Sample Questions International Investments and Swaps Q1 During 2003 the rate of return in yen in the Japanese bond market was 5 and in the stock market it was 12 The standard deviation of the Japanese bond market return in yen was 6 and the Japanese stock market return in yen was 10 During the same period the yen went from 105 to 110 and the standard deviation of the percentage change in the value of yen was 4 Also during the same period the correlation between the Japanese bond market return in yen and the percentage change in the dollar value of yen was 0 75 the correlation between the Japanese stock market return in yen and the percentage change in the dollar value of yen was 0 05 and the correlation between the Japanese stock market return and the Japanese bond market return was 0 25 Based on this information please calculate the following a The standard deviation risk of the rate of return in dollars terms for a US investor investing in Japanese stocks and bonds during 2003 b The standard deviation of return on a portfolio in dollar terms where 60 of it is invested in Japanese stocks and 40 invested in Japanese bonds Q2 Please answer the next 4 questions based on the following information on the stocks of Samsung SM a Korean company and SwissAir SA a Swiss company the Korean won KW and the Swiss francs SF Percentage change in the stock price of Samsung in KW during the 04 05 period 50 Percentage change in the stock price of SwissAir in SF during 04 05 period 20 Percentage change in the price of KW during the 04 05 period 15 Percentage change in the price of SF during the 04 05 period 15 Standard deviation of returns in KW on SM stocks during the 04 05 period 20 Standard deviation returns in SF on SA stocks during the 04 05 period 8 Standard deviation of the percentage change in the price of KW during the 04 05 period 10 Standard deviation of the percentage change in the price of SF during the 04 05 period 4 Correlation coefficient between returns on SM the KW 0 25 Correlation coefficient between returns on SA and SF 0 50 Correlation coefficient between returns on the SM and SA 0 01 a The percentage return to the US investor in Samsung stock is b The percentage return to the US investor in SwissAir stock is c The standard deviation of percentage return in Samsung stock to the US investor is d The standard deviation of percentage return in SwissAir stock to the US investor is Q3 Please answer the next 2 questions based on the following information The percentage return to the US investor in Samsung stock during 04 05 20 The percentage return to the US investor in SwissAir stock during 04 05 10 The standard deviation of percentage return in Samsung stock to the US investor during 04 05 12 The standard deviation of percentage return in SwissAir stock to the US investor during 04 05 15 Correlation coefficient between returns on the Samsung and SwissAir stocks 0 60 Percentage of portfolio invested in Samsung stocks 80 Percentage of portfolio invested in SwissAir stocks 20 a What is the percentage return on the portfolio of Samsung and SwissAir stocks to the US investor b What is the standard deviation of returns on the portfolio of Samsung and SwissAir stocks to the US investor Q4 Company X is a high risk firm who wants a fixed rate long term loan Its borrowing rate is 11 50 in the fixed rate market It is presently borrowing at a floating rate of prime plus 2 00 Company Y prefers a floating rate loan where it can borrow at prime plus 0 50 yet it is currently paying a rate of 9 75 in the fixed rate market You are the manager of a swap desk for a major bank Work out a swap which would generate a 5 basis point profit to the bank and split the rest equally between both counter parties companies X and Y a What will be the rate you will charge company X b What will be the rate you will pay company X c Calculate the effective rate of interest payed by company X d What will be the rate you will charge company Y e What will be the rate you will pay company Y f Calculate the effective rate of interest payed by company Y Q5 Please use the following information to answer the next two questions Company H is a high risk borrower It wants a fixed rate loan It can borrow is 8 75 in the fixed rate market It is presently borrowing at floating rate of 1 00 over PRIME Company L is a low risk borrower who prefers a floating rate loan Although its floating rate is 0 25 over PRIME it is currently borrowing at a fixed rate of 6 50 As a manager of the swap desk of a major bank you want work out an arrangement such that of the total savings from the swap 30 would go to company H 30 to company L and the rest to the bank a As result of the swap how much will Company H end up paying for its fixed rate loan b As result of the swap how much will Company L end up paying for its floating rate loan Q6 A US MNC needs to raise a 3 year loan for BP 10 million while a British MNC also needs to raise a 3 year loan for 20 million The current BP spot rate is 2 00 The US MNC could raise 20 million from a US Bank at 7 The US MNC s cost of borrowing in UK would be 8 5 Similarly the British MNC could raise BP 10 million from a British Bank at 8 25 The British MNC s cost of borrowing in US would be 7 8 They would like to mutually arrange a currency swap Based on the currency swap please complete this table to show the payments and receipts that the US MNC makes and receives during each period For each payment indicate the amount in or in BP Receipts Payments by US MNC Receipts from the US bank Payments to the US bank Receipts from the British MNC Payments to the British MNC Net payments receipts Year 0 principal Years 1 3 interest Year 3 principal