Need assistance with exam on 17th September. It's MCQ from 14:00-14:50 IST
1. If an Indian corporation issues bonds in 0. Rupees, foreign investors are exposed to FX risk (unless they hedge) 0. USD, US investors are hedged against FX risk because these bonds implicitly include a forward contract USD/INR 0. USD, European investors based in Spain may face risk related to the exchange rate USD/EUR 0. All of the above 1. International equity markets 1. Allow you to better diversify 1. Feature lower correlations across developed and emerging countries 1. Force you to use an international version of the CAPM 1. All of the above 1. You are based in India and are considering investing in Macroland equity. When you regress Macroland equity returns on your exchange rate changes, you find a slope of -1 with no estimation error. That is, when Macroland’s equities appreciate by 20%, Macroland’s currency depreciates against the Rupee by 20%. Same is true for other extents of appreciations. 2. The FX is behaving like a natural hedge 2. The FX is increasing the volatility of Macroland’s equities 2. Under CIRP, this effect does not matter for pricing equities 2. All of the above 1. According to the article `Rate rises affect global markets—and may feed back to America’ 3. The observed increased correlation among equity markets helps diversification 3. The high correlation in the global equity markets should not worry the FED when altering yields in the USA bond market 3. The increase in US rates should help global credit and emerging economies to grow 3. None of the above 1. You are based in India and are considering investing in Macroland equity. When you regress Macroland equity returns on your exchange rate changes, you find a slope of +1 with no estimation error. That is, when Macroland’s equities appreciate by 20%, Macroland’s currency appreciates against the Rupee by 20%. Same is true for other extents of appreciations. 4. The FX is behaving like a natural hedge 4. The FX is increasing the volatility of Macroland’s equities 4. Under CIRP, this effect does not matter for pricing equities 4. All of the above 1. Thinking of the financing of firm, we can say that 5. Under a centralized debt denomination system, there is currency diversification 5. Corporations rely primarily on internally generated funds, debt financing, and equity financing 5. When rates are expected to increase, firms should prefer loans with floating rates 5. None of the above 1. You are based in Europe and you will receive USD 1,000,000 in 30 days from ATT. The spot FX is €0.86/$, the forward rate is €0.86/$ as well. You buy a USD put option with a strike rate of €0.80/$ paying €10,000. 6. If the spot FX drops to €0.81/$, you exercise your option and receive a net of 790,000EUR 6. If the spot FX drops to €0.78/$, you do not exercise your option 6. If the spot FX stays at €0.86/$, you receive a net of 850,000EUR 6. All of the above PART II: Interpreting International News (50 points) This question is based on the following article. Rupee Climbs to Three-Week High WSJ, Updated June 7, 2012 MUMBAI – The Indian rupee rose to its highest level in three weeks against the U.S. dollar Thursday, as hopes of monetary easing in the U.S. and Europe emboldened investors to bet on risky assets. Thursday marks the third straight session of gains for the rupee. The dollar fell below the key psychological level of 55 rupees, marking a reversal in the greenback's trajectory just days after it rose to a record high of 56.51 rupees. The dollar was at 54.94 rupees late Thursday in Asia, a level not seen since May 18. It was at 55.36 rupees late Wednesday. The pair traded between 54.92 and 55.23 through the day, with likely dollar selling by a couple of foreign banks interspersed with demand for the greenback by oil companies setting the theme. Gains in local stocks further lent support. Indian shares rose for a fourth session, after posting one of their sharpest percentage gains in a single day this year on Wednesday. Economists are taking a less harsh view of the consequences of rupee weakness. Taimur Baig, India chief economist for Deutsche Bank, said the economy should benefit given that the exchange rate has depreciated both in nominal and real terms. "While the cost of imports will rise commensurately, investors will find Indian assets to be cheaper in dollar terms," he said in a note. Indian exports stand to benefit as the rupee has weakened more against the Chinese renminbi compared with the U.S. dollar, he noted. In the government debt market, bonds ended higher on hopes the Reserve Bank of India will trim interest rates at a rate-setting meeting later this month. The benchmark 8.79% 2021 bond ended at 102.84 rupees, compared with 102.68 rupees Wednesday. Trading volumes jumped as investors piled into bonds despite the improved risk sentiment. Yields dropped likely in response to Prime Minister Manmohan Singh's comments Wednesday laying out ambitious infrastructure development plans for the current fiscal year. India's economy grew 5.3% in the January-March period, its lowest pace in nearly a decade. The next important trading cue is a 150 billion rupee bond sale Friday, when a new benchmark note would be auctioned. Bond dealers tip the cut-off for the new 2022 bond to be around 8.20%. --------------------------------------------------------------------------------------------------------------------------- Question 