1) Ans: Borrowed CAD 1 Million converted to MXN 10 million.

Then deposited 10 million MXN for 18% interest for 6 months. After 6 months of deposit for 10 M @ 18% = 11800000. After 6 months converted MXN to CAD for forwarded rate of MXN/CAD=11 11800000/11=1072727.27 Repayed borrowed CAD IM with interest 6% = 1060000 Arbitrage profit = 1072727.27 1060000 = 12727.27 This can also expressed in CIA profit = 1/S * (1+r*)* F (1+r) = 12727.27 2) Ans: a) CAD Capital Spot S0 GBP Capital/1.25 ------------------- 2%+5% 1.07 C F1 -------------------------- (x%+i) 1.2/1.25 C 2%+i 1.2/1.25 (1+2% +i) C = 1.07 C After calculation i=9.46 % and UKs inflation rate = 9.46% b) 2%+I = 11.46% 3) Ans: From the table we can conclude that none of the two forecasts predict perfectly. The actual trend depicts that the USD will appreciate gradually each quarter. On the other hand forecast one and two predicts that it will depreciate in the second quarter and then from the 3rd quarter it will start to appreciate. However, both forecasts state that Euro will depreciate in last two quarters but figures doesnt match exactly. -> during 1st quarter: 1st forecast expects more appreciation of USD than 2nd forecast. -> 2nd quarter: 2nd forecast resource and 1st forecast expects USD to depreciate, whereas, in actual case, USD was appreciated. -> 3rd quarter: Both forecasts have given correct prediction of USD/EUR that USD will appreciate. -> 4th Quarter: in the fourth quarter, both forecasts depicts correctly that USD will appreciate but forecast two gave the exact number that matched with the actual event.

4) Ans: a) PPP is meaningless if we predict exchange rate on short-term basis, because international commodity arbitrage is very time consuming. b) On the contrary, PPP can be very helpful to predict long term exchange rate (6 years is long enough for international commodity arbitrage) 5) Ans: a) to eliminate the currency risk arising from ZAR will increase against CHF over the next 30 days period, pension fund manager should sell 30 day forward CHF against 30 day forward ZAR dealing (i.e. sell 30 day forward CHF against USD to buy 30 day forward ZAR against USD) b) CHF/ZAR cross currency rate used in valuing Swiss equity portfolio: Calculations as follows 30 days forward CHF are sold for USD. Dollars are brought at the forward selling price of CHF 1.5285=1USD (done at each side because going from currency in dollars)

 30 days forward ZAR are purchased for USD. Dollars are simultaneously sold to purchase ZAR at the rate of 6.2538=1USD (done at the bid side because going from dollars into currency) For every 1.5285 CHF held, 6.2538 ZAR are received, thus the cross currency rate is 1.5285 CHF/6.2538 ZAR = 0.2444 b) current value of pension fund in Swiss equity portfolio in ZAR, at the time of execution of forward conduct: 3million CHF/0.2444 = 12274387 ZAR c) calculate analyzed forward premium discount at ZAR/CHF spot rate = 1.5343 CHF/6.2681 ZAR = 0.24477 30 day forward ask rate 1.5285 CHF/6.2538 ZAR = 0.244411 Premium/Discount formula: [(FR-SR/SR)] (360/no. of days contract) = [(0.244411-0.24477)/0.24477] 360/30 = -1.80% discount ZAR to CHF 6) Ans: a) calculation of forward premium on JPY yen in BPS and % premium/discount over 90 days period, Forward Premium (F1$/ - S0$/) = .008772945 - .009057355 = -2.8441 Basis points As a% over 90 days [(F1$/ - S0$/) / S0$/] = -0.031401 = -3.14% b) calculation of annualized forward premium Forward premium [(F1$/ - S0$/) / S0$/] (n) = (-0.031401) 4 = -12.56% c) calculation of APR, (F1$/ - S0$/)4 1 = -11.98% 7) Ans: Calculation of Bid ask spread Chang Hing Bonk of Hong-Kong : Absolute bid-ask spread = USDHKD= 7.6214-7.6211= 0.0008 SGDHKD= 6.0012-5.9998 = 0.0014 EURHKD= 11.1895 11.1882 = 0.0013 JPYHKD = 0.0751- 0.0748 = 0.0003 Percentage spread = USDHKD = .0008/7.6219 = 0.0105% SGDHKD= 0.0014/6.0012 = 0.0233% EURHKD = 0.0013/11.1895 = 0.0116% JPYHKD = .0003/.0751 = .3995%

The least costly spread is USDHKD and the most costly spread is JPYHKD. We should consider percentage bid-ask spread instead of absolute one.

