Reports Of International Financial Management

Running head: INTERNATIONAL FINANCIAL MANAGEMENT
International Financial Management
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
Part A:........................................................................................................................................3
1.a Calculating the new exchange rate EURUSD:.....................................................................3
1.b Calculating the exchange rate GBPEUR:............................................................................3
1.c Explaining the relationship and triangular arbitrage:...........................................................3
2.a Indicating which currency will have the higher rate of inflation in 2017:...........................4
2.b Calculating the change in real value of dollar, where relevant implications of the change:4
2.c Identifying the implications of a change in the real exchange rate of a currency:...............5
2.d Explaining the expect interest rate in the US to be higher than Euro:.................................5
2.e Explaining the why there is no difference in the interest rates of government bonds of any
two countries in the Euro:..........................................................................................................6
Part B:.........................................................................................................................................6
5.a Calculating the Net Pay-out from the purchased call option at the strike price of 67 pence
for the following possible maturity prices 55p, 60p,65p,70p,75p:............................................6
5.b Calculating the Net Pay-out from the purchased put option at the strike price of 67 pence
for the following possible maturity prices 55p, 60p,65p,70p,75p:............................................7
5c. Calculate the total cost of the dollar for the questions:........................................................7
5.d Outlining the advantages and disadvantages of purchasing a call and put for the MNCs
importing from the US:..............................................................................................................8
6.a Explaining why selling futures contract on French bonds would reduce the effect on an
increase in Euro interest rates:...................................................................................................8
6.b Calculating the daily payments and receipts on the future contract given on the bonds:....9
6.c Explaining the market insists on daily settlement:...............................................................9
6.d Explaining how it might work in an interest rate swap:.....................................................10
6.e Calculating the net profit or loss per unit on maturity prices:............................................10

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6.f Explaining how the option contract protects against the interest rate rise:........................11
References:...............................................................................................................................12

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Part A:
1.a Calculating the new exchange rate EURUSD:
Particular Value
EURUSD 1.10000
USDEUR 1/1.10000
USDEUR 0.90909
New exchange rate 2%
New USDEUR 0.90909 *(1+2%)
New USDEUR 0.92727
New EURUSD 1/0.92727
New EURUSD 1.07843
From the relevant analysis, it has been detected that the new EURUSD is mainly at
the levels of 1.07843.
1.b Calculating the exchange rate GBPEUR:
Particular Value
EURUSD 1.1043
GBPUSD 1.2970
GBPEUR 1.2970/1.1043
GBPEUR 1.1745
The GBP/EUR is mainly at the levels of 1.1745 after calculating for the EURUSD to
GBPUSD.
1.c Explaining the relationship and triangular arbitrage:
From the relevant analysis, adequate relationship can be developed for the above
questions, which helps in deriving the values for the currency. Therefore, in the above
question we have used cross currency exchange rate for deriving the values of GBP/EUR

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after deriving the values from EURUSD and GBPUSD. The cross-currency values are mainly
calculated as there is a relationship between the values of EURUSD and GBPUSD., which
would help in deriving the appropriate valuation of the currency GBP/EUR. Thus, the
utilisation of the cross-currency calculation would eventually help in determining the third
currency value, which can be used in the calculation of triangular arbitrage. Consequently,
the method might help in determining the appropriate level of currency value over the period
of time. Therefore, from the relevant analysis, it has been detected that the Triangular
arbitrage can incur either profit or loss for the investors utilising the method for investments
in the currency market (Della, Ramadorai and Sarno 2016).
2.a Indicating which currency will have the higher rate of inflation in 2017:
Date Exchange rate Rate
Jan-17 EURUSD 1.100
Dec-
17 EURUSD 1.144
The above table provide information on the change in exchange of EURUSD from
Jan to December. The values of EURUSD has mainly increased from the levels of 1.100 to
1.144, which directly indicates that Euro has higher inflation rate in accordance with the
purchasing power parity. The analysis has mainly stated that the interest rate of EUR has
mainly increased over the period of 12 months from January to December in 2017. The price
of a burger in Europe has mainly increased from 1.100 to 1.144, which has forced the
payment of burger to increase by 0.44 USD in 12 month period.
2.b Calculating the change in real value of dollar, where relevant implications of the
change:
Particulars Value

