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939414780+MARK+anon+1+1
Question 1 (1 marks)
If Credit Suisse quotes you spot Swiss Francs at 1.4780-92 per US dollar, how much would it cost to
purchase 4 million Swiss francs?
0.0% 1. $2,704,164.41
100.0% 2. $2,706,359.90
Calculation:
We are buying SF with US$, so we get the lower number in the bid-ask quote, i.e.
1.4780 per US$1.
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Question 2 (1 marks)
Wong, a FX trader at Hong Kong & Shanghai Bank(HK), has $1 million to trade with and the following
information:
the current spot exchange rate is Yen106.00/$;
the 180-day forward rate is Yen103.5/$;
the Eurodollar rate is 8.00% per annum;
the Euroyen rate is 4.00% per annum.
Is there a chance for Covered Interest Arbitrage? If yes, how much is the profit?
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0.0% 1. $0.00
0.0% 2. $2,319.00
100.0% 3. $4,638.00
There is an arbitrage profit to be made here. It goes like this:
1) Sell the dollars for Yen106,000,000;
2) Invest the Yen proceeds in an Euroyen account for 6 months and earning
2%(4% x 180/360);
3) Sell all the Yen(108,120,000) back at Yen103.5/$ for $1,044,638;
4) Calculate the cost of funds used at the Eurodollar rate of 8.00% per annum, or
4% for 180 days,
with principal and interest then totaling $1,040,000. Thus the profit is $1,044,638 -
$1,040,000 = $4,638
0.0% 4. $6,957.00
0.0% 5. $9,276.00
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Question 3 (1 marks)
You have gone to work for Nike in the company's pension department. One morning you walk in and the
new Fund Manager asks, "How much would it cost us to hedge the rand? What's the forward discount, in
percent per annum, on three-month South African rand? There's some kind of crisis down there, and we
may have to hedge our S.A. bonds." Although you cannot find a quote for 3-month rand, you are able to
get the following: Spot: 4.93 rand per dollar Eurodollar 3-month interest rate: 5.85% Eurorand 3-month
deposit rate: 12.77% What's the forward discount (estimated to the nearest basis point)?
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Question 4 (1 marks)
Assume China adopts a "currency board" at 8.3 Yuan for one US dollar. If its trade deficit doubles, what
will likely happen to the exchange rate and the money stock in China?
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Question 5 (1 marks)
The central bank of Indonesia, Bank Negara, invests its reserves in US and German treasury bills. On one
day in early 1996, the US Dollar and Deutsche Mark rates shown below were quoted on the Reuters
screen. Where should Negara invest its spare cash? Can you identify a covered interest rate differential, in
other words a deviation from interest-rate parity? What factors might account for this deviation from
parity?
Student Response:
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xxx
Correct Answer:
The outright forward rates on the DM are 1.4696-1.4708. The bid-side forward premium is
(0.0073/1.4769)*4=1.9771%
A quick-and dirty calculation suggests it pays to buy US bills at 5.3125%. In dollar terms, a covered
investment in German bills gets Negara roughly 3.25% + 1.9771% = 5.2271% per annum--an inferior
return.
Why does this arbitrage opportunity persist? Because T-bill arbitrage is only quasi-arbitrage: Treasury
bill investors are not generally permitted or able to do it. The forward premium or discount is
determined by Eurocurrency rates, not T-bill rates. Indeed, T-bills are not necessarily equivalent--they
bear sovereign risk. See "Tea in Canada," a similar example.
Mark: 0
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Question 6 (1 marks)
The Hong Kong dollar is fixed against the US dollar. If Hong Kong doubles its export surplus, what is
likely to happen to the money stock in Hong Kong?
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Question 7 (1 marks)
Southwestern Bell needs to hedge a royalty payment from Mexico. If the dollar is trading at a spot price
of 8.27 and the 6-month Eurodollar and EuroPeso rates are 7.57% and 20.16%, per annum, respectively,
then what should the 6-month peso-dollar forward exchange rate be? (Calculate to two decimal points,
like 8.25)
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Question 8 (1 marks)
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What of the following is NOT a difference betweent the forward and futures contract?
0.0% 1. Customized terms and conditions of forward contracts vs. standarized futures contracts.
0.0% 2. Dispersed trading in forwards vs. centralized trading of futures contracts.
0.0% 3. Variable risks with forwards vs. standarization of counterparty risk with futures written
against the Clearinghouse.
100.0% 4. Only the futures contracts can be used effectively for hedging.
1,2,3 are right. Plus: there is initial and ongoing cash flows associated with
marking-to-market of futures contracts, but not so with the forwards.
0.0% 5. None of the above.
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Question 9 (1 marks)
The following table provides information about futures on the Canadian dollar at the Chicago Mercantile
Exchange.
(WSJ, 02/20/98)
Based on the quotations in the table, how much would a corporate foreign exchange trader at the 3M
Company have gained or lost if she had shorted 10 nearby Canadian dollar futures contracts the day
before?
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0.0% 1. +$6,600
100.0% 2. -$6,600
The nearby contract is March and the change in the settle price is "+0.0066".
Since the trader was shorting C$ futures, he lost from the drop by 0.0066 cents
per C$. 10 contracts at 100,000 C$ per times 0.0066 gives him a total loss of
$6,600.
0.0% 3. -$1,750
0.0% 4. +$3,125
0.0% 5. None of the above
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Question 10 (1 marks)
Suppose a foreign exchange rate wants to hedge a forward transaction. Which one of the following does
NOT work?
