FIN4802/201/0/2021
Tutorial letter 201/0/2021
International Financial Management
FIN4802
Year Course
Department of Finance, Risk
Management and Banking
This tutorial letter contains answers to
your assignment 1 questions
Bar code
CONTENTS
1
INTRODUCTION--------------------------------------------------------------------------------2
2
SUGGESTED SOLUTIONS TO ASSIGNMENT 01------------------------------------2
3
CONCLUDING REMARKS-------------------------------------------------------------------3
1
INTRODUCTION
The purpose of this tutorial letter is to provide you with suggested answers to Assignment 01.
2
SUGGESTED ANSWERS TO ASSIGNMENT 01
Question 1
a) Solution to Case Problem:
ANSWER: Locational arbitrage is possible:
Locational Arbitrage
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Buy Malaysian ringgit from Maybank (ZAR1 000 000/3.151) = 317 359.57
Sell Malaysian ringgit to RHB Bank (MYR 317 359.57 × 3.153) = 1 000 634.72
Rand profit (R1 000 634.72 – R1 000 000) =634.72
b) Triangular arbitrage is possible.
Triangular Arbitrage
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Exchange rands for Malaysian ringgits(R1 000 000/3.151) = 317 359.57
Convert the Malaysian ringgit into Japanese yen (MYR 317 359.57 × ¥32.69) = 10 374 484.34
Convert the Japanese yen into rands (¥10 374 484.34× R0.1058) =1 097 620.44
Rand profit (R1 097 620.44– R1 000 000) = 97 620.44
c) Covered interest arbitrage is possible.
1. On Day 1, convert rands to Malaysian ringgit and set up a 90-day deposit
account at a Malaysian bank (R1 000 000/3.151)
2. In 90 days, the Malaysian deposit will mature to MYR 317 359.57 × 1.0375,
which is the amount to be sold forward
3. In 90 days, convert the Malaysian ringgit into rands at the agreed-upon rate
(MYR329 260.55× 3.15)
4. Rand amount available on a 90-day South African deposit (R1 000 000 ×
1.02)
5. Rand profit over and above the rand amount available on a 90-day South
African deposit (R1 037 170.74– R1 020 000)
2
317 359.57
329 260.55
1 037 170.74
1 020 000.00
17 170.74
FIN4802/201
d) Arbitrage opportunities are likely to disappear soon after they have been discovered because of
market forces. Due to the actions taken by arbitrageurs, supply and demand for the foreign currency
adjust until the mispricing disappears. For example, covered interest arbitrage involving the
immediate purchase and subsequent sale of Malaysian ringgit would place upward pressure on the
spot rate of the Malaysian ringgit and downward pressure on the Malaysian ringgit forward rate until
covered interest arbitrage is no longer possible. At that point, interest rate parity exists, and the
interest rate differential between the two countries is exactly offset by the forward premium or
discount.
Question 2
Impact of Possible Exchange Rates on Cash Flows of Madison Co. (in Millions)
Exchange Rate Scenario
C$1 : $.75
C$1 : $.80
C$1 : $.85
Sales
(1) U.S. sales
$320.00
$320.00
$320.00
(2) Canadian sales
C$4 = $ 3.00
C$4 = $ 3.20
C$4 = $ 3.40
(3) Total sales in U.S$
$323.00
$323.20
$323.40
Cost of Materials and Operating
Expenses
(4) U.S. cost of materials
$ 50.00
$ 50.00
$ 50.00
(5) Canadian cost of materials
C$200=$150.00
C$200=$160.00
C$200=$170.00
(6) Total cost of materials in U.S. $
$200.00
$210.00
$220.00
(7) Operating expenses
$ 60.00
$ 60.00
$ 60.00
Interest Expenses
(8) U.S. interest expenses
$ 3.00
$ 3.00
$ 3.00
(9) Canadian interest expenses
C$10 = $ 7.50
C$10 = $ 8.00
C$10 = $ 8.50
(10) Total interest expenses in U.S. $
$ 10.50
$ 11.00
$ 11.50
Cash Flows in U.S. Dollars before
$52.50
$42.20
$31.90
Taxes
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CONCLUDING REMARKS
We trust that you are enjoying your studies. You can contact us at any time, telephonically or by
email if you encounter problems with the study material.
Best wishes
Lecturers
Department of Finance, Risk Management and Banking
University of South Africa
2021
©
UNISA
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