THE UNIVERSITY OF THE WEST INDIES

INTERNATIONAL FINANCIAL MANAGEMENT

MID TERM EXAM

ANSWER ALL QUESTIONS

DATE : October 28 2020

TIME : 45 MINUTES
QUESTION ONE (5 marks)

A In the second half of 1997, the Indonesian rupiah devalued by 84% against the U.S. dollar. By how
much has the dollar appreciated against the rupiah?

B The interest rate in England is 12%, while in Switzerland it is 5%. What are possible reasons for this
interest rate differential? What is the most likely reason?

C Suppose the direct quote for sterling in New York is 1.1110-5. What is the direct quote for dollars in
London?

QUESTION TWO (10 marks)

Carla Heinz is a portfolio manager for Deutsche Bank. She is considering two alternative
investments of EUR10,000,000. Either she will invest in euro deposits or she will invest in
Swiss francs (CHF) for 180 days. In the latter case, she knows that she must worry about
transaction foreign exchange risk, so she has decided to fully hedge her investment. Suppose
she has the following data:
180-day Swiss franc deposits: 8.0% p.a.
180-day euro deposits: 10.0% p.a.
Spot exchange rate: EUR1.1960/CHF
180-day forward exchange rate: EUR1.2024/CHF

Which of these deposits provides the higher euro return in 180 days? If these were actually
market prices, what would you expect to happen?

QUESTION SIX (10 marks)

1 One good indicator of political risk is

a. the seriousness of capital flight
b. the level of local interest rates
c. the level of local tax rates
d. a large middle class population

2 Which one of the following is NOT a form of direct political risk to the
multinational corporation?
a. currency controls
b. privatization of public utilities
c. changes in tax or labor laws
d. regulatory restrictions

3 Suppose annual inflation rates in the U.S. and Mexico are expected to be 6% and
80%, respectively, over the next several years. If the current spot rate for the
 Mexican peso is $.005, then the best estimate of the peso's spot value in 3 years
is
a. $.00276
b. $.01190
c. $.00321
d. $.00102

4 Suppose inflation rates in the U.S. and France are expected to be 4% and 9%,
respectively, next year and 6% and 7%, respectively, in the following year. If the
current spot rate is $.1050, then the expected spot value of the franc in two years
is
a. $.1111
b. $.1024
c. $.0992
d. $.1074
ANSWER: c: purchasing power parity

5 The current five-year Euro yen and Eurodollar rates are 8% and 12.5% per
annum, respectively. What is the implied forward premium or discount of the
yen (over the current spot rate for a five-year forward contract)?
a. 4.17% premium
b. 18.46% discount
c. 17.74% discount
d. 22.64% premium

6 The theory of relative purchasing power parity states that, between two nations,
the
a. inflation rates are unrelated
b. exchange rate differential reflects the inflation rate differential
c. inflation rate is smaller in weaker currencies
d. the interest rate is greater than the inflation rate during depreciations

7 Under a fixed-rate system, a country that followed policies leading to a lower

inflation rate than that experienced by its trading partners would
a. come under pressure to expand its money supply
b. restrict the growth of its money supply
c. experience a balance-of-payments deficit
d. be forced to buy its currency in the foreign exchange market

8 Governments intervene in the foreign exchange markets for all of the following
EXCEPT to
a. earn foreign exchange
 b. reduce economic uncertainty
c. improve the nation's export competitiveness
d. reduce inflation

9 Of the following, exchange rates depend the most on

a. relative inflation rates
b. relative interest rates
c. relative trade deficits
d. a and b

10 Suppose that the Brazilian real devalues by 40% against the U.S. dollar. By how
much will the dollar appreciate against the real?
a. 67%
b 40%
c. 32%
d. 28%