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Question 11 (1 marks)
Solvay, a Belgian company, needs to fund a U.S. investment. It obtains the following quotations:
3-month domestic funds in the United States 5.6125-5.6625 percent, 3-month EuroBFr. 3.70-3.71. The
$/BFr spot rate is 0.02695 -0.027 and the 3 month forward points for the dollar are .00010-.00015. What
is the cost of funding through the EuroBFr. market? Express your results in percentage points and keep
two decimal points (e.g 4.05).
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Question 12 (1 marks)
The relationship between domestic and Eurodeposit interest rates
is best explained by
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Question 13 (1 marks)
If the dollar is trading at a spot price of Yen130, and the 6-month Eurodollar and Euroyen rates are 10%
and 7.5%, per annum, respectively, what is the 6-month yen-dollar forward-exchange rate?
0.0% 1. 127.045
0.0% 2. 131.567
100.0% 3. 128.452
This is a standard exercise of the Interest- rate-parity theorem. Pay attention to
the time span (6 months) in question.
F = S(1 + Iey)/(1 + Ie$)
= 130 * (1 + 7.5%/2)/ (1 + 10%/2)
= 128.452
0.0% 4. 133.023
0.0% 5. 127.5
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Question 14 (1 marks)
What of the following statements are true about the Eurocurrency market?
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market is the market for such bank deposits. And it is a very active market that
dominates the domestic money markets.
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Question 15 (1 marks)
You work for Citigroup in London. You are considering selling a bond to a Russian client. It is a
European Investment Bank triple-A Yen-denominated Eurobond at a discount from par of 2.5%. The
bond has an annual coupon of 0.5% and will mature in exactly 5 years and 3 months. You offer him five
bonds, each with a face value of Y500,000.
How much money changes hands if you sell the bond? State the amount to the nearest yen. (Example:
12345)
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Question 16 (1 marks)
Which of the following are key features in differentiating Eurobonds from domestic bonds?
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Question 17 (1 marks)
Assume Unilever issues a Euro 300 million Eurobond. In the underwriting of the bond, if it is issued at
par (100), and the management fee, underwriting fee and selling concession are 0.38, 0.30 and 0.70
respectively, what is the price paid by Hamburger Landesbank, a member of the underwriting group?
State your answer as a percent of 100 to two decimal points, eg simply 78.50)
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Question 18 (1 marks)
Which of the following provide linkages between the markets for Eurobonds denominated in different
currencies?
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Question 19 (1 marks)
Clarient, the specialty chemicals company, engages in a five year interest-rate swap paying 11% annual,
receiving 6-month LIBOR+0.25% semi-annual. Three years later the two year swap rate has fallen to 9%.
Is Clarient's swap "in the money" (positive value) or "out of the money" (negative value)? By how much?
Clarient is paying 11% to receive 6-mo. LIBOR + 0.25% whereas such a swap
today (3 years later) would cost Clarient only 9% in return for LIBOR. Thus the
swap is "out of the money" by 1.75% per annum, or 3.08% present value.
0.0% 5. None of the above
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Question 20 (1 marks)
Anglo American, the global natural resources company, has to raise a lot of money to invest in gold
mines in Africa. It has three choices. Which is cheapest?
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0.0% 1. Issue a 3-year Swiss franc foreign bond at 5% with 0.75% fees
100.0% 2. sell a 3-year floating-rate medium-term note at US$ LIBOR - .25% and swap into Swiss
francs
Right.
Working in Swiss franc terms the cost of the different options are as follows:
(a) 5% plus 0.75% up front fee. 0.75% as a 3 year annuity is 0.275%. So all-in
cost is 5.275% p.a.
(b) 5.14% minus 0.25% in US $ , i.e. 0.23% measured in Swiss franc terms, gives a
cost of 4.91%.
(c) The basis of computation here would be to convert the principal at the spot
rate and buy the coupons forward using Swiss francs. These coupons would
amount to (in today's SF):
Option (b), which works out to less than 5% in Swiss franc terms, is the cheapest.
0.0% 3. sell a 3-year fixed rate U.S. dollar MTN at 8.00% annual and convert to Swiss francs
via the forward-exchange market.
0.0% 4. both 1. and 2.
0.0% 5. None of the above
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Question 21 (1 marks)
Niigata Life, a Japanese life insurance company, has been offered a newly-issued 7-year Republic of
Korea Eurobond at par. The bond, denominated in U.S. dollars, pays an annual coupon of 9.55%. The
total amount of the issue is $3 billion, and each bond has a face value of $5,000. Total issuance fees are
1.35%.
Niigata is interested in buying $5 million of the paper, and using a currency swap to create a synthetic yen
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floating-rate note. If the US dollar 7-year swap rate is 6.20% and the corresponding Japanese rate is
1.5%, what spread (in basis points) over quarterly yen Libor can Niigata expect to achieve if it buys the
bond?
0.0% 1. 350
0.0% 2. 402.5
0.0% 3. 322
0.0% 4. 292.5
100.0% 5. None of the above
General Feedback:
First currency
NUMBER OF BASIS POINTS (US$) 335
US$ INTEREST RATE 6.20%
NUMBER OF PAYMENT PERIODS PER YEAR 1
NUMBER OF YEARS 7
Second currency
Euro INTEREST RATE 1.50%
NUMBER OF PAYMENT PERIODS PER YEAR 4
NUMBER OF YEARS 7
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