QUESTION 1. This question contains 5 subparts, please complete all. (Total 10 marks)

I. Which of the following statements is(are) true? (Select all that apply) (2 marks)

A) As of 2021, London remains the largest financial centre in the world. The USD/GBP is the third most popularly traded in the FX market.

B) Prada chose to list its IPO in Hong Kong because, in large part, because the Hong Kong exchanges are known for hosting many foreign companies in the world.

C) In September 2021, El Salvador became the first country in the world to make bitcoin the sole legal tender. However, there is no concrete arrangements for exchange rate determination between the    bitcoin and other major currencies.

D) Citron Research has accused foreign-listed companies of frauds, including Valeant                              Pharmaceuticals in Canada, Jumia in Nigeria, Luckin Coffee in China, and Nano-X Imaging in Israel. By doing so, Citron Research has earned fortunes from its short selling activities.

II. The IPCs can be linked together to provide a neat benchmark for exchange rate determination in equilibrium. Before this benchmark equation may be derived, we have to assume: (Select all that    apply) (2 marks)

A) The forward exchange rate will be the future spot exchange rate.

B) Arbitrageurs will conduct currency carry trades, until the real rates of return between different money markets are equal.

C) Speculators will conduct covered interest arbitrages, until the real rates of return between different money markets are equal.

D) Nominal rates of return on the money market should be proportional to expected inflation rate in the country.

III. Which of the following is(are) considered as justifiable risk management practices? (Select all that apply) (2 marks)

A) A Forex trader ends her trading day with a flat trading book.

B) A U.S.-headquartered MNC relies on the expected profit from an uncovered interest arbitrage to settle a GBP-denominated bill.

C) A British company expecting USD payments takes a short position on USD forward contracts to offset potential loss when GBP appreciates against USD

D) A U.S. investor incorporates carry trade into his overall investment portfolio, together with U.S. stocks and U.S. treasury bills.

IV. In the effort of developing a better benchmark floating interest rate for the money market, which of the following factors should a financial market regulator consider? (Select all that apply) (2 marks)

A) It should be referenced by large amount of traded assets to ensure it is a true reflection of the cost of capital.

B) It should have only an overnight tenor to exclude any uncertainties from time horizon.

C) It should not be responsive to counterparty risk, especially when credit conditions in the wholesale funding market worsen, so that it is truly risk-free.

D) It can be an unsecured rate derived from transactions in the uncollateralised borrowing market.

IV. Transactions recorded on a country’s BOP reflect its economic activities with the rest of the               world. Of the three major BOP accounts, the current count usually receives special attention. Based on our lecture discussions, which of the following statements is (are) correct? (Select all that apply) (2        marks)

A) Higher commodity prices, especially that of iron ores, is the main reason that turned Australia’s persistent current account deficit into surplus since 2019, and further pushed it to a record high of A$18.3 billion recently as reported by the ABS.

B) Appreciation of the CNY within a band against major currencies, traditionally high national savings rate, and tightening of China’s capital control policies are factors that contribute to keeping China’s   current account in surplus.

C) The effective exchange rate for Germany is undervalued relative to other 18 eurozone countries,   thanks to Germany’s higher productivity, high national savings  rate, as well as tight fiscal policy. This has led to Germany’s persistent current account surplus since 2004.

D) Japan ranks top 3 in the world based on the size of its current account surplus. Unlike the cases  of China and Germany, however, the reason for Japan’s persistent surplus is due to its notoriously  protective policies of domestic companies, while Japan does not have a high domestic savings rate.

QUESTION 2. This question contains 6 subparts, please complete all.  (Total 15 marks)

We obtain the following information.

a. Identify the base currency and the quote currency in this exchange rate. (2 marks)

b. Where should you be for this rate to be an indirect quote? (2 marks)

c. Identify the big figure in the quote highlighted in the chart. (1 mark)

d. Suppose you believe market FX rates incorporate all available and relevant information, what is your predicted FX for 10/09/2021? Identify the approach you used for this prediction. (2 marks)

e. Suppose you offer currency trading advice. Based on the history of exchange rates provided and      what you learned about forecasting in class, should you issue buy or sell advice? Show your reasoning

with calculation where applicable. Which specific forecasting rule/approach did you use? (5 marks)

f. Calculate the percentage change in the spot rate between 10/07/2021 and 10/06/2021. The base    currency has a correlation of 0.72 with the SGD, based on this information only, would you expect the SGD to appreciate or depreciate against the price currency over the same period, or you need further information to make a good estimate? (3 marks)

