FINAL EXAMINATION

Faculty of Business & Management

Course :
BBCF4073
International Finance

Date : 30 April 2022

Module Lecturer : Noor Fadzilah Mohamad

(noorfadzilah.mohamad@city.edu.my)

Total marks : 100 marks (worth 40%)

Instructions to candidates:

1. Write your name and student number on the front page.

2. Answer questions according to the instruction for each section.

3. Please submit your answer within the given timeframe.

4. You may answer these questions either using words format or by scanning your
handwritten answer and upload into the LMS portal.

DO NOT REMOVE ANY PART OF THIS EXAMINATION PAPER FROM THE

EXAMINATION ROOM

Student ID : 202009040067

NIRC/Passport No : 800131-06-5249

Program : BACHELOR OF BUSINESS ADMINISTRATION (HONS)

Lecturer : NOOR FADZILAH MOHAMAD

Date: 30 April 2022 Course: BBCF4073 International Finance

STRUCTURED QUESTIONS [Total = 100 marks]

Answer ALL questions.

QUESTION 1 (20 MARKS)

(a) Explain the role of Bank Negara Malaysia in foreign exchange market. (2 marks)

As the banker and adviser to the Government, Bank Negara Malaysia provides advice on
macroeconomic policies and the management of public debt. Bank Negara Malaysia is also the
sole authority in issuing the national currency and in managing the country's international
reserves.

(b) Discuss the necessities of foreign exchange market. (4 marks)

Every nation in the world trades with other nations. Some trade more than others (little islands
like Iceland, Mauritius, and Ireland lead the way, in percentage of gross domestic product [GDP]
terms anyway) but all do it, even illicitly, conducting trade via barter isn’t practical in most
circumstances. So, we use money. But what happens when people who want to trade use
different types of money, when their units of account are not the same? There are several
solutions to that problem. The most frequent solution today is for one party, usually the buyer,
to exchange the money of his or her country for the money of the seller’s country, then to
consummate the transaction.

(c) Given the exchange rate of Omani Rial to Ringgit Malaysia of OMR / MYR =
10.9800. Assume you have OMR 20,000 and you would like to convert into MYR,
calculate the amount of ringgit you will have. (4 marks)

Yer/ MYR = .0170

Calculate the Amount of Ringgit if YER 200000 is Available
1 Ringgit = Rial .0170
YER 20000 = 3400 ringgit ( 200000 x .0170)

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Date: 30 April 2022 Course: BBCF4073 International Finance

(e) You received an invitation to become an adjunct professor in Universiti Brunei Darussalam.
You decide to exchange BND5,000 to cover your daily expenses before you get your first pay
check. The currency exchange board quoted MYR / IDR = 3,415.59 and BND / IDR =
10,611.73.

i. Calculate MYR/BND exchange rate. (4 marks)

MYR / BND rate = (MYR / IDR) / (BND / IDR)
MYR / BND = 3415.59 / 10611.73 = 0.3219

ii. Exchange the RM5,000 into BND. (2 marks)

By converting you will get
5000 * 0.3219 =1609.35 BND

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Date: 30 April 2022 Course: BBCF4073 International Finance

QUESTION 2 (20 MARKS)

(a) You are residing in Austria and you plan to visit Kuwait. You want to bring with you
KWD5,000 for your trip expenses. Given the below Bid and Ask spread for Kuwaiti Dinar against
Euro, (KWD/EUR), calculate how much Euro will you requires for the conversion.
(4 marks)

Bid Ask
2.9800 2.9898

Answers:
Since you are Purchasing KWD you should use ask rate
Ask rate = 2.9898
Number of euros required = 5000*2.9898 = 14,949

(b) Given the following exchange rates in Tunisia and Indonesia:

TND/USD = 0.3400
TUNISIA

IDR/USD = 0.000070

INDONESIA
TND/IDR = 4,850.61

i. Determine if there is any arbitrage opportunity. (4 marks)

