QUESTION 1 (A)

Year Currencies (RM)

US Dollar UK Pounds Japanese Yen Singapore Dollar
(100)
2003 3.8000 6.7678 3.5546 2.2342
2004 3.8000 7.3169 3.7026 2.3258
2005 3.7800 6.5226 3.2229 2.2714
2006 3.5315 6.9315 2.9675 2.3028
2007 3.3065 6.6070 2.9534 2.2938
2008 3.4640 4.9989 3.8327 2.4070

QUESTION 1 (B)

USD Dollar
Based on the respective table in question 1(a), the USD dollar against MYR depreciates
from year 2003 to year 2007 and appreciates again from year 2007 to year 2008. As
overall, the value of USD Dollar from year 2003 to year 2008 is depreciating.

UK Pounds
At the mean time, UK Pounds also appreciates against MYR from year 2003 to year
2004. But, the respective UK Pounds had depreciates against MYR from year 2004 to
year 2005 before appreciate again from year 2006 to year 2008. As overall, the value of
USD Dollar from year 2003 to year 2008 is depreciating.

Japanese Yen
As for the Japanese Yen against MYR, the value is appreciating from year 2003 to year
2004 and depreciates yearly from year 2005 to year 2007. However, the respective
Japanese Yen against MYR appreciate again from year 2007 to year 2008. As overall,
the value of USD Dollar from year 2003 to year 2008 is appreciating.
Singapore Dollar
As for the Singapore dollar, it is appreciate against MYR from year 2003 to year 2004
and depreciate in year 2005. The respective value of Singapore dollar against MYR is
appreciated again in year 2006 before depreciate again in year 2007. Lastly, the value of
Singapore dollar is appreciated further in year 2008. As overall, the value of USD Dollar
from year 2003 to year 2008 is appreciating.
QUESTION 1(C)

The global crisis began in July 2007 when a loss of confidence by investors in the value
of securitized mortgages in the United States resulted in a liquidity crisis that prompted a
substantial injection of capital into financial markets by the United States Federal
Reserve, Bank of England and the European Central Bank. The TED spread, an
indicator of perceived credit risk in the general economy, spiked up in July 2007,
remained volatile for a year, then spiked even higher in September 2008, reaching a
record 4.65% on October 10, 2008. In September 2008, the crisis deepened, as stock
markets worldwide crashed and entered a period of high volatility, and a considerable
number of banks, mortgage lenders and insurance companies failed in the following
weeks.

The currencies exchange rate will seriously affect especially those eastern countries
such as USA and United Kingdom. It is because the global economic crisis had make
the whole world demands become slumping down. The expenditures of the people
become lesser and lesser. Therefore, the developing country like Malaysia will reduce
their imported items because the local product is more than enough to sustain the needs
and demand of the local people. Once the demand on the imported items such as from
USA or UK is decreased, then it will decrease the demand of the USD and UK Pounds
as well. The respective consequences had made the dollar USD and UK pound
depreciated from year 2003 to year 2008 seriously.

At the mean time, most of the developing countries like Malaysia will try to source other
alternative countries such as Asia country to import all kind of necessary products such
as electrical applicants. Japan and Singapore will be ideal countries for Malaysia to
import the items. It is because Singapore and Japan is close to us and their currency
value is lower than western countries. Therefore, the demand of the imported item from
Japan and Singapore might slightly higher and it will increase the demand of their
currency. The respective increment in their currency demand had increase their currency
value against MYR.
Besides that, the instability of the global economics also makes the demand and
supplies power in the world become very unstable. The respective instability in the
demand and supplies force will seriously affect the currency exchange rate for other
countries against MYR. For instance, the global economic crisis had seriously affect the
industry in USA and the demand of all kind of the products from USA is slumped down
seriously. The respective slumping in the demand will seriously affect their currency
exchange rate compare to other countries.

