International Financial Management

International Financial Management

Final Assessment

Deadline: See the Syllabus.

Word Limit: 3,000 words,

ASSIGNMENT Notes:  Your answers are marked in accordance with the University’s grade descriptors (see the last page}.  Answers are marked on the basis of what can reasonably be conveyed given a word limit of 3,000 words (i.e. 1 mark = 30 words is an approximate guide to the required length of an answer).  You must make clear which question and which section of the question you are answering.  You must attempt all sections of the questions. Failure to do so will result in a zero mark for that section and a deduction of at least 3 further marks.  Marks depend on a clear presentation and explanation/discussion as required. This applies equally to numerical and non-numerical questions; this implies that questions that are numerical in nature must include clear explanations. At least half the marks in any one numerical section will depend on a clear, concise explanation using words as well as numbers. The assignment must be uploaded as one document only, in Word or PDF format, via Turnitin to RKC’s OnlineCampus. Please answer ALL questions 1. Turbot plc is seeking to invest internationally; interest rates being offered on safe investments (government bonds) are as follows: Country Interest rate Argentina 14% Brazil 10% Switzerland 0% United Kingdom ½% 2 a. According to the International Fisher Effect what is the reason for the difference in interest rates? (6 marks) b. A fellow investor, Mr A, comments: “Brazil is a good bet, the rates were the same last year and the Brazilian real (BRL) went from 28 pence to 27 pence” i. Calculate the percentage profit made by Mr A. (6 marks) ii.Estimate whether or not Brazil is a good investment this year? Explain how the concept of a risk premium is relevant to your answer (6 marks) c. Explain how the carry trade is relevant to their intended investment. (6 marks) 2. Given the following exchange rates taken from the internet: Country Currency code Exchange rate Yearly change in the exchange rate Australia AUD/ USD 0.9368 1.09% Brazil USD/BRL 2.2300 -5.51% China USD/CNY 6.1300 0.33 % Russia USD/RUB 36.9305 11.09% UK GBP/USD 1.6400 -2.98% a. Identify which currencies have gained in value against the US dollar (USD) over the previous year. Explain your selection. (6 marks) b. Calculate the cross exchange rate between British Pounds (GBP) and Roubles (RUB). (6 marks) c. How might triangular arbitrage be used if the actual exchange rate between the British Pound and the Rouble differed from the cross exchange rate? Include an example using a direct exchange rate of GBP/RUB 58. (6 marks) 3. The borrowing rates for two companies are: Company UK US Chancy plc 20% 22% Dull plc 13% 10% Chancy wants to borrow in US Dollars and Dull plc wants to borrow in British Pounds. Explain by giving an example how a swap arrangement can be used to lower the cost of borrowing for both Chancy and Dull. (8 marks) 4. Evaluate the different methods by which an exporter can be assured of payment without having to demand prepayment. (25 marks) 3 5. Lackaday plc has been offered the following quotes: Strike Price (in pence) of $1 Premium (pence) TYPE of option 67 3.0 CALL 58 3.0 PUT a. Calculate the maximum and minimum effective price of a dollar being offered by these two options. (4 marks) b. Draw up a contingency table for the CALL option given the prospect of maturity prices of 50p, 60p, 70p, and 80p. (4 marks) c. Show how a put can be used to eliminate the cost of the call option and critically compare your answer with just taking out a call option. (7 marks) d. Evaluate how derivatives (options, futures and swaps) can reduce the risk of variation in exchange rates. (10 marks) ANY QUERIES Any questions of a general nature should be posted in the Forum thread. Questions of a more personal nature should be emailed to duffill@rkc.edu. 4 The University’s general Marking Criteria for this level of study are as below:

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