Part -1:
1. Briefly discuss the various types of international banking offices.
2. How did the credit crunch become a global financial crisis?
3. Grecian Tile Manufacturing of Athens, Georgia, borrows $1,500,000 at LIBOR plus a lending margin of 1.25 percent per annum on a six-month rollover basis from a London bank. If six-month LIBOR is 4% percent over the first six-month interval and 5% percent over the second six-month interval, how much will Grecian Tile pay in interest over the first year of its Eurodollar loan?
4. A "three against nine" FRA has an agreement rate of 4.75 percent. You believe six-month LIBOR in three months will be 5.125 percent. You decide to take a speculative position in a FRA with a $1,000,000 notional value. There are 183 days in the FRA period. Determine whether you should buy or sell the FRA and what your expected profit will be if your forecast is correct about the six-month LIBOR rate.
Part -2:
1. Describe the differences between foreign bonds and Eurobonds. Also discuss why Eurobonds make up the lion's share of the international bond market.
2. Consider 8.5 percent Swiss franc/U.S. dollar dual-currency bonds that pay $666.67 at maturity per SF1,000 of par value. It sells at par. What is the implicit SF/$ exchange rate at maturity? Will the investor be better or worse off at maturity if the actual SF/$ exchange rate is SF1.35/$1.00?
3. A five-year, 4 percent Euroyen bond sells at par. A comparable risk five-year, 5.5 percent yen/dollar dual-currency bond pays $833.44 at maturity. It sells for V110,000. What is the implied ¥/$ exchange rate at maturity? Hint: The par value of the bond is not necessarily equivalent to ¥100,000.
Part -3:
On the Tokyo Stock Exchange, Honda Motor Company stock closed at V3,945 per share on Thursday, April 11, 2013. Honda trades as an ADR on the NYSE. One underlying Honda share equals one ADR. On April 11, 2013, the V/$ exchange rate was V99.8270/$1.00.
a. At this exchange rate, what is the no-arbitrage U.S. dollar price of one ADR?
b. By comparison, Honda ADRs traded at $39.97. Do you think an arbitrage opportunity exists?