using currency options could lead B u s i n e s s F i n a n c e

using currency options could lead B u s i n e s s F i n a n c e

This assignment consists of 2 questions, carrying a total of 100 marks. Student score will contribute 10% of the course score.

Question 1 (60 marks)

Assume that you are the vice president of a commercial bank. With less than 100 words each, comment on the following statements made by your customer Caesar Lee who is the CEO of an investment company in Hong Kong.

(a) “Currency futures are useless to control the exchange rate risk faced by my company for our share investments in Germany.”

(15 marks)

(b) “It is absurd that using currency options could lead to an upgrade in the credit rating of my firm.” (15 marks)

(c) “Swap is a safe business to the bank, why your bank taking risk-management measures while providing swap facilities to my company?” (15 marks)

(d) “If derivative markets lack of speculators, the market would be less efficient.” (15 marks)

Question 2 (40 marks)

On 12 June 2019, Citibank has purchased 220 units of 5.50% p.a. 15-year Exchange Fund Note (EFN) from HSBC. The purchase price of the EFNs is 118.33. The last interest payment was on 29 March 2019, which was 75 days ago (exclude end date). The next interest payment will be on 30 September 2019. From the last interest payment date to the next interest payment date, there is a total of 185 days (exclude end date).

(a) Draw a diagram for the above bond transaction from 29 March 2019 (last interest payment date) to 30 September 2019 (next interest payment date). Indicate the dates, time and events involved during the specified time period. (15 marks) (b) With a par value of HKD50,000 per unit and 365 days in a year calculation.

i. Assess the total amount of accrued interest HSBC should receive for selling EFNs to Citibank.

ii. Ignoring transaction cost, evaluate the lump sum which Citibank should pay to HSBC on the settlement date for the purchase of the EFNs.

(c) On 30 September 2019, the Exchange Fund paid the second coupon interest to EFN holders.

i. Find out the amount of coupon interest Citibank received on that day.

ii. Exclude the accrued interest previously paid to the seller (HSBC) on settlement date (12 June), assess the net amount of coupon interest income entitled by Citibank.

Place this order or similar order and get an amazing discount. USE Discount code “GET20” for 20% discount