International Finance M1

Final term exam - CORRECTION

MCQs (15 questions)

1) GDP is given by
a) C + I + G + X - M
b) X − M
c) I + X + M
d) M – X
e) None of the above
Answer: A

2) The current account is divided into four finer categories:

a) merchandise trade, reserves, factor income, and statistical discrepancy.
b) gold inventory, services, factor income, and transfers.
c) merchandise trade, services, portfolio investment, and transfers.
d) merchandise trade, services, factor income, and tranfers
e) none of the above
Answer: D

3) If the EU exports more than it imports, then this means that

a) the supply of euros is likely to exceed the demand in the foreign exchange market,
b) the demand for euros will be non existent
c) the euro would most likely depreciate against other currencies.
d) the demand for euros is likely to exceed the supply in the foreign exchange market,
and the euro would most likely appreciate against other currencies.
e) None of the above
Answer: D

4) The following table contains hypothetical data for the U.S. balance of payments in a
particular year. Answer the next question on the basis of this information. All figures are
in billions of dollars.

1) U.S. goods exports +300

2) U.S. goods imports -200
3) U.S. service exports +50
4) U.S. service imports -200
5) Net investment income +100
6) Net transfers -100
7) Balance on capital account +30
8) Foreign purchases of assets in the U.S. +40
9) U.S. purchases of foreign assets abroad -20
Refer to the above data. The U.S. balance on current account is a:

a) -50 BIL
b) +50 BIL
c) 0 BIL
d) 70 BIL
e) none of the above
Answer: A

5) Consider the following direct quotations and spot rates:

GBP/EUR =0.88
USD/AUD=0.78
AUD/EUR=1.57
The GBP/AUD cross rate is closest to:
a. 0.686
b. 1.381
c. 0.560
d) 1.582
e) none of the above
Answer: C

6) Consider the following direct quotations and spot rates:

NZD/USD=0.752
AUD/USD=1.490
AUD/EUR=1.613
The EUR/USD cross rate is closest to:
a. 1.613
b. 2.403
c. 0.923
d) 1.083
e) none of the above
Answer: C
7) The spot yen/£ exchange rate is 145.94 yen/£. The 3-month forward rate is 147 yen/£.
What is the yen's forward premium (or discount) on the pound, expressed as an annual
percentage?
a. 0.721 percent discount
b. 2.163 percent discount
c. 2.88 percent premium
d. 0.721 percent premium
e) None of the above
Answer: C

8) The Swiss economy is predicted to average inflation at 4 percent per year. The inflation
forecast for the United States is 2 percent per year. If the current exchange rate is
1.4SF/$, what should be the expected exchange rate one year from now in order to avoid
arbitrage?
a. 1.427SF/$
b. 1.485SF/$
c. 1.373SF/$
d. 1.484 SF/$
e) None of the above
Answer: A

9) The CAC 40 Futures Contract has a face value of €10 x [Value of the CAC 40 Index]. Today, you
have sold 5 futures contracts today, delivery June 2022 at a price of 6499 when the value of the
index on the market was 6489. At maturity, the value of the index is 6494. What is the amount of
your profit/loss?
a) Loss of €500
b) Loss of €250
c) Profit of €250
d) Profit of €500
e) None of the above

Answer: C

10) The graph below describes a Profit & Loss profile at maturity. Which one is it?
 a) Buyer of a futures contract
b) Buyer of a call option
c) Buyer of a put option
d) Seller of a put option
e) None of the above

Answer: B

11) When you trade options, which of the following pricing parameters is unknown from buyers and
sellers, but can be determined according to the price of the option:
a) Price of the underlying asset
b) Time to maturity
c) Exercise price
d) Implied volatility
e) None of the above

Answer: D

12) You have sold 100 put options on BNP-Paribas delivery June, exercise price €80 for a price of €35
per option. The underlying asset of 1 option is 1 BNP-Paribas stock. Exercise at maturity is
automatic if relevant. The price of BNP-Paribas at maturity is 60, which of the following is true:
a) Nothing happens, the options expire, you made a profit of €3,500
b) Nothing happens, the options expire, you made a loss of €3,500
c) You will have to sell 100 BNP-Paribas stocks for a price of €8,000
d) You will have to buy 100 BNP-Paribas stocks for a price of €8,000
e) None of the above

Answer: D

13) Xesla Inc issues debentures at a price of 99.123%. The underwriter’s spread is 1.3%. What are the
dollar proceeds to the company if the total amount of debentures issued (i.e., number of bonds
issued multiplied by the face value) is $100 million dollars?

