IV Sem. M.B.A. (Day)NI Sern. M.B.A. (Evening) Examination, July/ August 2006 (Updated Scheme)

MANAGEMENT (Paper - F - 4) International Financial Management

Time : 3 Hours Max. Marks : 75

SECTION - A

1. Answer any six questions briefly: (6x2=12) a) What do you mean by soft or weak and hard or strong currency ? b) What is BOP ? c) What is interest rate parity ? d) Explain the terms, with examples, Bid quote and Ask quote. e) What is the basic difference between a put on British pounds sterling and call

on sterling ? f) Explain the meaning of "Cross - rate consistency". g) Define tbe terms "hedging" and "currency r isk. h) What is the essence of the theory of comparative advantage ? i) What do you mean by political risk ? j) What is dollarisation ?

SECTION - B

Answer any four questions: (4x5=20)

2. What are the five basic mechanisms for establishing exchange rates ? How does each work ?

3. Why did the fixed exchange rate regime of 1945-1973 eventually fail ?

4. What are the arguments against a firm pursuing an active currency risk management programme ?

5. HOW can a MNE minimize its translation and transaction exposure simultaneously ?

6. What are tha benefits of achieving a lower cost and greater availability of capital ?

7. What are a country's objectives when determining tax policy on foreign source income ?

SECTION - C

Answer any three questions: (3x10=30)

8. Spot and 180 - day forward exchange rates of several major currencies are given below. For each pair, calculate the percentage premium or discount expressed as' annual rate. P.T.O.

Ouoted spot rate 180 dav forward rate

European Euro: $ 0.80001€ $ 0.8160/€

British Pound: $ 1.562 I & $ 1.5300/£

Japanese Yell Y 12000/$ Y 118.00/$

Swiss Franc SF 1.6000/$ SF 1.6200/$

Hongkong dollar HK $ 8.00001$ HK $ 7.8000/$

9. Assume a call option on euros is written with a strike price of $ 0.94001€ at a premium of 0.9000 per euro ($ 0.00901~) and with-an expiration date three months from now. The option is for e 100,000. Calculate your profit or loss if you exercise before maturity at a time when the euro is traded spot at:

b) $ 0.9200/€ f ) $ 1 .0000/€ .

c) $ 0.9400/€ g) $ 1.0200/€

d) $ 0.96001~

10. Define International Fisher effect. Explain to what extent do emperical tests confirm that the international Fisher effect exists in practice.

11. What are the main disadvantages for a firm located in an illiquid market and also in a segmented market ?

12. a) Explain the OL1 paradigm in relation to FDI.

b) Explain the behavioural approach to FDI.

SECTION - D (1x13=13)

1 3. On checking telerate screen, you see the following exchange rate and interest rate quotes:

Currency 90 Day Interest rate (annualized) Spot rates 90 Day Forward Rates .-

D o h 4.99% - 5.03%

Swiss Franc 3.14% - 3.19% $0.711-22 $0 .726-32

a) Can you find an arbitrage opportunity ?

b) What steps must you take to capitalize on it ?

c) What is the profit per $ 1,000,000 arbitrages ?

IV Sem. M.B.A. (Day)NI Sem. MJ3.A. (Eve.) Examination, JulyIAugust 2005

(Updated Scheme) F-4: FINANCE

International Financial Management

Time: 3 Hours Max. Marks: 75

Instruction: Use of calculators permitted.

SECTION -A

Answer any six of the following questions. Each question carries two marks. (6x2=12)

1. a) What is current A/c generally composed of ?

b) Distinguish between spot and forward market.

c) What is currency call option ?

d) Explain briefly International Fischer Effect.

e) Who are the participants in the foreign exchange market ?

f) Define translation exposure.

g) The US dollar-Thai Bath rate is: US $ 0.2339Bath and the US dollar Indian Rupee exchange rate is: US $ 0.2538lRs. What is RsBath exchange rate ?

h) Differentiate between depreciation and devaluation.

