đề thi tài chính quốc tế International Financial Management

đề thi tài chính quốc tế cho cao học First: To develop a marketbased understanding of exchange rates and show how exchange rate volatility affects corporate decisionmaking. Four major areas will be covered. •The International Environment•The Foreign Exchange Derivative Markets•What Factors Affect Exchange Rates•Foreign Exchange Exposure and the FirmSecond: To develop a general understanding of market functioning. The course will not only develop the institutional and quantitative details of markets, but also introduce a “financial” way of thinking about costs and risks.

Hemant Nahata Roll No 08509 Tutorial (Individual Assignment) August 23, 2009 International Financial Management What is meant by the terminology that an option is in-, at-, or out-of-the-money? Option is in the money: When the option holder benefits by exercising the option In a call option the option holder will benefit when the spot price of the underlying asset is higher than the exercise price of the underlying asset Similarly the option holder of a put option will benefit when the spot price is less than the exercise price of the underlying asset Option is at the money: When the spot price of the underlying asset and the exercise price are equal, then the option holder does not gain anything by exercising the option So the option holder may try to sell his option and recover some amount of premium provided that the premium received exceeds the brokerage amount Option is said to be out of money when the option holder does not gain anything by exercising the option In case of call option if the Spot price of the underlying asset is less than the exercise price then the option will not be exercised, similarly the holder of a put option will lapse the option instead of exercising it when the spot price is higher than the Exercise price Demonstrate with examples how would you hedge a receivable and payable position using options (Use examples out of the examples in slide) In Ausust 2009, a Carpet exporter from Nepal purchases Raw Wool worth US$ 100,000 from New Zealand under 90 days USD T/R Loan and sells his carpets for Euro 100,000 to a German buyer under a 90 days usance L/C the spot rate on 23rd August is as follows: NRB rates: Euro Buying NRs 110.59 and USD Selling USD 78.25 If he wants to hedge his risk then on the Euro receivables he will have to cover his losses that may arise due to the depreciation of Euro against Nepali rupees He will have to buy a forward put option at a premium so that he locks the rate at which he will receive Nrs For the Euro receivables He buys a Euro call option at strike price of NRs 109, with a brokerage fees of Rs 1,500 per 10,000 Euro contract Premium paid = (110.59-109) x 100000 = 159000 Brokerage fees for 10 contract @ 1500 = 15,000 Total expense for buying the contract = 174,000 The Exporter has ensured that his Euro receivables will get minimum 108.85 If the sport rate at the time of payment is Rs 105 (below the exercise price of 109) then the exporter will exercise his call option get the Euro exchanged for the exercise price of Rs 109 for his Euro receivables Submission Deadline – 24th August– IFM – KUSOM – EMBA V - 2009 Page If he wants to hedge his risk then on the Dollar receivables he will have to cover his losses that may arise due to the appreciation of US Dollars against Nepali rupees He will have to buy a call option so that he locks the rate at which he will have to pay Nepali Rs For the settlement of USD import bills He buys a Dollar put option at the strike price of 78.50, with a brokerage fees of Rs 1000 per USD 10,000 contract Premium paid = (78.50-78.25) x 100000 = 25000 Brokerage fees for 10 contract @ 1000 = 10,000 Total expense for buying the contract = 35,000 The Exporter has ensured that his cost for USD payables will get exceed 78.60 If the sport rate at the time of payment is Rs 80 (above the exercise price of 78.50) then the exporter will exercise his forward put option get the US$ exchanged for the exercise price of Rs 78.50 for his USD payables In case the options are out of money then they will not be exercised If the options are in the money the option will be exercised to that will save the exporter from unexpected losses that may arise due to foreign exchange fluctuations A speculator is considering the purchase of five three-month Japanese yen call options with a striking price of 96 cents per 100 yen The premium is 1.35 cents per 100 yen The spot price is 95.28 cents per 100 yen and the 90-day forward rate is 95.71 cents The speculator believes the yen will appreciate to $1.00 per 100 yen over the next three months As the speculator’s assistant, you have been asked to prepare the following: a) Diagram the call option Given: Speculator purchases three months contract of Yen call options with striking price of 96 cents per 100 yen Each Contract value is assumed to be of 6.25 million Yen Premium is 1.35 cents per 100 Yen or $0.000135 per yen Therefore, premium paid per contract is : 0.000135 x 6,250,000 = US$ 843.75 and total premium paid for contracts is : 0.000135 x 6,250,000 x = US$ 4218.75 His buying rate for Yen will not exceed 97.35 cents per 100 yen Net Gain /Loss on each contract to the speculator at different price levels is as follows: