International Finance Group Coursework 2017-18 QUESTION 1. Using the data available to you, you are encouraged to use Excel. Include all your Excel tables/calculations in the Appendix and write your answer to question 1 inside the assignment explaining every step. You are the Financial Manager of Walmart in the U.S. Walmart has recently started exporting food products to an Australian company, Woolworths. The exports are currently invoiced in the currency of the importer. a) Calculate the mean and volatility of the yearly percentage changes (%) of the AUD/ USD exchange rate for the period 2007-2017. What risk does Walmart face if it chooses not to hedge its sales? b) Walmart ships an order to Woolworths invoiced at AUD100 million on December 31, 2017. Walmart expects payment in a year’s time. Based on your predictions from the analysis above, at 95% confidence level, what do you expect the range for the future spot rate to be in a year’s time, and how would this impact the value of the receivables? c) Suppose you conduct a currency carry trade by borrowing USD1 million at the start of each year and investing in Australian Dollars for one year. Using the one-year interest rates for US and Australia between 2007 – 2017 provided, compute the total dollar profits/losses from this carry trade for each individual year over the sample period. In your report show and explain the formula used and each step of the calculation. d) What do we learn from and why is it useful to look at the distribution of historical percentage changes of the exchange rate? Notes: To calculate the yearly percentage change use the formula: st = (St – St-1)/St-1 in % format. You do not need to apply any further transformation to the percentage changes or to interest rates. QUESTION 2. a) As a foreign exchange trader at Citigroup, one of your customers would like a yen quote on Australian dollars. The current spot market rates are JPY106.35-83/USD and AUD1.2624-76/USD. What bid and ask yen cross rates would you quote on spot Australian dollars? b) Suppose the following exchange rates are quoted: USD/AUD 0.7921 JPY/AUD 84.1323 EUR/AUD 0.6381 (i) Calculate all possible cross rates. (ii) Using the calculated cross rates, determine whether there is any opportunity for triangular (or three-point) and four-point arbitrage, respectively. Assume you start with one AUD. (iii) How do you expect the above rates to change as a result of arbitrage activity in (ii)? c) Suppose the spot rate is CHF1.4706/£ in the spot market, and the 180-day forward rate is CHF1.4295/£. If the pound interest rate is 7% p.a., what is the annualized interest rate on Swiss francs that would prevent arbitrage? Note: You may use up to 4 decimal places in your calculations. QUESTION 3. You are the sales manager for Airbus and export aircrafts from the United States to other countries. You have just agreed on a deal with a Swiss distributor denominated in CHF, and you are due to receive CHF1,000,000 when the goods arrive in Geneva in 180 days’ time. Assume that you can borrow and lend at 0.85% p.a. in U.S. dollars and at 1.75% p.a. in Swiss Francs. Both interest rate quotes are for a 360-day year. The spot exchange rate is USD1.0773/CHF, and the 90-day forward exchange rate is USD1.0197/CHF. a) Describe the nature and extent of your transaction foreign exchange risk. b) Discuss and calculate your transaction exposure using a forward contract hedge vs. a money market hedge. c) Which of the alternatives in part b is superior? d. Assume that the U.S. interest rate and exchange rates are correct. Determine what Swiss interest rate would make your firm indifferent between the two alternative hedges. Note: You may use up to 4 decimal places in your calculations. Key Information: Weighting: This coursework constitutes 40% of the overall module mark. All questions carry equal weight. Word Limit: The group report should be maximum 2,500 words (this includes any appendices, references or tables). Students are encouraged to work together and double-check each other’s’ part. The report should also include brief personal statements from each group member stating their contribution to the group (this will not be included in the word count). our name is M,L,Y,G,Z AND C. Please include all your Excel tables and show all calculations at every step. They are marked.