Financial Accounting > QUESTION PAPER (QP) > MODULE CODE: ABF204 TITLE OF PAPER: Financial Markets and Institutions. REVISION STUDY QUESTIONS (All)

MODULE CODE: ABF204 TITLE OF PAPER: Financial Markets and Institutions. REVISION STUDY QUESTIONS

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Question 1: a Give an example of an international parity condition, explaining it in words and giving it in equation form. You are given the following information from the foreign exchange market: ... The spot price of the £ is $1.25 The one year forward price of the £ is $1.20 The one year US dollar interest rate in the euromarket is 8.15% The one year UK pound interest rate in the euromarket is 11.5625% Show that these prices are inconsistent with each other. In which country should you borrow; in which country should you invest? Calculate the arbitrage profit to be had if one borrows 1 million units (£’s or $’s as appropriate) of the currency Explain what is meant by the Expectations hypothesis. What criticisms might be made of it? The first and second columns list the names and prices of three different bonds; the next three columns list the cash flows of the bonds from year 1 through year 3. All cash flows arrive at the end of the year. Work out the term structure of (spot) interest rates. Show your calculations. What should be the price of a three year 4% bond? Explain, using a foreign exchange example, how a foreign currency exposure combined with a position in currency futures can result in a position of no risk. Explain the impact of rising market interest rates on equity capital of a financial institution that has a positive duration gap Lucky Mi has won a huge sum of money from the lottery recently. Lucky told you that her wealthy friend suggested that she invest in hedge funds. She has collected the following information regarding underlying assumption and investment strategy on various types of fund to analyse. [Show More]

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