Arbitrage = 98.54 million Rs December 2009 1. Spot Rs/$= 46.

5125/50 IRP Bid after 30 days Borrow 1$ for 30 days at 1% p.a. , convert it at spot 46.5125 Rs and invest at 6.5% per annum for 30 days. 1$*(1+.01/12) = 46.5125(1+.065/12 1$ = 46.5125(1+.065/12)/ (1+.01/12)= 46.76/ 1.0008= 46.72 = 3.5289*1/180.30/ 3.5285*1/179.75= .0196/.0196 Or CHF/ GBP = 3.5280/85 SPOT JPY/GBP = 179.75/180.30 Cross rate in Zurich CHF/ JPY = CHF/GBP*GBP/JPY

IRP ask after 30 days Borrow 46.5150 Rs at 7% and buy 1$ and invest at .5% per annum for 30 days. 1$(1+.0.005/12) = 46.5150(1+.07/12) 1$= 46.5150(1+.07/12)/ (1+.005/12) = 46.78/ 1.0004= 46.76 Rs/$ = 46.72/46.78 Forward rate = 45.7565/45.7600 after 30 days. Buy $ in forward market and sell $ in spot market. Borrow 100 million $ in spot market and convert it to 4651.25 million Rs Invest Rs for 30 days at 6.5% pa After 1 month Amount of $ to be repaid is 100(1+.005/12)= 100.04 million$ , since already $ purchased in forward market in terms of rupees it will be 100.04(45.76)= (4577.83) million rs Amount of Rs from investment 4651.25(1+.065/12)= 4676.37 .0913 C. Receipts Export of goods 1424 Export of service 584 Income receipts 550 Total receipt 2558 Rs B Quote for SEK/$ = 10.9550/80 What is $/ SEK = 1/10.9580/ 1/10.9550 = .0913/

Payments Transfer to other countries 136

Income payment Import of goods Import of services Total payments

518 2526 492 3672

Part b is not intelligible.

Sept 12 2005 NZ$ = .48$

Balance of payment negative 1114 and due to which the domestic currency will depreciate and foreign currency will appreciate.

Sales in US = 100$ Sale in NZ = 288$ Revenue = 388

2 In the long run inflation determines the exchange rate. Higher the inflation lower the exchange rate , recent steep depreciation in Indian rupee is due to persistence of high inflation in India. But higher interest rate should appreciate the currency in short run but depreciate it under long run. But absence of a liquid bond market and cap on foreign investments in government and corporate investment in India has whittled down the effect of recent rate hikes by RBI. Forward rates reflect the mind of government in short term and act as a valuble forecasting tool. Higher the growth rate more will be depreciation of rupee Tighter the money supply more will be the appreciation of rupee. Price of crude and FPI plays major role in determining Indian exchange rate.

Matl cost US NZ = 200 = 48

Fixed operating Expense Variable Interest = 30 = 77.6 = 20

Profit before tax = 12.4

NZ$= .50$ US NZ = 105 = 300

Revenue = 405 3. Matl cost Bid ask spread is the profit earned by a dealer in currency. US Bid ask spread is an indicator of liquidity, higher the liquidity lower the bid ask spread and lower the liquidity higher the bid ask spread NZ = 200$ = 50$

Operating exp

Fixed Variable Interest PBT

= 30 = 81 = 20 = 24

If S$ is borrowed now 1.09S$ to be paid after 1 year. If 1.,09 S$ to be paid 1S$ to be borrowed now If 5,00,000 S$ to be paid = 5,00,000/1.09= 458716 S$ to be borrowed Converrt 458716S$ to US$ at .60$ = 275230$ Invest for 1 year in $ 5%= 275230*(1.05)= 288992$ Protective put .20( 5,00,000*.63)+ ..50(5,00,000*.63) + .30( 5,00,000*.67)- 5,00,000*.04= 63,000 + 157500+10050020,000= 3.01,000$ Covered Call

NZ $ = .54$ US $ = 110 NZ = 324

Revenue = 434 Matl Cost US NZ = 200$ = 54$

Operating expenses Fixed = 30 Variable = 86.8

5,00,000* .63= 3,15,000$ Interest = 20 Un hedged PBT = 43.2 .20* 5,00,000* .61+ .50* 5,00,000* .63+ .30* 5,00,000* .67= 61,000+157500+1,00,500= 3,19.000 Un hedged in the best strategy. 2. Forward hedge 5,00,000$* .62= 3,10,000$ Money Market hedge 3. Covered Call

It is seen that a deprecation of $ against NZ$ will increase profit, so vice versa will be true. To hedge the company can borrow in NZ$, procure matl in NZ$ or relocate to newzeland.

