MMAF511 International Corporate Finance Prof.

Name:______________________

Assignment 1 Due: August 18th to be received by noon electronically, after which 5 points will be deducted for late submission. No assignments will be accepted after this date. Instructions: This assignment is to be done strictly on your own without help or discussion with anyone. Be sure to show all your work. For all computations for exchange rates, round to four decimal places. 1. (Limit: 400 words ) From the reading from your textbook, list and explain three strategic motives why firms become multinationals and give an example of each. Market Seekers: Hyundai, a South Korean company has recently shifted a small portion of its car manufacturing divisions to India from it will be exporting to other countries all over the world. Knowledge Seekers: A firm that looks forward to get services like data analysis from foreign soil to complete its needs in its domestic market or in international market would fall under this category. For ex - Most software or telecommunications companies in the US have outsourced their businesses to India because of various reasons. India is considered as a highly efficient and cost effective industry for these companies because it is provides with cheaper manpower (as compared to US), various technologies along with managerial expertise. India has large number of well educated English speaking experts who can give the best quality of services in lesser salaries. Production Efficiency Seekers:

2. (Limit: 400 words ) Most Western nations were on the gold standard for currency exchange rates from 1876 until 1914. Today we have several different exchange rate regimes in use, but most larger economy nations have freely floating exchange rates today and are not obligated to convert their currency into a

predetermined amount of gold on demand. Today several parties still call for the "good old days" and a return to the gold standard. Develop an argument as to why this is a good idea. A system in which each countrys currency was fixed in terms of gold was known as Classical Gold Standard. With the Gold Standard of 1876 - 1913, every country had set a par value of their currency in terms of Gold. For ex - US$ gold rate was $20.67/oz. The rule said, that any country who wished to print more money, need to have equivalent value of gold to back it up. Thus, it always protected the country from unnecessary printing of money and controlling the inflation rate. As it follows a fixed exchange rate, trading between two countries was relatively easier as there is little uncertainty about their exchange rates.

3. Use the table to answer the following question(s).

Refer to Table above. Note that the Forward Rates and the Swaps for the yen and pound Bid and Ask are quoted in swap points.
a.

The midrate current spot rate of dollars per pound as quoted is ________ or pounds per dollar is ________.

b.

What is the outright one-month forward bid price for the Japanese yen per dollar?

c.

Refer to Table above. What is the outright ask price for the dollar two-year swap for a British pound?

d.

Refer to Table above. According to the information provided in the table, the 6-month yen is selling at a forward premium or discount and approximately how much per annum percentage? (Use the mid rates to make your calculations.)

4. Given the following currency exchange rates in the table below, calculate a cross-rates indicated by blanks in the table for the U.S. dollar, Swiss franc, Singapore dollar, Japanese yen, and the British pound. 1 U.S. Dollar Switzerland Singapore Japan U.K. a. 6.4071 1.9104 (a) 0.6376 1 Pound (b) 2.9964 (c) 1.00 1 Yen 0.05250 (d) 1.00 0.005224 1 Singapore dollar 3.3538 1.00 (e) 0.3337

b.

c.

d.

e.

5.

Given the following information, Direct Quotation Bid Ask 0.6784 0.6789 0.6999 0.7002 Indirect Quotation Bid Ask 1.4730 1.4741 1.4282 1.4288

Bank Quotation to U$ Brazilian real Singapore Dollar

a. What are the Brazilian and Singapore currency bid-ask quotations for the direct and indirect quotations? S$/BRZ Bid Cross Rates b. In direct quotation, what is the Bid-Ask percentage spread for the Brazilian real relative to the U.S. dollar? Ask Bid BRZ/S$ Ask

c. In indirect quotation, what is the Bid-Ask percentage spread for the Singapore dollar in (a)?

d. If the indirect quotation for the NZ$ bid and ask rates to the Brazilian real is BRZ1.3196 and BRZ1.3206, respectively, what is the direct bid and ask quotation for the NZ$?

Assume you are a trader with Deutsche Bank. From the quote screen on your computer terminal, you notice that Dresdner Bank is quoting a bid of 1.6230/$1.00 and Credit Suisse is offering at the ask rate SF1.4260/$1.00. You learn that UBS is making a direct market between the Swiss franc and the euro, with an ask current /SF quote of 1.1250/SF1.00. Show how you can make a triangular arbitrage profit by trading at these prices. (Ignore bid-ask spreads for this problem). Assume you have $5,000,000 with which to conduct the arbitrage.
6.

7. You plan to go Japan to visit Tokyo as a tourist and enjoy the sights. If you plan to spend $5,000 during your vacation, what percentage commission spread is the bank earning in providing the transaction service? Assume that the Citibank quote two rates on the Japanese yen: Bid = $0.0041 and Ask = $0.0043.

8. Assume: (1) the U.S. annual interest rate = 10%; (2) the Denmark annual interest rate = 4%; and (3) the 90-day forward rate for the Danish kroner = $0.3864. At what current spot rate will interest rate parity (IRP) hold?

9. Use the following information to answer the following questions: Assume the following: you have $10,000 to invest; the current spot rate of British pounds is $1.800; the 90-day forward rate of the pound is $1.780; the annual interest rate in the U.S. is 4%; the annual interest rate in the U.K. is 6%. a. Where would you invest your $10,000 to maximize your arbitrage profit with no foreign exchange risk?

b. Given the U.S. interest rate, the U.K. interest rate, and the spot rate, what would be an equilibrium forward exchange quotation if IRP returns to equilibrium?

c. Given the spot rate, the forward rate, and the U.S. interest rate, what is the equilibrium U.K. interest rate if IRP returns to equilibrium?