TND/IDR = TND/USD x USD/IDR
= 0.34 x 1/IDR/USD
IDR = 0.34 x 0.000070 = 4857.143 TND
IDR = 4857.143 TND
Arbitrage exists = 4857.143 TND

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Date: 30 April 2022 Course: BBCF4073 International Finance

ii. Calculate the profit/ (loss) from the above triangular arbitrage assuming your investment
starts with IDR50,000,000. (10 marks)

Investment IDR50,000,000 = 500 lay

Buy USD with IDR
1 USD = 0.000070 IDR
500lay IDR
500/0.000070
= 7142857.14layUDS
1 USD = 0.34TND
7142857.14layUDS x 0.34 = 2428571.43TND

IDR = 4850.61TND
2428571.43TND
= 2428571.43TND/4850.61
= 500.6734IDR

Investment 500 IDR

Profit = 0.6734IDR

Or even, in sample calculate

Convert TND to IDR ,
you will get = 50,000,000 / 4850.61 = 10307.98 TND
Convert TND to USD ,
Number of USD = 10307.98*0.34 = 3504.71 USD
Convert USD to IDR ,
Amount of IDR you will get = 3504.71 / 0.00007
= 50,067,340.57
Profit = 50,067,340.57 - 50,000,000 = IDR 67,340.57

iii. Conclude your answer in (b) above. (2 marks)

First buy USD using IDR later use USD and get IND later use TND to get IDR in
Indonesia and have arbitrage profit using 500IDR investment 0.6734IDR.

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QUESTION 3 (20 MARKS)

(a) Discuss the restriction to implement law of one price. (4 marks)

The law of one price takes into account a frictionless market, where there are no transaction
costs, transportation costs, or legal restrictions, the currency exchange rates are the same, and
that there is no price manipulation by buyers or sellers. The law of one price exists because
differences between asset prices in different locations would eventually be eliminated due to
the arbitrage opportunity.

(b) Explain relative purchasing power parity. (2 marks)

Relative purchasing power parity (RPPP) is an economic theory that states that exchange rates
and inflation rates (price levels) in two countries should equal out over time. Relative PPP is an
extension of absolute PPP in that it is a dynamic (as opposed to static) version of PPP.

c) Below table compare the price of laser engraver machine in Malaysia and Vietnam.

i. Determine if the laser engraver machine being priced equally. (4 marks)

5,407.62 = 8,000,000/1,500

ii. Is the laser engraver machine in Vietnam undervalued or overvalued? (2 marks)

Yes indeed, laser engraver machine in Vietnam overvalued.

iii. Calculate the implied Purchasing Power Parity (PPP) rate of exchange based on the two
product prices. (4 marks)
S = P1/P2
5,407.62 = 8,000,000/1,500

iv. Based on the implied PPP, calculate the percentage of the laser engraver machine in
Vietnam being undervalued or overvalued. (4 marks)
S = P1/P2
5,407.62 = 8,000,000/1,500
S = 8%

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Date: 30 April 2022 Course: BBCF4073 International Finance

QUESTION 4 (20 MARKS)

(a) Discuss how margin payments protect the clearing house. (4 marks)

The initial margin can be viewed as a good faith assurance that the trader can afford to hold
the trade until it is closed. These funds are held by the clearing firm but within the trader's
account, and can't be used for other trades. The intention is to offset any losses the trader may
experience in the transaction.

