MASSEY UNIVERSITY PALMERSTON NORTH & WELLINGTON CAMPUSES

Transcription

1 MASSEY UNIVERSIY PALMERSON NORH & WELLINGON CAMPUSES EXAMINAION FOR INERNAIONAL FINANCE Semeser wo Ocober/November 2008 ime Allowed: HREE (3) hours his examinaion consiss of wo (2) secions SECION A Fory (40) Muli Choice Quesions SECION B Long answer secion. Answer he COMPULSORY quesion and ONE (1) oher quesion, from he wo choices provided. Please ensure ha WO (2) quesions are answered in oal in his secion. Boh quesions are worh 20 marks each. oal: 60 marks 40 marks 100 marks Calculaors are permied - no resricions INSRUCIONS 1. A formulae shee is aached a he end of his examinaion paper. 2. Secion A mus be answered direcly on he pre-prined yellow muliple choice answer shee provided a he back of his examinaion paper. 3. Secion B is answered in he examinaion bookle provided. 4. A he end of he examinaion, please ie he muliple choice answer shee ino he blue examinaion bookle and hand in BOH. Page of 15

2 SECION A: Answer quesions 1 40 on he Muliple Choice Answer Shee aached o his exam. For each quesion, selec he one bes answer. (60 marks: 108 mins) 1. Which saemen is mos correc? a. A change in he real exchange rae is equivalen o a deviaion from PPP. b. he consequences of an expansionary moneary policy migh consis of a high inflaion rae and a srong home currency. c. If he relaive version of PPP holds, he exchange rae adjused prices of idenical radable goods and financial asses mus be wihin ransacion coss of equaliy worldwide. d. he Inernaional Fisher Effec saes ha currencies wih high relaive ineres raes will appreciae relaive o currencies wih low relaive ineres raes. 2. A Big Mac in Ausralia cos AUD3.45 on July 24h, 2008, while he Big Mac is he US is $3.57. he exchange rae is AUD/USD According o he Big Mac es he Ausralian dollar is: a. Overvalued by 37% b. Overvalued by 18.8% c. Overvalued by 15.8% d. Undervalued by 15.8% e. Undervalued by 18.8% 3. Which saemen is correc? (he quesion is abou he conclusions no he auhors) a. he nominal ineres rae consiss of he real ineres rae and a premium for risk expecaions. b. he Inernaional Fisher Effec saes ha an increased real ineres rae should arac foreign capial inflows unil he real ineres rae is resored. c. Robinson (1980) shows ha invesing in high inflaion currencies produces consisen excess reurns. d. AM aylor (2002) claims ha in he long run, real exchange raes exhibi mean reversion wih a half-life of deviaions of four o five years. 4. Which saemen is mos correc? a. Currencies move in accordance wih inflaion differenials. b. Currency forecasing is inconsisen wih he efficien marke hypohesis. c. echnical analysis (charing) is a reliable form of forecasing because publicly announced news quickly impounds ino currency prices. d. FX raes follow a random walk and have no underlying inrinsic value. e. Forecasing, hen hedging, is ofen unreliable in an efficien marke. Page of 15

3 5. oday's selemen price on a Chicago Mercanile Exchange (CME) EUR fuures conrac is EUR/USD Your margin accoun currenly has a balance of $2,000. he nex day s selemen price is EUR/USD (he conracual size of one CME EURO conrac is EUR125,000). If you have a shor posiion in one fuures conrac, he change in he margin accoun from daily marking-o-marke will resul in he balance of he margin accoun o change o (before calculaion of margin calls) a. -$500 b. $2,000 c. $2,020 d. $4, Which saemen regarding he Breon Woods sysem is incorrec? a. he sysem was largely based on he quaniy heory of money. b. he sysem gave cenral banks auonomy o manage heir own money supply. c. he sysem largely relied on an invisible hand adjusmen in he economy. d. he sysem largely failed hrough serilizaion aciviies. e. he Breon Woods meeing was held in When he exchange rae is expressed as an indirec quoe: a. he price is in unis of foreign exchange needed o buy one uni of home currency b. he price is given as unis of home currency needed per uni of foreign currency c. he quoaion does no apply o forward ransacions d. he quoaion is expressed as a percenage change from he spo rae e. he quoaion is expressed in basis poins 8. Which saemen is correc? a. In he quoe CAD/AUD he AUD is he base currency. b. If a quoe moves from CAD/AUD o he AUD has appreciaed. c. In he quoe CAD/AUD /15 he rae you can buy AUD as a cusomer is d. In he quoe CAD/AUD /15 he rae you may buy AUD as a Quoing Bank is e. b and c 9. A New Zealand invesor purchased a USD denominaed 3 year zero coupon bond for USD 90,000, when he exchange rae NZD/USD was quoed as /75. he invesor sold he foreign currency bond hree years laer when he currency quoaion was /60 and he bond maured worh USD100,000. he reurn on he invesmen, once he funds are convered back, is: a % b % c % d % Page of 15

