International Financial Management — DU B.A. (Hons.) Business Economics (BBE) Previous Year Question Papers

1197 5. (a) Derive International Fisher Effect by combining Purchasing Power Parity and Interest Rate Parity. (b) The analysis of demand and supply curve of a currency shows that the foreign exchange markets can become unstable. Critically examine the above statement. (c) Write a short note on Currency Swaps. 6. (a) Assuming zero transaction costs complete the following table with all spot prices are given in dollar terms:- (b) (c) Develop a Payoff profile for currency futures How does inflation in home country and foreign country affect the exchange rate. 8,5,5 Write short notes on any three of the following: (ii) Role of exchange brokers in Forex markets (iii) Currency Market Spread (iv) Bill of Lading (v) Hybrid System of exchange rates If any assumption is made while solving a problem, the same must be stated clearly. 1. A US Semi-conductor company agrees to sell its product to a UK based firm for 10,00,000 £. with an agreement that the payment for the same would be made in 90 days. At the time of deal, forward and spot rates between dollar and pound were: S($/£): 1.3490 and F($/£): 1.3321. The interest rates prevailing in two countries were as under : 2. Further, in currency options market, a call option is available with a strike rate of 1.341$/£with a premium as 0.921 $. The dollar-pound market three month forecast of spot rates are 1.3301 $/£ and 1.3311 $/£ with probabilities 0.7 and 0.3 respectively. Determine the payoffs for the UK based importer if the finance manager is considering the following plans : 1. Company decides to hedge its position in the forward market 2. Company decides to hedge by borrowing funds from US and creating a UK deposit 3. Company decides to hedge by borrowing funds from US and lending in U.K money market 4. Company decides to hedge in currency options market 5. 6. Company does not go for any kind of hedging Prepare a results table with three columns, first is the Hedging Strategy, Second is the Outgo from the strategy and third rank given by you (best (1) to worst (a) An Indian importer has to pay 1 million $ to pay for imports in 6 months. It enters a 6 month call option contract at ` 92.40/$ with a premium of 5%. Determine the final amount to be paid the Company if on the expiry of option, the spot price behavior is expected to be (i) Discount of 1.92% on Rupee (ii) Premium of 2.96% on Rupee. Under which of the two conditions mentioned above the call option becomes meaningless, clearly present with a comparative table. (b) If inflation in India is 7.25% while it is 4.25% in US. With the aim to restore the PPP, determine whether rupee shall appreciate or depreciate and by how much. (c) US interest rate is 4.25%, and India interest rate is 7.25%, exchange rate between these two currencies at 92.11 INR/$ Spot and 93.11 INR/S Forward.