QUESTION 1. This question contains 5 subparts, please complete all. (Total 10 marks)

I. Which of the following statements is(are) not true? Select all that apply. (2 marks)

A) FX dealers try to buy and sell foreign currencies with the goal of gaining profits. They therefore     quote two prices, a bid rate at which they want to buy a base currency and an ask rate at which they want to sell the base currency.

B) You noticed that the EUR/CHF is trading at 1.0274 at the moment, compared to 1.0294 earlier in the day. Therefore, you understand the Swiss Franc has depreciated against the euro during the day.

C) You asked for a direct quote from your bank, and you are given EUR-GBP0.8492. You are therefore located in London.

D) Two neighbouring countries are each other’s significant trading partner. Both of their currencies trade freely in the FX market without any government interventions. Prices in one country become more expensive, ceteris paribus, prices in the other country will also rise.

II. You observe the USD is trading spot at 0.7086 per AUD, and trading at a 30-day forward rate of 0.7061. The 30-day interest rate at the U.S. is 0.75% p.a. and the rate is 0.35% p.a. at home in Australia.

Which of the following statements is correct? Select all that apply. (2 marks)

A) The USD is selling forward at a premium.

B) Compared to money market prices, the USD is overvalued in the forward market .

C) As a profit-driven trader, you will borrow USD today and use the proceeds to buy AUD at the spot rate, and then invest the AUD for 30 days.

D) In 30 days, you will expect all profit-driven market activities will drive the interest rate differential between the two money markets to be wider.

III. Which of the following statements is(are) correct? Select all that apply. (2 marks)

A) A key function of a bank’s foreign representative office includes providing a broad range of research services including macro, sector and company coverage complemented by trade ideas and investment strategies.

B) Nowadays, European banks are still dominating the world’s Top 10 largest banks, measured by the size of their total assets.

C) A bank can provide client services abroad but avoid having to set up operations in a foreign location by entering into an agreement with a foreign local bank that works as an affiliate bank.

D) Many monetary authorities of major currencies around the world are using existing but reformed versions of short-term interest rates as more reliable replacements of the LIBOR.

IV. Which of the following statements is correct? Select all that apply. (2 marks)

A) Euroyuan bonds are the more popular Eurobonds typically issued by non-Chinese companies that are denominated in yuan and sold to non-Chinese investors.

B) Sushi bonds are yen denominated foreign bonds issued by non-Japanese companies and sold in Japan.

C) When a central bank’s goal is to achieve full financial integration along with a fixed exchange rate, the best strategy that it can use to maintain the value of its currency is to implement capital controls.

D) A small, emerging market economy that is dependent on imports would prefer a floating exchange rate.

V. Which of the following statements is(are) correct? Select all that apply. (2 marks)

A) Sophisticated traders such as Citron Research and Muddy Waters make money by identifying companies with very solid fundamental value and hold them in their long-term portfolios. They often focus on highly publicised foreign companies newly listed in the US.

B) Cross-listed stocks are sometimes traded directly on a stock market as common shares, with a large percentage trading in the form of a depositary receipt.

C) When companies want to cross-list on US stock exchanges, they would ask a US bank to issue        sponsored ADRs on behalf of the foreign company. In these cases, a foreign custodian bank will buy shares of the foreign company from its home market and keep it in trust as the underlying assets for the ADRs.

D) GDRs are used widely by local investment banks to fulfil customer demand and likely without direct participation by the underlying company.

QUESTION 2. This question contains 4 subparts, please complete all. (Total 18 marks) Use only information provided below to answer all subparts.

Sri Lanka is an island nation dependent on imports of critical supplies such as fuel, medication, and food. It exports textiles, garments, and crops such as tea and coffee (mostly to the US and the UK while both import more heavily from elsewhere in all product categories). It is also a popular destination for  foreign tourists. Many Sri Lankan households depend on workers remittances and gifts from relatives   living overseas, such remittances accounted for 8.9% of Sri Lanka’s GDP in 2020.

After years of excessive debt and failed policies to build sustainable growth, Sri Lanka is in an economic crisis with a worsening current account deficit and dwindling forex reserves. The amount of forex reserves is so low it is concerned about not having enough to pay for imports of critical supplies. While the economic troubles grew over time, some considered the following as a “trigger” for rapid economic deterioration.

•   Due to a series of bombings targeting Christian churches and luxury hotels on Easter Sunday, 2019, which killed at least 250 people, and then worldwide COVID-related travel restrictions from 2020 onwards, foreign tourist arrivals to Sri Lanka suffered a steep decline (with some reports stating up to an 80% drop).

