There are SEVEN (7) questions in this section. Answer ALL questions. (80 Marks) Question 1 The current spot exchange rate is RM5.76/ and the three-month forward rate is RM5.70/. Based on your analysis of the exchange rate, you are pretty confident that the spot exchange rate will be RM5.72/ in three months. Assume that you would like to buy or sell 7,000,000. a) Determine the action you need to take to speculate in the forward market. Compute the expected dollar profit from speculation. (4 Marks) b) Compute the speculative profit in RM terms if the spot exchange rate turns out to be RM5.67/? (4 Marks) (Total: 8 Marks) Question 2 Ali is holding 20,000 kilograms stocks of palm oil. Suppose the price of 1,000 kilograms of palm oil in the cash market is RM2,500. He wants to hedge against the decline in palm oil prices so that it does not have a severe effect on the value of his investment. a) Discuss the actions that Ali should do to achieve this purpose. (4 Marks) b) Compute the value of his portfolio when the spot price: i) drops to RM1,400 (4 Marks) ii) increases to RM1,900 (4 Marks) (Total: 12 Marks) Question 3 Exchange rate quotations can be quoted in two ways, direct quotation and indirect quotation. Direct quotation is when the one unit of foreign currency is expressed in terms of domestic currency. On the other hand, the indirect quotation is when one unit of domestic currency as expressed in terms of foreign currency. a) If the Euro depreciates against the U.S dollar, can a U.S. dollar buy more or fewer euros as a result? Explain. (4 Marks) b) If the United States imports more goods from abroad than it exports, foreigners will tend to have a surplus of U.S. dollars. How will this do to the value of the dollar with respect to foreign currencies? Briefly explain the corresponding effect on foreign investments in the United States. (4 Marks)