International Finance - Questions & Exercises 2022
TOPIC 2: BOP
I. Multiple choice question
1. Calculate Current Account (CA) if (Million USD):
Export goods
79,500
Import goods
75,400
Export services
1,800
Import services
5,050
Personal transfer receipt
6,930
Personal transfer payment
1,180
2. Calculate Financial Account (FA) if (Million USD):
Category
Assets
Liabilities
FDI
Increase by 90
Increase by 3,520
FPI
Decrease by 100
Increase by 305
Other investments
Increase by 1,640
Decrease by 1,020
3. Providing the following changes:
Balance
Value (million: USD)
Current Account
- 1,541
Capital Account
- 150
Financial Account
+ 3,506
Errors and omissions
?
Reserve assets and related items
- 955
Determine the value of the missing item?
4. Given: Reserve assets increase by 250 million USD. Central Bank borrows IMF 100 million
USD. Determine the value of Reserve assets and Related items?
II. Exercise
#Record the following transactions into BOP of Vietnam:
(1) Vietnamese workers in Korea repatriate 200 million USD.
(2) The Vietnamese enterprises pays the British company a transport fee of 2 million GBP.
(3) WB forgives a 50 million USD debt owed by Vietnam.
(4) Vietnam supports the natural disaster areas in Laos with 40 million USD, of which 25 million
is in goods, 10 million in medical support and 5 million in money.
(5) Vietnam issues bonds worth 100 million USD abroad, 60 million is used to import machinery
and equipment, the rest is used to pay debt to ADB.
(6) The Japanese enterprise sells goods to the Vietnam company worth of 50 million JPY with
deferred payment.
(7) The Vietnamese exporter is prepaid by the British importer for goods worth of 100 million
GBP.
TOPIC 3: FOREX
I. Multiple choice question
1. Assume that E(GBP/USD) = 1.2308 – 1.2317. How much GBP would you gain from selling
200,000 USD?
2. Assume that E(USD/JPY) = 142.94 -143.12. How much JPY do you need to buy 300,000 USD?
TOPIC 4: IRP
I. Multiple choice question
1. The USD and AUD annual interest rates are 3% and 4.5% respectively. Based on the
international Fisher effect, calculate the expected inflation rate of GBP, knowing that the expected
inflation rate of AUD is 1.75% per annum?
2. The SGD and USD annual interest rates are 5.25% and 4.5% respectively. Compute the 3-month
forward point based on CIP?
3. The CAD and USD annual interest rates are 4.5% and 3% respectively. Calculate the 7-month
forward rate according to CIP knowing that the USD/CAD spot rate is 1.3246?
4. The annual interest rates of USD and CHF are 5% and 2.4% respectively; the spot rate is 0.9781;
the 6-month forward rate is 0.9755. If you take a loan, which currency will you choose to borrow?
5. Assume that the one-year USD/VND forward exchange rate is 23,800 and the one-year expected
spot exchange rate is 23,830. How will you speculate in the foreign currency market to make
money? How much money will you make in VND?
II. Exercise
1. Apply PPP and IRP to solve the following:
Market data at the beginning of 2021: USD interest rate is 3%/year and VND interest rate is
7%/year; the spot rate is 23,522; The expected real interest rate of two currencies is 2.5%/year
a. Calculate the expected inflation rates of USD and VND?
b. The 4-month forward exchange rate of commercial bank X is 23,618. How will you arbitrage in
the international money market to make money?
2. Suppose that the one-year interest rates of USD and SGD are 3.1% and 4.5% respectively. The
USD/SGD spot exchange rate is currently 1.5263.
a. Calculate the 9-month forward premium.
b. Show how you can make a speculation if the 5-month forward exchange rate is 1.5239.
Determine the expected profit.
3. Suppose that the one-year interest rates of USD and NZD are 5% and 3% respectively. The
NZD/USD spot exchange rate is currently 0.6146 and the 6-month forward exchange rate is 0.6209.
a. Show how you can make a covered interest arbitrage.
b. Determine profit/loss if a trader sells a 6-month forward contract worth 2 million NZD against
USD at the forward rate above if the spot exchange rate is 0.6218 after one year.
TOPIC 5: PPP
I. Multiple choice question
1. The prices of the "standard basket of goods" in Canada and in the US are 3,100 AUD and 2,000
USD, respectively. Determine the Purchasing power parity of USD/CAD?
