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International Finance Finance 330
School of Business Administration University of Miami
Final
Take-home
(55 Points)
December 12, 2017
GOOD LUCK!!!
Name on Blackboard: ____________________________
ID Number: _____________________________________
Signature: _____________________________________
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Introductory Comments and Instructions This exam places you in various scenarios as a treasurer, currency dealer, and arbitrageur, and tests your understanding of the foreign exchange market, cross‐rate arbitrage, futures, and options. In addition, there are several multiple‐choice questions that test your understanding of international debt and banking. This is a take‐home exam and is to be completed individually, that is, without assistance from others. Make sure to sign the pledge below and include it with your exam. Before proceeding, please review the corresponding class lecture notes and homework. Thoroughly reacquainting yourself with this material prior to starting the exam will make its completion far easier. Most activities in this exam correspond to examples or discussions in the class lecture notes. This exam should actually be fun! Please don’t stress over it. Please submit your exam in physical form by handing it to me in class or office hours or placing your exam under the door to my office, 317H Jenkins Building. The due date/time is Thursday, December 19, by 5:00pm. Pledge: “As a student of the University of Miami, I commit myself to being an active member in the Academic Community of Trust By promoting the values of Honesty, Responsibility, and Integrity.” Moreover, I pledge, on my honor, that I have neither given nor received assistance on this assignment, and that I have accurately given attribution for all sources used to the best of my ability. Signed, _____________________________________
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Scenario 1 (5 points) You are a currency dealer in the interbank foreign exchange market and you note the following exchange rates available from your competitors (ignore bid/ask spreads): Bank Exchange Rate Citibank 1.15 USD per 1 EUR UBS 1.35 USD per 1 GBP Barclays 1.20 EUR per 1 GBP a. What is the cross‐rate between the euro and the pound based on the Citibank and UBS quotes? Express
your answer in euros per 1 pound to 4 decimal places. b. Can you make a cross‐rate/triangular arbitrage profit given the above exchange rates? c. Suppose you have 100,000,000 USD available for arbitrage. What steps (currency trades) would you take
to recognize this arbitrage profit? You may use a graphic as we did in class and the class notes. d. What would be your arbitrage profits in USD? (Note, you are asked for the profits, USD in excess of the
original 100,000,000 USD.) Scenario 2 (8 points) You are a corporate treasurer and observe the following Citibank quotes (professional quote with base currency listed first) on the EUR/USD dollar exchange rate:
Spot EUR/USD 1.1835 – 1.1837
1 month 2 ‐ 3
2 month 6 ‐ 8
3 month 9 ‐ 12
12 month 50 ‐ 60
Based on these quotes, answer the following questions. Provide 4 decimal places for exchange rates. a. You want to sell spot 100M EUR. At what rate of exchange in USD per EUR would the transaction take
place? b. You want to buy 2 months forward 100M EUR. At what rate of exchange in USD per EUR would the
transaction take place? c. You want to engage in an FX swap where you sell spot 100M EUR and you buy 3 months later 100M EUR.
i. At what rate of exchange in USD per EUR would the spot transaction take place? ii. At what rate of exchange in USD per EUR would the transaction in 3 months take place?
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d. You want to buy 100M USD spot. At what rate of exchange in EUR per USD would the transaction take place?
e. You want to sell 100M USD 2 months forward. At what rate of exchange in EUR per USD would the
transaction take place? Scenario 3 (10 points) You are a currency trader with Citibank in Sydney and believe that the Reserve Bank of Australia is going to lower the Official Cash Rate (Australia’s fed funds rate of interest) target to reduce the probability of recession. Your view is that this expansionary monetary policy will lower the value of the AUD vs. the USD. You anticipate an exchange rate of 0.75 USD per AUD in less than 2 months. The current spot rate is 0.80 USD per AUD and the 3‐month forward rate is 0.78 USD per AUD. Assume today is in June 2018. I. You look at the trading activity on futures on the Chicago Mercantile Exchange (CME) today and observe
the following futures prices for the September AUD futures contract.
CME September 2018 FX Future on AUD Contract Size: 100,000 AUD
Note: futures prices are in USD per AUD
a. Should you long or short the AUD in the futures market given your view? Assume you long or short (choose based on your answer to part a.) two September 2018 futures contracts on the AUD at the Last price, hold the position to maturity, and the spot rate at maturity is 0.7500 USD per AUD. b. What is the payoff to your position? Specify the currency of the payoff.
II. You look at the trading activity in European‐style options on the AUD on the NASDAQ OMX PHLX today and
observe the premiums on the September 2018 AUD options contracts.
PHLX September 2018 FX Option on AUD Contract Size: 10,000 AUD
Call Premium Strike Put Premium
0.0400 0.7400 0.0050
0.0350 0.7500 0.0070
0.0300 0.7600 0.0100
0.0250 0.7700 0.0150
0.0200 0.7800 0.0200
0.0150 0.7900 0.0250
0.0100 0.8000 0.0300 Note: Premiums and strike prices in USD per one AUD.
Maturity Open High Low Last Change Open Interest
Sept 2018 0.7910 0.7920 0.7890 0.7800 +0.0003 2,008
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a. If you wish to speculate on your view, should you buy a put contract or a call contract on the AUD? Suppose you choose the call/put option (choose based on your answer to part a.) with a strike price of 0.7800 USD per AUD. b. What is the spot exchange rate at expiration that will allow you to breakeven? Express your answer in
USD per AUD to 2 decimal places.