Spot Price Profit/Loss 94 -843.75 95 -843.75 96 -843.75 Submission Deadline – 24th August– IFM – KUSOM – EMBA V - 2009 97 -219 97.35 99 1031 100 1656 Page 101 2281 b) Determine the speculator’s profit if the yen appreciates to $1.00/100 yen If the Yen appreciates to $1.00/100 yen then the speculator will gain as follows: 6,250,000 x x (0.010000-0.009735) =$ 8281.25 c) Determine the speculator’s profit if the yen appreciates only to the forward rate If the Yen appreciates to the forward rate of 95.71 then he will lose as follows: 6,250,000 x x (0.009571-0.009735) = - $ 5,125 d) Determine the future spot price at which the speculator will only break even The speculator will break even at 97.35 cents per 100 Yen On April 28, you purchased a European Call option of GBP at a strike price of $ 1.4000 for a premium of $ 0.07 The spot rate at the time was $ 1.4500 The expiry date is October 16 The amount underlying is GBP 62500 a) What is the total premium payment? The Total premium payment is GBP 62,500 x $0.07 = US$ 4,375.00 b) Is the option in-the-money, at-the-money or out-of-the-money? This is a call option and upon maturity the Spot price is $ 1.45 which is higher than Strike price, therefore the option is in-the-money Submission Deadline – 24th August– IFM – KUSOM – EMBA V - 2009 Page c) Does the option have any intrinsic value? If yes, how much? How much is its time value? Intrinsic value is the difference between the exercise price of the option and the spot price of the underlying asset Hence the Intrinsic value of the option is $ 1.45-$ 1.40 =$ 0.05 Speculative value (Time value) is the difference between the option premium and the intrinsic value of the option Hence the Time value of the option is $ 0.07-$ 0.05=$ 0.02 d) On expiry suppose the spot rate is USD/GBP = 1.4800 Will you exercise the option? What is your net gain or loss? The Spot price is higher than the Exercise price therefore the option is in-the-money and the option has to be exercised to materialize the gain The net gain would be GBP 62,500 x (1.48-1.40) - $4375 = $ 625 You have a payable of EUR 500,000 three months from now The USD/EUR spot is 0.8700, three month forward is 0.8825 You decide to purchase a put option on USD vs EUR at a strike price of EUR 1.1235 per USD You have to pay a total premium of $ 7,500 a) Is the option in-the-money, out-of-the-money or at-the-money with reference to the current spot rate? Spot rate = 0.8700 USD/EUR, this is equal to 1.1494 Euro/USD Striking Price is 1.1235 Euro/USD Since this is a put option on USD and the spot price is higher than the striking price, the option is out-of-the-money b) At expiry at USD/EUR spot rate is 0.8950 Do you exercise the option? At expiry if the spot rate is 0.8950 This is equal to 1.1173 This price is lower than the striking price of 1.1235 For buying Euro 500,000 at spot would cost = $ 447,500 For buying Euro 500,000 at strike price would cost = $ 445,038 Buying Euro at strike price will cost less by $ 2,462 therefore it is better to exercise the option c) Including the cost premium, have you done better than or worse than a forward hedge? Submission Deadline – 24th August– IFM – KUSOM – EMBA V - 2009 Page The cost of buying Euro 500,000 at strike price would cost = $ 445,038 + premium of US$ 7,500 Total would be US$ 452,538 The cost of buying Euro at Forward rate of 0.8825 USD/Euro would be 441,250 Buying Euro under forward contract would save USD 452,538-441,250=$11,588 Since the cost of buying Euro under forward contract is lower than the Option price it is better to enter in a forward contract than an options contract d) In what range must the spot rate at expiry be for the option hedge to be as good or better than a forward hedge? The premium is US$ 7500 for Euro 500,000 and the Forward Price is 0.8825 If the spot price is lower than the forward price and covers the premium than the option hedge is better than the forward hedge Forward price – premium = 0.8825 -0.0150 =0.8675 USD/EUR For example if the Spot is 0.8670 then Euro 500,000 can be bought for US$ 433,500+7500 = USD 441,000 Whereas the cost of buying Euro at Forward rate of 0.8825 USD/Euro would be 441,250 For the option hedge to be better than a forward hedge the Spot price must be lower than 0.8675 USD/EUR Describe the difference between a swap broker and a swap dealer A swap bank may work as a swap dealer or a swap broker A swap broker arranges a swap between two counterparties for a fee without taking a risk or a presuming a position in the swap As a dealer the swap bank stands willing to accept either side of the currency swap, and then later lay it off or match it with one or more counterparty In this capacity, the swap bank assumes a position in the swap and therefore assumes certain risks Here as a dealer the work is risky, but for this receives cash flows passed through it to compensate it for bearing the risk What is the necessary condition for a fixed-for-floating interest rate swap to be possible? Submission Deadline – 24th August– IFM – KUSOM – EMBA V - 2009 Page The two parties involved must have the opposite requirement of fixed interest and floating interest The borrowing rates of both the parties will not be same, and for a fixed-for-floating interest rate swap to be possible it is necessary for a quality spread differential