Assignment Intl Finance Ans

8/3/2019 Assignment Intl Finance Ans

1/22

Concordia University Wisconsin

Master of Business Administration

MBA 540/840

International Finance

Assignment

Submitted by: Mr. Kenny Law Chu Kong

Student No.: F00315970

Submission Date: February 6 2012

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1. What are the market forces leading MNC to a global economy?

Answer:

Market forces:

1. Raw materials seeking a MNC can obtain low-cost raw materials from

overseas.

2. Market seeking a MNC can enlarge the markets by entering into another

countries such as by FDI, joint ventures, etc.

3. Cost minimizing a MNC can reduce their costs by producing overseas.

2. What should MNC manager know about the international financial management?

And why?

Answer:

MNC manager should know the following:

1. Political risks the risk that government decisions may adversely affect

the MNCs cash flows. Governments (central banks in particular) also

affect important asset prices, such as interest rates, which constitute the

main component of a firms cost of debt.

2. Exchange risks it may have significant adversely effect on the MNCs

receipts and payments. Sometimes the effect may be so great that it will

make a company to go bankrupt.

3. Transfer pricing it can have significant tax savings if suitable transfer

pricing can be applied.

4. Arbitrage arbitrage profits can be earned when someone buys something

at a low price and sells it for a higher price without bearing any risk.

5. International cash flows it can affect the MNCs cash flows management

especially when there are a number of foreign currency receipts and

payments.

3. State the conditions under which a nation can gain from international trade.

Answer:

Beginning with the writings of David Ricardo in the 19th century, economists

have known that countries gain from trade if each nation specializes in the

production of those goods in which it has a comparative advantage. Even if one

country is more productive at producing a given item than other countries, it

should still focus its production on those goods in which it is relatively most

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efficient, and doing so will make all trading partners better off. There also

appears to be a link in the data between trade and growth: More open countries

tend to grow faster.

4. Discuss the effects of international trade on domestic supply and demand.

Answer:

In general, international trade can produce lower (higher) prices and higher

(lower) domestic consumption for imported (exported) goods.

5. How do exchange rates change, use USD to explain the impact on an exporter

perspective.

Answer:

Here, it assumes that the US exporter to export goods to other countries, in

general, the US exporter will charge US dollar to importer. For example, a Hong

Kong (HK) company purchases US$100,000 goods from US exporter who gives

one month credit to the HK company. When reaching the due date, the US

company still get US$100,000 no matter how the exchange rate changes in

respect of HK dollar. In other words, the exchange rate risk is borne by the HK

company. Of course, if the US exporter receives HK dollar, the situation is

different, i.e. the US exporter bears the exchange rate risk.

6. If Eur appreciate from 1 Eur = 1 USD to 1 Eur = 1.3 USD, calculate the

appreciation /depreciation for Eur / USD

Answer:

Euro will appreciate = %30%100

1

13.1=

USD will depreciate = %23%1003.1

3.11=

7. How the central bank impacts in the foreign exchange market?

Answer:

Central banks sometimes intervene in foreign exchange markets to affect

exchange rates directly. By supplying more of their currency, they weaken it;

and by demanding their currency, they strengthen it. With either intervention,

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the central bank ends up buying foreign currency. In practice, central banks do

not just buy foreign currency; they eventually buy foreign currency assets that

earn interest, such as foreign bonds. Of course, it is just a short-term effect on

the currency movement. In longer term, in order to stabilize the domestic

currency, the central bank should help the government to maintain sound

economic policies.

8. Explain any one from free floating, managed floating and fixed-rate systems.

Answer:

Freely floating exchange rates (or clean float) A genuine free float would

involve leaving exchange rates entirely to the vagaries of supply and demand on

the foreign exchange markets, and neither intervening on the market using

official reserves of foreign exchange nor taking exchange rates into account

when making interest rate decisions. For example, the Monetary Policy

Committee of the Bank of England clearly takes account of the external value of

sterling in its decision-making process, so that although the pound is no longer

in a fixed exchange rate system, it would not be correct to argue that it is on a

genuinely free float.

9. Explain what is arbitrage?

Answer:

Arbitrage is the act of exploiting price differences on the same instrument or

similar securities by simultaneously selling the overpriced security and buying

the underpriced security to obtain riskless profit.

10. Calculated forward premium or discount-

Annualised forward premium and discountForward rate=9.5 (90days)

Spot rate=9

Forward premium = ?

Forward rate=8 (90days)

Spot rate=9

Forward discount = ?

Answer:

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Forward premium = 2222.090

360

9

95.9=

Forward discount = 4444.090

360

9

98=

11. There are a number of theories to explain the parity between two countries.

Explain PPP and International Fisher Parity Theory using

PPP

Current (Spot) US$=1.5

(1+Inflation rate) US$ =1.04

(1+ inflation rate) GBP=1.03

Find out expected (Spot) US$ = ?