4 10. he inerbank marke quoes he exchange rae EUR/USD and GBP/USD In a no arbirage world, he implied cross exchange rae EUR/GBP is a b c d New Zealand Dairy Ld expecs o receive USD 1,000,000 in 3 monhs ime. o proec he firm value agains he poenial currency risk, he reasury hedge he exposure wih a 3 monh Call opion on NZD a a srike price of NZD/USD=0.70. he spo rae in 3 monhs urns ou o be he opion premium is NZD 5,000 (afer holding coss). How much does he company receive in NZDs afer he hedge? a. 1,428,571 b. 1,538,462 c. 1,543,462 d. 1,423,571 e. 1,533, he inerbank spo rae is NZD/USD /25, he NZD ineres rae is 5.00/10, he USD ineres rae is 3.00/10. Wha are he implied ourigh 1 year forward raes for NZD/USD given hese deails? a / b / c / d / On December 3, 2003, spo NZDs were sold a USD Suppose he 6 monh forward NZD was selling a USD and he inerbank 6 monh ineres rae in he NZD is 8%, wha is he implied 6 monh inerbank ineres rae in he USD p.a.? a % b % c % d % 14. ABC Co buys an OC call opion on 1,000,000 USD wih a srike price of USD/NZD , a premium of 66%, he curren spo price is USD/NZD is If he spo rae happens o be USD/NZD a expiraion wha is he ne ouflow of NZD on he ransacion ignoring ineres rae effecs? a. 1,784,000 b. 2,082,400 c. 1,660,000 d. 1,640,000 Page of 15

5 15. Which of he following saemens is he correc: a. In he Breon Woods currency sysem, if he GBP came under selling pressure he BOE would buy GBP wih foreign currency reserves. hese GBPs needed o be reinroduced ino circulaion for he exchange rae mechanism o work. b. he US currenly runs a large, hough no excessively large, capial accoun defici. c. rade flows represen he bulk of FX urnover. d. New Zealand runs a capial accoun surplus. e. New Zealand runs a clean floa exchange rae regime. 16. Which of he following saemens is incorrec: (he quesion is abou he conclusions no he auhors) a. McCauley and Zimmer, 1994, show here are differences in he cos of capial in differen counries. b. Research shows ha fuller, more ransparen, and more sandardised financial disclosure of operaing resuls and balance shee posiions appears o arac foreign invesors and lower he cos of equiy capial. c. Jacquilla & Solnik, 1978, sugges i is difficul for MNCs o break ou of a domesic valuaion basis. d. Alman and Kishore, 1996, show ha he chance of defaul (over a 10 year period) for bonds wih a raing of B is more han 25%. 17. oday s spo rae is NZD/USD 0.69 and he one year forecas spo is NZD/USD Which of he following is consisen wih his forecas? a. NZ ineres rae = 8.0%, US ineres rae = 3.304% b. NZ inflaion rae = 6.0%, US inflaion rae = 1.391% c. NZ ineres rae = 9.0%, US ineres rae = 4.52% d. a and b e. b and c 18. he bea for GF Co is he sandard deviaion of he NZ marke s reurns is 18%. If inernaional expansion resuls in he correlaion of GF wih he NZ marke o drop from 0.65 o 0.50 and he esimaed sandard deviaion of GF s reurns o increase from 30% o 32%; wha is your esimae of he new bea for GF? a b c d Which saemen is correc? a. Relaive PPP saes ha you pay he same exchange adjused price o ge your hair cu in any wo differen counries. b. he forward rae predicor heorem saes ha he expeced spo rae can be esimaed wih he ineres rae currenly rading in he FX marke. c. In pracice high ineres rae currencies ofen have srong currency values. d. Covered ineres arbirage has no balance shee and capial adequacy consequences. Page of 15