8)

ans: t=0 0 260000 t=1 1300000 312000 t=2 1560000 374400 t=3 1872000 449280 t=4 2246400 539136 t=5 2695680 0

Items 1 Revenue 2 NWC

3 4 5 6

Investment CF Capital 4200000 Expenditure Salvage Change in NWC 260000 Investment CF - -4460000 3+4-5 Operating CF Revenues Direct expenses= Revenues* 20% Fixed expenses depreciation Pre-tax income Taxes = 11*0.3 NOPAT= Pretax income-taxes Operating CF = 13+10

52000 -52000

62400 -62400

74880 -74880

89856 -89856

3000000 -539.136 3539.136

7 8

0 0

1300000 260000

1560000 312000

1872000 374400

2246400 449280

2695680 539136

9 10 11 12 13 14

0 0 0 0 0 0

200000 240000 600000 180000 420000 660000

200000 240000 808000 242400 565600 805600

200000 240000 1057600 317280 740320 980320

200000 240000 1357120 407136 949984 1189984

200000 240000 1716544 514963 1201581 1441581

CF= 6+14 on -4460000 608000 743200 905440 1100128 4980717 CNY Assumptions European interest rate is 3% and Chinese interest rate is 7% EURCNY CF on EUR 10.500 -424.762 10.908 55.740 11.331 65.588 11.771 76.918 12.229 89.964 12.703 392.076

9) Ans: capital budgeting for a foreign project is more complex because : Parent cash flow must be distinguished from project cash flow. Each of these two types of flows contributes to a different view of value. Parent cash flow often depend on the form of financing. Thus we cant clearly separate cash flow from financing decision, as we can in domestic capital budgeting. Additional cash flows generated by a new investment in one foreign subsidiary may be in part or in whole taken away from another subsidiary with the net result that the project is favorable from a single subsidiarys point of view but contributes nothing to worldwide cash flows. The parent must recognize the funds because of different tax systems, legal and political constraints on the movement of funds, local business norms and differences in the was financial markets and institution function.

An array of non-financial payments can generate cash flow from subsidiaries to the parent, including payment of license fees and payment for imports from the parent. Managers must anticipate differing rates of national inflation because of their potential to cause changes in competitive position, and thus changes in cash flow over a period of time. Managers must keep the possibility of unanticipated foreign exchange rate changes in mind because of possible effort on the value of local cash flows, as well as indirect efforts on the competitive position of the foreign subsidiary Use of segmented national capital markets may create an opportunity for financial gains or may lend to additional financial costs. Use of host-government subsidized loan complicates both capital structure and the parents ability to determine an appropriate weighted average cost of capital for discounting purpose. Managers must evaluate political risk because political events can dramatically reduce the value or availability of expected cashflow. Terminal value is more difficult to estimate because potential purchases from the host, parent, or third countries, or from the private or public sector, may have widely divergent perspectives on the value to them of acquiring the profit.

10) Ans: calculation of NPV from parent project perspective under changing currency assumption and constant currency assumption. Cash flows and NPV calculation (GBP/CAD) CF (GBP/CAD) t=0 -20 M t=1 10 M t=2 7M t=3 6M

Assumption CAD inflation 6%, GBP inflation 9% Using PPP, GBP/CAD forecast = S1 [(1+6%)/(1+9%)] Changing currency assumption -> GBP CAD -> t0 0.594 20 CF CAD in millions DCF CAD @ 15% -> -> -11.88 M -11.88 M t1 0.577 10 5.77 M 5.02M t2 0.561 7 3.93M 2.97M t3 0.542 6 3.25 M 2.16M

Based on currency changing assumption NPV @ 15% CAD: -1.72 Million

Now under constant currency assumption CF CAD DCF CAD t=0 -11.88 -11.88 t=1 5.94 5.64 t=2 4.15 3.44 t=3 3.56 2.34

NPV under constant currency assumption NPV @ 15% CAD = -1.22 Million

11) Ans: Expected value of unsecured coverage = [20% 50000000 (1/.25)] / (1+13%)6 After calculation, the result is 19212741.58 12) Ans: flexible parameters in projects are known as real options. Just as a currency option allows exercise when rates are advantages, real options allow certain corporate actions when conditions are advantageous. Firms value the possession of real options. International projects are often strategic projects and therefore often have embedded real option.