a. According to Purchasing Power Parity which currency area should have had the higher rate of inflation in 2017 and by how much? (6 marks)

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Module Title International Financial Management

Learning Outcomes to be assessed (from module spec.)

1. To examine the impact of such factors as exchange rates, inflation rates and interest rates on the performance of firms and to assess their significance in decision making in an international market/global context

2. To critically evaluate principles and practices guiding financial management of the multinational enterprise

3. To explore factors that differentiate multinational from domestic financial management

4. To devise a risk management strategy to measure and hedge against variation in global financial market prices including financial crises

5. To prepare students for the high-risk high return environment of international finance

Part A Please answer ALL questions in this section Note that this paper uses the standard notation for exchange rates, for example EURUSD 1.1 means “$1.1 for 1 euro” 1.

a. Calculate to 4 decimal places the new exchange rate after a 2% increase in the value of the dollar given a current exchange rate of EURUSD 1.1 (6 marks)

b. Given the following exchange rates calculate the GBPEUR rate to 4 decimal places. EURUSD 1.1043 GBPUSD 1.2970 (6 marks)

c. Explain the relationship between your answer to part b of this question and triangular arbitrage.

2. Consider the following data: Date Exchange rate January 2017 EURUSD 1.100 December 2017 EURUSD 1.144 Take the US dollar as the home currency

a. According to Purchasing Power Parity which currency area should have had the higher rate of inflation in 2017 and by how much? (6 marks)

b. If inflation in the US were 3% higher than in the euro area, calculate the change in the real value of the dollar. What are the implications of this change? (6 marks)

c. What are the implications of a change in the real exchange rate of a currency? (6 marks)

d. Explain why you would expect interest rates in the US to be higher than in the euro area. (6 marks)

e. Explain why you would expect there to be no difference in the interest rates of government bonds of any two countries in the euro area and also explain why in practice there are differences.

Part B please answer TWO questions only from this section

3. Compare and contrast country risk analysis with exchange rate volatility. (25 marks)

4. MNCs promote globalization. Is this a force for good or bad? Discuss. (25 marks)

5. XYZ plc has been offered the following quotes for options on the dollar given a current market price of 60 pence: Strike price of dollar in pence Call premium Put premium 1 year 1 year 62 6.9 3.0 64 5.9 3.8 66 4.8 4.5 67 4.5 5.1

a. Calculate the net payout from a purchased call option at a strike price of 67 pence for the following possible maturity prices 55p, 60p,65p,70p,75p. (6 marks)

b. Calculate the net payout for a written put option at 66p for the following possible maturity prices: 55p, 60p,65p,70p,75p.

a. Calculate the total cost of the dollar if the MNC were to implement part a and part b of this question for the following maturity prices: 55p, 60p,65p,70p,75p . (6 marks)

b. Outline the advantages and disadvantages of purchasing a call at 67p and writing a put at 66p for a MNC importing from the US. (7 marks)

6. Pico plc has borrowed heavily in euros and is worried about increasing interest rates in the eurozone. The Finance Director suggests that Pico plc should sell futures on French bonds (known as OATs or Obligations Assimilables du Trésor).

a. Explain why selling a futures contract on French bonds would reduce the effect of an increase in euro interest rates. (3 marks)

b. Pico sells a futures contract on bonds for €1,010 calculate the daily payments and receipts on the futures contract given the following bond prices: Day 1 Day 2 Day 3 Day 4 Day 5 €1,010 €1,005 €1,001 €1,006 €1,009 (4 marks)

c. Explain why the market insists on daily settlement. (3 marks) The Finance Director also offers two alternatives:

d. One alternative is to engage in an interest rate swap. Explain how this might work. (4 marks)

e. The other alternative is to purchase a PUT contract on euro denominated bonds. Calculate the net profit or loss per unit on a put option contract with a strike price of €1,008 with a premium of €4.00 for the following maturity prices: €985, €1,000, €1,015 and €1,020 (8 marks)

f. Explain how the option contract in part e protects against interest rate rises and how this form of protection differs from the futures contract. (3 marks) E

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