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INS3032 FINAL ASSIGNMENT FINAL ASSIGNMENT Grade (Office Use Only) SUBJECT CODE: INS3032 Date received (Office Use Only) Date received (Office Use Only) Name : Nguyen Duc Quang Class : IB2017B PART 1: EXERCISES EX1 Case * STEP : Borrow mil EUR to invest in CAD Invest payable : 1,000,000*4% = 40,000 STEP : Convert to CAD= 1,000,000/0,7344 = 1361,655,773 CAD STEP : Invest in CAD = 1361,655,773 *( 1+ 2,5%) = 1,395,697.167 CAD STEP :Convert back to EUR = 1,395,697.167*0,7330 = 1,023,046.024 EUR STEP : Compare : 1,023,046.024 - 1,000,000-40000 = -16,953.98 It is loss Case * STEP : Borrow mil CAD to invest in EUR Invest payable : 1,000,000*3% = 30,000 STEP : Convert to EUR= 1,000,000*0,7322 = 732,200 STEP : Invest in EUR = 732,200*(1+3,5%)= 757,827 EUR STEP :Convert back to CAD = 757,827/0.7358= 1,029,936.124 CAD STEP : Compare : 1,029,936.124- 1,000,000-30000 = -63,88 So it still loss EX4 Suppose that the US government imposes higher tax applied on rice imported from Vietnam How these events affect exchange rates between USD and VND on the foreign exchange market (FX)? The central bank of Vietnam (SBV) would like to maintain the previous rate What actions will they do? Impact on currency on foreign exchange market when higher rice import tax is applied: The price of rice in general in the US market will increase, reducing Vietnam's demand for rice (when Vietnam is one of the world's No rice exporters and has a very cheap price) This will reduce demand for the American people in general and for VND in the market, leading to an increase in USD/VND exchange rate volatility The association will then make imports from Vietnam less attractive, reducing the flow of USD into the country and causing the VND exchange rate to decrease against the USD in the foreign exchange market The Central Bank of Vietnam may take the following measures to maintain the previous exchange rate: ● Regulate member banks through capital or reserve requirements and provide loans and services to the country's banks and governments ● Buy and sell securities on the open market, including other currencies ● Other techniques for manipulating currency values and exchange rates may be used, such as direct capital or currency controls ● Support to reduce import tax on convertible items to serve the goal of increasing agricultural production EX3 PART A Quality Spread Differential is the difference between market rates of interest rates applicable to two parties on the basis of their Credit Rating If QSD is positive then there exists a profitable opportunity of entering into interest rate swaps between parties QSD is calculated as : QSD = Fixed Interest Rate Differential - Floating Interest Rate Differential Fixed Interest Rate Differential = 7% - 5% = 2% Floating Interest Rate Differential = LIBOR - (LIBOR+1%) = -1% QSD = 2% - (-1%) = 3% Hence Alpha can swap its Floating Interest Rate for the Fixed Interest Rate In simple words Alpha will pay interest @ LIBOR to Beta whereas Beta will pay interest @5% to Alpha PART B All-in-Cost is the total cost incurred by both the parties including processing charges if any The costs associated with an investment can adversely impact an investor's ability to profit, so understanding the all-in costs of a trade, including the spread and commission, is important In terms of loans, consumers need to understand the true cost of their loans, including closing costs and interest, in order to evaluate both their ability to repay and whether the item is worth that expense We take a closer look at all-in costs below In the given case the All-in-Cost will consist of only the interest rates as there are no other charges Hence All-in-Cost : Fixed Interest Rate @5% + Floating Interest Rate @LIBOR = LIBOR + 5% Cost Savings in borrowings = 3% which is split as 60% to Alpha i.e 1.8% and 40% to Beta i.e 1.2% All-in-Cost for Alpha = LIBOR + 1.2% as the Floating Rate of Alpha is higher All in Cost for Beta = 5% + 1.8% = 6.8% PART C Including Charge by Bank = 1% Cost Savings = 3% Net Savings = 2% distributed equally between Alpha and Beta hence AIC for Alpha = LIBOR + 1% + 0.5% = LIBOR + 1.5% AIC for Beta = 5% + 1% + 0.5% = 6.5% ESSAY QUESTION : Question : The war between Russia and Ukraine has been a very hot topic affecting all continents recently While the border war situation between the two sides is extremely tense, from an economic point of view, it is also a crisis with positive effects along with recognizable negatives After the shock of the Covid-19 pandemic, the world economy had not yet recovered, the outbreak of the Russia-Ukraine military conflict threatened a terrible economic crisis According to the assessment of the International Monetary Fund (IMF), the events that took place from February 24, 2022 when Russia conducted a special military operation against Ukraine, have become one of the main factors hindering recovery of the global economy after the crisis caused by the Covid-19 pandemic The IMF has lowered the economic growth forecast in 2022 of nearly 150 countries, with the global gross domestic product (GDP) at 86% Specifically, in 2023, the growth rate is forecast to decrease by 0.2%; oil, food and fertilizer prices will increase sharply; The restructuring of international shipping and logistics chains as well as emerging disruptions in the global payment system could cost the global economy in 2022 about $1 trillion, equivalent to 1% of