FNCE90016 INTERNATIONAL FINANCIAL MANAGEMENT PRACTICE MIDTERM

FNCE90016 INTERNATIONAL FINANCIAL MANAGEMENT

PRACTICE MIDTERM

  1. Describe how the following transaction would be recorded in the Australian balance of payments: An Australian visiting Japan purchases a pair of ski-boots, using her debit card to make the payment from her Australian savings account.
    • A debit in the capital account, a debit in the current account and a credit in the reserve account.
    • A credit in the current account and a debit in the capital account.
    • A debit in the current account and a credit in the reserve account.
    • A debit in the current account and a credit in the capital account.
    • None of the above.
  2. The following quotations are available for you as a customer to transact in Euros and Pounds against the USD:
  Bid Ask
S(USD/EUR) 1.0578 1.0582
S(USD/GBP)           1.2370    1.2376

The price at which you could sell Euros and buy Pounds quoted as a direct quote for EUR is:

  • 8555
  • 8547
  • 1700
  • 1690
  • None of the above.
  1. The following quotations are available for you as a customer to transact in the AUD and USD FX and annual interest rate markets:
  Borrow Lend
iAUD 5.0% 4.7%
iUSD                    3.1%        2.8%

Bid                                     Ask

S(USD/AUD)       0.7501    0.7508

The price at which you could buy AUD and sell USD via spot and money markets settling in 1 year is:

  • 7372.
  • 7344. (c) 0.7625.
  • 7393.
  • None of the above.
  1. The annual rate of inflation in Japan is 2% and in the US is 3%. According to both absolute and relative purchasing power parity, the following statement regarding the USD vs. JPY exchange rate is true:
    • The JPY is expected to depreciate against the USD by approximately 1%.
    • The USD is expected to depreciate against the JPY by approximately 1%.
    • The JPY is expected to depreciate against the USD by approximately 5%.
    • There is not enough information to answer this question.
    • None of the above.
  2. Find the dollar value today of a one year call option on €20,000. The spot exchange rate is €1.00 = $1.00 and the strike price is the current spot price. In one year’s time, the euro will either increase in dollar value to $1.50 or fall to $0.75. The interest rate in dollars is iUSD = 5% and the interest in euros is iEUR = 4%.
    • $3296.70
    • $3333.33
    • €3296.70
    • $3083.03
    • None of the above.
  3. For an American call option, A and B in the graph are:
    • A = intrinsic value and B = time value.
    • A = time value and B = intrinsic value.
    • A = in-the-money and B = out-of-the money.
    • A = delta and B = theta (e) None of the above.
  4. A Japanese investor is considering purchasing US stocks. The investor believes that the Japanese yen tends to weaken when equities perform well and tends to strengthen when equities fall in value. Which of the following strategies results in the lowest expected portfolio volatility, if this investor’s beliefs about correlations are true:
    • Do nothing, if he is correct, hedging the currency exposure would actually increase the portfolio volatility.
    • Sell USD / buy JPY in the forward market today.
    • Buy USD / sell JPY in the forward market today.
    • Buy a USD call / JPY put today.
    • None of the above.
  5. Over the long term, a country with a fixed exchange rate regime that also wishes to maintain free international flows of capital must:
    • Maintain capital account surpluses.
    • Prevent domestic investors from purchasing overseas assets.
    • Set monetary policy to ensure that sufficient foreign exchange reserves are maintained.
    • Set monetary policy to maximize local economic growth.
    • None of the above.
  6. The following quotations are available for you as a customer to transact in AUD, NZD and USD:
Dealer Pair Bid Ask
A S(USD/AUD) 0.7501 0.7508
B S(USD/NZD) 0.6935 0.6945
        C            S(NZD/AUD)       1.0830    1.0840

At these prices:

  • There is a triangular arbitrage opportunity and it involves selling AUD and buying NZD at the S(NZD/AUD) rate with Dealer C.
  • There is no triangular arbitrage opportunity.
  • There is a triangular arbitrage opportunity and it involves selling AUD and buying USD at the S(USD/AUD) rate with Dealer A.
  • There is a triangular arbitrage opportunity and it involves buying AUD and selling NZD at the S(NZD/AUD) with Dealer C.
  • None of the above.
  1. A trader holds a long Euro / short US dollar futures position on the CME at 1.0500 in an amount of EUR 125,000. The initial performance bond is $6,500 and the maintenance performance of the bond is $4,000. Tomorrow, the spot price is 1.0100. To maintain the position, she must:
    • There is not enough information to answer this question. We must know about the future path of the contract price.
    • Contribute $2500 to her margin account.
    • Do nothing, she has a sufficient amount of money in her margin account.
    • Contribute $5000 to her margin account.
    • None of the above
  2. The owner of an American EUR call vs. the USD has the right to:
    • Sell EUR and buy USD at the strike price at maturity.
    • Buy EUR and sell USD at the strike price at any time until maturity.
    • Sell EUR and buy USD at the strike price at any time until maturity.
    • Buy EUR and sell USD at the spot price at any time until maturity.
    • None of the above.
  3. An Australian investor purchases 500 shares of the SPY ETF today at a price of USD 234.50. She uses Australian dollars converted at today’s spot rate of 0.75 to pay for the shares. In one year’s time, the ETF has gained 11% in value while the S(USD/AUD) rate is now 0.84. Assuming she left the position unhedged, her net profit or loss in Australian dollars in % is:
    • A profit of 0.90%
    • A loss of 0.89%
    • A profit of 11%
    • A loss of 12%
    • None of the above.
  4. Suppose the residents of country A own a total of $100bn of foreign assets and that these earn an average annual interest rate of 5% (paid quarterly) but foreigners do not own any assets of country A. It must be true that:
    • There will be a credit and debit entry in the capital account, that net to zero, capturing the payment of income from these holdings.
    • There will be a credit and debit entry in the current account, that net to zero, capturing the payment of income from these holdings.
    • There will be a net debit entry in the current account and a net credit in the capital account account capturing the payment of income from these holdings.
    • There will be a net credit entry in the current account and a net debit in the capital account account capturing the payment of income from these holdings.
    • None of the above
  5. Suppose you own a EUR put / USD call with a strike price equal to spot price and expiry in one month. One month interest rates are 3% (annualized) in both EUR and USD. If, after entering into the option contract, the FX rate S(USD/EUR) appreciates by 1%, the value of the option will:
    • Fall, all else being equal – the delta of this position with respect to the S(USD/EUR) is negative
    • Rise, all else being equal – the delta of this position with respect to the S(USD/EUR) is negative
    • Fall, all else being equal – the delta of this position with respect to the S(USD/EUR) is positive
    • Rise, all else being equal – the delta of this position with respect to the S(USD/EUR) is positive
    • None of the above.
  6. Expected inflation in country X is higher than expected inflation in country Y. According to the relative purchasing power, the direct quote for X (i.e. from the perspective of country Y) in the spot market in one year’s time is expected to:
    • be higher than today’s value – currency X is expected to appreciate relative to

Y

  • be lower than today’s value – currency X is expected to depreciate relative to Y
  • be higher than today’s value – currency X is expected to depreciate relative to

Y

  • be lower than today’s value – currency X is expected to appreciate relative to

Y

  • None of the above