International Finance Prelims Question Paper 2 – Vipin Saboo Tutorials

International Finance- Paper 2

Both sections are compulsory. Solve any 3 questions in section 2

Section I

Q.1)  explain briefly (5 marks each)

1. SDR  2.Petro dollar  3.ADR   4.Triffin’s paradox  5.Holgate’s principle

Q.2) a) 1GBP = USD 1.5000(spot) (5 marks)

1GBP = USD 1.4985 (3 months forward)

3 months interest rate on GBP 6% p.a.

Interest rate on USD 5% p.a.

Identify arbitrage opportunity

b) The global meltdown of 2008 saw a record withdrawal of USD 13 billion of portfolio investments from the Indian capital markets. The record crude oil price is the first half of the year also contributed to the outflow of foreign currency reserves from the country, which dropped almost USD 60 billion from their peak levels of the previous year. Capital inflows because of mergers and acquisition, joint venture and foreign direct investments’ were reduced to a trickle. The Indian economy, which was struggling with the management of liquidity and inflation, was suddenly faced with adverse liquidity and is needed to maintain the falling economic growth rate. Although the monetary authorities took several stages to boost consumption by increasing more supply and reducing interest rates, the sector, which suffered the most, was the export sector. The absence of export orders from the developed countries and fall in domestic demands was double blow for this units. The difficult situation in international market and the drastic fall in equity prices created major problem for the entities who had borrowed internationally through hybrid instruments such as foreign currency convertible bonds. Due to low equity prices the bondholders avoided conversion into equity on maturity. This meant that the borrowing company has to arrange debt for financing the redemptions in a very difficult market.

1. What are the different forms of foreign currency inflows?  (2)

2. What are the characteristics features of foreign currency convertible bonds?                                      (4)

3. How can any country monitor its FOREX reserves                                        (4)

Section II

Q.3) a) Study the following quote (3+2 marks)

1 USD = NZD 1.5510/1.5560

I.            Find the midrate spread and spread %

II.            Find the inverse quote

b) The following quote is from New York

1 GBP = USD 1.5975/1.6010

1 EUR = USD 1.2375/90

Find the rate of GBP/EUR

The following quote is from Frankfurt

1 GBP = EUR 1.2950/65

Find whether there is arbitrage opportunity.

Q.4) a) the following quotes are from Mumbai

Spot 1 USD = Rs. 49.5600/5700

1 month forward 600/700

2 month forward 1500/1600

I.            Write the quotes in outright form

II.            What is the premium or discount percentage on bid and ask rates  for one month ?

III.            What is forward quote for 50 days?

b) From the following data decide the best option for borrowing 10 million rupees for a period of 6 months:-                                                                                                                                                                      (5)

Currency               spot in INR              6month forward in INR            Interest rate

GBP                       95.25-95.30                  95.36-95.46                           5.25-5.50

AUD                        64.00-64.10                  64.28-64.32                          5.00-5.25

INR                                                                                                                    5.75-6.00

Q.5) a) Write a note on Offshore banking (5)

b) What are factor that led to the growth of EURO currency (5)

Q.6) a) Distinguish between Forwards vs Futures (5 marks)

b)  Write a short note on BIS (5 marks)

Prof Vipin Saboo can be contacted on 9820779873 for any further clarifications.