School of Business, Department of Accounting & Finance

Semester: SUMMER 2020, MID TERM

FIN 444

The deadline is August 23, 9:40 pm.

Please answer all the questions in a single word document (*.docx file). Please answer
chronologically. Submit only when you have finished the exam and refrain from submitting multiple
times. Your name, NSU ID number, and section number must be on the first page of the document.

Section_______

NAME: _____________________________________________

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ID:0626640______________

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Question 1. (7 points). MSN Bank expects that the New Zealand dollar (NZD) will

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depreciate against the U.S. dollar (USD) from its spot rate of $.44 to $.41 in 60 days. The
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following interbank lending and borrowing rates exist:
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Annual borrowing rate Annual lending rate
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USD 7.20% 7.00%

NZD 10.00% 9.00%
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MSN Bank considers borrowing 2 million New Zealand dollars in the interbank market and
investing the funds in U.S. dollars for 60 days. Estimate the profits (or losses) that could be
earned from this strategy. Should MSN Bank pursue this strategy? Show necessary
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calculations and discuss (50 words excluding calculations).

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Answer1.
MSN bank is borrowing NZD 2,000,000 at 10.00% in annual rate
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The repayment in NZD:

NZD 2,000,000*(.1/6) +NZD 2,000,000=Nzd 2,033,333
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Converting NZD into USD at the spot rate

Invest in the USD money market security
$880,000*(.07/6) +880,000=$890,267
After 60 days of the value investment in 890,267
Convert back into NZD $0.41
$890,267/$0.41=NZD 2,171,383
Profit or Loss=NZD 2171,383-2033,333

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 NZD 138050 profit.

Question 2. (4 points).
i) The bid rate for the British pound is $1.40 and the ask rate is $1.47. What is the
bid/ask spread (in %)?

Ans i)Given, British pound $1.40 and ask rate $1.47

Bid ask spread=($1.47-1.40)/$1.47=0.0476 or 4.76%

ii) Assume the spot rate of the British pound is $1.45. The expected spot rate one
year from now is assumed to be $1.35. What percentage depreciation/appreciation
does this reflect?

Ans ii) ($1.35- $1.45)/$1.45=-0.0689= 6.9% Expected depreciation of 6.9%

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percent.

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Question 3. (4+3 points)

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i) Abdul purchased a put option on British pounds for $.05 per unit. The exercise
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price was $1.80, and the spot rate at the time the pound option was exercised was
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$1.62. Assume there are 31,250 units in a British pound option contract. What was
Abdul’s net profit on the option contract? Calculate the break-even spot rate (at
expiration) for Abdul.
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ANS: Profit per Unit on exercising the option=$1.80-$1.62=$0.18

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Premium paid per Unit=$0.05

Net profit per unit=$0.18-$0.05=$0.13
Net profit per option=31250*$0.13=$4062.5
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ii) Mike sold a put option on British pounds for $.04 per unit. The exercise price was $1.70,
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and the spot rate at the time the pound option was exercised was $1.59. Assume there are
50,250 units in a British pound option. What was Mike’s net profit on the option?
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Question 4. (5 points) How would a relatively high home inflation rate affect the home
country’s trading activities (i.e. exports and imports), other things being equal? Explain (word
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limit: 120 words)

Ans: Basically, when there are too many imports coming from a country in relation to its
exports which are products shipped from that country to a foreign destination it can distort a
nation’s balance of trade and devalue its currency. The devaluation of a country's currency
can have a huge impact on the everyday life of a country's citizens because the value of a
currency is one of the biggest determinants of a nation’s economic performance and its gross
domestic products by maintaining the appropriate balance of imports and exports is crucial
for a country. The importing and exporting activity of a country can influence a country's
GDP, its exchange rate, and its level of inflation and interest rates.

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 Question 5. (7 points) Determine the value the U.S. based MNC with the following free cash
flow and exchange rate estimations. The MNC has operations in Bangladesh and India.

Year 1
Year 2 Year 3 Year 4 Year 5
Expected Exchange rates
USD vs INR 50 47 45 42 40
USD vs BDT 80 84 88 92 97
Expected free cash flows (in millions)
India (in INR) 4000 4000 4000 4000 *40000
Bangladesh (in BDT) 8000 8000 8000 8000 *80000
USA (in USD) 200 200 300 300 *3000
The firm has an overall cost of capital of 10%

*present values of all the Expected future free cash flows at time t= year 5

Ans:5

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