FINAL EXAMINATION

INTERNATIONAL FINANCE MANAGEMENT

Students are allowed to use the materials when doing the test.

Students submit work (file .pdf or .doc) on LMS before 07AM OCT 21st 2024

Student Name: Hoang Tran Thao Nguyen

MSSV: 31221026093

QUESTION 1. Student fill in the blank below and solve the problem (04 POINT).

The 1-year deposit and lending interest rate in New York is 1%-2% %/year; in London
is 2% - 3,5%/year.

Spot Rate 1GBP = USD 1.2440 - 1.2470

The 1 year forward rate 1GBP = USD 1.1810 – 1.1880

The price of GBP on a 1-year Future contract is 1GBP = USD 1.2640.

I.1. Is GBP in premium (in comparision to USD) and the 1-year deposit and
lending interest rate in New York must be higher than in London? (01 POINT).

a. Yes, GBP is in premium (in comparision to USD, 1 year) and the 1-year deposit and
lending interest rate in New York must be higher than in London

b. No, GBP is in discount (in comparision to USD, 1 year) and the 1-year deposit
and lending interest rate in New York must be lower than in London

c. Yes, GBP is in premium (in comparision to USD, 1 year) and the 1-year deposit and
lending interest rate in New York must be lower than in London

d. No, GBP is in discount (in comparision to USD, 1 year) and the 1-year deposit and
lending interest rate in New York must be higher than in London

I.2. Is there an arbitrage opportunity and we can compute it? Explain your
answer. (01 POINT).

a. Yes, there is an arbitrage opportunity and we can compute it

b. No, there is not an arbitrage opportunity and we can compute it

c. No, there is not an arbitrage opportunity and we can not compute it

d. Yes, there is an arbitrage opportunity but we can not compute it

⇒Explain:

- Spot Rate: 1 GBP = 1.2440 - 1.2470 USD

- Forward Rate: 1 GBP = 1.1810 - 1.1880 USD
𝑛
1 + 𝑟𝑎× 360
● Exporter: Using the IRP formula: 𝐹𝑏(𝑡, 𝑛) > 𝑆𝑎(𝑡) × 𝑛
1 + 𝑟𝑏*× 360

𝑛
1 + 𝑟𝑎× 360
⇔ 𝐹𝑏(𝑡, 𝑛) 𝑆𝑎(𝑡) × 𝑛
1 + 𝑟𝑏*× 360

1 + 2%
⇔ 1.1810 1. 2470 × 1 + 2%
⇔ 1.1810 < 1.2470

⇒ No arbitrage
𝑛
1 + 𝑟𝑏× 360
● Importer: Using the IRP formula: 𝐹𝑎(𝑡, 𝑛) < 𝑆𝑏(𝑡) × 𝑛
1 + 𝑟𝑎*× 360
𝑛
1 + 𝑟𝑏× 360
⇔ 𝐹𝑎(𝑡, 𝑛) 𝑆𝑏(𝑡) × 𝑛
1 + 𝑟𝑎*× 360
1 + 1%
⇔ 1.1880 1. 2440 × 1 + 3.5%

⇔ 1.1880 < 1.2145

⇒ Arbitrage - USD (1)
Assume we start with £1

1. Borrow GBP in London at the lending rate

2. Convert GBP to USD at the spot bid rate
3. Invest USD in New York
4. Buy GBP at forward price (1GBP = USD 1.1880)

1.2440*(1+1%)
Net profit in GBP = 1.1880
− (1 + 3. 5%) = 0. 0228 (2)

⇒ We can have profit and We can compute it (2)

From (1) & (2) ⇒ there is an arbitrage opportunity and we can compute it
I.3. Should an American exporter who will receive £2 million within the next 1
year hedge this payment by using the 1 year forward contract (s) if this exporter
makes decisions based on the theory of interest rate parity? (01 POINT).