QUESTION 3. This question contains 2 subparts, please complete all.  (Total 10 marks)

We have discussed how exchange rates are influenced by macroeconomic and institutional factors. You read the following news excerpt from Reuters, which states

"The New Zealand dollar jumped after the economy grew at a much faster pace than expected,         reinforcing the view that the central bank will start lifting interest rates despite a recent outbreak of the coronavirus. The kiwi was 0.23% higher at $0.7125, after briefly surging as much as 0.47%."

a. Based SOLELY on the information within this news excerpt, explain clearly the kiwi's movements, include discussions of relevant factors and market forces. (3.5 marks)

b. Amazon Web Services (AWS), a U.S. on-demand cloud computing service provider, announced in  September 2021 that it plans to invest NZ$7.5 billion (US$5.3 billion) to open its first datacentre and cloud region in New Zealand by 2024. Assume the investment will be paid from AWS’s US bank         account. How is this transaction booked on the New Zealand balance of payments? Explain. (6.5       marks)

QUESTION 4. This question contains 2 subparts, please complete all.  (Total 15 marks)

PJSC Gazprom (“Gazprom”) is a Russian multinational energy corporation headquartered in Saint           Petersburg, Russia. Its functional currency is the Russian ruble (RUB). Gazprom is Europe’s largest          supplier of natural gas. On October 29, 2021, Gazprom extended its contract with the Moldovan            government for another five years, starting from November 1, 2021. Energy transactions are typically   settled in the USD; Moldova will pay an average US$450 per 1,000 cubic metres on November 30, 2021 (Reuters, 2021). Moldova is an Eastern European country. It is not a member of the EU and its currency is the Moldovan leu (MDL).

Suppose the following interest rates are available as of November 1, 2021.

The following spot exchange rates are also available: USD/RUB 71.6116, AUD/USD 0.7459, EUR/USD 1.1597, and EUR/RUB 82.9201, EUR/MDL 20.2150.

Based SOLELY on information provided above and what we have learnt in this course, answer the following questions.

a. A U.S.-based FX trader has programmed a trading algorithm to scan market information in the hopes of finding risk-less profits.

i) If the trader began with US$100,000, would he be able to find such a profit and if so, what’s the         percentage return? Describe and show step by step reasoning, accompanied by calculations. (7 marks)

ii) Suppose you are the trader, and you are relying on profits from this trade to pay one semester’s tuition fee at the ANU (let it be A$22,680), how much start fund would you need in the strategy     described in part (i)? (4 marks)

b) The existence of trading algorithms quickly and fully exploited away all available “free lunches” in an instant. Market has returned to equilibrium. With the Moldovan deal confirmed, Gazprom entered an  appropriate 30-day forward contract to hedge FX exposure as implied in the question. What would       have been the forward rate that Gazprom have obtained on the Russian market at home? Show step    by step calculations and reasoning. Do not use approximation. (4 marks)

QUESTION 5. This question contains 7 subparts, please complete all.  (Total 40 marks)

Moët Hennessy Louis Vuitton SE (“LVMH”) is a French luxury conglomerate formed in 1987 following the merger of the French fashion and leather goods company Louis Vuitton and the French wines and spirits producer Moët Hennessy. LVMH stocks are currently listed on the Euronext Paris (Ticker:           MC.PA). U.S. investors could purchase the stocks indirectly via unsponsored, Level I ADRs (Ticker:        LVMUY).

LVMH has grown to be the world’s largest luxury group with a strategy of acquiring a diverse range of  established luxury brands that now encompass all six segments in the luxury market: wines and spirits (e.g., Belvedere, a Polish vodka brand fully acquired in 2005), fashion and leather goods (e.g., Loewe, a Spanish luxury fashion house fully acquired in 1996; RIMOVA, a German luggage manufacturer              acquired in 2016), perfumes and cosmetics (e.g., Acqua di Parma, an Italian fragrance maker acquired  by 2003; Fresh, an American cosmetics company acquired in 1999), watches and jewelry (e.g., TAG       Heuer and Hublot, both Swiss watchmakers acquired in 1999 and 2008, respectively; Bulgari, an Italian jeweller and watchmaker acquired in 2011), selective retailing (e.g., DFS, the airport duty-free retailer  founded in Hong Kong acquired in 1997), and other activities (e.g., Belmond, a luxury travel and hotel  chain based in Bermuda acquired in 2019).

