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CUHK FINA3020C Final Exam Paper

This document contains information about a final exam for an international finance course taken by a student named Chen Qixin at the Chinese University of Hong Kong CUHK Business School. The exam is scheduled for May 7, 2020 from 2:30 pm to 4:30 pm and is an open book exam with multiple choice questions covering topics like purchasing power parity, balance of payments, interest rate parity conditions, and foreign exchange risk hedging. The exam questions provide financial information and scenarios to be analyzed by the student.

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qixin chen
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74 views8 pages

CUHK FINA3020C Final Exam Paper

This document contains information about a final exam for an international finance course taken by a student named Chen Qixin at the Chinese University of Hong Kong CUHK Business School. The exam is scheduled for May 7, 2020 from 2:30 pm to 4:30 pm and is an open book exam with multiple choice questions covering topics like purchasing power parity, balance of payments, interest rate parity conditions, and foreign exchange risk hedging. The exam questions provide financial information and scenarios to be analyzed by the student.

Uploaded by

qixin chen
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

The Chinese University of Hong Kong

CUHK Business School


FINA3020C International Finance
Second Term 2019 2020

Name: CHEN Qixin


Student ID:
Lecture:
1155091947 FINA 3020C (Thursday)

Question Paper

Final Exam (Two Hours Open Book)


May 7, 2020 (Thursday); 2:30 pm 4:30 pm

1
Q e i 1 P cha i g P e Pa i (7 Ma )

o o
An American in estor has in ested in an ETF in Mainland China. The inflation rate is 6%
p.a. in China and 2.5% p.a. in the U.S.

(a) If the purchasing po er parit holds bet een China and the U.S., b ho much should
灬 o
the CNY appreciate or depreciate ith respect to the USD o er a ear? (3 marks)

MY Fc Hc
(b) Suppose that the annual return on the ETF is 12%, and the CNY depreciated ith respect
to the USD b 5%. Suppose that a Chinese in estor also held the same ETF. Using the

in
appro imation form, compare the real returns for both in estors and discuss h the do
or do not differ from one another. (4 marks)

With PPP
it [Link]
Stii 华 譽 7 H [Link] 3.302

depreciate by 3.302 with respect to USD


MY will
b Using Fisher Open Relationship
I ti Inta r ti

器
9 [Link] 毕 [Link]
ltrtif
1
上
1 12 51 ⼗⼆ 9.268
以 ⼼⼈
China fix [Link] 乁 之
1.06
t 3.774
9 titt 吖 5.494 751 real return differs more than depreciation
than
⼆ Theydiffer because CNY depreciate more

indicated by Ppp which means PPP is violated under

this condition

2
Q e i 2 Ba a ce f Pa e (15 Ma )

(a) A U.S. consumer bu s a computer from a French compan and pa s for his purchase ith
a USD 1,000 cheque. The staff then deposits the cheque at Citibank in Chicago. What
are the credit and debit items on the U.S. BOP? (3 marks)

(b) A U.S. tra eler pa s USD 200 for a fine dinner at Des Gars dans la Cuisine during his
isit to Paris. The tra eler pa s the bill on his Visa credit card. What are the credit and
debit items on the U.S. BOP? (3 marks)

(c) Your aunt, Mar from Chicago, bu s a ne l issued IPO in Hong Kong. She places her
order ith her broker, U.S. Interacti e Broker Inc., pa ing USD 100,000 ith a cheque
dra n on her Chase mone market account. U.S. Interacti e Broker, in turn, transfers
the USD 100,000 to the recei ing bank of the IPO in its U.S. bank account. What are
the credit and debit items on the U.S. BOP? (3 marks)

(d) Ethiopia borro s USD 200 million from IMF, and the proceeds of the loans are deposited
at the Central Bank of Ethiopia. The e change rate is ETB/USD 33. What are the
credit and debit items on the Ethiopia BOP? (3 marks)

(e) A French in estor recei es CHF 100 of di idends from the shares of a S iss compan .
He in ests the mone in the S iss go ernment bond. What are the credit and debit items
on the S it erland BOP? (3 marks)

Ethiopia BOP act [Link]


a Ucrttj_D.im_
Officialreserve RT
CAH vsDpoo
[Link]
Computerpurchase

Ǖ 忄 怤赢
焱装 筘 mtiioi ⼼吵
EthiopiuliabiiykAtn
的 ua
ETB
in
b USBOP [Link] [Link] 灯SwitzerlandBop [Link] Dr
Pgfctthil
services Duo 403
Dividendpaidto CAt

[Link]
Swim
investment0517200
KAH land
AT100
investment
liabilitiesabroad portfolio

tn Dr E

㗊 㥙⿏
abroad
⼀
U.s liability KAH 爽 伙 USD
investment100.000
portfolio 3
Q e i 3 I e ai a Pa i C di i (6 Ma )

You are gi en the follo ing information about the AUD and HKD:

HKD AUD
Inflation (annual rate) 6% p.a. ?% p.a. (2 marks)
0
5 [Link]
One- ear interest rate 8% p.a. 7% p.a.

are
Spot e change rate ? (2 marks)
HKDl AND25.9440
E pected e change rate in one- ear
cityHKD/AUDcity6
One- ear for ard e change rate ? (2 marks)
HkDlAUDI630
Based on the international parit relations, replace the ? ith appropriate ans ers.