a. Yes, he should hedge this payment by using an 1-year forward contract

b. Yes, he should hedge this payment by using 32 1-year standardized forward

contracts

c. No, he should not hedge this payment by using an 1-year forward contract

d. No, he should not hedge this payment by using 32 1-year standardized forward
contracts

I.4. Should an American importer who will pay £3 million within the next 1 year
hedge this payment by using an 1 year forward contract if this importer makes
decisions based on the theory of interest rate parity (01 POINT).

a. Yes, he should hedge this payment by using an 1-year forward contract

b. Yes, he should hedge this payment by using 32 1-year standardized forward

contracts

c. No, he should not hedge this payment by using an 1-year forward contract

d. No, he should not hedge this payment by using 32 1-year standardized forward
contracts

II.1. Student fill in the blank below and solve the problem (01 POINT).

Assume today’s settlement price on a CME EUR futures contract is

$1.3140/EUR. You have a short position in one contract. Your performance
bond account currently (your Future Account) has a balance of $1,700.

The next three days’ settlement prices are $ 1.3100, $ 1.3080 and $ 1.3120

Calculate the changes in the performance bond account from daily

marking-to-market and the balance of the performance bond account after the
third day.
Contract Size: €125,000 (standard CME EUR futures contract size)

Day 0: Day 1: Day 2: Day 3:

$1.3140/€ $1.3100/€ $1.3080/€ $1.3120/€

ACC 1700 + 500 2200 + 250 2450 - 500

$1700
(Short) = $2200 = $2450 = $1950

π = = =
125.000x(1.31 125.000x(1.31 125.000x(1.31
40-1.3100) 00-1.3080) 20-1.3100)
= 500 = 250 = -500

Day 0: The account balance is $1,700.

Day 1: The investor gains $500. The account balance on Day 2 is $1700 + $500 =
$2200 (the account receives an additional $500).
Day 2: The investor gains $250. The account balance on Day 3 is $2200 + $250 =
$2450 (the account receives an additional $250).
Day 3: The investor loses $500. The account balance on Day 4 is $2450 - $500 =
$1950 (the account is deducted $500).
Therefore, the final account balance after the third day is $1950.

II.2. Do problem II.1 again assuming you have a long position in the futures
contract. (01 POINT).

Contract Size: €125,000 (standard CME EUR futures contract size)

Day 0: Day 1: Day 2: Day 3:

$1.3140/€ $1.3100/€ $1.3080/€ $1.3120/€

ACC 1700 - 500 1200 - 250 950 + 500

$1700
(Long) = $1200 = $950 = $1450
 π = = =
125.000x(1.31 125.000x(1.30 125.000x(1.31
00-1.3140) 80-1.3100) 20-1.3080)
= - 500 = -250 = 500

Day 0: The account balance is $1700

Day 1: The investor loses $500. The account balance on Day 2 is $1,700 - $500 =
$1200 (the account is deducted $500).
Day 2: The investor loses $250. The account balance on Day 3 is $1200 - $250 = $950
(the account is deducted $250).
Day 3: The investor gains $500. The account balance on Day 4 is $950 + $500 =
$1450 (the account receives an additional $500).
Therefore, the final account balance after the third day is $1450.

III. Student fill in the blank below and solve the problem (04 POINT).

An investor is considering the purchase of five three-month Japanese yen call options with
a striking price of 95 cents per 100 yen. The premium is 1.5 cents per 100 yen. The spot
price is 94 cents per 100 yen and the 90-day forward rate is 95.71 cents.

The investor believes the yen will appreciate to $1.00 per 100 yen over the next three
months. As the investor’s assistant, you have been asked to prepare the following:

1. Graph the call option cash flow schedule. (01 POINT).

Strike price: 95 cents

Premium: 1.5 cents/100 yen

Break-even point => where the profit is zero

Break-even spot price = strike price + premium

= 95 + 1.5 = 96.5 cents

 - When Future Spot Price < 96.5 cents: Option is out of money; the investor
loses premium.
- When Future Spot Price = 96.5 cents: Option is at the money; the investor loses
the premium.
- When Future Spot Price > 96.5 cents: Option is in the money; the investor
gains.