6 20. he curren exchange rae NZD/AUD is An invesor long in he base currency is expecing o make a reurn of 6% per annum for hree years. Which migh be he expecaion of his invesor for he exchange rae hree years laer? a b c d DBP hedges a USD 3 million receivable due in 180 days. he curren spo rae is NZD/USD and he 180-day forward rae is NZD/USD If he spo rae a he end of 180 days is $0.6800, how much has he forward marke hedge cos/or benefied DBP? a. a gain of $62,508 b. a loss of $62,508 c. a gain of $28,500 d. a loss of $28,500 e. a gain of $19,378 he following informaion is o be used in answering quesions 22,23. Alum Manufacuring's French subsidiary has he following balance shee: Cash, markeable securiies Accouns receivable Invenory (hisorical) Fixed Asses oal asses EUR 250,000 1,000,000 2,700,000 5,100, EUR 9,050,000 Curren liabiliies Long-erm deb Equiy oal liabiliies plus equiy EUR 750,000 3,400,000 4,900, EUR 9,050,000 Suppose he EUR depreciaes from NZD2.00 o NZD1.60 during he accouning period. 22. Under he emporal mehod, wha is Ajax's ranslaion gain (loss)? a. a gain of $80,000 b. a loss of $80,000 c. a gain of $1,160,000 d. a loss of $1,160, Under he curren rae mehod, wha is Ajax's ranslaion gain (loss)? a. a gain of $1,960,000 b. a loss of $1,960,000 c. a gain of $1,160,000 d. a loss of $1,160,000 Page of 15

7 24. If you fear he NZD will rise agains he USD, wih a resuling adverse change in he NZD value of he equiy of your USD subsidiary, which of he following is he recommended form of long erm hedging a. selling USD forward in he amoun of ne asses. b. buying USD forward in he amoun of ne asses. c. reducing he liabiliies of he subsidiary. d. increasing he liabiliies of he subsidiary. 25. In heory, he MNC should suppor deb raios han a purely domesic firm and he expeced impac on he cos of equiy is a. lower; coningen upon several facors b. lower; higher c. higher; lower d. higher; higher e. higher; coningen upon several facors 26. Suppose Apple is selling Macinosh compuers in 2008 in NZ for NZD 2,500 when he exchange rae is NZD / USD If he NZD falls o $0.6666, wha price mus Apple charge o mainain is USD per uni revenue? a. 3,000 b. 2,000 c. 2,500 d. 3, A firm wih fixed-rae deb ha expecs ineres raes o fall may engage in a swap agreemen o a. pay fixed-rae ineres and receive floaing rae ineres. b. pay floaing rae and receive fixed rae. c. pay fixed rae and receive fixed rae. d. pay floaing rae and receive floaing rae. 28. Which of he following is mos likely o be he main source of advanage from invesing in a well-governed mulinaional company? a. improved capial srucure b. increased use of risk c. lower risk of agency cos problems d. beer use of liabiliies e. improved dividend policy 29. A NZ company has esablished a muliplex cinema operaion in Argenina. Wha is he bes opion for hedging he exchange rae risk associaed wih his invesmen? a. exporing o Argenina. b. imporing from Argenina. c. raising finance in Argeninean Pesos. d. buying Argeninean Pesos in he forward marke. Page of 15

