The Stern School of Business

New York University

International Financial Management

Professor Ian Giddy

Sample Final Exam

1. If the dollar is trading at 130 yen in the spot market, and the 6-month Eurodollar and Euroyen rates are 10% and 7.5% respectively, what is the 6-month yen/dollar forward exchange rate?

(a) 127.045
(b) 131.567
(c) 128.452
(d) 133.023
(e) 127.500

2. What is the real exchange rate?

(a) The sum of the rate of inflation and a "real" component that represents the return to capital in the absence of inflation.
(b) An index designed to measure deviations from purchasing power parity.
(c) An index of the exchange rate constructed by weighting each foreign currency by the country's share in trade with the home country.
(d) Your own definition (explain).

3. A yen/dollar corporate trader at J.P. Morgan has sold a customer 10 million forward for delivery in 1 year. What alternative methods could the foreign-exchange trading manager use to offset this exposure?

4. What are the key differences between options and forwards, futures etc.? When is an option a better hedging tool?

5. In 1993 Sallie Mae issued currency-linked bonds that were sold to U.S. individual investors. These bonds had the characteristic that the principal amount would rise if the U.S. dollar value of the Japanese yen fell, and vice versa. Explain why Sallie Mae, a federal agency, would issue such bonds; and explain why investors would buy them.

6. In 1992, Kingston Graphics, a producer of software for computer graphic editing for newspapers, had captured 35% of the U.S. market for such software. In 1993, Kingston set up a subsidiary in Australia to sell into the local market a version of their software that had been slightly adapted to the Australian newspaper industry's needs. The response was excellent, and Kingston was soon a major factor in that market. By the end of the year, the subsidiary's balance sheet was as follows:

Kingston (Australia) Ltd

(A$ '000)

Assets Liabilities
Cash (A$) 23 50 S.T. bank debt (A$)
A/R (of which 55,000 in NZ$) 198 6 Taxes payable
Inventory 11 100 5 year A$ bank term loan
Fixed Assets 205 120 1 year A$ loan from parent
161 Equity
Total 437 437 Total

Footnote: A$1=US$0.80

(a) Show carefully which assets and liabilities would be exposed to a 10% devaluation of the A$ under the current/non-current method, and under the monetary/non-monetary method of translation.

(b) What would you say Kingston's economic exposure to the A$ is?

(c) As global treasurer for Kingston Graphics (USA), you notice that the Australian subsidiary's sales to New Zealand have produced accounts receivable of NZ$55,000, due in 60 days. How would you hedge this?

(d) Would your answer to (c) change if the Australian subsidiary invoiced in A$?

7. The Republic of Turkey can issue a four year Dutch Guilder Eurobond at 8.35% annual with 1.3% up front issuance costs. What LIBOR-based floating cost of funds can Turkey attain? (Use the swap quotations below if necessary.)

Interest Rate and Currency Swaps
Years US $ Interest Rate Swaps Act/365 sa DFl Currency Swaps 30/360 pa