Task
Answer all questions which are based on Topics 1 to 7.
Each question is classified as either conceptual problem, quantitative problem, analysis of business, or communicate financial analysis. In some instances a question is a combination of two classifications.
Keep in mind the requirements for each classification by referring to the marking criteria.Questions requiring calculations should include all working and an explanation of the calculations. You should read the Marking Criteria section below. This assessment must be submitted electronically in Word format. PDF and other non-Word formats are not acceptable.
Question 1(Conceptual Problem) 10 marks
Analyse the relationship of a country's economy and its currency. Other things being equal, explain with examples the impact of a weak home currency on the home economy and the impact of a strong home currency on the home economy. (Word Limit 500 words)
Question 2 (Quantitative Problem, Analysis of Business Situation)
Explain covered interest arbitrage. Given the following information what would be your yield (percentage return) if you invest AUD 1,000,000 and use covered interest arbitrage? :
| Quoted Price |
| Spot rate of AUD |
USD 0.80 |
| 90 day forward rate of AUD |
USD 0.81 |
| 90 day USA interest rate |
4% |
| 90 day Australian interest rate |
2.5% |
What market forces could occur to eliminate any further possibilities of covered interest arbitrage?
Question 3 (Conceptual Problem, Communicate financial analysis)
Compare and contrast the ways a multinational corporation (MNC) manages economic exposure with the way it manages transaction exposure. (Word Limit 500 words)
Question 4(Quantitative Problem, Analysis of Business Situation, Communicate financial analysis)
Globetel Australia Ltd. does business in Australia and Japan. Globetel sales in Australia are somewhat affected by the value of Japanese Yen (JPY) because it faces competition from Japanese exporters.
Globetel has forecasted annual Australian sales based on the following three exchange rate scenarios:
| Exchange rate of JPY | Revenue from Australia business (in AUD) |
| 1 AUD = 80 JPY |
$100,000,000 |
| 1 AUD = 85 JPY |
$110,000,000 |
| 1 AUD = 90 JPY |
$125,000,000 |
In attempting to assess its operating exposure, Globetel has compiled the following information on annual cash flows:
- Its JPY revenues on sales to Japan invoiced in JPY are expected to be JPY 25 billion.
- Its anticipated cost of materials is estimated at AUD 200 million from the purchase of Australian materials and JPY 4 billion from the purchase of Japanese materials.
- Fixed operating expenses are estimated at AUD 30 million.
- Variable operating expenses are estimated at 20% of total sales (after including Japan sales, translated to a dollar amount).
- Interest expense is estimated at AUD 20 million on existing Australian loans, and the company has no existing Japanese loans.
a) Forecast net annual cash flows for Globetel Australia Ltd. under each of the three exchange rate scenarios.
b) Explain how Globetel can restructure its operations to reduce the sensitivity of its net cash flows to exchange rate movements without reducing its volume of business in Japan.
Question 5 (Quantitative and Conceptual Problem)
Find the rate of inflation in Australia for calendar year 2017 and the rate of inflation in New Zealand for the same year. Calculate the percentage change in the value of the AUD with respect to the NZD. Did the currency change in the direction and by the magnitude that you would have expected according to Purchasing Power Parity (PPP)? If not, offer possible reasons for this discrepancy. (Word Limit 200 words)
Question 6 (Quantitative Problem)
Matthew Miller does not believe that the international Fisher effect (IFE) holds. Current one-year interest rates in Europe are 5%, while one-year interest rates in the Australia are 3%. He converts AUD 100,000 to Euros and invests them in Germany. One year later, he converts the Euros back to dollars.
If the current spot rate of the Euro is AUD 1.10
a. What should the spot rate of the Euro in one year be according to the IFE?
b. If the spot rate of the Euro in one year is AUD 1.00, what is Matthew's percentage return from his strategy?
c. If the spot rate of the Euro in one year is AUD 1.08, what is Matthew's percentage return from his strategy?
d. What must the spot rate of the Euro be in one year for Matthew's strategy to be successful?
Question 7(Quantitative Problem)
Blades USA Ltd has future receivables of NZD 4,000,000 in one year.
Determine whether a forward hedge, money market hedge, or a currency options hedge would be most appropriate. Then compare the most appropriate hedge to an unhedged strategy, and decide whether Blades should hedge its receivables position. Use the following information to make the decision and verify your answer by determining the estimate (or probability distribution) of dollar revenue to be received in one year for each type of hedge.
Spot rate of NZD = USD 0.54
The one year forward rate of the NZD = USD 0.52
One year call option: Exercise price = USD 0.50 and Premium = USD 0.07
One year put option: Exercise price = USD 0.52 and Premium = USD 0.03
| USA | New Zealand |
| One year deposit rate |
9% |
6% |
| One year borrowing rate |
11% |
8% |
|
|
Rate |
Probability |
| Forecasted Spot rate of NZD |
USD 0.50 |
20% |
|
USD 0.51 |
50% |
|
UAD 0.53 |
30% |