GDP Global Also a clean counter to sanctions against Russia, on February 26, 2022, Western countries took Russia out of the global payment system (SWIFT) in the third package of sanctions In the statement, the Chairman of the Commission said the new sanctions, agreed by the US, France, Canada, Italy, the UK and the European Commission, include limiting the Bank of Russia's ability to support the ruble, the European Commission (EC) said In addition, individuals and institutions in Russia and countries that support Moscow in the conflict with Ukraine are also targeted by the sanctions In the face of the fact that the assets of countries are stored in USD when there is political turmoil, it is used by the US and the West as one of the effective sanctions, causing many countries to change and the USD to stand still before the risk of losing credibility in the world basket of money Although all the major players in the world's currency markets are not interested in a quick abandonment of the dollar, most financial experts agree that the crisis involving Ukraine and especially US sanctions on important Russian banks will reduce the role of the dollar in the global financial system It is likely that by the end of this decade, the US dollar's share in global foreign exchange reserves, which is currently around $12 trillion, will be cut by more than half In view of the current state of the world economic picture, pessimists believe that the recent economic disruption is irreversible and that the crisis will only accelerate the trend of de-globalization and fragmentation subdividing the world economy Optimists, however, argue that, although the crisis is significantly disrupting global energy, food and food markets, as well as international finance, the trading systems, investment and Global investment and finance are now self-correcting and will recover Self-regulation could thus prevent the world from slipping into another recession that could lead to chronic food shortages or the loss of the dollar as a major international reserve currency To overcome the economic crisis, the most comprehensive solution is that Russia and Ukraine must negotiate, end the conflict and the West remove all or at least part of the embargo and sanctions Russia, especially in terms of energy and food Because Russia is the largest energy supplier to Europe and plays a major role as a supplier of wheat, contributing to ensuring food security for the world Question : Vietnam is still a country that relies heavily on agricultural development, so petroleum is an important strategic commodity and accounts for 3.52% of the total production cost of the entire economy, accounting for 1.5 percent of the total cost of production % of total household consumption Petroleum is used in almost all industries and fields; Therefore, fluctuations in gasoline prices will strongly affect producer prices and consumer prices According to the General Statistics Office, a 10% increase in domestic fuel prices will increase inflation by 0.36% Therefore, the more fuel prices increase, the more likely that inflation will lead to a market crisis SSI Securities Company noticed that the movements of the global financial market continued to be affected by political tensions between Russia - Ukraine as well as the message of interest rate increase from the Fed Pressure on VND has appeared in recent times The main reason is that the USD tends to strengthen in the international market as well as the foreign currency supply has not recovered because the trade deficit in the first two months of the year is estimated at 0.9 billion USD and the peak period of overseas remittances The truth is that when the USD appreciates, it will make Vietnamese exports more expensive, reducing competitiveness for markets other than the US.The pressure of interest rates and inflation increased, along with the recovery of the stock market and the strong dollar, making investors fear that gold would drop, so they sold to take profits, causing the gold price to also go down In order for the dong to not fall into an uncontrolled inflation situation, the State Bank of Vietnam should meet with the government first to control gasoline prices from rising too quickly The government can reduce excise tax and environmental tax on the petroleum industry at the same time, the State Bank can focus on using the central bank's interest rate system as a tool to adjust the exchange rate in addition to buying and selling through the foreign currency reserves of the State Bank To that, the interest rate of the Central Bank must fully reflect the increase and decrease of the domestic money supply In turn, the increase or decrease in the money supply depends on the forecast of inflation The State Bank only buys and sells foreign currencies in case supply and demand are not balanced at the central equilibrium exchange rate .. .FINAL ASSIGNMENT Grade (Office Use Only) SUBJECT CODE: INS3 032 Date received (Office Use Only) Date received (Office Use Only) Name : Nguyen Duc Quang Class : IB2017B PART... chains as well as emerging disruptions in the global payment system could cost the global economy in 2022 about $1 trillion, equivalent to 1% of GDP Global Also a clean counter to sanctions against... events that took place from February 24, 2022 when Russia conducted a special military operation against Ukraine, have become one of the main factors hindering recovery of the global economy after