International Finance - Questions & Exercises 2023

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(+) 14,800 Import services(-) 25,050
Personal transfer payment(-) 6,930 Personal transfer receipt(+) 1,180
CA= -11900
2. Calculate Financial Account (FA) if (Million USD):
Category Assets Liabilities
FDI Increase by 90(-) Increase by 3,520(+)
FPI Decrease by 100(+) Decrease by 305(-)
Other investments Increase by 1,640(-) Decrease by 1,020(-)
FA=565
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?
OM= OB-(CA+KA+FA)= (-OFB)-(CA+KA+FA)= -2770
4. Given: Reserve assets decrease by 250 million USD. Central Bank borrows IMF 100
million USD. Determine the value of Reserve assets and Related items?

R= 250, L=100, #=0 => OFB= 250+100= 350

II. Exercise
#Record the following transactions into BOP of Vietnam:
(1) Vietnamese workers in Korea repatriate 200 million USD.
CA
Secondary incomes receipt +200
FA
Assets increase -200
(2) The Vietnamese enterprises pays the British company a transport fee of 2 million GBP.
CA
Services import -2
FA
Assets decrease +2
(3) WB forgives a 50 million USD debt owed by Vietnam.
FA
Liability decrease -50
KA
Capital transfer receipt +50
(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. (trả chậm)
CA
Goods import -50
FA
Liabilities increase +50
(7) The Vietnamese exporter is prepaid (trả trước) by the British importer for goods
worth of 100 million GBP.
FA
Assets increase +100
Liabilities increase -100

TOPIC 3: FOREX
I. Multiple choice question
1. Assume that E(GBP/USD) = 1.3398 – 1.3407. How much GBP would you gain from
selling 200,000 USD?

Sell USD= 200,000/ 1.3407= 149,176

2. Assume that E(USD/JPY) = 142.04 -142.12. How much JPY do you need to buy 300,000
USD?

Buy USD= 300,000 x 142.12= 42,636,000

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 1.5% per annum?
2. The HKD and USD annual interest rates are 6.05% and 4.5% respectively. Compute
the 3-month forward point based on CIP?
USD/ HKD
R*= 4.5%
R= 6.05%
T=3 months => N=12/3=4
¿
r−r 6.05 %−4.5 %
pt = ¿= =0.38 %
n+ r 4 +4.5 %
3. The CAD and USD annual interest rates are 4.5% and 3% respectively. Calculate the
60-day forward rate according to CIP knowing that the USD/CAD spot rate is 1.3246?
USD/ CAD
R*= 3%
R=4.5%
S(USD/ CAD)= 1.3246
T= 60 days=> n= 365/60
365
+4.5 %
n+ r 60
F t=S × =¿ F =1.3246 × =13278
n+ r ¿ 365
60
+3 %
60
4. The annual interest rates of USD and CHF are 5% and 2.4% respectively; the spot rate
is 0.9788; the 6-month forward rate is 0.9763. If you take a loan, which currency would
you choose to borrow?

5. Assume that the one-year USD/VND forward exchange rate is 23,890 and the one-
year expected spot exchange rate is 23,850. How will you speculate in the foreign
currency market to make money? How much money will you make in VND?
USD/VND
F(USD/ VND) = 23,890
Se(USD/ VND) = 23,850
Sell forward, buy spot at the maturity
Money in VND = 40 VND
II. Exercise
1. Apply PPP and IRP to solve the following:
Market data at the beginning of 20xx: USD interest rate is 4%/year and VND interest rate is
7.5%/year; the spot rate is 23,517; 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 23,615. How will you
arbitrage in the international money market to make money?

USD/VND

IRP

R=7.5%

R*= 4%

F4= 23,615

S = 23,517

T= 4 months => n=12/4

 C
r T =n ×
( ( ) ) (
S
F
r
× 1+ −1 =3 ×
n
23,517
23,615
× 1+
2(
7.5 %
) ) ¿
−1 =9.96 %>r =4 %

Invest VND, borrow USD

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 1.5243.
a. Calculate the 7-month forward premium.
b. Show how you can make a speculation if the 5-month forward exchange rate is
1.5219. Determine the expected profit.