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Jan-17 1.100
Dec-17 1.144
Inflation 3%
Change in real value of USD (((1/1.144)/(1/1.100))/(1+3%))-1
Change in real value of USD 0.933532487 -1
Change in real value of USD -6.647%
The above calculations have mainly helped in detecting the overall change in real
value of USD, after detecting the relevant level of inflation to the overall valuation. The
calculation has mainly helped in detecting that about -6.647% change in the overall rate value
of USD has been witnessed over the period of time. There is significance implication of this
change, where it could be identified that when a burger is purchased with the actual cost of
USD in December then the overall cost states that less amount of 6.31% is being paid for the
burger in comparison to January. Thus, the change in Euro in comparison to the USD is
mainly at the level of -6.647%, as calculated in the above table.
2.c Identifying the implications of a change in the real exchange rate of a currency:
From the analysis, it has been detected that the change in the real exchange rate has a
direct impact on the currency valuation. For example, it can be detected that currency
exchange rate of USD has a direct impact on the valuation of the currency, where buying a
burger will increase in USD value, as compared to previous years. Hence, from the relevant
evaluation, it can be detected that utilising the measure could help in detecting the level of
burger value after implementing the inflation rate (Alagidede and Ibrahim 2017).
2.d Explaining the expect interest rate in the US to be higher than Euro:
From the analysis of the case study, it has been detected that the overall prices of the
foreign currency have mainly declined over the period of 12 months. This mainly indicates
that the overall decline in the foreign currency value is due to the increment in the value of

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local currency. This indicates that the USD has depreciated in comparison to the EUR, which
directly indicates that the inflation rate in US has increased during the period of 12 months.
This increment in the real interest rate has mainly declined the valuation of the currency,
which has led to the increment in the value of USD from 1.100 in January to 1.144 in
December.
2.e Explaining the why there is no difference in the interest rates of government bonds
of any two countries in the Euro:
In accordance with the case study, it has been detected that the overall interest rate is
directly influenced by the inflation rate, which varies the values of the interest rate that is
associated with the government bonds. Therefore, from the relevant evaluation, it has been
expected that the interest rate of US is higher as compared to that in Europe. In general, the
overall interest rate that is present in the government bonds is mainly similar, where the
interest rate plays the major role for the difference in the interest rates. The payment in
government bonds of the Euro countries is mainly similar, while in the case study the interest
rate of US and Euro is compared, where the interest rates are different due to the presence of
different central banks (Hook and Boon 2017).
Part B:
5.a Calculating the Net Pay-out from the purchased call option at the strike price of 67
pence for the following possible maturity prices 55p, 60p,65p,70p,75p:
Particulars Value Value
Strike price of dollar in pence 0.670
Call premium 0.045
Possible maturity prices 1 0.550 (0.0450)
Possible maturity prices 2 0.600 (0.0450)
Possible maturity prices 3 0.650 (0.0450)

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Possible maturity prices 4 0.700 (0.0150)
Possible maturity prices 5 0.750 0.0350
The above table provides information about the possible maturity prices of relevant
call option has been taken into consideration. From the analysis, it has been detected that
possible profits are inly generated in 0.75 value, as other price increments will not yield
appropriate profits.
5.b Calculating the Net Pay-out from the purchased put option at the strike price of 67
pence for the following possible maturity prices 55p, 60p,65p,70p,75p:
Particulars Value Value
Strike price of dollar in pence 0.660
Put premium 0.051
Possible maturity prices 1 0.550 (0.0590)
Possible maturity prices 2 0.600 (0.0090)
Possible maturity prices 3 0.650 0.0410
Possible maturity prices 4 0.700 0.0510
Possible maturity prices 5 0.750 0.0510
From the relevant analysis, it has been detected that the overall value of net pay-out
from the purchase of put option has mainly indicated about the relevant changes in profits or
loss, which would be incurred from the relevant operations. The analysis has mainly
indicated that the overall strike price of option is at the levels of 0.66, while a continuous
income from premium of the put options mainly ensures the investors of payoff.
5c. Calculate the total cost of the dollar for the questions:
Particulars Call Put Total Value
Possible maturity prices
1
(0.045)
(0.0590)
(0.1040)
Possible maturity prices
2
(0.045)
(0.0090)
(0.0540)

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Possible maturity prices
3
(0.045) 0.0410 (0.0040)
Possible maturity prices
4
(0.015) 0.0510 0.0360
Possible maturity prices
5
0.035 0.0510 0.0860
The information directly indicates about the total value for the put and call options,
which provide us the total income that would be incurred by the investors utilising both call
and put options. Hence, from the relevant evaluation, it has been detected that under two
possible maturity price the combination of both the option would only generate profits.
5.d Outlining the advantages and disadvantages of purchasing a call and put for the
MNCs importing from the US:
The information analysed in the above questions have mainly helped in detecting
advantages and disadvantages of both call and put options, which can be used by the MNCs
importing from US. The analysis has indicated that purchase of the call options at a strike
price of 0.67 has the potential to generate unlimited benefit on option position when the
overall dollar appreciates in value. However, the major disadvantages for the call options is
when the overall value of the dollar depreciates, as the premium is lost on option position,
while reducing the benefits from the hedged activity. There is specific advantage for utilising
the put option, limited benefits are mainly provided from the option, when the dollar
appreciates over the time period. However, the loss from the put option increases more when
the overall dollar values depreciates over the period of time (Aftab, Syed and Katper 2017).

