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Question Paper International Finance - I : January 2001

Part A : Basic Concepts (30 Points)


This part consists of Questions with serial number 1 -- 30. Answer all questions. All questions carry equal points. Maximum time for answering Part A is 30 minutes. THIS PART IS OMITTED

Part B : Problems (50 Points)


This part consists of questions with serial number 1 -- 5. Answer all questions. Points are indicated against each question. Detailed workings should form part of your answer. Do not spend more than 110 -- 120 minutes on Part B.

1.

A customer approaches an Indian bank for a 6-month rupee - Mexican peso swap. The customer will buy 1 million Mexican peso (Ps) spot against rupee and sell 1 million Mexican peso 6 months forward against rupee. The forward markets for Mexican peso is almost non-existent and volatile. There is however a market in Europeso deposits. The rates quoted in the market are as follows: Spot Rs./Ps 6m Rupee interest rate 6m Peso interest rate You are required to find out what 10.22 8% 12% swap margin the bank should quote to break-even. (8 points)

2.

The following rates were prevailing on 26th September, 2000. Rs./$ 45.95/05 $/Euro 0.8800/05 Rs./Euro 42.20/30 You are required to a. Verify whether there is any scope for three-point arbitrage. b. Calculate the arbitrage profit if you have Rs.1,00,000 in your hand. c. Find out the limits of Rs./Euro rates to ensure no scope of arbitrage. (4 + 4 + 2 = 10 points) Spot

3.

On December 15, 2000 the following quotes are observed on the IMM and New York interbank foreign exchange market: Spot Futures:January March June September $/Euro 0.9125 0.9080 0.9050 0.9000 0.8960 $/ 0.0098 0.0096 0.0093 0.0091 0.0089

You are required to a. Find out the markets long term view of Euros prospects against Yen. b. Suggest a spread strategy if a speculator thinks the Euro is going to move in the opposite direction against the Yen. If the following rates are prevailing on the day of close out the position, what will be the profit/loss to the speculator? Futures:March June September $/Euro 0.9045 0.8990 0.8900 $/ 0.0094 0.0093 0.0092

4.

(4 + 6 = 10 points) An Indian exporter has a receivable of $ 10 million 3 months from now. As the foreign currency options are introduced in India, it is considering to hedge the exposure with either of the following strategies: i. Covered-call writing ii. Protective put. Following rupee-dollar 3 months European options are available in the market: Strike price (Rs.) Premium (Rs./$) Call 45.50 0.60 46.00 0.25 46.50 0.10

Put 0.05 0.25 0.50

5.

You are required to a. Develop pay off profile for both the strategies over the price range of Rs.44.00-Rs.47.00. b. Comment on the desirability of each of the alternatives. (6 + 4 = 10 points) ECB Ltd., an Indian company raises an external commercial borrowing of US$ 10 million at 50 basis points over 6 month Libor. The interest is payable half-yearly and principal will be repaid at the end of 3 years. Rupee-dollar spot exchange rate at the time of raising loan is 45.20/35. The company wishes to cover all its interest payments and principal repayments in the forward market. In India forward contracts are available for a maximum maturity of 6 months. So the company has decided to buy a roll-over forward contract for its principal repayment. The following forward rates are observed in the consecutive 6 months: Period 6 m 12 m 18 m 24 m 30 m 36 m The following 6 month Libor rates are observed: Period 1 2 3 4 5 6 Forward rate 45.30/50 45.50/50 45.80/00 46.10/30 46.30/50 46.60/85 Forward rate 6.25% 6.00% 6.20% 6.50% 6.60% 6.50%

You are required to a. Compute the rupee inflows and outflows (You can assume spot rate after 6 months to be same as current 6m forward rate). b. Compute effective cost of borrowing. (9 + 3 = 12 points) END OF PART B

Group Epsilon

Part C : Applied Theory (20 Points)


6. This part consists of questions with serial number 6 -- 7. Answer all questions. Points are indicated against each question. Do not spend more than 25 -- 30 minutes on Part C.

Write short notes on: a. b. J-curve effect Quality spreads. (5 + 5 = 10 points)

7.

The treasury managers of Indian firms need to forecast the exchange rates in taking some important decisions. What are these decisions which call for forecasting of exchange rates? What are the various ways in which the exchange rates can be forecasted? (10 points) END OF PART C END OF QUESTION PAPER