Sie sind auf Seite 1von 11

INTERNATIONAL FINANCE

TYBMS_INTERNATIONAL FINANCE SOLUTION FOR 2012-2013 1. Explain in brief:

QUEST TUTORIALS

______________________________________________________________________________________

2. Junk Bonds: Companies with very poor credit rating or entering into high risk business ventures issue such bonds. These bonds carry coupon rates at-least 3 - 4% above the normal rates. A characteristic feature of these bonds is the high turnover of investors. Such bonds are used by corporate entities and individuals to make short term gains on temporary surplus liquidity. 3. Participatory Notes : Participatory notes (PNs / P-Notes) are instruments used by investors or hedge funds that are not registered with the SEBI (Securities & Exchange Board of India) to invest in Indian securities. Participatory notes are instruments that derive their value from an underlying financial instrument such as an equity share and, hence, also known as, 'derivative instruments'. Indian based brokerages buy Indian-based securities and then issue PNs to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors. Participatory notes are instruments used for making investments in the stock markets. However, they are not used within the country. They are used outside India for making investments in shares listed in that country. That is why they are also called offshore derivative instruments. In the Indian context, foreign institutional investors (FIIs) and their sub-accounts mostly use these instruments for facilitating the participation of their overseas clients, who are not interested in participating directly in the Indian stock market. For example, Indian-based brokerages buy India-based securities and then issue participatory notes to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors. Any entity investing in participatory notes is not required to register with SEBI (Securities and Exchange Board of India), whereas all FIIs have to compulsorily get registered. Trading through participatory notes is easy because participatory notes are like contract notes transferable by endorsement and delivery. Secondly, some of the entities route their investment through participatory notes to take advantage of the tax laws of certain preferred countries. Thirdly, participatory notes are popular because they provide a high degree of anonymity, which enables large hedge funds to carry out their operations without disclosing their identity.
_________________________________________________________________________________________ nd QUEST TUTORIALS: A-201, 2 floor, Rajdarshan society, Behind ICICI ATM, Dada Patil Wadi, near platform no.1, THANE (W). Contact: 67120221 / 25394777. Website: www.questclasses.com Thane, Dadar & Kalyan

INTERNATIONAL FINANCE

QUEST TUTORIALS

______________________________________________________________________________________

4. Arbitrage: Arbitrage can be defined as an operation which involves simultaneous purchase and sale of equal quantity of asset or currency with the intention of deriving risk-free profit out of imperfect quotations in one or more markets. An arbitrageur is an entity who identifies an opportunity for arbitrage and derives profit from it. Arbitrageurs are not market makers and therefore do not provide any quotations. They only utilize quotations made by others and profit from them, Arbitrage operations help to equalize prices and remove imperfections. There are no arbitrage possibilities in a perfect market. The volume and profit of arbitrage transactions is market dependent. The arbitrageur does not use his/her assessment in this operation. 5. Holgates Principle: This principle states that (1) Premium on base currency is always added whereas discount on base currency is always subtracted from the spot rate to arrive at the corresponding forward rate. (2) Premium on base currency implies discount on variable currency and discount on base currency implies premium on variable currency. 6. Autonomous Transactions: An autonomous transaction is a transaction undertaken in the normal course of business in response to the given environment of price levels, exchange rates, interest rates etc. It does not take into account the equilibrium aspect of the BOP. These transactions effectively represent Current and Capital account transactions. These are classified as Above the Line transactions. These transactions are normally undertaken by market participants other than the Central Bank. BOP is surplus if net balance of autonomous transactions is positive. BOP is deficit if net balance of autonomous transactions is negative. 1. Given: CHF 1.3615 per USD spot (USD/CHF) CHF 1.3595 per USD 6 month forward (USD/CHF) CHF interest rate 2% p.a USD interest rate 4% p.a Identify and calculate interest rate arbitrage (Assume 1 million USD) Ans: Identification: Factor I : (F-S)/S = (1.3595 1.3615) / 1.3615
_________________________________________________________________________________________ nd QUEST TUTORIALS: A-201, 2 floor, Rajdarshan society, Behind ICICI ATM, Dada Patil Wadi, near platform no.1, THANE (W). Contact: 67120221 / 25394777. Website: www.questclasses.com Thane, Dadar & Kalyan