40,00,000 NZ$ * .57$ = 22,80,000 $ Protective Put .20* .52* 40,00,000+ .50* .52* 40,00,000 + .30* .53* 40,00,000= 4,16,000+ 10.40.000+ 6,36,000= 20,92,00040,00,000*.03=19,72,000

PAT

= 2,88,000$

NPV = 2,88,000/ 1.182,00,000= 244068- 2,00,000= 44068

2 Scenario Money Market Hedge If 1 NZ$ is borrowed at 8% after 1 year 1.08 NZ$ to be paid If 1.08 NZ$ to be paid 1 NZ$ to be borrowed If 40,00,000 NZ$ to be paid = 40,00,000/ 1.08= 37,03,704 NZ$ to be borrowed 37,03.704* .54$= 20,00,000$ Invest for invest in US at 9% realization at 21,80,000 $. Covered call is best hedge. 3 Scenario PBT 2,00,000* 1.6= 3,20,000$ Tax at 40% 1,28,000$ PAT 1,92,000$ = PBT Tax at 50% Net profit = 4,80,000 = 2,40,000 = 2,40,000

NPV = 2033902,00,000 = 3390 $

4 Joint Probability of revenue being 3,00,000 pounds and tax 40%= .7*.8=.56 Joint probability of revenue being 3,00,000 pounds and tax 50% = .7*.2= .14 Joint probability of revenue being 2,00,000 pounds and tax 40% = .3*.8=.24 Joint probability of revenue being 2,00,000 pounds and tax 50% = .3*.2= .06 Total 1 1 Scenario PBT 3,00,000* 1.6= 4,80,000$ Tax 40% = 1,92,000$

NPV = 1,92,000/1.182,00,000= 162712-2,00,000= (37288)

4. Scenario PBT 2,00,000 * 1.6= 3,20,000$ Tax @ 50% 1,60,000$ PAT 1,60,000$ =

NPV = 1,60,000/1.18- 2,00,000= 135593-2,00,000= (64407)$ Probablity of project having negative NPV is 30%

An option forward contract of Rs/E can be entered for fourth month at 46.40 which will be the committed amount, irrespective of whichever direction rupee moves against euro. Call option

5. Japanese Yen after taking exchange variation is the effective obligation at 4.03%, but since the Company has dollar earnings it may prefer dollar loan, since it acts as a natural hedge, if the company do not want to speculate on currency.

Rs/Euro option call 46.20 at premium of 15 paise per Euro Since actual rate is 46.05 option wont be exercised and actual cost will be 46.20.

SEPT 15 2007 Rs$ call at 43 at premium 55 Section A 1.Balance of payment position is improving, which shows that rupee is in demand vis a vis foreign currency, which points towards appreciation of rupee. 2. On the alternate the FDI and FPI position shows negative trend, rupee will appreciate or depreciate depending on the net balance of current and capital account are positive or negative. 3. Market expectation of rate cut in Euro do not materialize, while FED has cut rate, this may lead to short term appreciation of Euro against $ 4. Indian rupee is expected to appreciate against $ Euro/$ call at 1.0900 at premium .005 euro A cross currency hedge between Rs/$ at 43 at a premium of 55 paise and between $ and euro at 1.0900$ / euro at a premium of .005$, in the market 1euro is obtained by 1.0747$, which is cheaper than option price, real cost including premium is 1.0797$ and rupee $ spot rate is less than call option, so the option need not be exercised and cost of $ is 43.40 Rs including premium so euro can be obtained at 46.64 Rs Futures on Euro

2. Forward

Spot payment Rs 46.05 Profit on going long on future .22( 46.02-45.80) Net payment is 45.83 Rs/ Euro

30,00,00,000*.7350+6000*3 25-24,000 .7450 30,00,00,000*.7450+6000*3 25-24,000

4 Under forward for every $ chemco will get 42.90 Rs definite, but a call option is taken for 42.80 at premium of 95 paise till exchange rate reaches 43.85 forward will be profitable, but beyond 43.85 call option will be profitable. 5. Euro appreciates stronger than $ , as per forward rate, so I wll accept invoice in $ for imports and Euro for exports.

