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International Finance
September 2022 Examination
Q1. The largest trading partner of India is the USA. If the inflation in India is higher than that of the – explain how it
will impact the value of Indian rupee against USD under free
floating exchange system. Will the US consumers continue to buy Indian products under
such situation? (10
Marks)
Ans 1.
Introduction
In
the year 2019, the India Gross Domestic Product (GDP) was estimated at $ 2.95
trillion at the current market exchange rates. The real GDP stood at
approximately 4.2%, and the population was around 1.4 billion people as by the
IMF report.
In
the same year, U.S. and India traded goods and services estimated at $ 146.1
billion. India exports were valued at around $ 58.6 billion
Q2. Assume the following information :
|
Particulars |
Quoted Price |
||||
|
Value of Canadian Dollars (C$)
in terms of |
$0.90 |
||||
|
US dollars ($) |
|||||
|
Value of
New |
Zealand |
(NZ$) |
in |
US |
$ 0.30 |
|
Dollars($) |
|
|
|
|
|
|
Value of
Canadian
dollar (C$) in
New |
NZ$3.02. |
||||
|
Zealand dollar (NZ$) |
|||||
Based on the above information please answer
the following question –
a) Is triangular
(three-point) arbitrage
possible?
b) If the answer to question (a) is affirmative, please explain the steps that would result in arbitrage profit if you
have
$1 million. Quantify the arbitrage profit.
c) How the
market forces
will act
to eliminate triangular arbitrage. (10 Marks)
Ans 2.
Introduction
Arbitrage trading in Financial Markets refers
to the opportunity whereby similar assets are bought and sold
simultaneously at different price for profit. An investors buys a cheap
asset and sell at a higher price in order to profit, without cash flows. In
theory, this process involves no capital nor risk.
The efficient markets hypothesis states that a
triangular arbitrage does not exist during the normal conditions of market and
trade when price communication is moving toward equilibrium levels across the
markets. At this occasion, moneys can be disvalued because of the irregular
information on the price quotation amongst the market participants.
Question 3.
G Co Ltd- a famous US based firm requires 10 million pound (GBP) by way
of loan to finance a new venture in UK.
But the firm being unknown to British investors is unable to
get financing from UK debt market nor any UK bank. Hence, the firm decides to raise fund from US debt market through dollar-denominated 3 years’ bond at annual coupon of 10%
PA. It will then convert the dollar ($) into GBP at prevailing spot rate of GBP/ $ = $1.70.
Over the each
of next
3 years it plans to use the revenue earned in GBP from
UK market out of new business
to
make its
annual debt payment. G Co engages in currency swap agreement with a counter-party in which it will convert GBP to
USD at an exchange rate of $1.70
per GBP at the end of
each of next 3 years.
Answer the
following questions –
a.
How
many dollars should G Co Ltd borrow initially to support new UK venture?
Understanding and
usageof the formula
Ans 3a.
Introduction
The Dollar to Pound exchange rate got to as
high as $2.648 on 6th,
March 1972. That remains the robust level the Dollar has been against Pound
since it was freely drifted in 1971. Before the year 1970s, the Dollar to Pound
exchange rate was fixedby the British government.
Ans 3b.
Introduction
How
many pound should G specify in the swap agreement that will swap over each of
the
next
3 years in exchange of USD so that it can make its annual coupon payment to the
US
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