Explain how the carry trade is relevant to their intended investment.

/in /by

International Financial ManagementASSIGNMENT
Notes:
? Your answers are marked in accordance with the Universitys grade descriptors
(see the last page}.
? Answers are marked on the basis of what can reasonably be conveyed given a
word limit of 3,000 words (i.e. 1 mark = 30 words is an approximate guide to
the required length of an answer).
? You must make clear which question and which section of the question you are
answering.
? You must attempt all sections of the questions. Failure to do so will result in a
zero mark for that section and a deduction of at least 3 further marks.
? Marks depend on a clear presentation and explanation/discussion as required.
This applies equally to numerical and non-numerical questions; this implies that
questions that are numerical in nature must include clear explanations. At least
half the marks in any one numerical section will depend on a clear, concise
explanation using words as well as numbers.
The assignment must be uploaded as one document only, in Word or PDF format, via
Turnitin to RKCs OnlineCampus.
Please answer ALL questions
1. Turbot plc is seeking to invest internationally; interest rates being offered on
safe investments (government bonds) are as follows:
Country Interest rate
Argentina 14%
Brazil 10%
Switzerland 0%
United Kingdom ½%
2
a. According to the International Fisher Effect what is the reason for the difference
in interest rates? (6 marks)
b. A fellow investor, Mr A, comments: “Brazil is a good bet, the rates were the
same last year and the Brazilian real (BRL) went from 28 pence to 27 pence”
i. Calculate the percentage profit made by Mr A. (6 marks)
ii.Estimate whether or not Brazil is a good investment this year? Explain how
the concept of a risk premium is relevant to your answer (6 marks)
c. Explain how the carry trade is relevant to their intended investment. (6 marks)
2. Given the following exchange rates taken from the internet:
Country Currency code Exchange rate Yearly change in
the exchange rate
Australia AUD/ USD 0.9368 1.09%
Brazil USD/BRL 2.2300 -5.51%
China USD/CNY 6.1300 0.33 %
Russia USD/RUB 36.9305 11.09%
UK GBP/USD 1.6400 -2.98%
a. Identify which currencies have gained in value against the US dollar (USD) over
the previous year. Explain your selection. (6 marks)
b. Calculate the cross exchange rate between British Pounds (GBP) and Roubles
(RUB). (6 marks)
b. How might triangular arbitrage be used if the actual exchange rate between the
British Pound and the Rouble differed from the cross exchange rate? Include
an example using a direct exchange rate of GBP/RUB 58. (6 marks)
3. The borrowing rates for two companies are:
Company UK US
Chancy plc 20% 22%
Dull plc 13% 10%
Chancy wants to borrow in US Dollars and Dull plc wants to borrow in British
Pounds. Explain by giving an example how a swap arrangement can be used to
lower the cost of borrowing for both Chancy and Dull. (8 marks)
4. Evaluate the different methods by which an exporter can be assured of payment
without having to demand prepayment. (25 marks)
3
5. Lackaday plc has been offered the following quotes:
Strike Price (in pence)
of $1
Premium
(pence)
TYPE
of option
67 3.0 CALL
58 3.0 PUT
a. Calculate the maximum and minimum effective price of a dollar being offered
by these two options. (4 marks)
b. Draw up a contingency table for the CALL option given the prospect of maturity
prices of 50p, 60p, 70p, and 80p. (4 marks)
c. Show how a put can be used to eliminate the cost of the call option and critically
compare your answer with just taking out a call option. (7 marks)
d. Evaluate how derivatives (options, futures and swaps) can reduce the risk of
variation in exchange rates. (10 marks)
ANY QUERIES
Any questions of a general nature should be posted in the Forum thread. Questions of
a more personal nature should be emailed to duffill@rkc.edu.