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FINC3011
International Financial Management
PRACTICE EXAM
TIME LIMIT: 2 hours plus 10 minutes reading time
TOTAL MARKS: 50
EXAM CONDITIONS: This is a CLOSED book examination. No written, printed or
electronic reference materials are permitted. No electronic aids are permitted e.g. laptops,
phones.
MATERIALS PERMITTED IN THE EXAM VENUE: A standard linguistic dictionary
(English to foreign language and vice versa/bilingual) and a handheld calculator are
permitted. One sheet of blank scratch paper and a pen/pencil for workings are permitted. No
other materials are permitted.
MATERIALS TO BE SUPPLIED TO STUDENTS: None
INSTRUCTIONS TO STUDENTS: This exam consists of 7 short answer and/or extended
response questions. Marks are as indicated. Please read each question carefully. Write your
answers in the space provided on this question paper. Show all working. This question paper
must be returned. Candidates are not permitted to remove any part of it from the exam venue.
1. Foreign exchange market (4 marks)
If the Australian dollar-British pound exchange rate is A$1.80 per pound, and the
Australian dollar-euro rate is A$1.53 per euro:
(a) What is the pound-per-euro rate? (2 marks)
(b) How could you profit if the pound-per-euro rate were above the rate you calculated in
part a? What if it were lower? (2 marks)
221p (paper code) Semester 1, 2022 Page 3 of 10
2. Interest rate parity conditions (5 marks)
(a) It is often said that interest rate parity is satisfied when the differential between the
interest rates denominated in two currencies equals the forward premium or discount
between the two currencies. Explain why this is an imprecise statement when the
interest rates are not continuously compounded. (3 marks)
(b) Suppose you are the German representative of a company selling washing machines
in South Africa. Describe your foreign exchange risk and how you might hedge it
with a money market hedge. (2 marks)
221p (paper code) Semester 1, 2022 Page 4 of 10
3. Purchasing power parity and real exchange rates (10 marks)
(a) Suppose the Australian dollar-United States dollar exchange rate moves from
AUD1.28/USD to AUD1.42/USD. At the same time, the prices of United States-made
goods and services rise 8.3 per cent, while prices of Australian-made goods and
services rise 5.1 per cent. What has happened to the real exchange rate between the
Australian dollar and the United States dollar? (2 marks)
(b) The same television set costs A$750 in Australia, US$500 in the United States, €450
in France, £300 in the United Kingdom, and ¥100,000 in Japan. If the law of one price
holds, what are the AUD/USD, AUD/EUR, AUD/GBP, and AUD/JPY exchange
rates? (2 marks)
(c) Why might the law of one price fail? (2 marks)
(d) Can purchasing power parity help predict short-term movements in exchange rates?
Why or why not? (2 marks)
221p (paper code) Semester 1, 2022 Page 5 of 10
(e) If the price (measured in a common currency) of a particular basket of goods is 10 per
cent higher in the United Kingdom than it is in Australia, which country’s currency is
undervalued, according to the theory of purchasing power parity? Why? (2 marks)
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4. Foreign currency swaps (5 marks)
The swap desk at Macquarie Bank is quoting the following rates on 5-year swaps versus
6-month Australian dollar BBSW:
Australian dollars: 6.85% bid and 6.95% offered
Swiss francs: 4.25% bid and 4.35% offered
You would like to swap out of Swiss franc debt with a principal of CHF50,000,000 and
into fixed-rate Australian dollar debt.
(a) At what rates will Macquarie Bank handle the transaction? (2 marks)
(b) If the current exchange rate is AUD1.46/CHF, what would the cash flows be? (3
marks)
221p (paper code) Semester 1, 2022 Page 7 of 10
5. A monopolist with imported costs (8 marks)
Suppose you are a monopolist who faces a domestic demand curve given by Q = 1,000 –
2P. Your domestic cost of production involves domestic costs per unit of 300 and a
foreign cost per unit produced of 150.
(a) If the real exchange rate is 1.1, what would be the price you would charge and the
quantity you would sell? (4 marks)
(b) How does the price you would charge and the quantity you would sell change when
the real exchange rate increases by 10%? (4 marks)
221p (paper code) Semester 1, 2022 Page 8 of 10
6. International debt financing (6 marks)
(a) What is the difference between a foreign bond and a Eurobond? (2 marks)
(b) Why are Eurocredits not extended by one bank but by a large syndicate of banks? (2
marks)
(c) Should corporations issue bonds in countries where they face the lowest credit
spreads? Be specific about the concept of credit spread you use. (2 marks)
221p (paper code) Semester 1, 2022 Page 9 of 10
7. Risk and return of international investments (12 marks)
Suppose a Singaporean investor wishes to invest in a British firm currently selling for £80
per share. The investor has S$20,000 to invest, and the current exchange rate is S$2/£.
(a) How many shares can the investor purchase? (2 marks)
(b) Fill in the table below for rates of return after one year in each of the nine scenarios
(three possible share prices denominated in pounds times three possible exchange
rates). (3 marks)
Price per
share (£)
Pound-
denominated
return (%)
Singaporean dollar-denominated return for
year-end exchange rate (%)