.7550 30,00,00,000*.75+6000*32524,000-2,10,000 .7650 30,00,00,000*.75+6000*32524,000-2,10,000

.76$ Section B 1. US $ strike price .74$ Spot .7350$ 30,00,00,000* .7350$+ 6000*598.50-24,000$ .7450$ 30,00,00,000*.74+6000*598.50-24,000$-2,10,000$ .7550$ 30,00,00,000*.74+6000*598.50-24,000$-2,10,000$ .7650 30,00,00,000*.74+6000*598.50-24,000-2,10,000 .7350$ 30,00,00,000*.7350+6000*1 56.50-24,000$ .7450$ 30,00,00,000*.7450$+6000* 156.50$-24,000$ .7550 30,00,00,000*.7550+6000*1 56.50-24,000$ .7650$ 30,00,00,000*.7600+6000*1 56.50-24,000$-2,10,000$

.75$ .7350$

2. Liberal Finance Borrows at fixed rate and swaps with Numeans at 18%, earning gain of 3%, while Numeans borrows at Tbill+2% and swaps with liberals at Tbill+4% thus earning QSD of 1.5%. Liberal as per actual earns always less than 3% without swap 6 months 1.98% 12 months 2.1% 18 months 2.2% 24 months 2% 30 months 1.95% 36 months 1.75%

Rate 42.85Rs/ $, after one month if the $ is delivered bank will pay 42.85 but will get only 42.70 thus loss is .15 Rs/$ , total outflow is 1,50,000. The bank has to buy $ at 42.95 and deliver at 42.85 thus incur .10Rs/$ and total loss is 1,00,000 Rs . Total loss is Rs 2,50,000.

Sept 9 2006 1. Canadian $ .4*.7= 28% 13% Canadian$ .4*.3= 12% 16% Japanese Yen .6*.5 = 30% 13% Japanese Yen .6*.5= 30% 16% Overall portfolio cost = .28*.13+.12*.16+.3*.13+.3*. 16= 3.64+1.92+3.9+4.8=14.26%

3. When the company borrows at fixed rate it can receive fixed rate and pay floating in swap to hedge against fall in interest rates, while if the company borrows in floating rate , it can receive floating and pay fixed to hedge against rise in rates.

4. If the company borrows in $ it borrows at 9%, the repayment at 1$(1+.09/4)= 1.0225$ If the borrowing to be done at 1.240 C$ then borrowing at 10.5% after 3 months repayment is 1.240 (1+.105/4) = 1.2726 C$/ 1.255= 1.014$, thus borrowing should be in Canadian $. If lending in S after 3 months 1.02$, If lending in C$ 1.235(1+.095/4)= 1.2643/ 1.260= 1.0034$ so better to invest in $.

2. 1. IRP says that difference in interest rate is diffence in exchange rate, so the currency with lower interest rate will appreciate and that with higher interest rate will depreciate, there by offsetting the interest rate

5.

difference. IRP conditions exist then there wont be any benefit by borrowing in Japanese yen and locking at one year forward rate. 2. Whether forward rate exist or not if IRP is true one year spot rate will reflect difference in one year nominal interest rates. 3. Here again if IRP is true one year forward rate only reflects difference in interest rate, other wise arbitrage will exist. 4. If the forward rate provides arbitrage then if Japanese Yen appreciates by 5% , it is costly to borrow in Japanese yen than in US dollar since the exchange appreciation of 5% exceeds interest rate difference of 4%, but in subsequent two cases it is cheaper to borrow in Japanese Yen and cover exposure in forward market, since difference in interest rate is more than appreciation of currency.

