FINM8007S12021MIDSEMESTEREXAMSOLUTIONS 1 FINM8007 TOPICS IN INTERNATIONAL FINANCE MID-SEMESTER EXAM (SEMESTER 1, 2021) Brief suggested solutions All the parts are independent of one another. You are required to answer all the parts. Part A Answer both parts [i] and [ii]. Parts [i] and [ii] are independent of each other. [i] Assume that you are a Singaporean importer of top-grade Australian Manuka Honey. Initially, the original price of top-grade Australian Manuka Honey exported to Singapore is 8000 Australian dollars (AUD) per tonne and the original exchange rate is 1.20 Singapore dollars (SGD) per AUD. If the SGD subsequently appreciates 20% and you adjust the price of top-grade Australian Manuka Honey in SGD to reflect a 75% exchange rate pass-through, what is the new price of top-grade Australian Manuka Honey in SGD Explain and show your working clearly and completely. [ii] Assume that you are a currency trader of forward exchange contracts in Germany. You observe the following spot and forward quotes for the United States dollar (USD) against the Euro (EUR): Spot rate (USD per EUR) USD/EUR 1.1760 1-month forward rate (USD per EUR) USD/EUR 1.1904 9-month forward rate (USD per EUR) USD/EUR 1.1927 12-month forward rate (USD per EUR) USD/EUR 1.1977 What are the forward premiums or discounts on the EUR Explain and show your working clearly and completely. Give your final answers in annual percentage terms. Part B Assume that you trade forward contracts involving the United States dollar (USD) against the Australian dollar (AUD) in Australia. The forward margins on the AUD are available in the table below. What are the forward premiums or discounts on the USD Explain and show your working clearly and completely. Give your final answers in annual percentage terms. Length of forward contract Forward margin on AUD per annum 30-day contract -22% 60-day contract -7% 180-day contract 9% 270-day contract 12% Part C Assume that you are in Germany. The current spot exchange rate of the Euro (EUR) against the US dollar (USD) is 0.8426 EUR per USD (EUR/USD). Suppose that the spot exchange rate is 0.8730 EUR/USD tomorrow. Has the EUR appreciated or depreciated against the USD Calculate the percentage change in the EUR.
Show your working clearly and completely. FINM8007S12021MIDSEMESTEREXAMSOLUTIONS 2 Part A [i] Original SGD price = SGD 8000 x 1.2 = SGD 9600 Let new exchange rate be SGD/AUD R2. 1.2/R2 – 1 = 0.20 R2 = 1 If 100% exchange-rate pass through SGD price = SGD 8000 x R2 = SGD 8000 x 1 = SGD 8000 Magnitude of decrease in price if 100% pass through = SGD (9600 – 8000) = SGD 1600 Decrease in price if 75% exchange-rate pass through = 0.75 x SGD 1600 = SGD 1200 So, new SGD price of Australian Manuka Honey = SGD (9600 – 1200) = SGD 8400 [ii] 1-month forward premium on EUR = (1.1904/1.1760 – 1) x 360/30 x 100 % = 14.69387755 % = 14.69% 9-month forward premium on EUR = (1.1927/1.1760 -1) x 360/270 x 100 % = 1.893424036 % = 1.89% 12-month forward premium on EUR = (1.1977/1.1760 – 1) x 100% = 1.845238095 % = 1.85 % Comments: Similar questions are available in the lecture slides, Practice Questions and Exercises (PQE), Short Quizzes (SQ), and past year questions. FINM8007S12021MIDSEMESTEREXAMSOLUTIONS 3 Part B Forward rate = F USD/AUD Spot rate = S USD/AUD 30-day forward contract: (F/S -1) x 12 = -0.22 F/S = 11.78/12 30-day forward premium on the USD = (S/F -1) x 12 = (12/11.78 – 1) x 12 = 2.64/11.78 = 22.41086587 % = 22.41 % 60-day forward contract: (F/S-1) x 6 = -0.07 F/S = 5.93/6 60-day forward premium on the USD = (S/F – 1) x 6 = (6/5.93 – 1) x 6 = 0.42/5.93 = 7.082630691 % = 7.08 % 180-day forward contract: (F/S-1) x 2 = 0.09 F/S = 1.045 180-day forward margin on the USD = (S/F – 1) x 2 = (1/1.045 -1) x 2 = -0.09/1.045 = – 8.612440191 % = – 8.61% (discount) 270-day forward contract: (F/S – 1) x 360/270 = 0.12 F/S = 1.09 270-day forward margin on the USD = (S/F -1) x 360/270 = (1/1.09 -1) x 360/270 = -32.4/294.3 = -11.00917431% = -11.01% (discount) Comments: Similar questions are available in the lecture slides, Practice Questions and Exercises (PQE), Short Quizzes (SQ), and past year questions. FINM8007S12021MIDSEMESTEREXAMSOLUTIONS 4 Part C Percentage change of the EUR = (0.8426/0.8730 – 1) x 100% = -3.482245132% = -3.48% (depreciation) Comments: Similar questions are available in the lecture slides, Practice Questions and Exercises (PQE), Short Quizzes (SQ), and past year questions.