INTERNATIONAL FINANCE
= (0.0015) Factor II : (Rv-Rb)/100 * n/12 = (2 4) /100 * 6/12 = (0.0100) Factor 1 > Factor 2; we borrow Vc CHF to gain Arbitrage

QUEST TUTORIALS

______________________________________________________________________________________

But as it is mentioned in the question to solve assuming borrowing Bc USD Assume borrowing Bc USD as 1 million. Amount Payable: P* (1 + R/100 * n/12) 1000000* (1 + 4/100 * 6/12) = 1020000 USD Amount Receivable: Step A: Convert to CHF = 1000000 * 1.3615 Step B: Invest in CHF = 1000000 * 1.3615 * (1 + 2/100 * 6/12) Step C: Reconvert to USD = (1000000 * 1.3615 * (202/200)) / 1.3595 = 1011485 USD Arbitrage = Amount Receivable Amount Payable = 1011485 1020000 = (8515) If we borrow Bc USD, then there is no opportunity for Arbitrage. Case Study: 1. Different exchange rate systems followed by different countries in the world: FIXED SYSTEM: Provides for stable exchange rates. Exchange rates are officially controlled. The system promoted trade and investments, Rates are artificially controlled and hence may not reflect the correct state of the underlying economy. Subject to devaluation / revaluation by the monetary authority. Devaluation / Revaluation are one time effects which cannot be
_________________________________________________________________________________________ nd QUEST TUTORIALS: A-201, 2 floor, Rajdarshan society, Behind ICICI ATM, Dada Patil Wadi, near platform no.1, THANE (W). Contact: 67120221 / 25394777. Website: www.questclasses.com Thane, Dadar & Kalyan

INTERNATIONAL FINANCE

QUEST TUTORIALS

______________________________________________________________________________________

factored into trade negotiations since they are unpredictable. It provided for greater control over inflation by the monetary authority, FLEXIBLE SYSTEM: Provides for variable exchange rates. Exchange rates are market determined. The system promoted transparency in price discovery. Market established rates reflect the true state of the economic changes. Subject to depreciation / appreciation through market demand / supply forces. Depreciation / Appreciation are gradual effects which can be reasonably predicted and hence can be factored into trade negotiations. The monetary authority has lesser control over inflation. 2. Explain the impact of appreciation of Yuan on Chinese economy 1. Appreciation would significantly cut China's trade surplus or the difference between what it sells to, and what it buys from, its trading partners. 2. One positive effect that the appreciation of the yuan will have on the Chinese economy is the reinforcement of domestic market targeted industries as appreciation will increase the purchasing power of Chinese people. 3. The actual appreciation may lead to much more increase in stock prices later in the future. 4. The yuan appreciation leads to an increase in Chinese export prices in dollars, which leads to a decrease in U.S. imports from China. Evaluate the reactions of emerging economies towards appreciation of Yuan 5. Appreciation represents increase in the value of the currency through market action. It is a continuous process which can be anticipated and is associated with flexible exchange rate system. 3. Evaluate the reactions of emerging economies towards appreciation of yuan Ans. Many of the economies feel they have no choice but to intervene daily in forex markets to prevent their respective currencies from appreciating faster than the yuan. The appreciation in the Asian and Latin American currencies will keep pace with the yuan. This is a long term secular trend for emerging market currencies especially in Asia. 2. Given: USD/SGD 1.5423 1.5433 SGD/GBP 0.3323 0.3333 Calculate GBP/USD quotation
_________________________________________________________________________________________ nd QUEST TUTORIALS: A-201, 2 floor, Rajdarshan society, Behind ICICI ATM, Dada Patil Wadi, near platform no.1, THANE (W). Contact: 67120221 / 25394777. Website: www.questclasses.com Thane, Dadar & Kalyan