Using [Link] get


在 r妡 盥
甇 [Link]
It701
know
20 934579
FromPPP and international Fishereffect we
x
Itt ⼼下 ray
Itt or
0.934579
It In x it rt ⺾

i 6 Itt 20 934579 14 It 巧
5.06542 110.934579 It 吖 qnual
It 吖 5.01 的 [Link]
ⓛ
Based on internationalFishereffect
Et 仢
謍
⼼
箭
下 20.934579

i 16 5 t 0.934579 St 5 t 25.9440

1 forward rate
i yr
Fti
5.944_5
ci44
20 934577

5 944 5.94440.934577
Fti
4
Ftii 630
Q e i 4 F a da dM e Ma e Hedge (22 Ma )

You are the CFO of U.S. Corporation. U.S. Corporation is a oung firm that speciali es in
the face recognition s stem. The management of the compan belie es that the U.K. market
has good prospects for future gro th.

On December 3, 2019, the compan decided to tender a contract to install the face recognition
s stem for a British firm. Your accountant hasofprepared the follo ing information for the bid
preparation:

USD
Materials 847,061
Direct labor 416,820
Shipping 70,000
Direct o erhead 208,410
Indirect o erhead 100,492
Total cost 1,642,783

[Link]
The management board decided just to add a 6% profit margin on the total cost hen placing
the bid, in order to increase the chance of inning. Note: profit margin = (total re enue
total cost) / total re enue. revenue 1642785

(a)
ajrtt
Based on the accounting information, ho
上006 revenue
much in GBP should ou bid?
噐
The spot rate
1747641.4
V
on December 3, 2019 is USD/GBP 1.4820. (3 marks)

i 1747641.49 it 4820 i GBP1179245.27 big


On Januar 13, 2020, U.S. Corporation has been a arded the contract. You e pect the

o
installation ork ill be completed in three months. The British firm ill pa a 10% deposit
on Januar 14, 2020, and the remaining balance ill be paid upon project completion, that is,
are
in three months. The spot rate on Januar 14, 2020 is USD/GBP 1.4370. Noticed that GBP

less
[Link]
has eakened since December 3, 2019, ou concern the alue of GBP ill depreciate e en
wereand to find
further initthe ne t three months. Your CEO ants ou to discuss ith our banker
out the tools a ailable to reduce the e change rate e posure.
m inflow inflow
tǚ1 is mouth
1

GBP 117924527
9070X1179245 吓 Fbl320，74 GBP
cl
rrlob 3 1476，39681 USD
5

[Link].y.tl027，416.015 GBP
Your banker proposes that ou can engage in for ard hedge or mone market hedge. On
Januar 14, 2020, our banker pro ides ou the follo ing information:

USD GBP
Interbank mone market rate 8.30% p.a. 13.20% p.a.
Lending rate to bank s customers 9.50% p.a. 13.50% p.a.
Deposit rate to bank s customers 8.00% p.a. 12.90% p.a.

(b) Calculate the three-month for ard rate. (2 marks)


1 1008
巡
下印⼆ St x 器
毕 1 up
(c) If ou decide to use for ard hedge, state ho
[Link] 0.9881
Hou ill appl the for ard contract to
engage it. (2 marks) onJan14 how
contract theamountofpresent value 0
I willsell a threemonthforward by
(d) Ho large ill be the profit margin for this bid if ou use for ard hedge? (4 marks) the
rest 90
contractGBP
1，027416.015
(e) If ou decide to use mone market hedge, state clearl ho ou ill engage it. Ho
large ill be the profit margin hen ou appl mone market hedge? (6 marks)

(f) Comparing the t o hedging approaches, hich one do ou recommend? (1 mark)

(g) Is the profit margin under the t o hedging approaches the same? If not, h ? (2 marks)

(h) Your CEO asks ou hether the for ard hedge can eliminate all e change e posure.
Will the U.S. Corporation face an e change e posure after using the for ard hedge? (2
marks)

d Afterthree months forwardandcashinflowoffseteachother so the profit


117924.527 1027416.015741.4370 1642783
margin will be Ciirxiooi
117924527 1 1027416.015 1.4370
3

9 I will borrowGBP 1027416.015forthree month on Jan14 how and


the USD for threemonths
then convert it to USD Then invest
with
months take out the USD and pay the GDPloan

[Link]
After three
11027418.015 X 13.570个4 GBP 34675.27
borrowing is
is 1476396.8 X 8⼈上4 [Link]
The profit from swing
the loan we have U 1594507.68 afterthree months
After paying
59450768409881个 ⽐ 了⼼ 4 1027416.015 1642783iin
6

i Profitmargin [Link]
55214
since itgiveshigher
f I will recommend money market approach
return
USD to gain
not the same In money market you candeposit
g interest gain
interest But for forward there is no

h Yes there will still be risk if the forward rate is not the
derivation etc
same as predicted C like different inflation
Q e i 5 O i Hedge (10 Ma )

Continue ith the pre ious question. The CEO of U.S. Corporation is not satisfied ith the
hedging techniques suggested b ou. His primar concern is that the t o hedging
approaches cannot deli er a profit margin of 6%. He asks ou to e plore option hedging.

