IFM 2017 Final Exam-Solution-Sample
IFM 2017 Final Exam-Solution-Sample
IFM 2017 Final Exam-Solution-Sample
Explain how a firm can use currency diversification to reduce transaction exposure.
ANSWER: If a firm has net inflows in a variety of currencies that are not highly correlated with each other, ex
Question 2 (4 marks)
(a) As Firm Ohio has comparative advantage in USD market and Firm B has comparative advantage in GBP market. Net spre
(b) If they split the saving, then the saving for each firm will be 20 b.p. the interest payment for Firm Ohio: 8.4% -0.2%= 8.2
(c) (1) Firm Ohio borrows USD at 7% and lends to Firm Asco at 7.2%. Firm B borrow GBP at 9% and lends to Firm Ohio at 8.4
Firm Asco (wants USD) Swap rate workout Assume Ohio pays 8.2% to Asco on GBP loan;
Pays GBP 9% to the bank Effective interes rate of Ohio = 8.2% = 7%-X%
Receives GBP 8.2% from firm Ohio Solve this equation for X and get X=7%
Pays USD 7% to Ohio Therefore, the swap rate should be
Net interest costs: 7%+9%-8.2%= 7.8% aggregate Ohio pays 8.2% to Asco on GBP loan; Asco pa
(c) (2) Firm Ohio borrows USD at 7% and lends to Firm Asco at 7%. Firm B borrow GBP at 9% and lends to Firm Ohio at 8.2%
Firm Ohio Firm Asco Saving (in bp) Effective borrowing costs from swap
GBP 8.40% 9.00% 20 8.20%
USD 7.00% 8.00% 20 7.80%
e in GBP market. Net spread across USD and GBP markets = 1%-0.6% = 0.4% or 40b.p.
m Ohio: 8.4% -0.2%= 8.2% Interest payment for Firm Asco: 8% - 0.2% = 7.8%
d lends to Firm Ohio at 8.4% (this is just one example of possible swap rates and there can be many other possible swap rates as long as
ends to Firm Ohio at 8.2% (this is just one example of possible swap rates and there can be many other possible swap rates as long as U
ossible swap rates as long as USD rate is not higher than 8% and GBP rate is not higher than 9%)
ssible swap rates as long as USD rate is not higher than 8% and GBP rate is not higher than 9%)
Question 4 Answers:
1) Forward hedge
Purchase S$2,000,000 one year forward:
S$2,000,000 $.66 = $1.32M
Amount paid
per Unit Total amount
Possible Premium Exercise (including Paid for
Spot Rate per Unit Option? the premium)S$2,000,000 Probability
$0.61 $0.03 No $0.64 $1,280,000 20%
0.63 0.03 No 0.66 1,320,000 50%
0.67 0.03 Yes 0.69 1,380,000 30%
4) Unhedged Strategy
Total
Possible Amount Paid
Spot Rate for S$2,000, Probability
$0.61 $1,220,000 20%
0.63 1,260,000 50%
0.67 1,340,000 30%
The unhedged strategy is preferable to forward hedge because the expected unhedged value is better than hedged
Therefore, the unhedged strategy is the best compared to other 3 alternative strategies
$1,343,333.33)
ed value is better than hedged value of forward hedge, so it will outperform the forward hedge.
Question 5 Answers:
30% 55%
Scenario 2:
Scenario 1: No Remittance Must be Scenario 3: Rand Scenario 4: Both types of
Country risk Invested for 1 year Remittance tax country risk
NPV
NPV Probability Probability Probability
Scenario 1 36,400.00 0.315 11,466.00
Scenario 2 -56,784.00 0.135 -7,665.84
Scenario 3 0.00 0.385 0.00
Scenario 4 -87,360.00 16.50% -14,414.40
1
Total NPV -10,614.24
discount rate 25%
1d
2d
3c
4a
5e
6e
7b forward hedge 1M USD= 1.06M AUD Money market hedge
borrow USD USD 990099.00990099
Sell USD and AUD 1019801.980198
Deposit AUD
FV of depositAUD 1,070,792
20 c ((0.79-0.75)-0.02)= 0.02
09,200 = $600.
0.0768674699