Integration of financial markets is a process of unifying markets and enabling

convergence of risk- adjusted returns on the assets of similar maturity across the
markets. The process of integration is facilitated by an unimpeded access of participants
to various market segments. Financial markets all over the world have witnessed
growing integration within as well as across boundaries, spurred by deregulation,
globalization and advances in information technology. Central banks in various parts of
the world have made concerted efforts to develop financial markets, especially after the
experience of several financial crises in the year 2008. As may be expected, financial
markets tend to be better integrated in developed countries. At the same time,
deregulation in emerging market economies (EMEs) has led to removal of restrictions on
pricing of various financial assets, which is one of the pre-requisites for market
integration. Capital has become more mobile across national boundaries as nations are
increasingly relying on savings of other nations to supplement the domestic savings.
Technological developments in electronic payment and communication systems have
substantially reduced the arbitrage opportunities across financial centers, thereby aiding
the cross border mobility of funds. Changes in the operating framework of monetary
policy, with a shift in emphasis from quantitative controls to price-based instruments
such as the short-term policy interest rate, brought about changes in the term structure
of interest rates. This has contributed to the integration of various financial market
segments. Harmonization of prudential regulations in line with international best
practices, by enabling competitive pricing of products, has also strengthened the market
integration process.
In integrated financial markets, domestic investors can buy foreign assets and foreign
investors can buy domestic assets. Among countries that are fully integrated into world
financial markets, assets with identical risk should command the same expected return,
regardless of location.

The integration of emerging market economies into the world financial markets is
generally followed by: a significantly larger and more liquid equity market; stock returns
which are more volatile and more correlated with world market returns; a lower cost of
capital; improved credit ratings; real exchange rate appreciation; and increased
economic growth. They find strong evidence of structural breaks in emerging equity
markets, but no evidence of structural breaks in the world equity market. However, these
breaks do not always correspond very closely to the dates of official capital market
reforms.

As a conclusion, the global economic crisis had seriously causing a slump down the
worldwide economic and it will also consequently affect the exchange rate of the
currency for different kinds of the countries such as USA or UK. Meanwhile, the
integration of the financial market which a process of unifying markets and enabling
convergence of risk- adjusted returns on the assets of similar maturity across the
markets had explain the contagious effect of the respective crisis for this world.
QUESTION 2 (A)

USD DOLLAR
Buying price in year 2003 = RM3.8000
Total cost of buying = RM1.9 million
Selling price in year 2008 = RM3.4640
Total selling = RM1.732 million
Profit = (RM0.168 million)

UK Pound
Buying price in year 2003 = RM6.7678
Total cost of buying = RM3.3839 million
Selling price in year 2008 = RM4.9989
Total selling = RM2.4995 million
Profit = (RM0.8845 million)

Japanese Yen
Buying price in year 2003 = RM3.5546
Total cost of buying = RM0.711 million
Selling price in year 2008 = RM3.8327
Total selling = RM0.7665 million
Profit = RM0.0554 million

Singapore Dollar
Buying price in year 2003 = RM2.2342
Total cost of buying = RM4.44684 million
Selling price in year 2008 = RM2.4070
Total selling = RM4.814 million
Profit = RM0.36716 million

TOTAL = RM 0.36716 million + RM0.0554 million - RM0.8845 million - RM0.168 million

= (RM0.62994 million)
Therefore, he make a loss as much as RM0.62994 million.
QUESTION 2(B)

Interest rate parity is an economic concept, expressed as a basic algebraic identity that
relates interest rates and exchange rates. The identity is theoretical, and usually follows
from assumptions imposed in economics models. There is evidence to support as well
as to refute the concept.

Interest rate parity is a non-arbitrage condition which says that the returns from
borrowing in one currency, exchanging that currency for another currency and investing
in interest-bearing instruments of the second currency, while simultaneously purchasing
futures contracts to convert the currency back at the end of the holding period, should be
equal to the returns from purchasing and holding similar interest-bearing instruments of
the first currency. If the returns are different, an arbitrage transaction could, in theory,
produce a risk-free return. However, it wills not a good hedge strategy for Mr. Macmani.
It is because the currency different for 4 countries which been bought buy Mr. Macmani
is too wide and large. Therefore, the respective interest rate parity might not workable as
said in theory to convert the currency back at the end of the holding period, should be
equal to the returns from purchasing and holding similar interest-bearing instruments of
the first currency.