Since 2021, the Sri Lankan rupee (LKR) had been pegged to the USD at around USD/LKR197. On March 7, 2022, the Central Bank of Sri Lanka devalued the LKR to USD/LKR230 and later announced it would  not intervene in the FX market any further. LKR’s value has been falling since then and is trading at 361.63 per dollar now. Then, in May 2022, Sri Lanka defaulted on US$78M coupon payments on sovereign foreign debt.

Based SOLELY on the information provided above, answer the following subparts.

1) Compute the percentage change in LKR’s value between March 7 and now. (2 marks)

2) Explain how the “trigger” would impact on the country’s balance of payments. Describe the impact on the specific BOP account & subaccount, the flow of foreign exchange, and the BOP deficit/surplus. Limit your discussion to the primary transaction. (5 marks)

3) Discuss possible reasons behind Sri Lanka’s decision to devalue the LKR, pause further FX interventions, and then to default on debt payments, include specific discussions on supply and

demand. (5 marks)

4) Suppose you are the head of the country’s central bank, what could you do to stop the currency  from weakening any further (please ensure your answer is consistent with your answer for part (3)). Describe the involved changes in currency supply and demand. How effective do you think these measures could be? Discuss all relevant factors. (6 marks)

QUESTION 3. This question contains 6 subparts, please complete all. (Total 25 marks)

In 2022, USD strength surged and the USD index reached a two-decade high in early May. The USD’s strength is in stark contrast against other major currencies; notably, the JPY’s value against the USD crashed to a two-decade low in late April.

(1) Using ONLY information available in the course, explain the drivers for the USD’s rapid change in value in 2022. (5 marks)

(2) Should the US be concerned about this rapid change in its currency? Why or why not? Discuss all potential factors using ONLY information available in the course. (5 marks)

(3) You are an Australian trader. After reviewing the information below, you decide you have enough information to make a trade. Using this information, answer parts (a) to (c).

•   Today’s spot Aussie rate is 0.6919/24 and the Yen rate is 125.4650/750

•   You believe today’s spot rates are the best predictors of the spot rates in one month

•   You have savings of AUD75,000 in your bank account that you plan to use for the trade

•   You are able to borrow, either 48,000 U.S. dollars for one month at 4.17% p.a., or an additional

6 million Japanese yen at 1.50% p.a.

•   You have access to 1-month eurodollar deposit rate 2.92% p.a. and also 1-month euroyen deposit rate 0.25% p.a.

•   All interest rates are discretely compounded.

a) Name the trade you are planning. (2 marks)

b) What is the expected rate of return from your trade in one month? Assume no triangular arbitrage opportunity exists. Show all your workings step by step. (8 marks)

c) Explain the impact of your trade and other similar trades by other market participants on FX prices. Discuss briefly also whether such type of trades would be considered as “stablising” or “destablising”, what do you need to consider?  (5 marks)

QUESTION 4. This question contains 4 subparts, please complete all. (Total 21 marks)

You obtain the following news excerpts from various websites.

[A] “The African Development Bank [a supranational institution] today [2021] launched a AU$600 million 5.5 year [bond], making its return to the Australian dollar bond market … also the largest AUD trade ever issued by the Bank. More than 30 investors participated in the deal … included a strong cohort of Australian investors, while fund managers were the major investor type.”

[B] “Thomson Reuters is to quit the London stock market, 144 years after its shares were first traded in the City. The media conglomerate announced … it would drop its London listing ...Once the plan is approved by shareholders, Thomson Reuters will be listed in Toronto and New York [NYSE], and will also drop its Nasdaq listing.”

[C] “Kuaishou Technology, operator of China’s second-largest short video-sharing app, gave investors plenty to cheer about earlier this year [2021] when it launched the most sought-after initial public offering in the Hong Kong’s stock market. The deal was oversubscribed with demand being 1,204 times the number of shares on offer and HKD41.28 billion (USD5.32 billion) was raised.”

Based SOLELY on the information provided above, answer the following subparts.

1) Identify the sources of funding implied by [A], [B] and [C], respectively. Answers should contain the precise funding method and its specific name, and why you think this is the correct classification. (6    marks)

2) Discuss possible drivers motivating investors to invest in [A]. Reasons provided must be relevant to the specific issuer. (5 marks)

3) Discuss possible drivers motivating the decision of the issuer in [B]. Reasons provided must be relevant to the specific issuer. (5 marks)

4) Discuss possible drivers motivating the decision of the issuer in [C]. Reasons provided must be relevant to the specific issuer. (5 marks)