Institute of Chartered Financial Analysts of India (ICFAI) University 2006 Certification Finance International and Trade – I - university paper

3.
200
50
200r
200r + 50

4.
150
50
150r
150r + 50

5.
100
50
100r
100r + 50

6
50
50
50r
50r +50

















current value of repayments

= 200r X PVIF (9% 1) + 200r X PVIF (9% 2) + (200r + 50) X PVIF (9% 3)

+ (150r+50 ) XPVIF (9% 4) + (100r + 50) X PVIF ( (9% 5) + (50r +50) X PVIF (9% 6)

= (200r x 0.9174) + ( 200r x 0.8417) + (200r + 50) ( 0.7722) + (150r + 50) ( 0.7084)

+ (100r + 50 ) ( 0.6499) + (50r + 50) (0.5963)

= 183.48r + 168.34r + ( 154.44r +38.61) + (106.26r + 35.42) + (64.99r + 32.50) + (29.82r + 29.82)

= 707.33r + 136.35

If the project is to be accepted APV = 0

So, [ 200 – (707.33r + 136.35)] x 44.62 = 500

Or, [ 63.65 – 707.33r ] =

Or, 707.33r = 63.65 – 11.206

Or, r = = 7.41%.

So the interest on the concessional loan should be less than 7.41% to make the project viable.
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3.
a. In the U.S. market the cross rate of S $/Euro is:

(S$/€)bid = (S$/$)bid ($/€)bid = ($/€)bid = = 2.0240

(S$/€)ask = (S$/$)ask ($/€)ask = ($/€)ask = = 2.0254

Cross rates: S$/€ 2.0240/2.0254

Spot rate: S$/€ 2.0379/2.0382

Since synthetic ask rate is lower than the true bid rate there is possibility of 3 point arbitrage.

Thus, Euro is cheaper in the US market and worth more in Singapore. Therefore, we can buy Euro in the US, sell Euro in Singapore for Singapore $. Which we will sell in the US to convert back into US$. The triangular arbitrage will be implemented as follows:

First we buy euro for $1,000,000 in US.

Thus we get Euro 1,000,000 = € 779,970.36

Then we sell this € 779,970.36 in Singapore market for S$

Thus we get S$ = 779,970.36 2.0379 = S$ 1,589,501.60

Finally we sell this S$ in US market for dollars = 1,589,501.60 0.6330 = $1,006,154.51

Profit from the trasaction = 1,006,154.51 - 1,000,000 = $ 6,154.51.

b. three month risk less rate in Singapore

=

= 0.8028%

By interest rate Parity.





Or, 1+ rus =

rus = 0.01233 for three months

Effective annual rate = (1 + 0.01233)4 – one = 1.05024 – one = 5.024%.

Earning:   Approval pending.