INTERNATIONAL FINANCE
(GBP/USD)BID = (GBP/SGD)BID * (SGD/USD)BID = (1/ 0.3333) * (1/ 1.5433) = 1.9441 (GBP/USD)ASK = (GBP/SGD)ASK * (SGD/USD)ASK = (1/0.3323) * (1/1.5423) = 1.9512 The following quote is given in Mumbai 1 USD = Rs. 44.7250 44.7300 Is it a direct or indirect quote? Find the mid rate, spread, and the spread percentage SOLUTION 1. Its a direct quote in India 2. Mid Rate = (Bid Rate + Ask Rate)/2 = (44.7250 + 44.7300) / 2 = 44.7275 Spread = (Ask rate Bid rate) = (44.7300 44.7250) = 0.0050 %Spread = (Spread / Mean Rate) * 100 = (0.0050/ 44.7275) * 100 = 0.0112 % 1USD = Rs. 44.7250 44.7300 Inverse Quote; 100 INR/USD = (100 / 44.7300) - (100/44.7250) 100 INR/USD = 2.2356 - 2.2359 3. Given:USD/CAD 1.1685 1.1695 USD/CHF 1.3785 1.3795 CAD/CHF 1.1885 1.1895

QUEST TUTORIALS

______________________________________________________________________________________

_________________________________________________________________________________________ nd QUEST TUTORIALS: A-201, 2 floor, Rajdarshan society, Behind ICICI ATM, Dada Patil Wadi, near platform no.1, THANE (W). Contact: 67120221 / 25394777. Website: www.questclasses.com Thane, Dadar & Kalyan

INTERNATIONAL FINANCE
Identify and calculate Triangular Derived USD/CAD USD/CAD = (USD/CHF)BID * (CHF/CAD)BID = 1.3785 * (1/1.1895) = 1.1589 USD/CAD = (USD/CHF)ASK * (CHF/CAD)ASK = 1.3795 * (1/1.1885) = 1.1607 USD/CAD 1.1589 1.1607 Derived; USD/CAD 1.1685 1.1695 Bid 1.1685 > Ask 1.1607 Arbitrage exists Assume borrowing USD as 1 million Gain = (P*B/A) P = (1000000 * 1.1685/1.1607) - 1000000 = ((1000000 * 1.1685 * 1.1885) / 1.3795)) 1000000 = USD 6714 per USD 1 million

QUEST TUTORIALS

______________________________________________________________________________________

_________________________________________________________________________________________ nd QUEST TUTORIALS: A-201, 2 floor, Rajdarshan society, Behind ICICI ATM, Dada Patil Wadi, near platform no.1, THANE (W). Contact: 67120221 / 25394777. Website: www.questclasses.com Thane, Dadar & Kalyan

INTERNATIONAL FINANCE
Forward Rate Calculation Spot GBP/USD 1.9845 1.9855 USD interest rate: 4.1250 4.3750 % p.a GBP interest rate : 5.8750 6.1250 % p.a Calculate Swap points (forward margins) for three months SOLUTION Swap Points Fbid Spot bid Bc Lending Vc Deposit Fask Spot ask Bc Deposit Vc Lending

QUEST TUTORIALS

______________________________________________________________________________________

F(Bid) = SR * (1 + Rv/100 * n/12) (1 + Rb/100 * n /12) = 1.9845 * (404.1250 / 406.1250) = 1.9747 F(Ask)) = SR * (1 + Rv/100 * n/12) (1 + Rb/100 * n /12) = 1.9855 * (404.3750 / 405.8750) = 1.9782 3 months forward GBP/USD 1.9747 1.9782 Bid Points = Fbid Sbid = 1.9747 1.9845 = (0.0098) Ask Points = Fask Sask = 1.9782 1.9855 = (0.0073) 3 Months Swap Points = 98 73
_________________________________________________________________________________________ nd QUEST TUTORIALS: A-201, 2 floor, Rajdarshan society, Behind ICICI ATM, Dada Patil Wadi, near platform no.1, THANE (W). Contact: 67120221 / 25394777. Website: www.questclasses.com Thane, Dadar & Kalyan