Suppose you buy 20 call/put option contracts (choose based on your answer to part a.) with a strike price of 0.7800 USD per AUD, hold the option to maturity, and the spot rate at maturity is 0.7500 USD per AUD?
c. What is the payoff on your contracts? Specify the currency of the payoff. d. What is the profit on your contracts? Specify the currency of the profit.
Scenario 4 (10 points)
The Lear Corporation, headquartered in Southfield, Michigan, is one of the largest suppliers for the global automotive industry, making products in five major interior systems: seat; instrument panel/cockpit, door and trim, overhead and flooring, and acoustics.
Lear will make a payment of 100,000,000 MXN (Mexican pesos) in December 2018 as part of a significant capital investment in one of its facilities in Ciudad Juárez, Mexico. Lear’s currency of operation is the USD; therefore, Lear is concerned about the volatility of the dollar‐peso exchange rate.
You work for the treasurer who asks you to construct a hedge today using futures on the Chicago Mercantile Exchange (CME) where a contract for 500,000 MXN trades. Assume today is in April 2018.
a. Should you long or short the futures?
b. How many contracts should you long or short?
c. The peso future trades on a monthly cycle (all 12 months). Which contract month should you optimally choose to hedge?
d. Assume that the futures price today on the contract you selected in part c. is F0 = 0.0700 USD per 1 MXN. Show the effect of hedging by correctly completing the following table for the December 2018 spot rate scenarios. Circle + for a gain or – for a loss when indicated.
Dec 2018 Spot (USD per MXN)
Unhedged Cost of Investment (USD)
Gain (+) Loss (–) on Futures (USD)
Net‐of‐Hedge Cost of Investment (USD)
0.0800 + –
0.0700 + –
0.0600 + –
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Scenario 5 (10 points) Archer Daniels Midland Company (ADM) will export a cocoa powder order to a Swiss chocolate company and receive 10,000,000 CHF (Swiss francs) in September 2018. ADM’s currency of operation is the US dollar (USD); therefore, ADM is concerned about the volatility of the dollar‐franc exchange rate. You work for the treasurer who asks you to construct a hedge using foreign currency options on the Nasdaq OMX PHLX exchange where a contract for 10,000 CHF trades. Assume today is in April 2018.
a. Should you buy Put or Call contracts on the CHF?
b. How many contracts on the CHF should you select?
c. Which contract maturity should ADM select? (The CHF contract matures on the March quarterly cycle: March, June, September, December)
You have the following information on the Nasdaq OMX PHLX option premiums (assume the premiums correspond to the correct maturity date):
Call
Premium Strike Put
Premium 0.0200 0.9500 0.0010
0.0170 0.9600 0.0030
0.0120 0.9700 0.0055
0.0100 0.9800 0.0100
0.0050 0.9900 0.0120
0.0030 1.0000 0.0170
0.0010 1.0100 0.0200 Note: Premiums and strike prices in USD per one CHF
d. Assume you select the options with a strike price of USD 0.98 per CHF to hedge (and the correct option (put/call), maturity, and number of contracts). For each spot rate scenario below, what would be:
i. the unhedged payment?
ii. the payoff on the option contracts?
iii. the net hedged payment excluding the premium on the option contracts? and
iv. the net hedged payment including the premium on the option contracts?
Answer part d. of this question by completing the following table for the indicated spot rate scenarios:
Spot Rate Sept 2018
(USD per CHF)
Unhedged Receivable (USD)
Payoff on Option Contracts (USD)
Net‐of‐Hedge Receivable Excluding
Premium (USD)
Net‐of‐Hedge Receivable Including Option Premium (USD)
0.95
0.98
1.00
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e. Hedging with futures and options differ as (Circle one):
i. Options allow the holder to use the hedge only when it is beneficial, whereas a future commits the firm to the hedge even when it is costly.
ii. Futures are initially free (ignoring commissions and costs of posting margin), whereas options have an initial price (premium).
iii. None of the above. iv. Both (i.) and (ii.).
Scenario 6 (12 points) You are the treasurer of Toyota and seek USD‐denominated debt to fund an expansion of a production facility in the US at Toyota Motor Manufacturing Indiana. In this question, you are asked to describe/assess the following borrowing opportunities. For each of the following sources of debt capital, select the corresponding attributes from the table that follows. Hint: Each attribute is used once but only once.
Source of Capital
Foreign Bond a. b. c. d. e. f. g. h. i. j. k. l. .
Eurobond a. b. c. d. e. f. g. h. i. j. k. l.
Eurobanks a. b. c. d. e. f. g. h. i. j. k. l.
Attributes
a. Not subject to US Fed reserve requirements b. Interest rate spread (the difference between the loan and deposit rate) is narrower than the
domestic dollar spread
c. Securities underwritten by an international syndicate of banks and sold exclusively in countries other than the one in whose currency it is denominated
d. Avoids the cost of registration and disclosure with the US Securities Exchange Commission e. Makes loans denominated in a currency other than that of the country where the bank is
located
f. Known as a Yankee bond g. Underwritten by a syndicate from a single country, sold within that country, denominated in
that country’s currency, but issued by a firm from outside that country
h. Deposits are uninsured so there are no FDIC deposit insurance costs thereby allowing a firm to offer lower interest rates
i. Not like on‐shore securities in the US and Japan where the owner’s name is registered with the issuer or broker—that is, in bearer form
j. Typically issues Eurocredits as part of a syndicate k. Offers investors anonymity and the increased possibility of tax evasion thereby allowing a firm
to issue at a lower interest rate
l. Makes loans that are often at a variable rate tied to LIBOR