The buyer of a call option on Yen, with a strike price of 95 cents/100 yen, has a
limited loss of 1.5 cents/100 yen at spot rates less than 95 (out of the money), and
unlimited profit potential at spot rates above 95 cents/yen (in the money), and profit
potential at spot rate greater than 95 cents/100 yen (in the money) up to 95 + 1.5 =
96.5 cents/100 yen.

2. Determine the investor’s profit if the yen appreciates to $1.00/100 yen. (01
POINT).

Future spot price: $1.00/100 yen

Strike price: 95 cents

Premium: 1.5 cents/100 yen

Number of contracts: 5
12,500,000
Contract size: 2
= 6, 250, 000 per contract

Total Premium = 1 cent/100 yen * 6,250,000 * 5 = 312,500 cents =$3.125

We have 100 cents = 1 USD

Future Spot Price: $1,00 per 100 yen ⇔ 100 cents/100yen

π = (Future Spot Price - Strike Price)* Contract size * Number of contracts - Total
premium

= (100 - 95)cent/100 yen * 6,250,000 * 5 - 312,500 cents = 1,250,000 cents = 12500$

Thus, if Yen appreciates to $1.00/100 yen, the investor will achieve a profit of
$12500.

3. Determine the investor’s profit if the yen only appreciates to the forward rate.
(01 POINT).

Future spot price: 95.71 cents per 100 yen (the 90-day forward rate)

- Strike price: 95 cents

- Premium: 1.5 cents/100 yen
- Number of contracts: 5
12,500,000
- Contract size: 2
= 6, 250, 000 per contract
- Total Premium: 6,250,000* 1.5cents/ 100 yen * 5 = 468,750

Intrinsic value = Future spot price - Strike price

= 95.71 cents - 95 cents

= 0.71 cents per 100 yen

=> Positive, the option is in the money

=> Should exercise

π = (Future spot price - Strike price)* Number of contract * Contract size - Total
premium
= (95.71 - 95)/100 yen * 5 * 6,250,000 cents - 468,750 = - $246,875 = - $2468.75

The investor loses 2468.75$ if the yen only appreciates to the forward rate of 95.71
cents per 100 yen.

4. Determine the future spot price at which the speculator will only break even.

Suggested Solution to the Options Speculator. (01 POINT).

Break-even spot piece = strike price + premium = 95 + 1.5 = 96.5 cents/100 yen

=> At this price, the profit from exercising the option equals the premium paid.

Solution:

The speculator should still exercise the currency call option because:

- If they do not exercise, the amount the investor loses = option premium = -1.5
cents
- But if the speculator exercises, the amount they lose = 96.5 - 95 - 1.5 = 0

Therefore, we can see that if they exercise, the speculator will not suffer any loss,
whereas if they do not exercise, the investor will lose 1.5 cents.

=> The speculator should still exercise their call option contract.

IV. BONUS QUESTION (01 POINT)

Suggest (Graph and Draw the profit table) an option strategy for a strongly
decrease (but may also increase) in the price of The Japanese Yen (in comparison
to USD) in next 3 months.

Because the Japanese Yen strongly decreases but may also increase in the next 3
months => the investor should buy put options if the investment if the investment
price decreases and sell put options if the investment price increases slightly or not
increase or decrease around the strike => Investor should choose the bear put spread
strategy.
 S(t) < E1 E1 < S(t) < E2 S(t) > E2

Buy 1 Put: E2, K2 (X): [E2 - S(t) - (X): [E2 - S(t) - (0): - K2
K2] K2]

Sell 1 Put: E1, K1 (X): - [E1 - S(t) - (0): + K1 (0): + K1

K1]

Bear = (1) + (2) [(E2 - E1) + (K1 - [E2 - S(t) + (K1 (K1 - K2) <0
K2)] -K2)]

=> No detailed data => Only suggest in theory.