Answer both parts [i] and [ii]. Parts [i] and [ii] are independent of each other.
[i] Assume that you are a Malaysian importer of Australian mutton. Initially, the original price of Australian mutton exported to Malaysia is 4000 Australian dollars (AUD) per tonne and the original exchange rate is 4.4 Malaysian ringgit (MYR) per AUD. If the MYR subsequently appreciates 10% and you adjust the price of Australian mutton in MYR to reflect a 40% exchange rate pass-through, what is the new price of Australian mutton in MYR? Explain and show your working clearly and completely.
[ii] Assume that you are a currency trader of forward exchange contracts in France. You observe the following spot and forward quotes for the United States dollar (USD) against the Euro (EUR):
Spot rate (USD per EUR) USD/EUR 1.1760
3-month forward rate (USD per EUR) USD/EUR 1.1804
6-month forward rate (USD per EUR) USD/EUR 1.1827
12-month forward rate (USD per EUR) USD/EUR 1.1877
What are the forward premiums or discounts on the EUR? Explain and show your working clearly and completely. Give your final answers in annual percentage terms.
Assume that the domestic currency is the Australian dollar (AUD). AIC Mines Limited (an Australian-based multinational corporation) has a Canadian subsidiary (Intrepid Mines Limited), which pays a dividend to the parent company (based in Australia) each year. A dividend of 10 million Canadian dollars (CAD) has been declared now and will be paid to AIC Mines Limited 120 days later. AIC Mines Limited is trying to decide how to manage the foreign exchange exposure associated with the dividend. The currently available data are given below:
Spot rates (CAD per AUD) CAD/AUD 0.9251 – 0.9335
120-day forward points 33 – 37
120-day CAD interest rates 4.0% – 4.5% per annum (p.a.)
120-day AUD interest rates 2.8% – 3.3% p.a.
120-day CAD call option strike rate CAD/AUD 0.9200
120-day CAD call option premium 1%
120-day CAD put option strike rate CAD/AUD 0.9600
120-day CAD put option premium 2%
Based on the data, explain and calculate the various strategies to manage the foreign exchange exposure associated with the dividend. Which strategy do you think would be better for AIC Mines Limited? Explain your answers clearly and completely. Give your final answers in AUD.
Assume that you trade forward contracts involving the United States dollar (USD) against the
Australian dollar (AUD) in Australia. The forward margins on the AUD are available in the table
below. What are the forward premiums or discounts on the USD? Explain and show your working clearly and completely. Give your final answers in annual percentage terms.
Length of forward contract Forward margin on AUD per annum
30-day contract -18%
90-day contract -5%
120-day contract 9%
180-day contract 12%
With reference to the journal articles in Special Topics 1 and 3, explain and discuss in your own words the roles and importance of information and news arrivals in the Chinese and United States financial markets. The word limit of your answer is 1000 words. This word limit does NOT include the list of references. Do NOT include graphs and tables in your answer.
Note: your answer must contain in-text citations and references. 20 marks from your final exam marks will be deducted for not including in-text citations and a SINGLE list of references. Use the Harvard style of referencing. Any sentences and paragraphs that exceed the word limit will NOT be marked. For instance, if you have submitted an answer containing 1030 words, then only the first 1000 words will be marked and the last 30 words will not be marked.
Ho, K., and An, J. 2020. Decomposing the value premium: the role of intangible information in theChinese stock market. Emerging Markets Review 44, 10700.
Ho, K., Shi, Y., and Zhang, Z. 2017. Does news matter in China’s foreign exchange market? Chinese RMB volatility and public information arrivals. International Review of Economics and Finance 52, 302-321.
Ho, K., Shi, Y., and Zhang, Z. 2018. Public information arrival, price discovery and dynamic
correlations in the Chinese renminbi markets. North American Journal of Economics and Finance 46, 168-186.
Hou, K., and Loh, R. 2016. Have we solved the idiosyncratic volatility puzzle? Journal of Financial Economics 121, 167-194.
Shi, Y., Liu, W., and Ho, K. 2016. Public news arrival and the idiosyncratic volatility puzzle. Journal of Empirical Finance 37, 159-172.