A. $101.3 million
B. $100 million
C. $99.123 million
D. $97.823 million
e) None of the above
Answer: D (99.123%-1.3%)*$100 million = $97.823 million

14) Call protection is a bond provision that protects whom?

a) Bondholders
b) Bond issuer
c) Broker
d) It depends on interest rates
e) None of the above
Answer: A

Call protection prevents the issuer from exercising the option of calling the bond. Insofar as (i)
the issuer only exercises the option when this is to the benefit of the issuer, and (ii) options
are a zero-sum game, it follows that the call protection protects bondholders. For example, if
interest rates decrease the issuer would like to call the bond to refinance itself at lower interest
rates while the bondholder would prefer to keep on receiving the above-market rate coupon
payments. The latter would only be possible if there is a call protection in place. Hence, the
call provision benefits the issuer and the call protection benefits bondholders.

15) Lafarge Corp needs to raise $2 billion in new equity. The pre-announcement share price is €75/sh.
Lafarge decides to raise additional funds via a 4 for 16 rights offer at €50 per share. If we assume
100% subscription, what is the value of each right?

a) $18.75
b) $19.73
c) $20.00
d) $20.23
e) None of the above

Answer: C

• Current market value = 16 × €50 = €1,200

• Total shares = 16 + 4 = 20
• Amount of funds = 1,200 + (4x50) = €1,400
• New share price = (1,400) / 20 = €70
• Value of a right = 70 – 50 = €20

Essay Questions (10 questions)

1) Define the balance of payments.

Answer: The balance of payments (BOP) can be defined as the statistical record of a
country’s international transactions over a certain period of time presented in the form of
double-entry bookkeeping.

2) Why would it be useful to examine a country’s balance of payments data? Provide

concisely at least 2 reasons.

Answer:
It would be useful to examine a country’s BOP for at least two reasons. First, BOP provides
detailed information about the supply and demand of the country’s currency. Currency
forecasting
Second, BOP data can be used to evaluate the performance of the country in international
economic competition. For example, if a country is experiencing perennial BOP deficits, it
may signal that the country’s industries lack competitiveness.
Third BOP management and strategy (tariffs, quotas etc..)

3) Explain official reserve assets and provide at least 2 major components.

Answer: Official reserve assets are those financial assets that can be used as international
means of payments.
Currently, official reserve assets comprise: (I) gold, (ii) foreign exchanges, (iii) special
drawing rights (SDRs), and (iv) reserve positions with the IMF. Foreign exchanges are by far
the most important official reserves.

4) Consider the following direct quotations. The exchange rate was GBP/EUR =0.88/EUR at
the beginning of the year and ended at 0.90 GBP/EUR. Has the euro appreciated or
depreciated? How much?
Answer: the euro has appreciated by 2,27%
5) Suppose that the annual interest rate is 5.0 percent in the United States and 3.5 percent
in Germany, and that the spot exchange rate is $1.12/€ and the forward exchange rate,
with one-year maturity, is $1.18/€. Assume that an arbitrager can borrow up to
$1,000,000. If an astute trader finds an arbitrage, what is his net cash flow in one year?
Answer: $40,446.43
6) The spot yen/£ exchange rate is 145.94 yen/£. The 3-month forward rate is 147 yen/£.
Compute the yen's forward premium (or discount) on the pound, expressed as an annual
percentage.
Answer: 2.88 percent premium

7) You are a US farmer producing corn. You fear that corn prices may drop this summer
when comes the time of the harvest. You’ve been told that corn futures and options
can be traded in the Chicago Exchange. Describe 2 strategies that you could put in
place to protect your crop revenues, briefly discuss their advantages/disadvantages.
Answer: Sell corn futures, delivery in the summer. No cost, protection if corn price drops, but no
benefit if corn price raises.
Buy corn put options, delivery in the summer. Cost of the option, protection if corn price drops,
and upside benefit if corn price raises.

8) You are the CFO of Arcelor-Mittal, an international company in the steel industry. Your company
is selling its products and sourcing its supplies on all continents. Also, you are considering a new
bond issue which proceeds will be used to finance new furnaces. In the current volatile
environment, you want to protect your company against the risks it is currently facing. As a
member of the Finance Department, your CFO asks you to describe the risks (name at least 3
categories) and the derivative instruments your company could be using for protection.

Answer: Foreign exchange risk (forwards, futures, options, swaps)

Interest rate risk (forwards, futures, options, swaps)

Price of iron ore (futures and options)

Price of energy e.g. coal, electricity, gas (futures and options)

9) Everything else being equal, explain the impact of an increase (respectively decrease) of any of
the following parameters on the price of a call (respectively a put) option:

Exercise price

Time to maturity

Standard deviation

Underlying asset price

Answer: Increase of exercise price => decrease of call/increase of put price

Decrease of time to maturity => decrease of call and put prices

Increase of standard deviation => increase of call and put prices

Increase of underlying price => decrease of put/increase of call price

10) What is the difference between a senior bond and a secured bond?

Answer: Secured bonds are backed by collateral, i.e., assets owned by the issuer of the bond. In
case of default, the bondholders have a claim on the secured assets. Senior bonds have priority
over junior bonds in case of default, meaning that senior bondholders get paid before junior
debtholders do.