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NMIMS
Global Access
School
for Continuing Education (NGA-SCE)
Course:
International Finance
Internal
Assignment Applicable for September 2020 Examination
1. 1. You are given the following interest
rates.
TABLE BELOW
|
Rs. |
$ |
||
|
3- months |
12% |
6% |
|
|
6-month |
11.5% |
5.5% |
|
|
9-month |
11% |
5.0% |
|
The 3-month forward rate is Rs. 75/$.
Calculate the 3-month forward rate 6-months from now.
Ans:
INTRODUCTION;
A forward rate is an interest rate applicable to a financial transaction
that will take place in the future. Forward rates are calculated from the spot
rate and are adjusted for the cost of carry to determine the future interest
rate that equates the total return of a longer-term investment with a strategy
of rolling over a shorter-term investment.Forward rate agreements (FRA) are
over-the-counter contracts between parties that determine the rate of interest
to be paid on an agreed upon date in the future. An FRA is an agreement to
exchange an interest rate commitment on a notional amount.The FRA determines
the rates to be used along with the
2. Suppose that the exchange rate for U.S. $1
for another currency is such that U.S. $1 = 3.5 ARS (Argentine pesos). Further
suppose that if the exchange rate remains the same, you will receive a 25%
return on your investment in ARS currency over the next year’s period. As an
investor, you are aware of the volatility in Argentina’s currency exchange so
sudden movements are expected.
If the exchange rate were to change such that
$1 = 50 ARS, what return do you expect on the investment? If the exchange rate
were to change such that $1 = 2 ARS, what return do you expect on the
investment?
Ans:
INTRODUCTION:
In finance, an exchange rate is the rate at which one
currency will be exchanged for another. It is also regarded as the value of one
country's currency in relation to another currency. For example, an interbank
exchange rate of 114 Japanese yen to the United States dollar means that ¥114
will be
3a. Groucho Marx, as Governor of Freedonia’s
central bank, has problems. He sees the value of his currency, the FDK, under
constant attack from Rosor, a wealthy mutual-fund manager.
Apparently, Rosor believes that the FDK will
soon devalue from GBP 1.000 to 0.950.
a. Currently, both GBP and FDK interest rates
are 6% p.a. By how much should Groucho change the one-year interest rate so as
to stabilize the spot rate even if Rosor expects a spot rate of 0.950 in one
year? Ignore the risk premium—that is, take 0.950 to be the
certainty equivalent.
Ans:
INTRODUCTION:
The British pound sterling is referred to as the GBP. It is the official
currency in the United Kingdom and its territories of South Georgia, British
Antarctic Territory, South Sandwich Islands, the Isle of Man, and the Channel
Islands. It is one of the major currencies of the world and is closely followed
by traders around the globe. Zimbabwe, an African country, is an independent
country which uses GBP as an official currency along with Zimbabwean Dollar.
There are a lot of currencies that are attached to GBP. A few of them are
3b. If the interest-rate hike also affects
Rosor’s expectations about the future spot rate, in which direction would this
be? Taking into account also this second-round effect, would Groucho have to
increase the rate by more than your first calculation, or by less?
(5 Marks)
**********
Ans:
INTRODUCTION:
Interest, in finance and economics, is payment from a borrower or
deposit-taking financial institution to a lender or depositor of an amount
above repayment of the principal sum (that is, the amount borrowed), at a
particular rate. It is distinct from a fee which the borrower may pay the
lender or some third party. It is also distinct from dividend which is paid by
a
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