INTERNATIONAL FINANCE

MBA303 INTERNATIONAL FINANCE Task brief & rubrics

Project

• The assignment consists of 5 questions, with a mixed of theoretical concepts and exercises. • Concepts included are in UNIT 1 to 7. • The final assignment will be accepted in WORD format ONLY. It is mandatory to submit an EXCEL file where you explain the different calculations you made. So, both

files have to be submitted. • Maximum word count is 2500 words, not including graphs and annexes if necessary.

LAUNCH: WEEK 5 / DELIVERY: June 15th, 2022, 23:59HRS ON MOODLE

Submission file format: Word document with all the answers.

This task is worth 60% of your overall grade for this subject.

It assesses the following learning outcomes:

• Recent trends and events in international finance using the appropriate financial theories. • Understand exchange rates and why currency values fluctuate • Understand and critically discuss economic principles behind the determination of interest rates. • Be conversant with what determines the demand and supply of money. • Communicate thoughts and critically discuss why financial institutions exist. • Evaluate and distinguish between different types of money

Task

1. Regarding monetary regimes: a. Make a summary of the article on China, posted in Moodle and explain the relationship with the Trilemma. b. Under the gold standard, which theory explains the mechanism which restores the balance of payments equilibrium when it disturbed under

the gold standard? Which are the advantages and disadvantages of the gold standard? Would you be supportive to return to a gold standard for the EUR?

c. Describe the balance of payments identity and discuss its implications under the fixed and flexible exchange rate regimes. 2. You purchased an Aston Martin for £70,000, payable in three months. You have enough cash at your bank in Barcelona, which pays 0.35% interest

per month, compounding monthly, to pay for the car. Currently, the spot exchange rate is €1.45/£ and the three-month forward exchange rate is €1.40/£. In London, the money market interest rate is 2.0% for a three-month investment. There are two alternative ways of paying for your Jaguar.

a. Keep the funds at your bank in the U.S. and buy £70,000 forward. b. Buy a certain pound amount spot today and invest the amount in the U.K. for three months so that the maturity value becomes equal to

£70,000. c. Evaluate each payment method. Which method would you prefer? Why?

3. Currently, the spot exchange rate is $1.10/£ and the three-month forward exchange rate is $1.12/£. The interest rate is 2.5 percent per annum in the U.S. and 1.25 percent per annum in the U.K. Assume that you can borrow as much as $1,500,000 or £1,000,000.

a. Determine whether interest rate parity is currently holding. b. If IRP is not holding, how would you carry out covered interest arbitrage? Show all the steps and determine the arbitrage profit.

4. Suppose that in 2021, the Japanese rate of inflation is 3%, and the UK rate of inflation is 6%. If the GBP weakens relative to the Yen by 9% during 2021, a. what would be the magnitude of the real depreciation of the GBP versus the Yen? b. What hedge would you best recommend?

5. Explain the main differences between a forward and a future contract a. Yesterday, you entered into a futures contract to buy €62,500 at $1.08 per €. Suppose that the futures price closes today at $1.14. How much

have you made/lost? And if it would be $1.02? b. A call option exists on the $/€. The exercise price is $1.10. Right now the call option can be purchased for $0,15. $/€ is currently selling for

$1.12. What is the "intrinsic value" of the call option? Explain the payoff. c. A put option exists on $/€. The exercise price is $1.10. Right now the put option can be purchased for $0,01. $/€ is currently selling for $1.12.

What is the "intrinsic value" of the put option’ Explain the payoff. d. If your views about what the $/€ is going to do are mixed, which do you think would be a better fit?

6. Suppose two parties enter a 5-year interest rate swap to exchange one-year LIBOR plus 60 basis points (bp) for a fixed rate on $100 million notional principal. a. If LIBOR turns out to be 10% in year 1, 9% in year 2, 9% in year 3, 8% in year 4 and 8.5% in year 5, what cash flows will be exchanged between

the two parties? Assume a flat Eurodollar yield curve at 10% b. What is the value of the swap? c. What fixed rate in the swap agreement will make the value of the swap equal to zero?

Rubrics

Exceptional 90-100 Good 80-89 Fair 70-79 Marginal fail 60-69

Knowledge & Understanding

(40%)

Student demonstrates excellent understanding of key concepts and uses vocabulary in an entirely appropriate manner.

Student demonstrates good understanding of the task and mentions some relevant concepts and demonstrates use of the relevant vocabulary.

Student understands the task and provides minimum theory and/or some use of vocabulary.

Student understands the task and attempts to answer the question but does not mention key concepts or uses minimum amount of relevant vocabulary.

Application (40%) Student applies fully relevant knowledge from the topics delivered in class.

Student applies mostly relevant knowledge from the topics delivered in class.

Student applies some relevant knowledge from the topics delivered in class. Misunderstanding may be evident.

Student applies little relevant knowledge from the topics delivered in class. Misunderstands are evident.

Critical Thinking (10%)

Student critically assesses in excellent ways, drawing outstanding conclusions from relevant authors.

Student critically assesses in good ways, drawing conclusions from relevant authors and references.

Student provides some insights but stays on the surface of the topic. References may not be relevant.

Student makes little or none critical thinking insights, does not quote appropriate authors, and does not provide valid sources.

Communication (10%)

Student communicates their ideas extremely clearly and concisely, respecting word count, grammar and spellcheck

Student communicates their ideas clearly and concisely, respecting word count, grammar and spellcheck

Student communicates their ideas with some clarity and concision. It may be slightly over or under the wordcount limit. Some misspelling errors may be evident.

Student communicates their ideas in a somewhat unclear and unconcise way. Does not reach or does exceed wordcount excessively and misspelling errors are evident.