normalised trade weights.
v1. Calculate the trade-weighted effective exchange rate index.
v11. What is the rate of appreciation or depreciation of the Australian dollar in
effective terms?
v111. Compare the result of (vii) with that obtained in (ii) and (iv) above. Comment on
your results.

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Question 3 (15 marks)

Consider a five-year currency and interest rate swap, whereby A receives annual
payments on Australian dollars and based on a floating interest rate, and B receives
annual payments on New Zealand dollars based on a fixed interest rate. The notional
involved is AUD I 00000, the fixed rate is 6 per cent, and he contracted exchange rate is
1.18 (NZD/AUD). If on each payment date, the floating interest rate assumes the values
8.25, 9.75, 5.50, 4.75 and 6 per cent, respectively, and the market exchange rate assumes
the values 1.25, 1.15, 1.10, 1.30 and 1.18, then determine the payments made by A to
B, and vice versa, and hence the net payments, all in AUD, for the first 3 years of the
swap contract.

Question 4 (15 marks)

The following information is available:
Call contract size GBP200 000
Put contract size GBP200 000
Price of call AUD0.01
Price of put AUD0.008
Exercise exchange rate of call 2.50
Exercise exchange rate of put 2.50

1. Calculate the net pay-off on long call, long put and the combined position at
the following spot exchange rates:
a. 2.505;
b. 2.540;
c. 2.495; and
d. 2.480.
11. Calculate the intrinsic values of the two options at various values of the
exchange rate.

Question 5 (15 marks)

An FDI project that is run by a subsidiary produces the following cash flows over a
period of five years:
-200 20 70 90 110 150

The following information is also available:

Foreign tax rate 20%

Domestic tax rate (full tax credit is granted) 30%
Remitted cash flows allowed 75%
Current exchange rate (domestic/foreign) 0.80
Expected annual depreciation of foreign currency 4.5%
Discount rate 6.5%

Calculate the net present value of the project from the perspectives of the subsidiary
and that ofthe parent company.

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Section B. Answer ANY TWO questions in this section.

Each question is worth 15 marks

Question 6. Differentiate between long straddle and a long strangle with appropriate
gross payoff diagrams or schedules

Question 7. Explain the differences between long and short call option and long and
short put option in currency with appropriate gross payoff diagrams or schedules

Question 8. Discuss THREE factors that affect the current account, and THREE
factors that affect the financial account of the Balance of Payments (BOP)

Question 9. Explain the stages involved in a currency swap between parties A and B,
using any two arbitrarily chosen currency.

~The End~

RRK/S 1/FM303/2019