Mid-term

INTERNATIONAL FINANCE MANAGEMENT

Students are allowed to use the materials when doing the test.
Students submit work on LMS before 11h30 on Oct 6th, 2023

Student Name:----------------------------------------------------------------------------------------------

MSSV:--------------------------------------------------------------------------------------------------------

QUESTION 1 (01 POINTS): Restate the following one-, three-, and six-month outright
forward ($/1£) bid-ask quotes in forward points (forward swap rate).

Spot 1.3431-1.3436
One-Month 1.3432-1.3442
Three-Month 1.3448-1.3463
Six-Month 1.3488-1.3508

QUESTION 2 (03 POINTS): Student fill in the blank below and solve the problem

The 1-year deposit and lending interest rate in New York is............. %/year; in London
is..............%/year.
Spot Rate 1GBP = USD 1.2430 - 1.2450
The 1 year forward rate 1GBP = USD 1.2610 – 1.2680
The price of GBP on a 1-year Future contract is 1GBP = USD 1.2640.

I.1. Should an American exporter who will receive £2 million within the next 1 year hedge this
payment by using a forward contract if this exporter makes decisions based on the theory of interest
rate parity (01 POINT).

I.2. Should an American importer who will pay £3 million within the next 1 year hedge this
payment by using a forward contract if this importer makes decisions based on the theory of
interest rate parity (01 POINT).

I.3. Should an American importer who will pay £3 million within the next 1 year hedge this
payment with a Futures contract (The price of GBP on a 1-year Future contract is 1GBP = USD
1.2640)? (0.5 POINT).

I.4. Should an American exporter who will receive £2 million within the next 1 year hedge this
payment by using Futures contract if this exporter makes decisions based on a 1-year Future price
forecast of 1GBP = USD 1.2690. (0.5 POINT).

QUESTION 3 (03 POINTS): Student fill in the blank below and solve the problem

An investor is considering the purchase of five three-month Japanese yen call options with a
striking price of 96 cents per 100 yen. The premium is …………cents per 100 yen. The spot price
is 95.28 cents per 100 yen and the 90-day forward rate is 95.71 cents. The investor believes the
yen will appreciate to $1.00 per 100 yen over the next three months. As the investor’s assistant,
you have been asked to prepare the following:
1. Graph the call option cash flow schedule. (0.5 POINT).
2. Determine the investor’s profit if the yen appreciates to $1.00/100 yen. (0.5 POINT).
3. Determine the investor’s profit if the yen only appreciates to the forward rate. (01 POINT).
4. Determine the future spot price at which the investor will only break even. (01 POINT).

QUESTION 4 (03 POINTS): Student fill in the blank below and solve the problem

Describe (01 POINT), make a payoff table (01 POINT) and draw a profit/loss graph (01 POINT)
an optimal option strategy for an American exporter who will receive £…………..million (which
needs to be hedged against foreign exchange risk) in case where GBP is forecast to decrease
sharply against USD.