FINA862 International Financial Management
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FINA862
International Financial Management
TIME-CONSTRAINED ASSESSMENT - ONLINE
Trimester 2 2021
Question 1 (6 marks)
A Japanese Investor has invested in a UK govt bond (gilt) priced 1,000 with a yield of 4 percent, and the investor expects the UK yields to decline by 12 basis points over the next year. The duration of the bond is 7. The one year forward exchange rate is ¥129 per £. The Japanese yen cash rate is 1.5 percent and UK pound cash rate is 2.5 percent.
(a) The Japanese Investor has used his own forecasting model to forecast the ¥ per £ exchange rate one year ahead to be ¥119 per £. Based on this forecast, should the Japanese investor hedge currency risk of his investment using forward contract?
(b) If the Japanese investor decides to hedge using a forward contract, give a rough estimate of his expected return.
(c) Verify for the hedged investment that the risk premium in Japanese yen is the same as the risk premium on the same UK govt bond for a UK investor.
Question 2 (9 marks)
You are thinking to invest in an emerging market. Its recent economic growth rate is around 7%, well above the average growth rate of developed countries estimated at 2% by the IMF. Its annual inflation rate is around 10%, well above the average inflation rate of developed countries estimated at 2% by the IMF. The currency of the emerging country has been depreciating at an annual rate of around 8% against major currencies. While the volatility of the World stock index (standard deviation of dollar returns) is around 15%, the stock market of this emerging country has a volatility of 25%. The correlation of this emerging stock market with the World index is only
0.2.
(a) Are the high inflation rate and weak currency sufficient reasons to avoid investing in this emerging country? (3 marks)
(b) Is the high volatility of the local market a sufficient reason to avoid investing in this emerging country? (3 marks)
(c) Suggest why you would consider investing in this emerging country. (3 marks)
Question 3 (8 marks)
A Danish portfolio manager has a significant portion of the portfolio invested in dollar-denominated assets. The portfolio manager is concerned about the political situation surrounding the next U.S. presidential election and fears a potential drop (depreciation) in the value of the dollar. The portfolio manager decides to sell the dollars forward against Danish Krone.
(a) Give some reasons why the Danish portfolio manager should use futures rather than
forward currency contracts? (4 marks)
(b) Give some reasons why the Danish portfolio manager should use forward currency
contracts rather than futures? (4 marks)
Question 4 (8 marks)
BioNTech SE (BNTX) is listed as an ADR in New York on the NASDAQ stock exchange in dollars (USD). It is also listed in Frankfurt in euros. Here are some quotes:
New York (in $) |
354 1/2 - 355 1/8 |
Frankfurt (in €) |
302 ½ - 303 |
$:€ (euros per dollar) |
0.8516 - 0.8529 |
In addition, you must pay a commission of 0.3% in New York or 0.5% in Frankfurt.
(a) Where should you buy BNTX shares if you are an American investor? (2 marks)
(b) Where should you sell BNTX shares if you are an American investor? (2 marks)
(c) If all commissions were waived for a large transaction, would your answer be the same? (4 marks)
Question 5 (6 marks)
You are a portfolio manager based in New Zealand who is considering investing in the Australian stock market, but you are worried about currency risk. You run a regression of the returns on the Australian stock market index (in AUD) on movements in the foreign exchange rate (AUD:NZD) and find a slope coefficient of −0.8.
(a) What is your currency exposure if you invest in a diversified portfolio of Australian stocks? (3 marks)
(b) You invest NZD 5 million in the diversified portfolio, but you fear the Australian dollar will
depreciate by 8% relative to the New Zealand dollar. How much do you expect to lose
because of the currency movement? (3 marks)
Question 6 (6 marks)
A money manager believes that the US dollar will drop (depreciate) and buys one European call option on the British pound at an exercise price of 138 cents per pound. The option premium is 2 cents per pound, or $250 per contract of 12,500 pounds (NASDAQ).
(a) For what range of exchange rates should the investor exercise the call option at expiration?
(b) For what range of exchange rates will the investor realize a net profit, taking the original
cost into account?
(c) If the investor had purchased a European put with the same exercise price and premium,
instead of a call, how would you answer the previous two questions?
Question 7 (7 marks)
You are an American holding some French stocks. Over the year, the value of your French stock portfolio goes from €3.1 million to €3.4 million. The exchange rates move from $1 per euro to $0.96 per euro over the same year.
(a) What is your portfolio’s rate of return in euros? (2 marks)
(b) What is your portfolio’s rate of return in dollars? (2 marks)
(c) Is the difference between the US dollar return and the euro return exactly equal to the
percentage movement in the exchange rate? If not, why? (3 marks)
2022-09-22