NMIMS Global Access
School for Continuing Education (NGA-SCE)
Course: International Finance

Internal Assignment Applicable for September 2020 Examination

Rs. $
3- months 12% 6%
6-month 11.5% 5.5%
9-month 11% 5.0%

The 3-month forward rate is Rs. 75/$. Calculate the 3-month forward rate 6-months
from now.

(10 Marks)
2. Suppose that the exchange rate for U.S. $1 for another currency is such that U.S. $1 = 3.5 ARS
(Argentine pesos). Further suppose that if the exchange rate remains the same, you will
receive a 25% return on your investment in ARS currency over the next year’s period.
As an investor, you are aware of the volatility in Argentina’s currency exchange so
sudden movements are expected.
If the exchange rate were to change such that $1 = 50 ARS, what return do you expect on the
investment? If the exchange rate were to change such that $1 = 2 ARS, what return do
you expect on the investment? (10 Marks)
3. Groucho Marx, as Governor of Freedonia’s central bank, has problems. He sees the

value of his currency, the FDK, under constant attack from Rosor, a wealthy mutual-
fund manager.

Apparently, Rosor believes that the FDK will soon devalue from GBP 1.000 to 0.950.
a. Currently, both GBP and FDK interest rates are 6% p.a. By how much should Groucho
change the one-year interest rate so as to stabilize the spot rate even if Rosor expects a
spot rate of 0.950 in one year? Ignore the risk premium—that is, take 0.950 to be the
certainty equivalent. (5 Marks)

b. If the interest-rate hike also affects Rosor’s expectations about the future spot rate, in
which direction would this be? Taking into account also this second-round effect,
would Groucho have to increase the rate by more than your first calculation, or by less?