ACF315 International Financial Management



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(In Lieu Of Formal Exam)


Release Date:                            Monday 25 January 2021



Release Time:                           11:00



Submission Deadline:               

Academic Year:                         

Submission procedure:             Via the module page on the DLE







Candidates are not permitted to look at the examination paper until instructed to do so.

Semester 1 Exam



Section A


Answer any four questions in this section; each question carries 5 marks

(Answer each question in approximately 50 – 75 words)



  1. What is suggested by the international Fisher effect?


  1. Show the rationale of covered interest rate parity.


  1. Defined transaction exposure.


  1. What does relative PPP tell us about exchange rate determination and movement?


  1. What is the balance of payments? Specify its major categories.


  1. How does economic exposure differ from transaction exposure?


  1. Demonstrate the relationship between absolute PPP and real exchange rates.


  1. What is defined as effective exchange rate?


Section B


Answer any two questions in this section; each question carries 20 marks.



  1. Define and present three types of foreign exchange exposure. Discuss and critically evaluate how multinational corporations may manage the three types of foreign exchange exposure.

(300 – 500 words approximately)

(20 marks)



  1. Explain the meanings and implications of various international parity conditions with their respective perspectives. Demonstrate and deliberate the links between theses international parity conditions.

(300 – 500 words approximately)

(20 marks)



  1. What does the international Fisher effect (IFE) tell us about exchange rate determination? Discuss and reflect on the rationale of IFE.

(300 – 500 words approximately)

(20 marks)



Section C


Answer any two questions in this section; each question carries 20 marks.



  1. Interbrew Leuven produces Leffe according to the same basic recipe adopted in 1240 when Leffe was first brewed. Leffe enjoys worldwide sales. Craft Beer Importers of Ontario specialises in importing beers from Europe. Payment of €30 million is due in six months. Craft Beer Importers is concerned with the volatility in the Canadian dollar exchange rate vis-à-vis the euro and its adverse effect on accounts payables. Therefore, the firm decides to hedge its exposure to foreign exchange risk and examines the prospects of forward hedge and money market hedge for the payables. Relevant information is collected as follows:


  • Currently prevailing spot exchange rate: C$1.5645/€


  • Six-month forward exchange rate: C$1.5807/€


  • Money market rate in Canada: 1.75% per annum for the six months


  • Money market rate in the eurozone: 0.75% per annum for the next six months





(a)  Demonstrate an appropriate forward hedge procedure for the case and illustrate the gain and loss profile of the forward hedge.

(4 marks)


(b)  Demonstrate an appropriate money market hedge procedure for the case and illustrate the gain and loss profile of the money market hedge.

(4 marks)


(c)  What will be the gain or loss from the forward hedge and the money market hedge respectively, if the exchange rate in six months is C$1.5500/€?

(3 marks)


(d)  What will be the gain or loss from the forward hedge and the money market hedge respectively, if the exchange rate in six months is C$1.6100/€?

(3 marks)


(e)  Discuss which of the two hedging methods may be preferred under the circumstances, with theoretical justification and empirical results evident by this case.

(6 marks)



  1. The spot exchange rate and the three-month forward exchange rate of the euro vis-à-vis the US dollar are quoted in New York as follows:


  • S0 = $1.1877/€ with a spread 075 – 079


  • F0,90 = $1.1822/€ with a spread 020 – 024


  • The interest rate at which the trader can borrow or lend in the US is 2.75% per annum, and it is expected to remain unchanged in the next three months;


  • The interest rate at which the trader can borrow or lend in Euroland is 3.25% per annum now, and it is expected to remain unchanged in the next three months.





  • Ignoring transaction costs, what should be the US interest rate if CIRP holds while other figures remain unchanged?

(8 marks)


  • Set up procedures to exploit the arbitrage opportunities. Work out how big the arbitrage profit is, taking into account the transaction costs in the foreign exchange market as indicated by the bid-ask spread in the quotations.

(12 marks)



  1. Suppose there are two countries: Sweetland and Vinegaryard; and there are two sectors in both countries: a tradable goods sector for manufacturing automobiles and a non-tradable goods sector for providing restaurant services. Vinegaryard has higher productivity in automobile manufacturing than Sweetland; while both countries have the same productivity in restaurant services. Relevant data have been collected as follows:


  • The price of a model of car is Ў10,000 and Ş50,000 in Vinegaryard and Sweetland respectively;


  • The wage rate in Vinegaryard is Ў10/wh, i.e., Ў10 per worker per hour worked, indicating the marginal product of labour is 0.001 car/wh, or one worker in one hour worked can make 0.001 cars;


  • The wage rate in Sweetland is Ş25/wh, indicating the marginal product of labour is 0.0005/wh;


  • The marginal product of labour is 1 dinner/wh in both Vinegaryard and Sweetland, i.e., one chef in one hour worked can prepare 1 dinner in both countries;


  • The economy of Vinegaryard consists of 50% of the tradable goods sector and 50% the non-tradable goods sector.




(a)  What would be the exchange rate between Ў and Ş?

(4 marks)


(b)  What is the ratio of the Ş price and the Ў price for a dinner?

(4 marks)


(c)  Estimate the extent to which the overall price level in Vinegaryard is higher or lower than what the exchange rate suggests.

(6 marks)


(d)  Discuss your results with reference to the Balassa-Samuelson hypothesis.

(6 marks)





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