INTERNATIONAL FINANCE
4. (a) Distinguish between Gold Standard and Bretton Woods System No 1. Gold Standard

QUEST TUTORIALS

______________________________________________________________________________________

Bretton Woods System

The Gold Standard promoted by the Bank of The Bretton Woods system was introduced England and introduced in 1870, was the first by the IMF in 1946 and represented the first universally Rate implemented Exchange semi-fixed exchange rate determination Determination system system. (Adjustable Peg System) In addition to gold, US Dollars were also accepted as reserve asset.

2. 3.

Only gold was used as reserve asset

The Central bank of each country was Only Federal Reserve Bank of the US was required to announce an official price for required to fix the price of gold in terms of gold in terms of the domestic currency US Dollars Federal Reserve Bank gave an

4.

Each Central Bank gave an unconditional The gold at the official price

guarantee to buy or sell unlimited quantity of unconditional guarantee to buy or sell unlimited quantity of gold at 1 ounce gold = US Dollars 35 5. Every currency note carried an irrevocable Every currency note carried an irrevocable promise 6. of redemption against specific promise of redemption against specific amount of US Dollars. acceptability of the currency. Failure to fulfill the gold convertibility clause resulted in the failure of the system 7. Exchange rates varied between upper and Exchange rates varied between support lower gold points 8. 9. Each currency pair had unique gold points points at (+/-) 1% on either side of parity rates. All currency pairs had a standardized variation range Central exchange rates were based on the Parity rates were fixed against US Dollars by ratio of the official gold rates in the two the respective Central Bank currencies 10. 11. The system had an in-built mechanism for Protection of parity was to be achieved achieving exchange rate stability through intervention International settlements were done in terms International settlements were done in terms quantity of gold. for changing the money supply

The system failed because it lacked flexibility Oversupply of US Dollars reduced the

_________________________________________________________________________________________ nd QUEST TUTORIALS: A-201, 2 floor, Rajdarshan society, Behind ICICI ATM, Dada Patil Wadi, near platform no.1, THANE (W). Contact: 67120221 / 25394777. Website: www.questclasses.com Thane, Dadar & Kalyan

INTERNATIONAL FINANCE
of gold 12. 13. 14. was The Mint Par of Exchange system was difficult. It promoted Bilateral approach any interest 15. of US Dollars

QUEST TUTORIALS

______________________________________________________________________________________

Mechanism for calculating exchange rates Mechanism for calculating exchange rates was The Par Value mechanism promoted a Multilateral approach reserves could be invested to get return on reserves There was no commitment mechanism in the In the Bretton Woods System the IMF gold standard since there was no institutional functioned as a supervisor of the Par Value support to monitor the Mint Parities Mechanism achieve trade equilibrium Rigid system in which liquidity adjustment More flexible with greater liquidity. It In the gold standard the reserves did not earn Under the Bretton Woods System, USD

16.

The Price Specie Adjustment Mechanism Trade policy controls were necessarily to helped in achieving trade equilibrium 4. (b) What are FRNs? State its features? A Floating Rate Note (FRN) is as its name implies, a bond with varying coupon. Periodically

(typically every six months), the interest rate payable for the next six months is set with reference to a market index such as LIBOR. In some cases, a ceiling may be put on the interest rate (capped FRNs), while in some cases there may be a ceiling and a floor (collared FRNs). 5. (a) Explain the term FDI. State its advantages and disadvantages FOREIGN DIRECT INVESTMENT (FDI): Foreign Direct Investment can be described as investment made by a foreign entity in the equity of a domestic company (Target Company) with the intention of participating in the management of the enterprise. Alternatively it can be described as an investment transaction in which an investor from one country (home country) seeks to obtain managerial interest in an entity in another country (host country) for controlling and operating physical assets created through such investments. ADVANTAGES OF FDI: 1. FDI inflows are long-term in nature and therefore do not lead to volatility either in foreign exchange or capital markets 2. Since the investments are in physical assets it is not easy to instantly withdraw such investments therefore there is no panic withdrawal during periods of economic crises
_________________________________________________________________________________________ nd QUEST TUTORIALS: A-201, 2 floor, Rajdarshan society, Behind ICICI ATM, Dada Patil Wadi, near platform no.1, THANE (W). Contact: 67120221 / 25394777. Website: www.questclasses.com Thane, Dadar & Kalyan