3. a. As per PPP US $ will depreciate in long run against Krank b. Because of increase in US interest rate $ may appreciate against Krank in short run. C. Since US income level increases consumption will increase , exports will decrease, imports will increase, balance of payment will turn negative and US$ will depreciate. d. Since US imposes small Tariff in short run imports will decrease and the extent of depreciation of $ will decrease. Since it is mentioned that US interest rate increases substantially $ will appreciate against krank in short term but will depreciate in long run due to inflation.

Whether Czech Krona is freely convertible or the repatriation is restricted. As long as host currency is freely convertible then the investment can be either in home or host currency, but if the repatriation of host currency is restricted then borrowing should be in host currency. Even if arbitrage opportunity exists in interest rate and exchange rate, the same can be taken advantage through derivative instruments and a project need not be done for that purpose. Since assets and liabilities are denominated in same currency netting will hedge the exposure. Since all payment for borrowing is in local currency any repatriation restriction, nationalization cannot lead to exchange loss.

Sept 17 2004 1. Liability under forward contract= 20,00,000/.8850= 22,59,887 Euro Futures 20,00,000/.8876= 2253267/125000= 18.03= 18

4. If NZ$= .50$ then profit of NZ = 350$, if it is .55$ then profits of NZ = 385$, NZ= .60$ then profits= 420$

5.

Sell 18 December future contract 125000*18*(.8876-.8695)= 40725$/.8760$= 46490 Euro

9% (9-9.125)/2= (.063)+(.125)= (.188%) negative spread 9.5% (9.5-9.125/2)= .188+(.125)= .063% 10%

Spot payment = 20,00,000/.8760$= 2283105-46490=2236615 euro Thus in this case future involves less outflow.

2. Number of dollars needed to construct risk less portfolio is delta= Cu-Cd/Vu-Vd=1.25-0/2 = 0.625

(10-9.125)/2= .438+(.125)= .313% 10.5% (10.5-9.125)/2= .688+(.125)= .563% 11% (11-9.125)/2= .9375+(.125)= .8125% B. If FRA is written spread is always = 9.22-9.125/2= .048%+(.125)= (.077%) negative spread whatever may be the range of Libor

B P= R-d/U-d= 1-.9832/ 1.028-.9832= .0168/.0448=.38= Cu*P+Cd*(1P)/ R= .1.25*.38+0*.62/1 = .48

3 A. Current reinvestment loss = (9.125-8.875)/2 = (.125%) If after 6 months Libor 7% (7-9,125) = 2.125/ 2= (1.063)= (1.188%) negative spread 7.5 ( 7.5-9,125)/2= (1.6125/2) = (.8063) +(.125)= (.9313%) negative spread 8% (8%-9,125)/2 = .(.561)+(.125) = (.686%) negative spread 8.5% (8.5-9.125)/2= (.313)+(.125) =(.438%) negative spread

4. It should be White requiring Floating Rate and Black fixed rate QSD= 1.6-.6= 1% To be shared equally Black borrows at 11% swaps with bank at 11.45% , bank swaps with white at 11.5%,

White borrows at Libor+1 and swaps with bank at Libor +.35% bank swaps with black at libor+.4%

5. Premium 9 million $ and 6 mpnths annuity is 9 million $ = A((1.045)^6-1)/(1.045)6*.045)= 1.74 million Period 0 6 Months 12 Months 18 Months 24 Months 30 Months 36 Months Interest Option premium amortisation 0 1.74 1.74 1.74 1.74 1.74 1.74 Principle Total 200 0 0 0 0 0 -200 200 9.36 6.74 8.74 10.74 11.865 211.865

7.62 5 7 9 10.125 10.125

Cost of Loan = -200+ 9.36/ (1+r)+ 6.74/(1+r)^2 +8.74/(1+r)^3+10.74/(1+r)^4+11.865/(1+r)^5+211.865/(1+r)^6 Find the IRR and annualize it to get the cost of loan

Section C 1. Imagine a person who exports watch for 100$ and imports one component in Japanese Yen for 6000 yen other variable expenses are Rs 700 per piece. At the time of receipt of the order the exchange rate was $ = 45 Rs and $= 120 JY Profits Revenue = 100*45= 4500 Imports = 6000/120 *45= 2250 Variable exp= 750

Profits = 1500 Rs At the time of exports and realization $= 50 rs and $= 100 YEN Revenue = 100* 50= 5000 Imports = 6000/100*50= 3000 Variable exp = 700

where adjustment of exchange rate is much more frequent than exc

Profit = 1300 thus inspite of appreciation of export currency there is loss of 200.

