• Your answers are marked in accordance with the University’s grade descriptors as
distributed during the course taking into account that your answers are under
• Pay particular attention to the regulations on plagiarism.
• We are assessing your ability to develop your own explanations and evaluations.
Referencing should at most play a minor part in your answers.
• The word limit is 3000, marks awarded for each section are an approximate
indication of the number of words appropriate for the requirement (e.g. 10 marks 300
words or 30 words per mark).
• Make sure that you provide FULL ANSWERS to the question that CLEARLY
EXPLAIN your answer to the question. Answers without an adequate explanation will receive a fail mark.
Answers that make unreasonable assumptions will be penalized
Part A Please answer ALL questions in this section
Note that this paper uses the standard notation for exchange rates, for example
EURUSD 1.1 means “$1.1 for 1 euro”
a. Calculate to 4 decimal places the new exchange rate after a 2% increase in the value of the dollar given a current exchange rate of EURUSD 1.1
b. Given the following exchange rates calculate the GBPEUR rate to 4 decimal places.
c. Explain the relationship between your answer to part b of this question and triangular arbitrage.
2. Consider the following data:
|January 2017||EURUSD 1.100|
|December 2017||EURUSD 1.144|
Take the US dollar as the home currency
a. According to Purchasing Power Parity which currency area should have had the
higher rate of inflation in 2017 and by how much?
b. If inflation in the US were 3% higher than in the euro area, calculate the change
in the real value of the dollar. What are the implications of this change?
c. What are the implications of a change in the real exchange rate of a currency?
d. Explain why you would expect interest rates in the US to be higher than in the
e. Explain why you would expect there to be no difference in the interest rates of
government bonds of any two countries in the euro area and also explain why in
practice there are differences.
Part B please answer TWO questions only from this section
3. Compare and contrast country risk analysis with exchange rate volatility.
4. MNCs promote globalization. Is this a force for good or bad? Discuss.
5. XYZ plc has been offered the following quotes for options on the dollar given a
current market price of 60 pence:
|Strike price of dollar in pence||Call premium||Put premium|
|1 Year||1 Year|
a. Calculate the net payout from a purchased call option at a strike price of
67 pence for the following possible maturity prices 55p, 60p,65p,70p,75p.
b. Calculate the net payout for a written put option at 66p for the following possible
maturity prices: 55p, 60p,65p,70p,75p.
c. Calculate the total cost of the dollar if the MNC were to implement part a and part
b of this question for the following maturity prices: 55p, 60p,65p,70p,75p .
d. Outline the advantages and disadvantages of purchasing a call at 67p and
writing a put at 66p for a MNC importing from the US.
6. Pico plc has borrowed heavily in euros and is worried about increasing
interest rates in the eurozone. The Finance Director suggests that Pico
plc should sell futures on French bonds (known as OATs or Obligations
Assimilables du Trésor).
a. Explain why selling a futures contract on French bonds would
reduce the effect of an increase in euro interest rates.
b. Pico sells a futures contract on bonds for €1,010 calculate the daily
payments and receipts on the futures contract given the following
bond prices: (4 marks)
|Day 1||Day 2||Day 3||Day 4||Day 5|
c. Explain why the market insists on daily settlement.
The Finance Director also offers two alternatives:
d. One alternative is to engage in an interest rate swap. Explain how
this might work.
e. The other alternative is to purchase a PUT contract on euro
Calculate the net profit or loss per unit on a put option contract with
a strike price of €1,008 with a premium of €4.00 for the following
€985, €1,000, €1,015 and €1,020
f. Explain how the option contract in part e protects against interest
rate rises and how this form of protection differs from the futures