International Fisher Parity

Current (Spot) US$=1.5

(1+nominal interest rate) US$ =1.0475

(1+ 1+nominal interest rate) GBP=1.035

Find out expected (Spot) US$ = ?

Answer:

PPP claims that the rate of exchange between two currencies depends on the

relative inflation rates within the respective countries. In equilibrium, identical

goods must cost the same, regardless of the currency in which they are sold.

PPP predicts that the country with the higher inflation will be subject to a

depreciation of its currency.

Formally, if you need to estimate the expected future spot rates, PPP can be

expressed in the following formula:

b

c

hh

SS

++=

11

0

1

Where: S0 = Current spot rate

S1 = Expected future rate

hb = Inflation rate in country for which the spot is quoted (base country)

hc = Inflation rate in the other country (country currency).

Expected (spot) US$:

03.104.1

5.11 =S

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GBPUSS /5146.1$5.103.1

04.11 ==

The International Fisher Effect claims that the interest rate differentials

between two countries provide an unbiased predictor of future changes in the

spot rate of exchange.

The International Fisher Effect assumes that all countries will have the same

real interest rate, although nominal or money rates may differ due to expected

inflation rates. Thus the interest rate differential between two countries should

be equal to the expected inflation differential. Therefore, countries with higher

expected inflation rates will have higher nominal interest rates, and vice versa.

The currency of countries with relatively high interest rates is expected to

depreciate against currencies with lower interest rates, because the higher

interest rates are considered necessary to compensate for the anticipated

currency depreciation.

Under International Fisher Parity Theory, the expected (spot) US$ rate:

035.1

0475.1

5.1

1=

S

GBPUSS /5181.1$5.1035.1

0475.11 ==

12. The fisher effect state that the nominal interest rate is made up of two

components, what are they? State the formula.

As mentioned in question 11 above, given free movement of capital

internationally, this idea suggests that the real rate of return in differentcountries will equalize as a result of adjustments to spot exchange rates. The

International Fisher Effect can be expressed as:

b

a

b

a

h

h

i

i

+

+=

+

+

1

1

1

1

Where: ia = the nominal interest rate in country a

ib = the nominal interest rate in country b

ha = the inflation rate in country a

hb = the inflation rate in country b

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13. Show me the relationship between spot rate and forward rate for a currency.

Please use UFR (unbiased forward rates) to explain.

Answer:

Expected future exchange rate at time t (units of home currency per unit of

foreign currency) and f(t) is the forward rate for settlement at time t.

14. If 90 days forward rate is 1 GBP=0.8987 USD, what is the expected value of

euro in 90 days?

Answer:

It is because the forward rate is 1 GBP=0.8987 USD, the expected spot rate of

euro in 90 days is about 0.8987.

15. Interest rate differential can be used to supply exchange rate prediction beyond

one year. If five year interests rate on dollar and euro are 6% and 5%; if current

spot rate for the euro $0.90 find out the value of euro in year 5.

Answer:

Value of Euro in year 5 = 9437.005.1

06.190.0

5

5

=

16. Comment on: It makes sense to borrow during times of high inflation because

you can repay the loan in cheaper dollars.

Answer:

From point of view of borrower: an assumption is made that the high inflation

will continue during the currency of the loan agreement.

From the point of lender: they will charge higher interest rate to cover their cost

under high inflation. So the borrower cannot repay the loan in cheaper dollars.

Other factors, such as the timing of funding needs and general business

environment, would also play an important role on this.

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17. Why some governments does not allow foreigner to own domestic assets?

Answer:

First, it can help eliminate current account deficit.

Second, it can avoid a large amount of foreign capital inflow (reduce capital

supply) because it may raise real domestic interest rates.

18. Identify the sources [S] and use [U] of foreign currency for a country by giving

examples.

Answer:

1. Export of goods

2. Import of goods

3. Income receipts

4. Government lending to overseas countries

5. Other foreign investment in home country

19. One of the useful indicators for country risk is capital flight (export of savings by

a nations citizen). Discuss.

Answer:

Capital flight is an outflow of capital from a country, typically associated with a

prospective devaluation of the currency or other actions by the countrys

government that would result in a loss of wealth for investors in that country.

It occurs for several reasons, one of the most important reasons is the

inappropriate economic policies. Other reasons include government regulations,

controls, taxes and political risk.

