Please answer ALL questions
Question 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% |
a. According to the International Fisher Effect what is the reason for the difference in interest rates?
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.
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
c. Explain how the carry trade is relevant to their intended investment.
Question 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 |
2.23 |
-5.51% |
| China |
USD/CNY |
6.13 |
0.33% |
| Russia |
USD/RUB |
36.9305 |
11.09% |
| UK |
GBP/USD |
1.64 |
-2.98% |
a. Identify which currencies have gained in value against the US dollar (USD) over the previous year. Explain your selection.
b. Calculate the cross exchange rate between British Pounds (GBP) and Roubles (RUB).
c. 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.
Question 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.
Question 4. Evaluate the different methods by which an exporter can be assured of payment without having to demand prepayment.
Question 5. Lackaday plc has been offered the following quotes:
| Strike Price (in pence) of $1 of option |
Premium (pence) |
TYPE |
| 67 |
3 |
CALL |
| 58 |
3 |
PUT |
a. Calculate the maximum and minimum effective price of a dollar being offered by these two options.
b. Draw up a contingency table for the CALL option given the prospect of maturity prices of 50p, 60p, 70p, and 80p.
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.
d. Evaluate how derivatives (options, futures and swaps) can reduce the risk of variation in exchange rates.