BUSMGT 742 International Trade & Finance Mid-term Test 2019 Q4
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BUSMGT 742
Mid-term Test 2019 Q4
BUSMGT 742
International Trade & Finance
1. The theme dominating global financial markets today is the complexity ofrisks associated with financial globalization. List and briefly explain four examples ofthe complexity of risks affecting the leading and managing of multinational firms in the rapidly moving marketplace.
(10 marks)
2. Although international trade might have approached the comparative advantage model during the nineteenth century, it certainly does not today, for a variety of reasons. Develop an argument as to why this is not happening today.
(10 marks)
3. The Big Mac is considered a good candidate for the application ofthe law of one price and
measurement of under- or overvaluation of a currency. Develop an argument as to why this is a good idea.
(10 marks)
4. The price of a Big Mac in the U.S. is $4.25 and the price in Mexico is Peso 72.25. The current actual exchange rate is Peso19.50/US$1.
a. What is the implied PPP ofthe Peso per dollar?
(3 marks)
b. Determine whether the Peso is overvalued or undervalued and by what percentage. (7 marks)
5. Imagine you work for Philips New Zealand, a wholly owned subsidiary ofthe Dutch firm Philips NV and that you have the responsibility for setting New Zealand prices ofPhilips’ products. Philips NV produces televisions and exports them to New Zealand. Last year the exchange rate was NZ$1.50/Euro and Philips charged €18,000 for a 98” Ultra HD TV in Europe and $27,000 in New Zealand. Currently the spot exchange rate is NZ$1.75/Euro and you intend setting a price of $30,000 per TV in New Zealand.
a. What will be the degree ofpass through by Philips on this TV?
(5 marks)
b. Write a brief email to your boss at Philips NV explaining why you might have decided on this price.
(10 marks)
6. An application of uncovered interest arbitrage (UIA) known as "yen carry trade."
a. Define UIA and describe the example ofyen carry trade.
(5 marks)
b. Explain why an investor would engage in the practice ofyen carry trade and explain any risk in this investment strategy.
(5 marks)
7. You are a foreign exchange trader at BNZ and can invest NZ$50 million, or the foreign currency equivalent of the bank's short term funds, in a covered interest arbitrage with Sweden.
Quotes available:
Funds available NZ$5,000,000
Spot SEK/NZD 6.20
3 month forward SEK/NZD 6.225 NZD 3 month interest rate (p.a.) 1.80% SEK 3 month interest rate (p.a.) 5.00%
Using these quotes:
a. Explain how you can make a covered interest arbitrage (CIA) profit within a 3-month period and why this can happen.
(10 marks)
b. Calculate how much you can make.
(5 marks)
8. Compare and contrast foreign currency options and forward contracts. Identify situations when you may prefer one vs. the other when speculating on foreign exchange.
(10 marks)
9. Define and explain the logic for the time value of an option. Explain the value ofthe time value of an option for deep out-of-the money and deep in-the-money options.
(10 marks)
[Total 100 marks]
2022-02-10