MSc IB EXAM July 08IntBus

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1、Calculatorsmaybeusedinthisexaminationprovidedthattheyarenotcapableofbeingusedtostorealphabeticalinformationotherthanhexadecimalnumbers.ANSWERTHREEquestions;atleastONEfromeachsection.SectionAQuestion1(a)AUKcompanycanborrow$10millionintheUSAforoneyearataninterestrateof

2、8percent.TheFinancialTimesindicatesthespotmarketexchangerateis$2.00/£.andtheoneyearforwardexchangerateis$1.96/£,reflectinglowerinterestratesintheUSA.However,thereisastrongbeliefbythemarketsthatthedollarislikelytocontinueit’sdepreciation,inparticular,againsttheeuroand

3、theyen,overthenextyear.Assumeyouareswayedbytheprecedingmarketviews,andfurther,youbelievethedollar’sslidewillalsoextendtosterling.Youthinktheexchangerateattheendoftheyearwillbe$2.05/£..Calculatetheeffectivecostofdebtundertheassumptionthatthespotmarketrateofexchangeatt

4、heendoftheyearwillbe(i)today’sforwardexchangerate,and(ii)yourforecast.(30marks)(b)Ifthecompany’sforeignoperationsarelocatedmainlyintheFarEast,discusstherisksinvolvedinborrowingmoneyintheUSAassuming:(i)thedebtraisedwouldbeusedintheUSA.(ii)thedebtraisedwouldbeusedinEur

5、opewithnooperationsintheUSA.(iii)thedebtraisedwouldbeusedintheUKwithnooperationsintheUSA.(40marks)(c)Compareandcontrastthefloatingexchangeratesystemwiththefixedexchangeratesystem.(30marks)TotalMarks1000717315Question2(a)In2007itwasexpectedthattheinflationrateintheUKw

6、ouldbe3.5%andintheUSwouldbe2%.Therealrateofinterestinbothcountriesis1%.Thespotmarketexchangerateatthebeginningof2007was$1.90/£.Required:(i)UsethePurchasingPowerParity(PPP)toprojecttheexpectedUS$per1£attheendof2007(theexpectedfuturespotrateofoneUS$peroneBritishpound).

7、(10marks)(ii)UsetheFisherrelationtoestimatethenominalinterestratesintheUSAandtheUKthatmakeitpossibleforinvestmentsineachcountrytoearntherealrateofinterest.(10marks)(iii)UsetheInterestRateParity(Fisherclosed)toestimatethecurrent(January2007)sixmonthforwardrateofUS$per

8、1£.(30marks)(iv)Whatcanyouconcludefromyourresultsforparts(i)and(iii)?(15marks)b)Discusseachofthefollowing:PurchasingPowerParityUnco