8 30. Suppose accessible EUR borrowing raes are 10% bu NZD borrowing raes are 15%. A NZ firm borrows EUR 1million when he exchange rae is NZD/EUR0.50 and moves he money back ino he NZD. Wha percenage rae reurn mus be made on he NZD invesmen o pay off he EUR loan in 1 years ime (ineres and principal combined) if he exchange rae is down 40% a ha poin in ime? a. 54.0% b. 83.3% c. 108% d. 44.0% 31. he informaion in his quesion applies o he nex 3 quesions. A NZ-based MNC is considering a European opporuniy. he size and iming of he Euro afer-ax ne cash flows are: -600, 500, and 500 in years 0, 1 and 2. he expeced inflaion rae in he euro zone is 3%, and in NZDs is 4%. he unlevered required reurn for projecs of his risk in NZ is 12%. he curren exchange rae is NZD/EUR Wha is he esimae of he exchange rae in year 1 and 2? a and b and c and d and See he informaion in Q 31 above on he European opporuniy. he bes esimae for he foreign currency unlevered discoun rae (euro zone) is: a % b % c % d % 33. See he informaion in Q 31 above on he European opporuniy. Wha is he NPV from he perspecive of he paren? a b c d Page of 15

9 34. Which of hese saemens is incorrec? (he quesion is abou he conclusions no he auhors) a. Coase, 1931, proposes ha DFI ofen creaes major problems for firms because of he complexiy and ransacions coss i inroduces. b. Hymer and Kindleberger, 1961, propose ha DFI is ofen moivaed by produc and facor marke imperfecions. c. Buckley and Casson, 1976, in Inernalisaion heory and he OLI paradigm propose ha DFI hinges on economies of scale ha he firm has. d. Ang and Cheng (2006) propose ha firms expand when heir relaive marke valuaions are advanageous and capial is boh available and cheap. e. Morck and Yeung (1992) demonsrae suppor for Inernalisaion heory in an even sudy of US firms DFI announcemens. 35. PN Compuer has a GBP10,000 paymen o make in 3 monhs. he firm s WACC (per annum) is 16%, he available rae on is borrowing in NZD is 8%, and he available rae on GBP deposis is 6%. he exchange rae is NZD/GBP PN Compuer can proec his paymen using a money marke hedge - wha is he effecive cos in 3 monhs in NZD in doing so. a. 33,498 b. 32,841 c. 34,154 d. 33, Acquiring Corp has 10 million shares ousanding selling for $40 each. Foreignarge has 5 million shares a $20 each. If Acquiring Corp has a P/E raio of 12 and Foreignarge has a P/E of 8 wha should be he P/E raio of he new firm, assuming no addiional capialisaion occurs because of he merger? a b c d e Youoob s bea is 2, is curren marke based deb o equiy raio is 100% and is ax rae is 20%. he risk free rae is 6% and he risk premium of 6%. Idenify he firm s unlevered cos of equiy for use in APV. a % b % c % d % e % Page of 15

10 38. Idenify he incorrec saemen. a. he financing mix chosen for foreign direc invesmen can be used by a company as par of is overall sraegy of managing currency risk. b. Poliical risk insurance policies usually have o be cusomised for he specific siuaion being insured. c. A major objecive of he inernaional financing decision is o minimise a company's afer-ax cos of capial. d. A mulinaional company is likely o have a greaer opporuniy o reduce is cos of capial han a domesic company. e. Boh he gearing of he company as a whole and he gearing of each subsidiary mus be considered, especially in he ligh of poliical risk. 39. he primary mehods of paymen for foreign rade, ranked in he order of leas secure o mos secure for he exporer are: a. open accoun, consignmen, leer of credi/ime draf, and cash in advance. b. consignmen, leer of credi/ime draf, cash in advance, and open accoun. c. cash in advance, leer of credi/ ime draf, consignmen, and open accoun. d. cash in advance, leer of credi/ ime draf, open accoun, and consignmen. 40. A ypical foreign rade ransacion under a leer of credi requires hree basic documens: a. open accoun, ime draf, bill of lading. b. ranspor documen, insurance documen, bill of lading. c. commercial invoice, ranspor documen, ime draf. d. consignmen, banker s accepance, bill of lading. e. cash in advance, banker s accepance, promissory noe. Page of 15

