Attempt all the problems.

Section-A

problem1) What are the different types of risk influences on investment? describe systematic and unsystematic risks.

problem2)a. What is IST?  What is its biggest challenge?

b. What steps has IST followed to meet its biggest challenge?

SECTION B

Case Study

UK Treasurer of A H Corporation expects to receive the payment for wool exports to a customer in Munich in 3 months time. Her marketing department has sold 1000 “100 % Wool suits” for delivered price of 250 Euros each. In financial times on 10th June she reads the following:

Spot FX Rate                              0.850(Euro/Pound)
3 month Forward FX Rate           o.853(Euro/Pound
Pound 3 month interest rate
                    Annualised                   r=5(9/16) (=0.055625)
Euro 3 month interest rate
                    Annualised                     r=7(1/16) (=0.07625)
problems

i) Describe using the above data how the Treasurer could hedge her receipts in Euros by

a) taking forward cover

b) taking money market cover.

ii) What will be the amount of Sterling received if Treasurer took an uncovered (open) position and the spot rate in 3 months time are as follows:

a) 0.653(Euro/Pound)

b) 0.658(Euro/Pound)

c) 0.640(Euro/Pound)

In each case, compare hedged outcome with the uncovered outcome.

c) Does the set of interest and exchange rates prevailing on 15th June conform with covered interest parity? If not, describe how equilibrium would be established in the relevant markets.