2. In 2022, prices of a standardized basket of good are 1,000 USD and 5,100 CNY. After one year,
these prices are 1,050 USD and 5,000 CNY. Suppose PPP holds, determine percentage change of
USD/CNY over one year.
3. The 2022, inflation rates of EUR and the USD are 3.5% and 6.2% respectively, E(EUR/USD)
= 1.0875. If PPP holds, determine the exchange rate after 3 months.
II. Exercise
1. Providing annual inflation rates of USD, CAD (% per annum):
Year
Inflation
rate The
inflation Year
of USD
rate of CAD
2017
4.0
3.75
2018
4.5
3.5
Inflation
rate The
inflation
of USD
rate of CAD
2019
4.25
3.0
2020
5.0
2.0
Questions:
a. If PPP holds, calculate the percentage change of exchange rate USD/CAD from the end of 2020
to the end of 2018.
b. Calculate the exchange rate at the end of 2020 if exchange rate at the beginning of 2017: 1 USD
= 1.3095 CAD
2. Inflation rates of VND and USD are given as follows (% per annum):
Year
Inflation
rate Inflation
of USD
of VND
2017
2.0
7.5
2018
3.0
7.0
rate Year
Inflation
rate Inflation
of USD
of VND
2019
3.25
7.25
2020
3.5
6.5
Questions:
1. Calculate the exchange rate at the end of 2020 if exchange rate at the beginning of 2017: 1 USD
= 22,400 VND
2. Calculate the percentage of real overvaluation/undervaluation of 2 currencies if market
exchange rate at the end of 2020: 1 USD = 23,370 VND
rate
TOPIC 6: EXCHANGE RATE & FOREIGN EXCHANGE INTERVENTION
I. Multiple choice question
1. Calculating the percentage of overvaluation and undervaluation if:
Market rate: USD/HKD = 7.3450
Exchange rate of the Central Bank: USD/HKD = 7.7795
2. Calculate the percentage of devaluation and revaluation of VND and USD if the SBV adjusts
the interbank exchange rate from 23,050 to 23,700.
3. Given the following information
Year
E(USD/VND)
CPIVN
CPIUSD
2011
23,150
100
100
2022
23,635
108.6
104.5
Calculate the real exchange rate and make a comment about Vietnam trade competitiveness
4. The AUD/USD exchange rate at the beginning is 0.7203; at the end of the year is 0.7278.
Calculate the real exchange rate and make a comment about the change in the trade
competitiveness between Australia and the US. Given the inflation of AUD and USD respectively
is 5% and 4%.
II. Exercise
1. Providing the supply and demand functions of USD
QS = 130,800 + 5E; QD = 345,000 – 4.5E
a. Suppose SBV (State Bank of Vietnam) and FED (US Federal Reserve) maintain the floating
exchange rate regime. What is the equilibrium exchange rate? What is the amount of VND and
USD traded on FX? Illustrated by a graph.
b. Suppose SBV and FED maintain floating exchange rate regime, assuming SBV decides to
intervene to buy USD 5,000 in the foreign exchange market. How will the exchange rate in the
market change and how much USD is traded on the foreign exchange market? Illustrate by a graph.
c. Suppose SBV and FED maintains a fixed exchange rate regime at E (USD/VND) = 23,300
How does SBV’s foreign exchange reserve change if the SBV is responsible for intervening on
FOREX? Explain why and illustrate by a graph.
2. Providing the supply and demand functions of EUR (unit: million)
Qs = 206 + 3.5E
QD = 216.5 – 6E
a. Suppose ECB (European Central Bank) and FED (US Federal Reserve) maintain the floating
exchange rate regime. What is the equilibrium exchange rate? What is the amount of EUR and
USD traded on FX? Illustrated by a graph.
b. Suppose ECB and FED maintain a fixed exchange rate regime at E (EUR/USD) = 1.2069
Calculate the overvaluation and undervaluation of EUR and USD. With all other factors being
constant, how does the exchange rate of E(EUR/USD) = 1.2069 affect the Australian and US
economies?
c. Suppose ECB and FED maintain a fixed exchange rate regime at E (EUR/USD) = 1.2069
How does ECB’s foreign exchange reserve change if the ECB is responsible for intervening on
FOREX? Explain why and illustrate by a graph.