11 SECION B: Complee he following compulsory quesion, Q41, and choose one of quesions 42 or 43. Each quesion is worh 20 marks. Answers should be relevan, concise and use good grammar. All workings mus be clearly shown for numerical quesions. (40 marks: 72 mins) Compulsory Quesion Q41 Argue he case for and agains corporae managemen of Foreign Exchange Risk. [oal: 20 marks] Choose one of he following wo quesions. Q42 I.a. I.b. he inerbank marke quoes he following exchange raes: EUR/USD /20 GBP/USD 2.000/15 Barclays bank quoes he EUR/GBP a /70. Deail he ransacions, seps, and profi on EUR 1,000,000 of funds in a successful arbirage operaion. Wha percenage gain is made? [6 marks] Commen on he implemenaion and risks in his operaion. Do hese opporuniies presen hemselves in markes oday? [4 marks] II.a. II.b. he inerbank spo rae is NZD/USD /25, he NZD 1 year ineres rae is 5.00/10, he USD 1 year ineres rae is 3.00/10. ADS Bank quoe he 1 year forward raes for NZD/USD as USD /13. Ouline he seps in covered ineres arbirage on one million of borrowed funds. Wha percenage gain is made? [6 marks] Commen on he implemenaion and risks in his operaion. Do hese opporuniies presen hemselves in markes oday? [4 marks] [oal: 20 marks] See over for Q 43 Page of 15

12 Q43. Use he following informaion o answer he quesions. A NZ firm holds an asse in Grea Briain and faces he following scenarios: Sae 1 Sae 2 Sae 3 Probabiliy 25% 50% 25% Spo rae (S) NZD/GBP 0.25 NZD/GBP 0.30 P * Where P * is he GBP price of he asse NZD/ GBP 0.40 a. Wha is he expeced value and sandard deviaion of he exchange rae (S)? [5 marks] b. Wha is he expeced value and sandard deviaion of he NZD value of he invesmen? [5 marks] c. Consider he hedging of his invesmen wih a foreign exchange forward conrac priced a NZD/GBP Make measuremens of he oucomes and commen on he principles shown in his problem o real life hedging problems. [5 marks] d. Fisher and Paykel have shifed manufacuring operaions from New Zealand o hailand. Commen on he economic exposure aspecs of his decision. [5 marks] [oal = 20 marks] Page of 15

13 FORMULAE SHEE IRP IFE PPP(relaive) = S F =1 =0 = S S =1 =0 = S F =1 =0 (1+ r) (1+ rb) (1+ r) (1+ rb) (1+ i) (1+ ib) PPP(absolue) P a * FX B B / = P a FE(domesic) (1+ r)= (1+ a)(1+ i) (1+ a = (1+ a B FE(global) ) ) UFRP = F S =1 =1 % Δ FX C annualised F S 1 x 12 n % Δ FX annualised Chain rule: F ACUAL > F IMPLIED S -1 x F 12 n? = Base,Base = 3rd,3rd = Borrow, Inves Base 2 2 Var( R p ) X i Var( R i )+ X j Var( R j )+2 X i X j Ρ ijσ iσ j σ ( R p ) Var( R p ) R p X i ( Ri )+ X j( R j ) Corr(R i,r m ) Cov( R, R Var( R Var (S) q ( S S) i i m i m ) ) Var( R ) 2 i K wacc K d (1-) D/V + K e E/V where V = E + D K e rf + β (Rm - rf) or D 1 /P 0 + g [or P 0 = D 1 /( k g)] Page of 15

14 β i Cov( R, R i Var( R m m ) ) Corr( R, R )σ i m i = or σ m ρ im σ σ m i Adjused Presen Value APV = = 1 S V + (1 + K ) ud S OCF (1 τ ) + (1 + K ) S C 0 ud 0 + S 0 RF = 1 0 S τd (1 + i ) d + S CL = 1 = 1 S τi (1 + i ) S LP (1 + i ) S is he expeced spo rae K ud is he unlevered domesic cos of equiy i d is he domesic cos of deb S 0 RF 0 is he accumulaed resriced funds ha are freed up by he projec CL is he concessionary loans LP is he loan paymens OCF is he expeced incremenal afer-ax operaional cash flow V is he expeced afer ax erminal value including reurn of ne working capial C is he iniial invesmen a incepion is he economic life of he projec in years D is he incremenal depreciaion I is he incremenal ineres expense τ is he marginal ax rae d d Page of 15

15 EXAMINAION FOR , MULIPLE CHOICE ANSWER SHEE Name: I.D. No.: Place an X in he appropriae box PLEASE DEACH HIS PAGE AND INCLUDE WIH YOUR ANSWER BOOK Page of 15