PSG INSTITUTE OF MANAGEMENT: PSG CT: COIMBATORE: 09GMA4: International Finance MBA- AU- Term Test- III Time:

1 hour Max: 40 Marks

Set- I

Choose the most suitable answer. One mark each The exercises below assume that the put and the call both have a strike price equal to X, a domestic Tbill has a face value equal to X, and both a foreign T-bill and forward contract pay off one unit of foreign currency at expiration. All instruments expire on the same date. 1. A forward sale can be replicated by: a. selling a put and buying a call. b. selling a foreign T-bill and buying a domestic T-bill. c. buying a put and selling a call. d. both b and c e. all of the above 2. A put can be replicated by: a. buying a call and selling foreign currency forward. b. buying a foreign T-bill and selling a call. c. buying a domestic T-bill, selling a foreign T-bill, and buying a call. d. both a and c e. all of the above Choose the most suitable answer. 3. Sterilised intervention by the monetary authorities is expected to: i.) increase the money supply in the country (ii) bear no ultimate effect on the money supply (iii) neither of the above 4. Demand for foreign currency is primarily influenced by: a. size of export (ii) size of import (iii) neither of the above 5. Domestic currency tends to depreciate owing to: i. high inflation rate (ii) lowering of inflation rate (iii) constant inflation rate True-False Questions 6. An options exposure is the sensitivity of a change in the price of the underlying asset to a change in the options price. 7. Fundamental analysis models analyze macroeconomic variables in an attempt to forecast future changes in the exchange rate. 8. In perfect markets, a managers decision to hedge a firms cash flows is irrelevant because the shareholders can hedge exchange risk themselves. 9. Operating exposure is the exposure that results when the forward rate is at a discount with respect to the spot rate at the moment you sign a sales or purchase contract.

10. Hedging exposure means eliminating all risk from a net position in a foreign currency. 11. Forward exchange contracts are traded on at an organised exchange. 12. The benefits that accrue due to favourable movements in foreign exchange rates can be availed of by using currency options. 13. Leading and lagging is an internal technique of foreign exchange risk management. 14. Translation profits or losses must be reflected in the income statement. 15. The ordinary shares underlying the GDRs can be denominated in any freely convertible foreign currency 16. For each pair shown below, which of the two describes a forward contract? Which describes a futures contract? a. standardized/made to order b. short maturities/even shorter maturities c. for hedgers/speculators d. more expensive/less expensive e. organized market/no organized market Forward contract (a) (b) (c) (d) (e) Futures contract

10 marks each 17. Discuss the Interest Rate Parity Theory and its role in determining the forward exchange rate. 18. Mr Ram leaving on a vocation to US to see his brother. He wish to spend USD1,000 each in Germany, New Zealand, and Great Britain (USD 3,000 in total). His bank offers him the following bid-ask quotes: USD/EUR 1.304-1.305, USD/NZD 0.67- .69, and USD/GBP 1.90-1.95. (a) If he accept these quotes, how many EUR, NZD, and GBP he will have at departure? (b) If he return with EUR 300, NZD 1,000, and GBP 75, and the exchange rates are unchanged, how many USD do you have? (c) Suppose that instead of selling your remaining EUR 300 once he return home, he want to sell them in Great Britain. At the train station, you are offered GBP / EUR 0.66-0.68, while a bank three blocks from the station offers GBP / EUR 0.665-0.675. At what rate are you willing to sell your EUR 300? How many GBP will you receive?