USD/SGD
R*= 3.1%
R= 4.5%
S(USD/SGD) = 1.5243
T=7 months => n=12/7
¿
r−r 4.5 %−3.1 %
pt = ¿= =0.8 %
n+ r 12
+3.1 %
7
T= 5 months => n=12/5
12
+ 4.5 %
e n+ r e 5
St =S 0 × =¿ S 5=1.5243 × =1.5331
n+r ¿ 12
+ 3.1%
5
e
S5 > F 5=1.5219 => should buy forward, sell spot => profit= 0.0112 SGD/ USD

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 0.6166 and the 6-month
forward exchange rate is 0.6229.
a. Show how you can make a covered interest arbitrage.
b. Determine profit/loss if a trader sells a 6-month forward contract worth 3 million
NZD against USD at the forward rate above if the spot exchange rate is 0.6238 after 6
months
c. Determine profit/loss if a trader sells a 6-month forward contract worth 3 million
USD against NZD at the forward rate above if the spot exchange rate is 0.6238 after 6
months

TOPIC 5: PPP
I. Multiple choice question
1. The prices of the "standard basket of goods" in Canada, Australia and the US are
3,100 CAD, 2,950 AUD and 2,000 USD, respectively. Determine the Purchasing power
parity of USD/CAD, AUD/USD, and AUD/CAD?

USD 3100
= =1.55
CAD 2000

AUD 2000
= =0.68
USD 2950

AUD 3100
= =1.05
CAD 2950

2. In 2022, prices of a standardized basket of good are 1,000 USD and 5,200 CNY.
After one year, these prices are 1,150 USD and 5,100 CNY. Suppose PPP holds,
determine percentage change of USD/CNY over one year.
P0 ( CNY ) 5200
E0 = ¿ = =5.2
P0 (USD ) 1000
P1 ( CNY ) 5100
E 1= ¿ = =4.43
P 1 ( USD ) 1150
E1−E 0
E P= =−14.8 %
E0

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 4 months. Percentage change of
n+ π 1 3+6.2 %
E 4=E 0 × ¿ =1.0875 × =1.0972
n+ π 1 3+3.5 %
 ¿
π −π 6.2 %−3.5 %
∆ e4 = 1 ¿ 1 = =1.33 %
n+ π 1 2+3.5 %
II. Exercise
1. Providing annual inflation rates of USD, CAD (% per annum):
Year Inflation rate The inflation Year Inflation rate The inflation
of USD rate of CAD of USD rate of CAD
2020 4.0 3.75 2022 4.25 3.0
2021 4.5 3.5 2023 5.0 2.0

a. If PPP holds, calculate the percentage change of exchange rate USD/CAD from the
end of 2023 to the end of 2020.
3
CPI t (3.5 % +1)(3 %+1)(2 %+1)
∆ e3=∏ ¿ −1= −1=¿ ¿
i=1 CPI t (4.5 % +1)(4.25 %+ 1)(5 % +1)
b. Calculate the exchange rate at the end of 2023 if exchange rate at the beginning of 2020: 1
USD = 1.3075 CAD
4
CPI t (3.75 %+1)(3.5 %+ 1)(3 % +1)(2 %+1)
E2023 =E2020 × ∏ ¿ =1.3075 × =¿ ¿
i=1 CPI t (4 %+1)(4.5 % +1)(4.25 % +1)(5 %+1)

2. Inflation rates of VND and USD are given as follows (% per annum):
Year Inflation rate Inflation rate Year Inflation rate Inflation rate
of USD of VND of USD of VND
2020 2.0 7.5 2022 3.25 7.25
2021 3.0 7.0 2023 3.5 6.5
Questions:
1. Calculate the exchange rate at the end of 2023 if exchange rate at the beginning of 2021: 1
USD
= 22,600 VND
3
CPI t ( 7 %+1)(7.25 % +1)( 6.5 %+1)
E2023 =E2021 × ∏ ¿ =22,600 × =¿ ¿
i=1 CPI t (3 %+1)(3.25 % +1)(3.5 %+1)

2. Calculate the percentage of real overvaluation/undervaluation of 2 currencies if

market exchange rate at the end of 2023: 1 USD = 23,670 VND
VND E−EP 23,670−25,094.09
vr = =
EP 25,094.09

USD E P −E 25,094.09−23,670
vr = =
EP 23,670