If at the time of exports and realization if 1$= 40 and $ = 140 yen Revenue = 100* 40= 4000 Imports = 6000/130 *40= 1846 Variable exp = Profit = 1454 700

Thus if only one currency is controlled while others are market determined depreciation/ appreciation of currency will not yield desired results.

2. Important element of translation exposure are whether exposure in the form of assets/ liabilities, whether the foreign operation is integral or non integral, what is functional currency and reporting currency, tax treatment of translation exposure.

3. Clean Float , where the exchange rate is purely determined by market forces, managed float where central bank intervenes to control the movement within limits, creeping exchange rate,

Where adjustment of exchange rate is not on a day to day basis but more frequent than fixed exchange system.

4. Various components of balance of payments are Current account, which consist of import and export of goods, import and export of services and transfer payments. Capital account , which consist of foreign investment for borrowing. When balance of payment is negative, the currency depreciates, to arrest the same government raises interest rates and due to which short term debt flows in leading to appreciation of currencies, but due to this , exports collapse, balance of payment problem collapse , leading to pulling out of short term debt, ultimately collapse of currency and economy, it is called as Dutch disease.

Sept 9 2006 1. Singapore $

20% Probability is 13% = 3.9% 60% probability is 16% = 4.8% 20% probability is 18% = 5.4%

Canadian $ 50% probability is 14% = 9.8% 40% probability is 17%= 11.9% 10% probability is 19% = 13.3%

The probability of yield being less than 8% is 0.

Currency US$ Australian$ Canadian $ Newzeland$ Japanese yen

investment 6 7 5 12 8

borrowing 9 18 12 9 11

1/3 in NZ at 12%+1/3 JY 8%+ 1/3 aAus$ 7= 9%

2 1/3*12.27+1/3*8+1/3*6.56= 8.94%

3. 15*.0894= 1.34 million 4. 2/3*9+1/3*7.8= 8.6% 5. 15*.086= 1.29 million$

6. =.05 million$ 7. Eventhough in theory addition .05 million $ = .33% by investing abroad, considering that exchange rate movement is only a forecast , there is no need to take such high risk to earn such dismal returns. I suggest netting than foreign investment and borrowings.

3. In Malaysian Ringgit millions Particulars Sales Cost of goods sold Grossprofit Selling and adminn EBDITA Depreciation EBIT Tax @ 35% Noplat Depreciation Cashflow Less cash for maintain existing operation FCF 1 200 100 100 30 70 20 50 17.5 32.5 20 52.5 7 2 216 108 108 30 78 20 58 20.3 37.7 20 57.7 7 3 233 117 117 30 87 20 67 23.46 43.54 20 63.54 7

45.5

50.7

56.54

Initial investment 9million*30= 270 million ringitt NPV in US$ -270*.25 + 45.5*.25/ 1.20+ 50.7*.25/1.20^2+ 356.54*.25/ (1.20)^3 If NPV is positive then BLR will be able to acquire the target at lower than its value.

May 18 2005 1. Borrow 50 million $ in London at 5.25% and convert into rupee at Rs 46.7/$ = 50 *46.7= 2335 million Rs Invest the same in India at 9% = 2335*(1+.09/4)= 2387.54 million rupees Amount of $ to be paid after 3 months = 50 million(1+.0525/4)= 50.65 million $ 3 rd month forward rate = 47.18/25 Amount of rupee to be repaid = 50.65*47.25= 2393.21 thus there is no gain Borrow in India at 9.1% for 3 months Amount of borrowing 50million*46.75=2337.5 Convert to $ and invest at 5% After 3 months = 50*(1+.05/4)= 50.625* 47.18= 2388.49 million rs Repayment of borrowing 2337.5(1+.091/4)= 2390.68 Thus arbitrage opportunity do not exceed.

