[SOLVED] FINM8007 P0 Exam

EXAMINATION

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Exam Conditions:
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Materials Permitted:
Calculator (non-programmable)
Unannotated paper-based dictionary (no approval required)

Instructions to Students:
1. Attempt all the parts in the question. All the parts are independent of one another. You are required to answer all the parts.
2. The total mark for this exam is 150. This exam is worth 75% of your overall grade (or 100% if redeemed).
You should apportion your time carefully so that you can finish all the parts within the time limit.
3. Start your solution to each part on a new page.

All the parts are independent of one another. You are required to answer all the parts.

Part A

Consider the following bilateral exchange rates involving the Swiss Franc (CHF), Euro (EUR), British pound sterling (GBP), and United States dollar (USD):

GBP per USD (GBP/USD) 0.8654 – 0.8656
CHF per USD (CHF/USD) 0.9897 – 0.9899 EUR per USD (EUR/USD) 0.9975 – 0.9977 GBP per CHF (GBP/CHF) 0.7742 – 0.7745 GBP per EUR (GBP/EUR) 0.8674 – 0.8676 EUR per
CHF (EUR/CHF) 0.9978 – 0.9980

Singatale Telecom (a multinational corporation based in the United States) has an Australian subsidiary (Octopus Telecom Australia), which either pays a dividend to the parent company or receives cash payments from the parent company each year.

The currently available data about the spot, forward, and money markets involving the United States Add (US) dollar (USD) and Australian dollar (AUD) are given below:

Spot rates (USD per AUD) USD/AUD 0.6452 – 0.6570
90-day forward points 20 – 23
90-day USD interest rates 3.5% – 4.0% per annum (p.a.) 90-day AUD interest rates 2.5% – 3.0% p.a.

Based on the data, answer both parts [i] and [ii] below. Parts [i] and [ii] are independent of each other.

[i] Suppose Octopus Telecom Australia declares a dividend of AUD 500,000, which will be paid to Singatale Telecom ninety (90) days later. Singatale Telecom (based in the US) is trying to decide how to manage the foreign exchange exposure associated with the dividend. Explain and compute the various strategies to manage the foreign exchange exposure associated with the dividend. Explain your answers clearly and completely. Give your final answers in USD.

[ii] Suppose the parent company Singatale Telecom needs to pay Octopus Telecom Australia AUD 250,000 ninety (90) days later. Discuss the various strategies to lock in the USD cost of this payment. Which strategy do you think would be better for Singatale Telecom? Explain your answers clearly and completely. Give your final answers in USD.

Part C

Consider the following spot and cross exchange rates quoted by Commonwealth Bank (Commbank) and Australia and New Zealand Banking Group (ANZ) involving the Australian dollar (AUD), British pound sterling (GBP), and United States dollar (USD):

Exchange Rate CommBank ANZ
USD per AUD (USD/AUD) 0.6248 – 0.6766 0.6184 – 0.6294
GBP per AUD (GBP/AUD) 0.4369 – 0.5228 0.5392 – 0.5769

Assume at the start that you have AUD 10,000, GBP 10,000, and USD 10,000, respectively. You can also assume that all interest rates are zero and there are no trading restrictions. Can you identify any positive arbitrage opportunities from this set of quotes? Consider all possible positive arbitrage opportunities. Explain and show your working clearly and completely. If there are no positive arbitrage opportunities, explain and show clearly why.

Part D

With reference to the journal articles in Special Topic 3, explain and discuss in your own words how various asset pricing anomalies in the Chinese and United States financial markets are related to the volatility and information in these markets. The word limit of your answer is 1,500 words. This word limit does NOT include the list of references. Do NOT include graphs and tables in your answer. Formulas are not necessary in your answer.

References

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