LINGNAN UNIVERSITY DEPARTMENT OF FINANCE AND INSURANCE, BACHELOR OF BUSINES ADMINISTRATION (HONOURS) FIRST TERM EXAMINATION, 2021-2022 ‘FIN33S2: INTERNATIONAL FINANCIAL MANAGEMENT, ‘TIME ALLOWED : 2 HOURS INSTRUCTIONS: (1) This paper contains FIVE questions. You are required to answer ALL questions, (@) Marks allocated to parts of qusstions are indicated in brackets, (©) Give labeled diagrams where these will make the answers clearer. (4) Smusentseannot use financial ale orsorprogrammable calculators, Only hose non: financisl_and_non-programmable models that are approved by the Hong Kong Examinations and Assessment Authority (HKEAA) can be used, () You ate reminded of the necessity for clear and orderly presentation in your answers Please show all steps of your workings and computations clearly. Otherwise marks will be deducted. For numerical answers, please show four decimal plaess for numbers and two decimal paces for percentages. (©) Answer all questions neatly in the answer book provided and START EACH QUESTION ON A NEW PAGE, (You are required to turn in both question paper and answer book. (8) This paper cartes 100 marks. Distribution of marks is shown below: ucstion Marks Allocated T 15 5 35 25 20 Total Too Marks19052 bursa Fnac! Monge! (Tm 1 of 313023) QUESTION 1 (15 Marks) (@) Assume the euro's spotrateis presently equal $1.10, Allof the following firms are based in Silicon Valley and ate the same size. Although these firms concentra on business in the US, thet entice foreign operations for this quater are provided here. Company A expects its expors to cause cath inflows of 9 million eures and imports to cause cash outflows equal t0 3 milion euros ‘Company B has a subsidiary in Portugal that expoets revenue of $ min eutos and has ‘expenses of | million curs. Company C expects exports to cause cash inflows of 7 million euros and imports to cause cash outflows of 3 million euros. It will repay the balance ofan existing loan equal to 2 rillion dollars Company D expects zero exports and expects import to cause cash outflows of 10 milion Company E will repay the balance of two existing loan equal to 8.5 milion dollars and $ lion euro, ‘Which ofthe five companies described here has the highest degree of translation exposure? Briefly explain, (Smarks) () Your employer, s large MNC, has asked you to assess its transaction exposure. Is projected cash flows are as follows for the next year: Danish krone inflows equal DKS0,000,000, while utflows equal DK40,000,000; British pound inflows equal £2,000,000, while outflows equal £1,000,000. The spot rate ofthe krone is DKS, and the spot rate of the pound i £0.79. Assume thatthe movements in the Danish krone and the British pound ate highly correlated. Provide your calculation and assessment of your firm's degree of transnetion exposure (that is, whether the exposure is high or low), (10 marks)QUESTION 2 (15 Marks) (a) You believe that interest rate party (IRP) and the international Fisher effect (LFE) hho, Assume the US. interest rates presently much higher than the New Zeafand interest rate. You have receivables of | million New Zealand dollars that you wl recive in one year, You could hedge the receivables with the one-year forward contrat, Or yo coud decide to not hedge. Is your expected U.S. dollar amount ofthe receivables in one year fom hedging higher, Tower, oF the same as your expected U.S, dollar amount of the recsvables without ‘hedging? Briefly explain in one or two sentences. (marks) (©) Assume that locational arbitrage ensures that spot exchange rates are properly aligned, Also assume that you believe in purchasing power parity (PPP). The spot rates of the British pound vs, U.S dolla and Swiss fan vs. UK pound ate as follows saws 0.55F ‘You expect the following one-year inflation rates and one-year interest ates inthe U.K., Switzerland and the US, ‘Country ]One-year inflation | One-year interest | rate rate UK 6% ‘Switzerland 2% US. % (1) What isthe eross exchange rate or Swiss franc spot rate in US. dolars that you can derive fiom the other spot rates, that is, the number of U.S. dallas per one unit of | Swiss fran (SSF)? @ marks) (@) What is your expected percentage change in Swiss ane against US. dollar in one year? (marks) (3) What is your expected spot rate of Swiss fran in US. dollar in one year, that is, the ‘umber oF U.S. dollars per one unit of Swiss franc (SSF) in one year? (G marks) Note: You must show all the steps and workings ofeach part)19252 Inert! Phil Menage (Tre! of 201-202) ‘QUESTION 3 (25 Marks) ‘Me Smith is a foreign exchange trader He may use any major cuteney that his bank holds to conduct arbitrage investment, He is authorized to horrow either USS300,000 or 280,000 fiom {he bank and he Faces the following rates. Assume 360 days in a year with no transaction cost “The bid and ask interest retes are the same. Current spot rate of the poun: stare S0aday forward rate of the pound SL3vie Interest rate in the United States 6% peramum Interest rate in the United Kingdom 10% per annum (®) What is the forward premiamiiscount on the pound on an annualized basis (p) (in percentage? (Saris) (©) Based on your answerin pat (a) and the interest rates in these two money markets, which money market would you suggest him to borrow and which money market would you “suggest him fo Jend (invest) to make an arbitrage profi? Briefly explin your