International Finance

UNIVERSITY OF STIRLING

 

MAIN EXAMINATIONS AUTUMN SEMESTER 2020

 

 

ACCOUNTING & FINANCE DIVISION

STIRLING MANAGEMENT SCHOOL

       

International Finance                                                                    FINU9FB

 

Answer any THREE questions.
Each question is worth 100 marks.

 

Time allowed: 3 hours

 

 

Dictionaries

Electronic dictionaries are not permitted in tests or examinations. Along with mobile phones, they constitute unauthorised material. Paper English/foreign language dictionaries may be used and will be subject to inspection by invigilators. If any notes or other material are found, they will be confiscated and an ‘Academic Misconduct’ report sent to the University Examinations Officer.

 

Calculators

The use of calculators in tests and examinations for Undergraduate students is restricted to the following models only:

• Texas Instruments BA II Plus
• Texas Instruments BA II Plus Professional
• Casio FC-100V Financial Calculator
• Hewlett Packard 12C
• Hewlett Packard 12C Platinum
• Casio FX-85GT Plus Scientific Calculator
• Casio FX-83GT Plus Scientific Calculator
• Casio FX83ES Natural Textbook Display Calculator (now discontinued)
• Sharp EL33OERB Desktop Calculator (now discontinued)
• Sharp EL240SAB Calculator
• Sharp EL233SB Calculator
• Sharp EL531WB
• Sharp EL531XB [replacement for Sharp EL531WB]

 

NB All forms of calculator instruction manual, operating guide or aide memoire are prohibited in tests and examinations.

 

 

 

1. a. Use the Demand and Supply model of exchange rate determination to explain the effect of an increase in domestic interest rates on the exchange rate. [30 marks]

 

 

 

2019. The following graph shows the 10-year Treasury bond rate for Mexico (blue line) and the US (red line). It also shows the exchange rate as the number of Mexican Pesos to one US dollar (green line). The figures are taken from the US Federal Reserve Fred database and cover the period from the beginning of 2002 to the end of 2019.

 

 

 

 

In the graph, the Mexican Peso has depreciated. Does this confirm your expectation based on your answer to question 1.a.? Explain your answer, with reference to any other theories that may help.

[50 marks]

 

 

 

1. What are the benefits and risks to the Mexican economy of a depreciating currency? [20 marks]

 

 

 

2. a. Compare and contrast (including any appropriate diagram(s)) the effect of an increase in the domestic money supply on the exchange rate using the Monetary Model, the Portfolio Balance Models and the Dornbusch Overshooting model. [50 marks]

 

 

 

1. Using the IS-LM-BP approach explain how your answer in part a. may be affected by issues of capital mobility and the exchange rate regime. [50 marks]

 

 

 

3. Either

Outline the theory of Purchasing Power Parity. Evaluate the success of this theory in describing exchange rate behaviour, making reference to any empirical evidence you are aware of.

 

Or

 

Outline the theory of Uncovered Interest Parity. Evaluate the success of this theory in describing exchange rate behaviour, making reference to any empirical evidence you are aware of.

[100 marks]

 

 

 

 

 

 

 

4. You are a portfolio manager who currently only invests in developed markets (you only invest in equities and bonds). You are considering investing in emerge markets.

 

1. What are the advantages and disadvantages of investing in emerging markets? [50 marks]

 

 

 

1. What actions can you take to minimise any risks associated with investing in emerging markets? [50 marks ]

 

 

 

 

 

END OF EXAMINATON PAPER