International Finance (600545)
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International Finance (600545)

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 Mock Exam Paper 


Business School

University of Hull


Duration of Examination: 3 Hours

SECTION A – Answer ANY THREE questions in this section; 


SECTION B – Answer ANY ONE question in this section 

(answer the question in approximately 500 words)


Formulae sheet attached to examination paper.


You should answer all compulsory questions. If you do not attempt to answer a compulsory question you will receive a mark of 0 for that question.

If you have a choice of questions and you answer more than you are asked to, your answers will be marked in the order that the questions appear on the examination question paper. Any additional questions that you attempt will not be marked.


You should cross out any questions which you attempt but do not wish to be marked.


Please write down the number of question you attempt before answering it.




Answer ANY THREE questions in this section


Question 1


The direct quote for the spot exchange rate and the one year forward exchange rate for the euro against sterling are quoted in Paris as follows:


S0 = €1.1638/£

F0,360 = €1.1821/£


The interest rate in the UK is 1.2% per annum and the interest rate in the euro area is 3.2% per annum now and they are expected to remain unchanged in the next year.




  • Examine whether arbitrage opportunities exist and if so how these might be exploited.

(8 marks)


  • What would you expect the spot exchange rate to be in one years’ time? If the actual rate in one is 1.1868 does this mean that uncovered interest rate parity holds

(10 marks)


  • In this case is the forward rate a good predictor of the future spot rate? Explain whether you would expect this to be true ‘on average’.

(7 marks)

(Total 25 marks)


Question 2


The cost of a Big Mac in the United States is $US 4.07. The cost in China is 14.7 Yuan.  Inflation in the United States is expected to be 4% over the year and in China 8%.




  • What would the exchange rate be if Purchasing Power Parity holds for the Big Mac?
    • marks)


  • If the actual exchange rate is 6.45 Yuan / $ by how much is the Yuan under or over valued relative to your answer to (a)?

(12 marks)


  • Explain how “Big Mac PPP” can be used to determine whether a currency is under or overvalued.
    • marks) (Total 25 marks)


Question 3


Neil Green has purchased a call option on Euros for US $0.05 per unit. The strike price is $1.25. Assume there are 67,500 units in a Euro option.



  1. If the spot exchange rate at the time the Euro option is exercised is $1.29 and ignoring the cost of the option, would Neil make a profit and if so how much?
    • marks)
  2. If the cost of the option is included in your calculations, calculate whether Neil will make a profit or loss
    • marks)
  3. What will the spot exchange rate have to be when the option is exercised in order for Neil to be ‘in the money’?

(2 marks)

  1. Briefly discuss the differences between forward/futures and options contracts.

(7 marks)


(Total 25 marks)

Question 4


On May 2nd  2011 a trader enters into one currency futures contract to sell

British pounds at a price of 1.6321 $US / £ on August 1st.  The contract size is £78500.  The initial margin is set at $2000 and the maintenance margin is set at $1350.  The settlement prices for the following five days are found in the table below.

Date Settlement price Daily losses/ gains Cumulative losses/ gains Margin call Margin account balance
May 02, 11 1.6321
May 03, 11 1.6458
May 04. 11 1.6471
May 05, 11 1.6389
May 06, 11 1.6241
May 09, 11 1.6186


  • Calculate the daily losses / gains and the cumulative losses / gains.
    • marks)


  • Calculate the margin call and explain how you have done this.
    • marks)

(c) Calculate the margin account balance and explain how you have done this.

(7 marks)

(Total 25 marks)




Answer ANY ONE question in this section  

(answer the question in approximately 500 words)


Question 5


  • Explain the links between different parity conditions and whether these conditions are consistent.

(15 marks)


  • Why might the violation of some parity conditions be easier to make arbitrage profits from than others?

(10 marks)

(Total 25 marks)


Question 6


How might multinational firms be exposed to foreign exchange transactions risk? Explain how firms might seek to manage this risk.

(25 marks)







Relative PPP


∆𝑆𝑡 = ∆𝑃ℎ,𝑡 − ∆𝑃𝑓,𝑡 = 𝜋ℎ,𝑡 − 𝜋𝑓,𝑡

Covered Interest Rate Parity

Uncovered Interest Rate Parity

International Fisher Effect


𝐸0(∆𝑆1)=𝑟−𝑟𝑓 =𝐸0(𝜋)−𝐸0(𝜋𝑓)




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