answer ‘ness than 100 words. (Saris) (©) Itustate with clear diagram snd detalled steps from Day 1 to Day 90}ow Mr, Smith ‘completes this caverod interest arbitage (CIA), You must show all steps of your ‘workings and computations clearly, Otherwise marks will be deducted. The ending profit should be converted into U.S. dollars. Please note the following. (1) Your step must show clearly how he will zetthe profit on Day 90 and how much the profit wll bein US. dollars (2) Your steps must indicate when, at what rate, and which money market he should borrow and lend and what spot and forward contracts he should buy/sell. In particular, forthe curency cotracs, what currency should he buy snd sell at spot fate and what currency forward should he buy and sll? (15 marks)INS2 bron! Focal Smeomens (Tr of 202-2022 QUESTION 4 (25 Marks) Apply the Value-at-Risk (VaR) method to estimate transaetion exposure 1 exchange rate ‘movements and answer the allowing questions. Assume thatthe monhly percentage changes of ach currency and the monthly percentage changes of the poatolie are normally distibuled The ‘maximum anon lose o the curency portfolios determine by the Tower brary (he etal) DoF the probebiitydisibuion which i about 168 standard deviations away om the expected percentage change in the currency ptt. The home country ithe U.S. an therefore the home Eurrency isthe US. doa. Amazon Corporation, 2 U.S. exporting fim, expects fo receive payments denominated in both in one mori Based on today's spot rates, tne dalla value of the funds to he received next month eatimated at $600,000 for the rupla and $400,000 forthe baht. Amtzon isexposed tos cureney portfolio consisting ofonly tne rth andthe baht Amazoy Wants to decrnine the maxinnum exposed L-moath fst to potential decline in the vale of these eurences (downside risk), Based on a98 percent confidence level. Bas onthe data for the last 30 months, iesimates the sandard deviaton of monthly percentage changes to be 7 cent fr the epi od perce forthe at The cera coin (CORK orp) teen the rpiah and the alt 0-80, Note: You mts show all he sep and worKings of cach part and make sare tha al th signs (02 }are accurate) (Assume thatthe expected percentage change forthe baht during the nest month is -1%. (0) "Whats the meximunt month toss of baht in pereemtage? (6 marks) (2) Suppose the spot rate ofthe baht (S) is $0.03%babt. Based onthe maximum I-month Tos that you atin ftom pat (1) above, what is the abt value? Tati this mai ‘one-month lose occurs, what wl the bats valve detine to? Answer this question using the diet quote of exchange rate where the US. dollar i the home cunency (US. dolla perone ba 6 marks) (@) As mensoned above, the dollar value ofthe funds tobe received next wont is estimated 1 $400,000 for the baht, whats the expected loss in the amouat of US. dolar based ‘nthe aaxianam Issn Toss ftom part (1) above? masks) ) Assume hat the expected percentage change for cach cureney (for both rpih and ba) zero (0%) (that, NOT-1% forthe rupiah any more) an ihe exposed percentage change Torte portale is zero 0%) ering the next month (0) Whats the maxima mon oss of rapa in percentage? 6 mks) @ marks) (@) Based on the dollar value of the estimated fund to be received in rupiahs and bats, ‘what are the weight of ruplah (Ws) and the weight of baht (4) ofthe tworcurTeney porllio consisting ofthe rpiah and the bah? (2) What isthe maximum Iman loss of bat in percentage? @marks) (#) What isthe standard deviation of monthly percentage changes of Gis two-curency portfolio (3) consisting of the rupiah and the baht? Tine: = (Wa? ov Woy 2 Wy Wyos0yCORR)}, G masks) ‘What isthe maximum I-month los of this vo-cureney portfolio in percentage? ‘G marks) 6) (6) Why is the maximum I-momh loss for this two-curency portfolic lower than the ‘maximum loss fr either individual currency (hats, Your answer to (5, i Tes than Your answers to (1) oF (2) above)? Answer this question in one sentence marks)F1N282 nero Pn Magen! (Tm 1 of 202 QUESTION 5 (20 Marks) (a) Galaxy Co. is a US-based company that is establishing project in a poieally unstable ‘country, Is considering two possible sources of finaneing() the parent could provide ‘ios of the financing: o i) the subsidiary could be supported by local loans from banks in that county. Which financing alternative is more appropriate to protect he subsidiary ‘hati, () oF (i)? Briefly explain your answer in Less than 100 wor, (marks) ©) Galaxy Co, has about 50% ofits sales generated from exports to Hong Kong, Galaxy Co. fhas no other international business. I finances its operations with 65% equity and the remainder of funds with dolla-denomsinated debt (i, US. dolla) inthe US. I’boxtows its funds from a U.S, bank stan interest rate of 7 pereent per year The iskefee rate in the U.S. is 2 percent. The risk-free rate in Hong Kong is 3 percent. The stock market reium in the US. is expected to be 13 percent annvally where the stock market return in Hong Kong is expected to be 10 percent annually. Galaxy Co.'s equty beta is L The comporate tax rate inthe U.S. i 30 pereemt while the corporate tax rate in Hong Kong is 15 percent. (1) What isthe cost of equity to Galaxy Ci (Smarks) 2) What isthe ater-tax cost of debt 19 Galaxy Co.? (Smarks) @) What isthe overall cost of capital to Galaxy Co.? (marks) ‘Note: You must show all the steps and workings ofeach part) THE END“