2. Rs/ = Rs/$ *$/= 46.96*1.3850/ 46.98*1.3855= 65.04/ 65.09 Rs/ = 65/65.05 No arbitrage opportunity exist.

May 18 2004 1 a. IRP Bid

3. German Branch $ Particulars Debit UK 167317 Subsidiary US Parent US Parent 89744 Total Net amt to be paid by German Subsidiary 257061 192958 Credit

64103

64103

UK subsidiary $ Particulars German Subsidiary US parent Swiss Subsidiary Swiss Subsidiary Total Netting centre will pay UK subsidiary Debit Credit 167317

75000 110800 103875 185800 271192 85392

Swiss Subsidiary $ Particulars Debit UK Subsidiary US Parent 105968 UK Subsidiary Total Swiss Subsidiary should pay to netting centre 103875 209843 99043 110800 Credit 110800

US Parent $ Particulars Debit UK Subsidiary German 64103 Subsidiary German Subsidiary Swiss Subsidiary Total 64103 Netting Centre pay US Parent Credit 75000

89744 105698 279442 215339

4. Forward cover for Payable outflow in rupee= 2,50,000*65.58= 1,63,95,000 Money Market cover buy 2,50,000/ (1+.0525/4)= 246731 In spot market borrow 246731*65.08 Rs at 9.25% pa = 16057253*(1+.0925/4)= 16428176 Rs Forward hedge is cheaper. Receivable. Borrow 5,00,000/ (1+.0475/4) = 494132$ Convert it at spot rate 494132*46.94= 23194556 Rs Invest for 6 months at 4.25%= 23194556(1+.0425/4)= 23440998 6 Month Forward 500000*48.05= 2,40,25,000 Since realization is more forward hedge is better.

5. Exports Invoice in $ = 5,00,000,00/48.60= 1028807$ 3 months realization is 48.60*1.0075= 48.96 Realisation = 1028807*48.96=5.03,70,391 Rs Invoice in = 5,00,000,00/ 74.40= 672043 3 month realization = 672043*75.14= 50497311 Rs Invoice in = 50000000/48.2= 1037344 3 month realization 1037344*48.80= 50622387 Euro invoicing is best for exports. Vice versa $ invoice is best for imports since it appreciates the least.

May 18 2004 1. a. IRP Bid $(1+.025/2) = 45.25(1+.06/2) $ = 45.25(1+.06/2)/ (1+.025/2)= 46.03 IRP Ask $ = 45.25(1+.065/2)/ (1+.0225/2)= 46.20 6 month forward rate to prevent arbitrage = 46.03/ 46.20

b. Fischer theory clearly suggest that real return across world will converge ceteris paribus, thus it created awareness for freeing capital control. But it do not take into account government intervention in the form of exchange control, tariff and withholding taxes. It also ignores the effect of free capital movement.

2. a. Since it is an option forward contract worst rate will be passed on so the rate will be 45.55 Rs/$. b. If contract is cancelled on 31.03.2004 it will buy $ at 45.55 and sell at 45.55, no gain /loss. c. Amount recd 495000*45.55= RAS 2,25,47,250 B. Beyond scope of current syllabus

3. a.

Invest in 60 day deposit 9,00,000*.04*60/360= 6000 , borrow 1,00,000 at 8% for 60 days and invest in 60 days CD @ 6% Interest = 10,00,000* .06*60/360= 10,000 Interest on borrowing 1,00,000* 8%*60/360= 1334 Net interest 8666 Second option preferable.

b. LC is a payment against document and not payment against goods, here the buyers bank guarantees payment as long as proper documents as called for in letter of credit are presented. Thus LC facilitates trade between two unknown buyer and sellers , who live in different countries, which have different legal systems.

4. a. Through forward market after discounting present value = 99760$*45.75/ 1.0325= Rs 4420358 Money Market hedge Borrow 99960/1.01= 98970$ Convert to Rs at Spot = 98970*45.25= 4478393 For immediate need money market is better

b. This can be funded through bank borrowings, foreign bonds, euro bonds, ADR, GDR, IDR and ECBs.