Tiffany & Co. (“Tiffany”), an American luxury jewellery and specialty retailer, was founded in 1837.   Over its history, it is known for its innovative designs and expert craftsmanship. In January 2021, it   became LVMH’s most recent acquisition through a deal of US$15.8 billion (LVMH, 2020). The Tiffany acquisition will roughly double the size of LVMH’s jewellery and watch business, and the number of brands owned by LVMH now grows to 75. For LVMH, the deal is expected to expand deeper into       jewellery and strengthen its presence in the U.S. For Tiffany, the deal is expected to strengthen         Tiffany’s presence in Europe and China (Investopedia, 2021).

In order to finance the Tiffany purchase, in February 2020, LVMH sold €7.5 billion euro-denominated     bonds and £1.55 billion pound-denominated bonds of varying maturities from 2 to 11 years tranches of the bonds carried very low yields. For example, two of the euro tranches were placed at negative           yields, meaning investors are paying LVMH to borrow money, and the longest 11-year euro tranche has

a coupon of just 0.45% p.a. LVMH’s access to “dirt cheap funding in its home currency to buy an             American company” is thanks to ECB’s unprecedented market stimulus policies, which was intended to lower the funding costs of European companies to invest at home (Bloomberg, 2020).

LVMH released its semi-annual earnings report on July 26, 2021. Asia, especially China, continued to drive LVMH’s revenue growth, accounting for nearly 40% of the group’s revenue; the U.S. market     ranked second and also saw sustained growth, while sales in Europe slowly recovered from COVID   disruptions. LVMH stocks reached historic high in early August.

On August 17, 2021, the Chinese President Xi Jinping gave remarks at the 10th Meeting of the Central  Committee for Financial and Economic Affairs that emphasised on China’s commitment on “promotion of common prosperity” and to narrow China’s growing wealth gap. A selloff of stocks in the luxury         industry followed, wiping out 60 billion euros off the value of Europe’s top luxury stocks, including        LVMH (WSJ, 2021). However, in an October earnings call following the release of Q3 results, LVMH’s     CFO has stated that the company is not worried because the bulk of its customer base in China is the    upper-middle class, rather than the ultra-rich. Asia (excl. Japan) again contributed the most revenue to LVMH’s business at the end of September (Bloomberg, 2021). MC.PA is currently at €683.40 and            LVMUY is trading at $159.10. The spot rate is $1.16/€ .

Based SOLELY on the case information above and what we have learnt in this course, answer the following questions.

a. LVMH started out as a successful French enterprise. What factors do you think have been driving its global expansion history and choices? Discuss and clearly relate each factors to LVMH’s core business.

(6 marks)

b. Much of LVMH’s global expansions involved cross-border acquisitions of foreign businesses and     established brands. Compare this strategy against each of the different international entry strategies we have discussed in class; make sure to identify and explain why you think LVMH focused on             acquisition rather than other entry strategies or models. (8 marks)

c. Explain all relevant types of risks that LVMH may be facing in its international operations. Also,           suggest TWO reasonable management strategies for EACH risk type that you have identified. (8 marks)

d. LVMH attempted to acquire Hermès, a 184-year-old iconic French luxury brand and LVMH’s long- time competitor. However, Hermès fought off the acquisition attempt. In addition to the explicit      reason already provided in the case, suggest and discuss TWO other plausible reasons you have       learned in the course to explain why Tiffany, itself with 184 years’ history, would be willing to be      acquired by LVMH. (3 marks)

e. LVMH financed the Tiffany acquisition with new bond issuance. Discuss all potential financing          choices that are available to LVMH, and why it did not choose other alternative financing methods. (6 marks)

f. After reading through this case, you and your friend, Zac, are impressed by LVMH’s growth strategy and optimistic about the company and the luxury industry’s growth in the future.