INTERNATIONAL FINANCE

QUEST TUTORIALS 10

______________________________________________________________________________________

3. Very often foreign inflows by way of debt or loans get used to finance consumption leading to debt repayment problems and increase in money supply. Such features are not seen in the case of FDI because the funds translate into productive capacity. 4. FDI not only helps to achieve economic growth but also improves the technological knowhow available to the country. This leads to sustainable development. 5. Access to international markets becomes easier and cost effective because the target company can leverage the existing brand of the contributing foreign investor. 6. The single most important advantage of FDI is employment generation which develops marketable skills in the local population and becomes the basis of sustainable economic growth. It effectively helps to build human capital. Disadvantages of FDI: 1. Repatriation, reinvestment and distribution of profits cannot be controlled by the host country. 2. Cultural differences between the foreign investor and the local management can lead to friction as also have adverse social side effects therefore social regulations need to be in place before permitting FDI. 3. Excessive dependence on the foreign entity may result in gradual loss of control over the business entity. 5. (b) State about the role of ECB and its objectives EUROPEAN CENTRAL BANK: (ECB) BACKGROUND: The Bretton Woods Agreement provided the US Dollar with the status of Universal Reserve Asset and simultaneously reduced the importance of European currencies. The idea of a Monetary Union arose out of the need to establish a currency to effectively compete with the US Dollar. The European nations formed a club called the European Union (EU) and achieved integration of trade and convergence of economies. The intention was to create a single frontierless market with a common currency and a common central bank. 16 of the 27 participating members have adopted a common currency called EURO (EUR). During the course of these developments it was essential to create a common institution which would monitor and implement a common monetary policy. The European Monetary Institute (EMI) was established to handle transitional issues of countries adopting the EURO and to prepare for creation of the European Central Bank and the European System of Central Banks (ESCB). In keeping with the
_________________________________________________________________________________________ nd QUEST TUTORIALS: A-201, 2 floor, Rajdarshan society, Behind ICICI ATM, Dada Patil Wadi, near platform no.1, THANE (W). Contact: 67120221 / 25394777. Website: www.questclasses.com Thane, Dadar & Kalyan

INTERNATIONAL FINANCE

QUEST TUTORIALS 11

______________________________________________________________________________________

terms of the Amsterdam Treaty (2 October 1997) the ECB replaced the EMI effective 1 June 1998. The bank assumed full powers effective 1 Jan 1999 when the EURO was introduced. ROLE OF ECB: The ECB has the mandate to administer the monetary policy of the 16 EU member countries who have adopted the common currency EURO. These nations are collectively called EUROZONE. OBJECTIVES OF ECB: 1. To ensure price stability within the Euro-zone through low inflation rates. (Ideally less than 2 %) 2. To define and implement a common monetary policy. 3. To take care of the foreign currency reserves of the ESCB. 4. To promote smooth operation of the financial markets. 5. To maintain an exclusive right over issuance of Euro-banknotes and coins. National Central Banks of participating nations are permitted to mint coins under quantitative control of the ECB. 6. To maintain a stable financial system and monitor the banking sector.

_________________________________________________________________________________________ nd QUEST TUTORIALS: A-201, 2 floor, Rajdarshan society, Behind ICICI ATM, Dada Patil Wadi, near platform no.1, THANE (W). Contact: 67120221 / 25394777. Website: www.questclasses.com Thane, Dadar & Kalyan

Das könnte Ihnen auch gefallen