Economics of International Financial Markets

Faculty of Business and Law

Academic Year: 2022/2023

Assessment Period or Date: January 2023

Module Leader: Yanhui Zhu

Module Code UMED8V-15-3

Module Title: Economics of International Financial Markets

Examination Duration: 24 Hours online

Assessment opens: 2 May 2023, 14:30

Submission deadline: 3 May 2023, 14:30


Instructions to Students:

There are two sections of the exam. Students must answer all four questions from section A and any two questions from section B.

The questions in Section A carry 10 marks each. Marks are awarded to appropriate methods (formula, model etc.), correct numerical answers and clear and brief explanations. The questions in Section B carry 30 marks each. Marks are awarded to detailed analysis, appropriate use of graphs and clear presentation of examples/evidence.

As is usual for an exam, for this assessment you are not expected to include full referencing, but are encouraged to cite the sources of key theories, models, case studies, statutes etc.

This is an individual assessment: do not copy and paste work from any other source or work with any other person during this exam. Text-matching software will be used on all submissions.

There is no +/- 10% on word count and anything after the maximum word count will not be marked, in line with UWE’s Word Count Policy. The word limit is 2,000 word.


Please use the following file format(s): Word, PDF. We cannot ensure that other formats are compatible with markers’ software and cannot guarantee to mark incorrect formats.

Please include the module name and number and your student number (not your name).

Please indicate clearly which questions you are answering.

Instructions for submission

You must submit your assignment before the stated deadline by electronic submission through Moodle.

It is your responsibility to submit exam in a format stipulated above

Your marks may be affected if your tutor cannot open or properly view your submission.

Do not leave submission to the very last minute. Always allow time in case of technical issues.

The date and time of your submission is taken from the Moodle server and is recorded when your submission is complete, not when you click Submit.

It is essential that you check that you have submitted the correct file(s), and that each complete file was received. Submission receipts are accessed from the Coursework tab.

There is no late submission permitted on this timed assessment.

Section A:

Consider a bond with a par value of £1,000, a coupon rate of 3.9%, a maturity of 25 years and one coupon instalment per year. The market interest rate of this bond is currently 0.95%. Calculate the fair price of the bond. If the bond price were to change to £1,080 in a year’s time, what would be the interest rate on this bond then?

(10 marks)

Consider two assets: Dell stock and Lenovo. You believe Dell stock will either go up in value by 40% or go down in value by 20% next year, with equal probability, and Lenovo will either go up by 30% or go down by 10% next year, with equal probability. Calculate the expected return and standard deviation for each asset. If you were to spread money between the two assets equally, what would be the expected return and standard deviation of the portfolio, assuming their returns are independent of each other? Briefly explain why it is beneficial to hold the portfolio rather than any one of the two assets alone.

(10 marks)

Consider the stock of DrReddyslab PLC traded on London Stock Exchange. The beta of the stock is 0.42. The risk-free interest rate is 0.8%. If FTSE all share index is expected to rise by 12% next year, what would be the expected return of DrReddyslab stock next year, according to the Capital Asset Pricing Model (CAPM)? The consensus of analysts is that the Earnings Per Share (EPS) of DrReddyslab is expected to be £5.06 next year. The Return on Equity (ROE) is expected to remain unchanged at 25%. The dividend payout ratio is also expected to remain unchanged at 90%. What would be the fair price of DrReddyslab stock, according to the Constant Growth Dividend Discount Model?

(10 marks)

Singapore Exchange (SGX) offers a 3-month $/£ futures contract at $1.10/£. The size of contract is £77,500. Trader C buys one contract and deposits the initial margin of $6,000 in her margin account. The maintenance margin is $5,000. Suppose the futures prices on the following three days are $1.08/£, $1.12/£ and $1.11 respectively. Find out when he would receive a margin call. Suppose she tops up the margin account to $6,000 after receiving the margin call. What is her rate of return on the total investment?

(10 marks)

Section B:

When the Federal Reserve Conducts an expansionary monetary policy, what happens to the money supply? How does this affect the supply of dollars assets? How does this affect the dollar exchange rate in the short run and long run?

(30 marks)

Evaluate the statement “if a country wants to prevent its exchange rate from changing, it must give up some control over its money supply”.

(30 marks)

At Timekeeper Watch Corp., a director of the company said that the use of dividend discount models by investors is “proof” that the higher the dividend, the higher the stock price.

a. Using a constant-growth dividend discount model as a basis of reference, evaluate the directors’ statement.

b. Explain how an increase in dividend pay-out would affect each of the following (holding all other factors constant):

i. Sustainable growth rate.

ii. Growth in book value.

(30 marks)

Evaluate the Efficient Market Hypothesis (EMH) using evidence and explain its implications for investment strategy.

(30 marks)


Please use this answer booklet to write your answers

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