Your banker ad ises ou that options are more complicated, and the cost of hedging is relati el
higher than the for ard hedge.

(a) Your banker e plains that there are t o options contracts: Call and Put . Which
option should ou purchase? (1 mark)

put
Your banker pro ides ou the follo ing information.

E ercise Price
USD/GBP 1.30
Call Premium
USD 0.1350 o
Put Premium
Not traded
USD/GBP 1.35 USD 0.0920 USD 0.0050
USD/GBP 1.40 USD 0.0475 USD 0.0155
USD/GBP 1.45 USD 0.0250 USD 0.0440
USD/GBP 1.50 USD 0.0090 Not traded

(b) You decide to enter the option contract ith an e ercise price of 1.45. Ho much ill

tl
be the premium that U.S. Corporation needs to pa for e posure of GBP 1,057,500? (2
marks) 057500 X145 xo 044iUSD67
685
(c) If at maturit the pound is lo er than 1.45, hat is the net pa off in USD that U.S.
Corporation ill get for that e posure? (2 marks)

(d) Your CEO kno s that the option contract allo s for an upside gain. He ants to kno
at hat e change rate, the for ard hedge and the option hedge ill gi e the U.S.
Corporation the same pa off for the GBP 1,057,500 e posure? (2 marks)

(e) Your CEO ants to kno ho likel the future e change rate can reach the breake en
rate in part (d). He asks hether he can use the for ard rate to predict the future spot
rate. Under hat conditions the for ard rate ill be an unbiased predictor of the future
spot rate? (3 marks)

= END =
7

Common questions

Powered by AI

Using the International Fisher Effect and Interest Rate Parity, the unknown inflation rate for AUD can be determined by aligning the one-year interest rate differentials and expected exchange rate. The relationship is set such that the spot exchange rate and forward rate equalize the real interest rates accounting for the inflation rate differential .

A forward exchange contract can lock in an exchange rate for a future transaction, thereby eliminating the uncertainty associated with currency fluctuations. However, exposure remains if the actual executed exchange rate in the future deviates from the agreed forward rate due to unexpected inflation rates or changes in market conditions. This residual risk is because forward contracts are based on predicted rates rather than exact future outcomes .

Option hedging incurs higher costs due to premiums paid for the right without obligation to transact, providing potential advantage if rate movements are favorable. Complexity arises from evaluating risk/reward scenarios of various strike prices against market volatilities. Unlike forwards, options allow participation in favorable currency moves but require expertise in premium valuation and market prediction accuracy, complicating execution .

The breakeven exchange rate, where payoffs from option and forward hedging match, occurs when the cost of hedging via options equals any exchange rate gain with forwards. As per the scenario with exercise price at 1.45, premium cost and exchange rate improvements position the breakeven slightly below market forward settings, circumventing further exposure if market forecasts are correct .

The USD 200 million loan from the IMF increases Ethiopia's financial account credit, as it represents an increase in liabilities to non-residents. The funds add to the central bank's reserve assets, causing an equivalent debit entry in the financial account .

The forward rate is an unbiased predictor of the future spot rate under conditions where markets are efficient with no arbitrage opportunities, investor rationality, and real exchange rate equilibrium. Exchange rates should fully reflect all available information and expectations of future spot rates. Deviations arise from unforeseen changes in inflation differentials, interest rate adjustments, and political or economic shocks .

The real returns differ because the CNY depreciates by 5% while the predicted depreciation based on purchasing power parity was only 3.302%. This discrepancy means that the violation of the PPP condition affects the real returns calculations. The American investor's returns are diminished more by actual depreciation than expected, while the Chinese investor's real returns are relatively unaffected by internal currency movement .

CNY should appreciate by approximately 3.302% with respect to USD if the purchasing power parity holds. This is calculated by taking the inflation differential between the two countries, which is 3.5% (6% in China - 2.5% in US).

The debit item on the U.S. balance of payments is the import of goods, recorded as a debit under the current account for the USD 1,000. The credit item is the offsetting financial account entry reflecting the reduction in foreign reserves held by the U.S. banking system as the cheque is deposited at Citibank in Chicago .

Using forward hedging, a U.S. firm secures a known exchange rate, hence fixed USD equivalents of future GBP inflows, which stabilizes revenue expectations. Money market hedging involves borrowing abroad and converting to USD immediately, investing proceeds, thus benefiting from interest differentials. Both methods have cost implications and financial results differ based on particular currency movements and interest rate variances .

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