5. Mortgage based securities are Residential Mortgage based securities( RMBS), Commercial Mortgage based securities ( CMBS), in both the PTC is backed by mortgage, RMBS has recourse to person, but CMBS has no recourse to person, both have prepayment risk. In Inflation indexed security the interest rate as well as principle is linked to inflation to give protection against falling value of currency.

b. Futures are standardized, with no credit risk, imperfect hedge subject to margin nrequirements, highly liquid Forwards are customized, OTC, perfect hedge, illquid, subject to counter party risk. Swaps are OTC but standardized either involves exchange of interest rates, currencies are both. Swaptions are options to exercise swap.

Jan 20 2007 1 a. Effective yield on both investment will be equal. Since as per IRP difference in exchange rate is difference in nominal interest rate.

b. If pound is over valued investment in pound will give far superior return. c. If pound is undervalued, investment in $ will give far superior return.

2. a. Whether is Krona exchange rate is market or government determined and whether repatriation of profit is permitted or not. If exchange rate of krona is market determined as well as repatriation is allowed, then it makes no difference whether investment is made is krona or $ If exchange rate is government determined and repartiation is restricted then investment should be in krona. b. Since assets and liabilities are in same currency , netting acts as hedge against exchange risk. C. If Government regulation restricts repatriation of krona, borrowing in krona avoids blocked accounts.

3. a. NZ$

1st

2nd

3rd

Contribution Fixed Cost EBIT Interest Depreciation PBT Tax PAT CFAT Earning remitted after with holding tax

18.8 6 12.8 2.8 5 5 1.5 3.5 8.5 7.65

23.80 6 17.8 2.8 5 10 3 7 12 10.8

29.4 6 23.4 2.8 5 15.6 4.68 10.92 15.92 14.33

NPV = -25 + 7.65*.52/1.20 + 10.8* .54/ 1.20^ 2 + ( 14.33+ 52)*.56/ 1.20^3= -25+3.32+ 4.05+21.50=3.87 million$ positive Since positive NPV he should accept the project.

B PBT Tax PAT CFAT Earning Remitted After with Holding tax NPV = -35 + 9.5*.52/ 1.2+ 11.93*.54/ 1.44 + (16.09+ 70)*.56/ 1.728 = -35+ 4.12 + 4.47 + 27.90= 1.49 Ist proposal is better. 7.8 2.24 5.56 10.56 9.50 11.8 3.54 8.26 13.26 11.93 18.4 5.52 12.88 17.88 16.09

C From parents perspective the return of the project will be more sensitive to exchange rate movement if US $ is used to finance working capital, since in the case of Newzeland $ revenue asset and liability will be in the same currency.

d. = -25 +( 7.65*(1.06)^2 + 10.8(1.06) + 14.33+52).56/ 1.728= -25+ (8.60+11.45+66.33)*.56/ 1.728= -25+ 28= 3 million$

e. Break even salvage value 0= -25 + 7.65*.52/ 1.2 + 10.8*.54/ 1.44+ (14.33+X)/ 1.725 0= -25 + 3.32 + 4.05+ 8.31+ .5797X 0= -9.32+ .5797X 9.32= .5797X X = 9.32/.5797= 16.08

4 Probablity % 5 10 30 30 20 5 Spot $ Forward $ 40,000 52000 45000 52000 48000 52000 50,000 52000 53000 52000 55000 52000 Difference (12000) (7000) (4000) (2000) 1000 3000

There is a 75 % probability hedging is costlier to non hedging.

Cost of hedging = .05*12000+.10*7000+.30*4000+.30*2000= 600+700+1200+600= 3100

5. Expected value of effective yield .04*.2+.15*.5+.19*.3= 14.2% 20%

Expected value of additional cost of hedging = .05*12000+.10*7000+.30*4000+.3*2000= 600+700+1200+600= 3100

Jan 21 2006 1. Invest in after 3 months 1,01,000 In $ convert to /$ spot .6393/94 $/ spot = 1/ .6394/ 1/.6393= 1.5640/ 1.5642 1,00,000 get 1,56,400$ After investment get 156400(1+.03/4)=157573$ 3rd month fwd = 1/.6427/1/.6413= 1.5559/ 1.5593 Thus in terms of 157573/1.5593=1,01,054 If Convert to / = 1/.6264/ 1/.6263= 1.5964/ 1.5967 1,59,640 invest at 159640(1+.05/4)=161636 Convert to / = 1/.6294/ 1/.6292= 1.5888/ 1.5893 1,61,636/ 1.5893= 1,01,702 Thus it should invest in to get maximum yield