to exist Discuss the basic motivations for a counterparty to enter into a currency swap The motivations for parties to enter into currency swaps may be due to the cover the commercial needs such as converting floating rate liabilities into fixed rate liabilities Another reason that motivates swap deals is to cover foreign exchange risks In a currency swap, the two payment streams being exchanged are dominated in two different currencies Both the parties involved want to lock in long-term exchange rates in the repayment of debt service obligations denominated in a foreign currency In case there is difference in interest rates in different currencies than the lower interest rates motivates a counter party to finance its debt at a lower interest rate This also helps to diversify the funding sources Discuss the risks confronting an interest rate and currency swap dealer The following are the major risks that a swap dealer confronts: Interest Rate Risk: - This risk refers to the risk of interest rates changing unfavorably before the swap bank can lay-off on an opposing counterparty the other side of an interest rate swap entered into with counterparty Basis Risk:- this risk refers to a situation in which the floating rates of the two counterparties are not pegged to the same index Exchange Rate Risk: - this risk refers to the swap bank faces from fluctuating exchange rates during the time it takes for the bank to lay off a swap it undertakes one counterparty with an opposing counterparty Credit Risk: This is one of the major risk faced by the swap bank It refers to the probability that a counter party will default The swap bank that stands between two counterparties is obliged to honour the contract to the non-defaulting counterparty Mismatch Risk: this risk refers to the difficulty of finding an exact opposite match for a swap the bank has agreed to take The mismatch may be with respect to the size of the principle sums the counterparties need, the maturity dates of the individual debt issues, or the debt service dates Sovereign Risk: refers to the probability that a country will impose exchange restrictions on a currency involved in a swap This may make it very costly, or perhaps impossible, for a Submission Deadline – 24th August– IFM – KUSOM – EMBA V - 2009 Page counterparty to fulfill its obligation to the dealer In this event, a provision exists for terminating the swap, which results in a loss of revenue for the swap bank 10 Alpha and Beta Companies can borrow at the following rates: a Calculate the quality spread differential (QSD) Fixed rate borrowing Floating rate borrowing Alpha 10.5% LIBO R Beta 12% LIBOR+1% Quality Spread Differential Difference 1.5% 1% 0.5% QSD=0.5% b Develop an interest rate swap in which both Alpha and Beta have an equal cost savings in their borrowing costs Assume Alpha desires floating-rate debt and Beta desires fixed-rate debt Alpha Borrows at Fixed rate of 10.5% and lends to Beta at 11.75% fixed rate Beta Borrows at Libor+1% and lends to Alpha at the same rate If this is done, Alpha’s floating-rate all-in-cost is: = 10.5% + LIBOR+1% - 11.75% = LIBOR - 0.25%, i.e 0.25% savings over its floating-rate debt Beta’s fixed-rate all-in-cost is: = (LIBOR+ 1%) + 11.75% - (LIBOR+1%) = 11.75%, i.e 0.25% savings over its fixed-rate debt By entering a swapping deal Beta saves 0.25% on its Fixed interest cost Alpha gains 1.25% on the amount that it lends to beta and finances it by paying 1% extra on the floating rate The net gain of Beta is 1.25%-1%=0.25%, they also get their desired floating and fixed rate debt 11 Consider the following data: Submission Deadline – 24th August– IFM – KUSOM – EMBA V - 2009 Page Alpha Corporation Beta Bank Requirement Fixed rate USD Funding Fixed rate CHF Funding Cost of $ Funding 12.5% 11.0% Cost of CHF Funding 6.5% 6% Alpha right now has obligation in CHF Funding to CHF Lenders Beta right now has obligation in USD Funding to USD Lenders Show how both parties can save on borrowing cost by entering into currency swap Assume that the swap bank requires a total gain of 10 bps (0.10 %) Answer: The difference between the funding cost of $ and CHF for Alpha Corporation is 6% whereas for Beta Bank it is 5%, Therefore the Beta Bank has an comparative advantage on funding in Dollars The following swap can be executed so that both the parties win and the swap bank gains 10bps CHF @6% CHF@ 6.5% Alpha Corp Swap Bank $@11.55% CHF @6% $@11.45% Beta Bank $ @11% Alpha Corp Borrows CHF at fixed rate of 6.5% and lends CHF to Swap Bank at 6% , they lose 0.5% in the deal and finance it by borrowing USD @11.55% from Swap Bank thus gaining 0.95% over their fixed USD cost of funding Beta Bank Borrows in USD at 11% and lends to Swap Bank at 11.45% In return borrows CHF at 6% to finance their fixed rate CHF funding If this is done, Alpha Corp.’s USD-rate all-in-cost is: = CHF 6.5% - CHF 6% + USD 11.55% = USD 11.55% +0.5% = USD 12.05% i.e 0.45% savings over its USD fixed-rate debt Beta Bank’s CHF fixed-rate all-in-cost is: = USD11% + CHF6% - USD 11.45% = CHF 6%- 0.45% = CHF 5.55% i.e 0.45% savings over its CHF fixed-rate debt The Swap Bank Borrows USD at 11.45 % from Beta Bank and lends to Alpha Corp at 11.55% thus earning 0.10% or 10 bps in the swap deal Submission Deadline – 24th August– IFM – KUSOM – EMBA V - 2009 Page