SECTION - B

Answer any four of the following questions. Each question carries 5 marks. (4x5=20)

2. Explain purchasing power parity principle and the rationale behind it.

3. An Importer has purchased from France goods worth 50,000 ffr. There is no quote available for Rs versus ffr. The quotes available are:

i) US$ = Rs. 45.05110 and

ii) US $ = ffr 5.1025150

What is the value of this transaction in Rupee terms ?

4. Explain coupon swap with the.help of an example.

5. Distinguish between futures and options.

P.T.O.

6. Explain straddle with the help of an example.

7. Given the following data

Sopt rate 1 $ = Rs. 42.00 10

6 month forward rate 1 $ = Rs. 42.8020 7 Annualised Interest rate on 6 month 'Rupee: 1.2%

Annualised Interest rate on 6 month US $ : 8%

Calculate Arbitrage possibilities.

SECTION - C f

Answer any three of the following questions. Each question carries 10 marks. (3x10 = 30)

8. What do you understand by the term "International Cash Management" ? Briefly elucidate its objectives.

4 9. Identify factors to be considered when assessing country risk. Briefly elaborate

on how each factor can affect the risk to the MNC. 1 1

10. Company A wishes to borrow 10 million at a fixed rate for 5 years and has been 4 i

offered either 11% fixed or six month LIBOR + 1%. Company B wishes to borrow 10 million at a floating rate for 5 years and has been offered either 10%

'1 fixed or 6 month LIBOR + 0.5%. 4

8 +.

a) How do they enter into a swap arrangement in which each benefit equally ? 3 <

b) What risks did this arrangement generate ? h

5 11. Farm products is the Canadian affiliate of a US manufacturing company. Its J

balance sheet in thousands of Canadian dollars (C $) for January 1, 2001 is ? 1

shown below. The January 1,2001 exchange rate was C $ 1.6 1 US dollar. Farm Products Balance Sheet (Thousands of C$)

Assets

Cash

Liabilities and Networth

C $ 1,00,000 Current Liabilities C$ 60,000 4

Account Receivable C $2,20,000 Long term Debt C $ 1,60,000 I

Inventory C $3,20,000 Capital and Stock C $ 6,20,000 1

Net plant and equipment C $2,00,000

Total C $8,40,000

a) Determine farm products accounting exposure on January 1, 2001 using ?

the current rate method/monetary and non monetary method. 9

b) Calculate farm products contribution to its parents accounting loss if the exchange rate on December 3 1,200 1 was C $1.8 per US dollar. Assume all

J 1

accounts remain as they were at the beginning of the year. i

12. While you were visiting London, you purchased Jaguar for £ (GBP) 35000 payable in three months. You have enough cash at your bank in New York city which pay 0.35 percent interest per month. Compounding monthly to pay for the car. Currently the sopt exchange rate is. $1.45/£ and the three month forward exchange rate is $1.40/£. In London, the money market interest rate is 2.0 percent for a three month investment. There are two alternative ways of paying for your Jaguar.

i) Keep the funds at your bank in the United States and buy £ 35000 forward. , ii) Buy a certain amount of Pound spot today and invest the amount in the UK

for three months so that the maturity value becomes equal to & 35000.

r Evaluate each payment method. Which method would you prefer ? Why ?

F 13. Case study

SECTION - D

(Compulsory)

(1x13=13)

The Sports Exports Company converts British Pounds into Dollars every month. The prevailing spot rate is about $1.65 per pound, but there is much uncertainty about the future value of the pound. Jim Logaw, owner of the Sports Exports Company, expects that British inflation will rise substantially in the future. In previous years when British inflation was high, the pound depreciated. The prevailing British Interest rate is slightly higher than the prevailing US interest rate. The pound has risen slightly over each of the last several months Jim wants to forecast the value of pound for each of the next 20 months.

i) Explain how Jim could use technical forecasting to forecast the future value of the Pound. Based on the information provided, do you think that a technical forecast of the Pound would reflect future appreciation or depreciation in the Pound ?

ii) Explain how Jim could use fundamental forecasting to forecast the future value of the Pound. Based on the information provided do you think that a fundamental forecast of the Pound would reflect appreciation or depreciation of the Pound.

iii) Explain how Jim could use a market based forecast to forecast the future value of the Pound. Do you think the market based forecast would reflect appreciation or depreciation or no change in the value of Pound ?