1 (25 points): This article states that: “The Indian rupee rose to its highest level in three weeks against the U.S. dollar Thursday, as hopes of monetary easing in the U.S. and Europe emboldened investors to bet on risky assets.” What is the connection between possibly lower rates in U.S. and Europe and the Rupee? Is this statement broadly consistent with what seen in class? Explain in detail. Question 2 (25 points): Take the perspective of a small Indian exporter that sells her products abroad quoting her prices in USD. Given the situation described in the article, which risks is she facing? How should she hedge these risks? PART II: Interpreting International News (50 points) This question is based on the following article. Playing ketchup to the dollar Value matters again in currency markets Whether a currency is cheap or dear is not always a good guide to its fortunes. It is now Print edition | Leaders Jan 18th 2018 IN DECEMBER a new dollar bill came into circulation adorned with the signature of Steve Mnuchin. Instead of his usual scrawl, the treasury secretary opted to print his name. If he hoped that his best handwriting would give the greenback a fillip, he may well be disappointed. The dollar reached a peak against a basket of other currencies a year ago and has not threatened to regain it. Gurus of the foreign-exchange markets agree that 2018 is likely to be another year of modest decline. That is because of three sources of downward pressure. The first relates to the world economy. The dollar’s descent is not so much a judgment on America’s fitness as a sign of the burgeoning health of other places. So long as America was one of the only places that could be relied upon for economic growth, there was a powerful logic to the dollar’s strength. A broad-based global upswing—evident in everything from booming stockmarkets to a surging oil price (see article (http://www.economist.com/news/finance-and-economics/21735059-and-why-it-might-not-fall-very-much-soon-why-oil-price-so-high))—means that investors are now rushing into currencies other than the dollar. That effect is proving stronger than the expectation that American firms will repatriate more profits thanks to the recent tax cut. And it seems likely to continue. The second source of downward pressure reflects a change in policymakers’ attitudes. Until quite recently, no country seemed keen on a strong exchange rate. A cheap currency was prized. Curbing imports and boosting exports was a way to grab a bigger share of scarce world demand. In 2010 Brazil’s finance minister said that a “currency war” had broken out, with countries vying to weaken their exchange rates using weapons such as quantitative easing (printing money to buy bonds) or capital controls. Rich-world central banks feared that even a hint of tighter monetary policy might cause their currencies to surge against their peers, to their economy’s detriment. But now that global growth is buoyant, few countries seem to mind much if their currency rises. Interest rates have been raised, not only in America but also in Canada and Britain. The European Central Bank (ECB) has reduced its bond-buying programme, as has Japan’s central bank. An era of currency peace As extraordinary monetary policy is slowly withdrawn, the fundamentals matter more. This is the third force pushing down the dollar: its price against other major currencies. Benchmarks such as The Economist’s Big Mac index, based on the idea that goods and services (in this case a burger) should cost the same the world over, are useful guides to how far currency values are out of whack. According to the latest version of the index, only a handful of rich countries have dearer currencies than America’s (see article (http://www.economist.com/news/finance-andeconomics/21735050-last-july-cheap-currencies-have-narrowed-gap-againstdollar-our-big)). That is a big change from a decade ago. On the same benchmark in 2008, only two rich countries had a cheaper currency than the greenback. Some currencies have already jumped against the dollar. In a matter of weeks last summer the euro moved from $1.11 to $1.20, in response to a hint from the ECB’s boss, Mario Draghi, that the tailing off of its bond-buying would begin soon. Other currencies are more likely to strengthen than in past years. It is easy to imagine the yen snapping back towards its fair value in the way the euro did last year. There are still cheap currencies in countries with close ties to the euro area’s thriving economy, such as Poland and the Czech Republic. With the exception of Brazil’s real, emerging-market currencies in general are still very undervalued. Expect them to strengthen further. In the short term, a consensus on a currency’s fall can be a prelude to it going the other way. But for 2018 as a whole, further strength in the greenback seems unlikely, no matter whose autograph is on the bills. --------------------------------------------------------------------------------------------------------------------------- Question 1 (25 points): This article suggests that the USD could become weaker in 2018 because according to the Big Max Index, many other currencies are undervalued. What does it mean? What does the Index capture? Is this related to something seen in class? Explain in detail. The Big Mac index measures the cost of the Big Mac Sandwich at McDonald