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6.a Explaining why selling futures contract on French bonds would reduce the effect on
an increase in Euro interest rates:
The analysis of the case study has indicated that the performance of the Euro interest
rates could decline, where the shorting the future contracts would be beneficial for
compensating for the rise in borrowing rates. In addition, the utilisation of hedge by selling
futures on French bonds would mainly help in securing the increment in interest rate any
further. This mainly states that the decline in the interest rate and increment in interest rate
would hedge from the shorting of the French bond, which secure Pico Plc for the abnormal
movements of the Euro interest rates. Thus, it could be understood that the selling of future
would eventually help in reducing the effect of increase in Euro interest rates.
6.b Calculating the daily payments and receipts on the future contract given on the
bonds:
Particulars Value MTM
Bond value
€
1,010.00
Day 1
€
1,010.00 € 0.00
Day 2
€
1,005.00 € 5.00
Day 3
€
1,001.00 € 9.00
Day 4
€
1,006.00 € 4.00
Day 5
€
1,009.00 € 1.00
The calculations of MTM presented in the above table directly provides information
about the total payoff that has been generated from the relevant evaluation. The analysis has
mainly indicated that the overall share price of the organisation will mainly generate over the
period of time. The calculation has indicated that the MTM has been positive, where Pico plc

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will only receive cash from the futures contract on bond rather paying anything during the 5-
day trade.
6.c Explaining the market insists on daily settlement:
The market insists on the daily settlement is relevantly positive, as it allows both the
exchange and investors to evaluate their current investment exposures and reduce the chance
of high debt. The daily settlement measure mainly reduces the chance of unethical measure
that might be conducted by investors while not providing relevant leverage for the loss
conducted from their trade.
6.d Explaining how it might work in an interest rate swap:
The above figure provides information about the relevant process of the interest rate
swap, which can be conducted by Pico Plc for reducing the risk of the interest rate. The above
figure would eventually help in deriving the method and the pathway that can be used for
completing the overall interest rate swap from floating to fixed, which can help in securing
the exposure of Pico Plc. The analysis has mainly indicated that the overall performance
interest rate has mainly changed from the floating rate of LIBOR+0.70% to Net 9.60%, as

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depicted in the above figure. The process can be done only with a help pf a bank, who needs
to behave as the intermediary between two companies. Thus, the process would ensure Pico
Plc to transfer their floating rate to other company with fixed rate (Benos, Payne and Vasios
2018).
6.e Calculating the net profit or loss per unit on maturity prices:
Particulars Value Value
Strike price of dollar in pence € 1,008.00
Put premium € 4.00
Possible maturity prices 1 € 985.00 19.0000
Possible maturity prices 2 € 1,000.00 4.0000
Possible maturity prices 3 € 1,015.00 (4.0000)
Possible maturity prices 4 € 1,020.00 (4.0000)
The information provided in the above table directly depicts about the put option that
has been taken into consideration for Pico Plc, where the organisation can secure the overall
risk exposure. The analysis has mainly indicated that the loss of € 4.00 is mainly indicated in
the above table. Therefore, it could be understood that the risk involved in put options can be
controlled, while the profits from the exposure is relevantly unlimited.
6.f Explaining how the option contract protects against the interest rate rise:
The put option contract mainly indicates about the level of risk exposure that can be
reduced from the exposure of the interest rates. The calculation of the bond directly includes
the valuation of the interest rate, which directly helps in determining the appropriate level of
bond price. In addition, the increment in interest rate directly reduces the overall bond prices
and vice versa. Thus, it is beneficial for buying the put option for appropriately protecting the
against the interest rate rise (Du, Tepper and Verdelhan 2018).

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References:
Aftab, M., Syed, K.B.S. and Katper, N.A., 2017. Exchange-rate volatility and Malaysian-
Thai bilateral industry trade flows. Journal of Economic Studies, 44(1), pp.99-114.
Alagidede, P. and Ibrahim, M., 2017. On the causes and effects of exchange rate volatility on
economic growth: Evidence from Ghana. Journal of African Business, 18(2), pp.169-193.
Benos, E., Payne, R. and Vasios, M., 2018. Centralized Trading, Transparency, and Interest
Rate Swap Market Liquidity: Evidence from the Implementation of the Dodd–Frank
Act. Journal of Financial and Quantitative Analysis, pp.1-76.
Della Corte, P., Ramadorai, T. and Sarno, L., 2016. Volatility risk premia and exchange rate
predictability. Journal of Financial Economics, 120(1), pp.21-40.
Du, W., Tepper, A. and Verdelhan, A., 2018. Deviations from covered interest rate
parity. The Journal of Finance, 73(3), pp.915-957.
Hook, L.S. and Boon, T.H., 2017. Real exchange rate volatility and the Malaysian exports to
its major trading partners. In ASEAN in an Interdependent World: Studies in an
Interdependent World (pp. 95-117). Routledge.