2. IRR of Singapore $ bond = + 10 , 000, 000- 364000/ (1+r) 392000/(1+r)^2- 406000/ (1+r)^3 5671000/(1+r)^4=10% Better to borrow in Singapore $ than in American $

3. Gandhors cost of capital = 13.8*.7*.6+ 18*.4= 13% Required rate of return = 17%

Probablity Chinese tax 20% with no withholding tax 60% Chinese Tax 40% with no with holding tax 20% Chinese Tax 20% with 10% withholding tax. 20%

Scenario 1 Year 1 Profit from joint venture = 60 million yuan * .8= 48 million US share 24 million = 24 million* .2= 4.8 million$ US tax on same 10% net amount 4.38 million $ Year 2 Profit from joint venture = 80 million yuan* .8= 64 million US share = 32 million yuan* .2= 6.4 million$ Share after US tax = 5.76 million $ Year 3 Profit from joint venture = 100* .8= 80 million yuan US share = 40 million* .2= 8 million $ Share after US Tax = 7.2 million $ NPV = -12 + 4.38/1.17 + 5.76/(1.17)^2+ 7.2/(1.17)^3= -12 + 3.74+ 4.21+ 4.50= 12.45 million $ so there is 60% probability of earning .45 million $ as positive NPV. Scenario 2

20% probability NPV = -12 + 3.6/ (1.17) + 4.8/(1.17)^2+ 6/(1.17)^3= 12+ 3.08+ 3.51+3.75=-1.66 NPV Scenario 3 20% probability -12 + 3.89/ 1.17 + 5.18/ (1.17)^2 + 6.48/(1.17)^3 -12 + 3.32 + 3.78+ 4.05= (.85) There is a 40% probability of getting negative NPV , if management is aggressive they will accept this project.

4. 12*.2+9*.3+8*.1+5*.4= 2.4+2.7+.8+2= 7.9% effective interest rate.

5. Cost of carry = 7.511*.11*248/365= .56 December value = 8.071 but future value is 8.456 so silver future is over valued, arbitrage can be taken care by selling silver future and borrowing and buying silver spot extent of arbitrage = 8.4568.071= .385$

6. Per day VAR = 20/ 300= 1.15% At 95.5% confidence level maximum loss = 50*41.3* 2*1.15%= 47.50 million Rs. Will be maximum loss per day.

JAN 18 2005 1. /$ = 1.1580/90 /$ = .6955/65 /= /$*$/= 1.1580*1/.6965/ 1.1590*1/.6955= 1.6626/ 1.6664 Ask rate should be greater than 1.6626 b. Internal hedging techniques are netting, combination, invoicing, leading , lagging , matching.

PPP assumes no transaction cost, no transportation cost, no tariff and no taxes

2. Exports should be invoiced in $ which has highest premium, while imports should be invoiced in euro having lowest premium.

B Opener, opening bank, advising bank, negotiationg, nominated bank, beneficiary, payment against document, UCPDC 600.

3. A. Nominal rate of return to India Mutual Fund = 50.3/48.4-1= 3.93% Nominal rate = 13-3.93= 9.07 Real rate = 9.07-3= 6.07 Real rate to Indian Investor = 13-7= 6%

PPP assumes no transaction cost, no transportation cost, no tariff and no taxes. It also assumes goods are identical across world which is not true, since big Mac is identical across world , it solves this assumption.

4 a. b. c. d. 47.48 46.85-47.48= (.63) 47.48-47.48= 0 47.45

5. 1,50,000*.65-1,00,000*.52+80,000*.6= 97500-52000+48000= 93500$ spot $ to be sold. 150000*(1.02/4)/ (1.06/4)= 148522$ -100000*(1+.02/12*5)/ (1+.06/12*5)= -101620 80000* (1+.02/12)/ (1+.06/12)= 80136/ 1.005= 79737 Future $= 126639$ to be sold in future market.