SUMMER 2010 - COURSEWORK

Module Code: IFMI Module Title: International Financial

Markets and Institutions

Program (s): MBA/M.sc Finance Due Date: 16 September 2010, 9:00am

Weighting: 100% of Final mark Word Limit: 3,500 (+/- 10%)

INDIVIDUAL ASSIGNMENT
FOREX DESK BRS

You are a Junior trader at BRS and there is an opening for a Senior trader position in your
Bank. In order to qualify for this position, you are required to have in-depth knowledge of the
risk management tools used by your bank with specific reference to hedging and derivatives.

You have decided to pitch for the position and have been provided with the following basic
information to test your knowledge of the fundamentals of hedging using derivatives as a
basic requirement for the advanced level training you will receive for the position

The above can be likened to the basic knowledge you were required to have during your
master’s degree to progress to your specialisation

You are required to prepare a presentation along the following lines:

A. Exchange Rates
• What are Fundamental determinants of exchange rates? Taking into
consideration the theories of funds flow and theory of foreign currencies as
assets, law of one price and as much as you can find
• Your presentation in this section should cover the empirical evidence that
backs the position of the “fund flow” theory and that of the “asset approach”
• What are the different ways that a foreign exchange rate can be quoted? Give
illustrations of such quotes using the US$ (Dollar) and GBP Pounds Sterling
as examples
• What is the difference between spot and forward exchange rates and how the
spread between spot are is and forwards calculated. You should illustrate this
using current spreads for the US$ and GBP£
• Present a time series plot of the 2009 observations of the British Pound
Sterling per U.S. dollar and the U.S. dollar per Pound Sterling exchange
rates. Did the Pound depreciate in 2009? By how much?
(35 marks)

B. Foreign Exchange Risk Exposure

Suppose that you loaned a British based client 10 million US Dollars for one year pm
the assumption that you are a US firm based in USA
• What is your foreign exchange risk exposure? And what is the client’s foreign
exchange exposure for the duration of this loan?
• Describe how forwards, futures, options, and swaps can be used to hedge
your foreign exchange risk exposure and how the client may also chose to
hedge their exposure.
SUMMER 2010 - Coursework

• What is the difference between an interest rate swap and a currency swap?
How would the knowledge of the difference have been beneficial to your client
and under what circumstance?
(30 marks)

C. Use of Options
• Discuss the different types of foreign currency options Also,
• What is the difference between buying a call option and writing a put
option?
• Explain why two option contracts similar in all respects but with different
expiration dates would not trade at the same premiums.
• Why would deep-in-the-money options never expire unexercised?
• If the GBP were to depreciate against the US$ would a put option or a call
option have been a better choice for your client who is a British exporter?
Illustrate using the currency values obtained in section 1 above

(35 marks)