Group assignment 5 Budgeting

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Feb 20, 2024

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FINA 4324 GROUP ASSIGNMENT #5 ______ Group ID: ______ Group members: ____________________________________________ Please delete parts not assigned to your group. Chapter 11-12-13. International Financial Markets (Banking and Money, Bond, Equity) 1. International financial markets might include foreign exchange market, international money market, international credit (banking) market, international bond market, and international stock (equity) market (40 points) A. Foreign exchange market – Either use the exchange rates on Yahoo! Finance (Markets -> Currencies ( https://finance.yahoo.com/currencies ) or create a free online forex practice trading account on ( http://www.oanda.com ). Fill in a matrix the exchange rates (midpoints are ok) for all possible pairs between the currency of your country and the following currencies: USD, EUR, CHF, CNY, using 5-digit rule and direct quotes following the priority ranking. (10 points) Ref: EUR > GBP > AUD > NZD > USD > CAD > CHF > JPY > Others (then based on higher value) Group 1 INR USD CHF INR CNY EUR USD CHF INR Group 2 MXN USD CHF MXN CNY EUR USD CHF INR Group 3 CAD CAD USD CHF CNY EUR CAD USD CHF Group 4 EUR USD CHF INR CNY EUR USD CHF INR Group 5 JPY USD CHF JPY CNY EUR USD CHF JPY 1

Group 6 GBP GBP USD CHF CNY EUR GBP USD CHF B. International credit market – in no more than a 7-10 line paragraph, summarize the causes and consequences of the global financial/ credit crisis of 2007-2009 which is also referred to as the Great Recession. There are many good and short videos on YouTube (for example https://youtu.be/SyjMz5Sf02Y and https://youtu.be/N9YLta5Tr2A ). (10 points) Causes (who to blame – in timing order): Consequences (what happened thereafter): C. International bond market – go to the Bloomberg website for bond rates ( https://www.bloomberg.com/markets/rates-bonds ). Look up for the current bond yield and the one-year trend. How are their bonds doing compared to US bonds? What economic and political events might explain for the discrepancies (if any)? (10 points) 2

D. International equity market – for Canada, and UK go to the list of cross-listed stocks ( https://stockmarketmba.com/globalcompaniescrosslistonusexchanges.php ) and for all countries go to full directory of bank-backed depository receipts ( https://adr.com/dr/drdirectory/drUniverse ). Pick a foreign company from your assigned country that is cross-listed on either NYSE or NASDAQ (try to avoid those being traded on OTC or PNK). If you can’t find your country, use a neighboring country. Then, compare the prices of the stock on two exchanges (or more) to see how close/ different they are. Exchange rates and prices can be found on Yahoo! Finance ( https://finance.yahoo.com/currencies ). (10 points) Ref: https://en.wikipedia.org/wiki/Dual-listed_company For example, Unilever Plc. is a British-Dutch company in household and personal products (solid defensive stock). Their stock is traded on three different stock exchanges. As of 3/3/2021: Stock exchange Ticke r Price in local Exchange rate Price in USD LSE (they list pence which is cent) ULVR £38.07 GBP/USD = 1.3960 $53.22 AMS UNA €44.11 EUR/USD = 1.2073 $53.25 NYSE UL $53.58 1.0000 $53.58 Chapter 16. Capital Budgeting with Country Risk Analysis 2. Incorporating country risk in capital budgeting (20 points) A US MNC in energy is using this capital budgeting model for a 4-year foreign project in Portugal. NPV =− $ 10 mil + € 2 mil ∗ € / $ 1.1 1.15 + € 2 mil ∗ € / $ 1.15 1.15 2 + € 2.5 mil ∗ € / $ 1.2 1.15 3 + ( € 3 mil + € 5 mil salvage ) ∗ € / $ 1.15 4 You should be able to understand what these numbers represent. Here is the generalized model. NPV =− Inv 0 + € CF 1 ∗ € / $ ER 1 ( 1 + r ) + € CF 2 ∗ € / $ ER 2 ( 1 + r ) 2 + € CF 3 ∗ € / $ ER 3 ( 1 + r ) 3 + ( € CF 4 + € Salvage 4 ) ∗ € / $ ER 4 ( 1 + r ) 4 The model did not capture the potential effects of a few events that happened recently. Considering potential country risks associated with the project, please suggest adjustments to the model. 3

Note. You could illustrate with some arbitrary numbers but please explain the rationale behind using them. a. Portugal is set to break away from 25-year long budget deficit that led to EU bailout in 2014, and expecting budget surplus of 0.5% of GDP. (5 points) b. Standard & Poor’s, Fitch, and DBRS changed their ratings on Portugal’s “debts” after years of considering it “junk” into “investment grade”. (5 points) c. FDI is considered a priority and the Portuguese Government recently launched the development of renewable energies (solar and wave), IT, and tourism (20% tax credit support). (5 points) d. The country got re-ranked on bureaucratic and juridical burdens, rated by World Bank Doing Business, from 29th to 34 th out of 190 countries. Still, it is among top countries for FDI. (5 points) Chapter 4. Exchange Rate Determination – Capitalization on Expectation of Exchange Rate Movement 3. Consider the currency of your assigned country and its exchange rate against USD. A. What are the key determinants for the movements in the exchange rates of this specific pair? Support your answer with some actual political or economic events. (10 points) - Interest rate differential – if the foreign country has higher rate, their currency will appreciate. - Inflation rate differential – if the foreign country has higher rate, their currency will depreciate. - Income level differential – if the foreign country has lower income, their currency will appreciate. - Government control – if the foreign gov has less restrictive control, their currency will change. 4

- Expectation – if the change in expectation of future rate increases, their currency will change. Groups 1-3-5. Blue Demon Bank expects that the Mexican peso will depreciate against the dollar from its spot rate of $.15 to $.14 in 10 days. The following interbank lending and borrowing rates exist: Currency Lending rate (APR) Borrowing rate (APR) U.S. dollar 8.0% 8.3% Mexican peso 8.5% 8.7% B. Capitalizing on differences in lending rates and expected exchange rate movements (15 points) Assume that Blue Demon Bank has a borrowing capacity of either $10 million or 70 million pesos in the interbank market, depending on which currency it wants to borrow. Note: The risk of borrowing in a currency with lower interest rate but later appreciates and becomes so expensive for repayment. How could Blue Demon Bank attempt to capitalize on its expectations without using deposited funds? (5 points) C. Estimate the profits that could be generated from this strategy. Please show the detailed work. (15 points) Groups 2-4-6. Diamond Bank expects that the Singaporean dollar will depreciate against the U.S. dollar from its spot rate of $.43 to $.42 in 60 days. The following interbank lending and borrowing rates exist: Currency Lending rate (APR) Borrowing rate (APR) U.S. dollar 7.0% 7.2% Singapore dollar 22.0% 24.0% B. Capitalizing on differences in lending rates and expected exchange rate movements (15 points) Assume Diamond Bank can borrow either 25 million Singaporean dollars or 10 million US dollars in the interbank market, depending on which currency it wants to borrow. (10 points) 5

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