(b) Name TWO (2) commodity futures available in Bursa Malaysia Derivatives Berhad.
(2 marks)
I. Commodity Derivatives (Crude Palm Oil Futures (“FCPO”),
II. Gold Futures (“FGLD”),
III. USD RBD Palm Olein Futures (“FPOL”)

(c) Logan deposited RM9,000 as margin to buy two FCPO contracts at a price of RM2,200
per metric ton. At the end of the day, the FCPO price settle at RM2,250. Logan decides to
hold the position until Day 2. On Day 2, the FCPO price went up to RM2,320 and Logan
decided to realise his profit by closing his position.

i. Calculate the cash position of Day 1. (3 marks)

Cash position at day 1= 2250-2200= +50

ii. Compute Logan’s realised profit on Day 2. (3 marks)

Profit on day 2= 2320-2250= +70

(d) Aluna deposited RM13,500 as margin to buy three FCPO contracts at a price of RM2,000
per metric ton. At the end of the day, the FCPO price settle at RM1,970. Aluna decides to hold
the position until the next day anticipating the price might goes up again. On Day 2, price of the
FCPO increases to RM2,150, thus Aluna still hold on to her investment. On Day 3, the market
declines and FCPO price drops to RM2,040 and she decides to sell and close out her FCPO
position.

i. Calculate the cash position of Day 1. (2 marks)

Cash position at day 1= (1970*3)-(2000*3)= -90

ii. Compute Aluna’s cash balances on Day 2. (3 marks)

Cash balances on day 2= (2150*3)-(2000*3)= +450

iii. Calculate Aluna’s profit / (loss) from her futures trading. (3 marks)
Total profit from futures trading= (2040*3)-(2000*3)= +120

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Date: 30 April 2022 Course: BBCF4073 International Finance

QUESTION 5 (20 MARKS)

(a) Explain the following option terminologies:

i. Put option. (2 marks)

A put option gives you the right, but not the obligation, to sell a stock at a specific price
(known as the strike price) by a specific time at the option's expiration. For this right, the put
buyer pays the seller a sum of money called a premium.

ii. Strike price. (2 marks)

A strike price is a set price at which a derivative contract can be bought or sold when it is
exercised. For call options, the strike price is where the security can be bought by the option
holder; for put options, the strike price is the price at which the security can be sold.

(b) Differentiate American style options from European style options. (4 marks)

The European Style Options: can be exercised only at expiration and American Style Options:
can be exercised at any time prior to expiration.

European and American style options are not regional options. They are actually terms used to
describe two different types of option exercise. The majority of CME Group options on futures
are European style and can be exercised only at expiration. Some of the notable exceptions
that have American style expiration are the quarterly options on the S&P500 futures contracts,
Eurodollar options, and Treasury options. Even though most CME Group options are
European-style and can be exercised only at expiration, it is important for traders to understand
style of option they are interested in trading.

c) Assume you purchase 100 units of Xynavane share at RM105 per share. To protect your
investment, your remisier advise you to also purchase an option as back up. Since share prices
fluctuates all the times, and you scared risking your total investment, you agreed to the
remisier’s suggestion and proceed to buy the option at a strike price of RM105 per share. The
option has an expiration date of 30 days and you pay RM600 as the premium.

i. Calculate the total cost of your shares. (2 marks)

Number of shares * Price per share
That is 100 * 105 = RM 10,500

ii. Identify the type of option that you should purchase. (2 marks)
Here we brought shares, therefore, we are afraid that the price of shares would fall Therefore
we have to do something so that the reduction in the price of shares will benefit us. Therefore,
it is advisable to buy a put option. We know that a put option is a right to buy at a predetermined
price called the exercise price/Strike price. Now we have the exercise price of RM 105. When
the share price moves below RM 105, we will benefit by exercising the option and making profit
So that loss on purchasing the shares will net off. Therefore, the option that need to be brought
is the put option

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Date: 30 April 2022 Course: BBCF4073 International Finance

iii. Assume the price of the shares goes up to RM127 per shares:

1. Decide on your option exercise right. (2 marks)

RM1,270

2. Calculate the net profit / (loss) from the above investment. (2 marks)
RM1.27

iv. Assume the price of the shares goes down to RM97 per shares.

1. Decide on your option exercise right. (2 marks)

RM9,700

2. Calculate the net profit / (loss) from the above investment. (2 marks)
RM9.70

-END OF QUESTIONS-
Thank you and good luck!

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