IV Semester MBA Examination, October 2004 (Updated Scheme)

F 4: INTERNATIONAL FINANCIAL MANAGEMENT

Time: 3 Hours Max. Marks: 75

SECTION -A

I . Answer six questions: (6x2 = 12)

a) What is Bid and ask rate ?

b) What is Covered Interest Arbitrage ?

c) Explain Spot and Forward Rate.

d) What is Clean and Dirty Float ?

e) Define collars in the context of Interest Rates.

f) What is marking to market ?

g) Explain Direct and Indirect Quotations.

h) What is PPP '?

SECTION - B

Answer four questions:

2. Mention the key areas of International Cash Management.

3. What are the Special Drawing Right ? Why they are created ?

4. In Balance of Payment what are debit and credit transactions ? What are the broad categories of International Transactions classified as debits and credits ?

5. Why do cornparlies involved in International Trade have tc kcigz thzir foreign exchange exposure ?

6. Explain the following:

a) Interest Rate Parity Theory

b) International Fisher Effects.

7. FDI flows into India are around 3.4%, which is very low when compared to China and Hong-Kong. What policy measures do you think the regulatory authorities should initiate to attract more FDI flows into the country ?

P.T.O.

' I A - A ." 4

SECTION - C I

I r h i(

, Answc;r three questions: (3x10 = 30) ";

8. V411y is i t important to study International Financial Management ? How is it I

different from Domestic Financial Management ?

9. Explain how these exchange rate systems functions: 4 7

a) gold exchange standard C) fixed exchange rate and '3 b) pegged exchange rate d) floating exchange rate 'i

10. What are the basic differences between forward and future contracts and between future and options contracts ? i

1 1. Given the following data: '1 Spot Rate Rs. 46.0010 = 1 dollar $ 6 months forward rate Rs. 46.8020 = 1 dollar

Annualised interest rate on 6 months rupee: 12%

Annualised interest rate on 6 months dollar: 8%

Cal::ir!ate the arbitrage possibilities.

12. a) Explain the origlin and development of Euro currency market.

b ) Highlight the reasons for lower borrowing costs in the Euro currencv market. (A SECTION - D

13. Case study compulsory:

Baltimore Tile company (US) is considering investing 50,000,000 Rupees in India to create a wholly owned Tile manufacturing plant to export to the European market. After five years, the subsidiary would be sold to Indian Investors for Rs. 100,000,000. A proforma income state for the Indian operations predicts the generation of Rs. 7,000,000 of annual casn t~ows as f-yl- -.

Annual sales revenue: Rs. 30,000,000

Less cash operating expenses: - 17,000,000

Less depreciation: - 1,000,000

Income before interest and taxes 12,000,000

Less Indian taxes at 50% 6,000,000

Net Income 6,000,000

Add bank depreciation

Annual cash flow

-3- OE - 2015

The icitial inlrestment will be made sn 31s: Ex. 2302 and cash flows will occur on December 3 1 of each succeeding year. Annual cash flows Dividends to Baltimore Tile from India will equal 75% of Accounting Income.

The US corporate tax rate is 40% and the Indian corporate tax ratio is 50%. Because the IndianTax ratio is greater than the UsTax ratio, annual dividends paid to Baltimore will not be subject to additional taxes in the United States. There are no capital gain taxes on the final sale. Baltimore Tile uses a weighted average cost of capital of 14% on domestic investments, but will add 6 percentage points for the Indian Investment because of perceived greater risk. Baltimore Tile forzcasts the Rupee/dollar exchange rate for December 3 1 st on the next six years to be:

Year Exchange rate -

Rs. 50.00/$

Rs. 54.001 $

Rs. 58.00/$

Rs. 62.00/$

Rs. 66.001$

Rs. 70.00/$ - What is the Net present value and whether the Investment in the Indian subsidiary is worth while ?