20. Identify key indicators of country risk and economic health.

Answer:

Key indicators of country risk can be as follows:

1. Large government deficit relative to GNP

2. High rate of money expansion, especially when combined with a relatively

fixed exchange rate

3. Substantial government expenditures yielding low rates of return

4. Price controls, interest rate ceilings, trade restrictions, and other barriers to

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the smooth adjustment of the economy to changing relative prices

5. Vast state owned firms run for the benefit of their managers and workers

6. A citizenry that demands, and a political system that accepts, government

responsibility for maintaining and expanding the nation's standard of living

through public sector spending and regulations

Key indicators of long-run economic health are as follows:

1. Structure of incentives that rewards risk taking in productive ventures a

legal structure that stimulates the development of free markets

2. Minimal regulations and economic distortions

3. Clear incentives to save and invest

4. Open economy

21. What does CHIP means?

Answers:

CHIPS stands for Clearing House Interbank Payments System. It is operated by

The Clearing House, which also provides ACH, paper check exchange and

check image exchange for financial institutions of all sizes.

For more than 40 years, CHIPS has set the industry standard for reliability,

efficiency and innovation in wire transfer payments. Leading banks worldwide,

their correspondents and customers rely on CHIPS for real-time payments that

are accurate and final. Today, CHIPS is responsible for over 95% of USD cross-

border and nearly half of all domestic wire transactions totaling $1.5 trillion

daily.

22. What is direct quotation? Give an example.

Answer:

Quotations are generally made in terms of the amount of local or domestic

currency required to purchase one units of foreign currency, and this is called

the direct exchange rate. For example, the Japanese quote the dollar exchange

rate as 120/$, a direct rate in Japan.

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23. Cross rate calculation for Yen/Won

Japanese Yen 105/USD

South Korean Won W1,050/USD

Answer:

Yen/Won = 1.0050,1

105= Yen/Won

24. Find out the bid-ask spread If GBP is quoted 1.8419-28.

Answer:

The foreign exchange market is a worldwide interbank market. The market is

organized like an international over-the-counter market. A customer wanting to

buy a specified amount of a currency calls several banks to get the best price.

The foreign exchange dealer quotes not one price, but two. The bid price is the

exchange rate at which the dealer is willing to buy a currency; the ask (offer)

price is the exchange rate at which the dealer is willing to sell a currency.

If GBP is quoted 1.8419 28, the bid price is 1.8419, the ask price is 1.8428.

The bid-ask spread can be given as a percentage defined as 100 times (ask price

bid price) / ask price. So, the bid-ask spread for GBP =

%049.0%1008428.1

8419.18428.1=

25. What are the expected spot rate and the adjustment for forward points in one

year?

Expected (Spot) us$ = ?

If Current (Spot) us$=1.4

(1+norminal interest rate) us$ =1.04(1+ 1+norminal interest rate) GBP=1.03

Answer:

Expected (Spot) US$ = 4136.14.103.1

04.1=

The adjustment for forward points in one year = 1.4136 1.4 = 0.0136 (i.e. 136

basis point).

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26. Risks associated with spot or forward foreign currency are: please select correct

answer.

A. Economic risks

B. Market risk (rate movements between two countries in a period)

C. Volatility

D. Liquidity risk

E. Credit risk

F. Settlement risk

G. All the above

Answer:

G All of the above

27. The price of a seller is willing to accept for the security is called:

A. Bid price

B. Ask price

C. Spread

D. Float

Answer:

B. Ask price

28. Explain difference between forward and futures contracts.

Answer:

In both a forward contract and a futures contract, all terms of a goods exchange

are arranged on one day, but the physical delivery takes place at a later date

(delivery date). More precisely, a forward or futures contract is a commitment to

purchase or deliver a specified quantity of the underlying asset on a designateddate in the future for a price determined competitively when the contract is

transacted.

The major differences between forward and futures contracts can be

summarized as follows:

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Forward contracts Futures contracts1. Customized contracts in terms

of size and delivery dates.1. Standardized contracts in terms of

size and delivery dates.2. Private contracts between two

parties.2. Standardized contract between a

customer and a clearing house.3. Difficult to reverse a contract. 3. Contract may be freely traded on

the market.4. Profit or loss on a position is

realized only on the deliverydate.

4. All contracts are marked tomarket; profits and losses arerealized immediately.

5. Margins are set once, on the dayof the initial transaction.

5. Margins must be maintained toreflect price movements.

6. Low level of market regulation. 6. High regulation encouragestransparency.

7. There is a risk (credit risk) thatthe counterparty will fail tohonor the transaction.

7. Credit risk is reduced because theclearing house is counterparty.

29. Define forward commitment and identify different types of forward commitment.

Answer:

A forward commitment is an agreement to lock in a sales price for a transaction

that will take place in the future. One party agrees to sell a security or offer a

loan at a rate specified in the contract, as long as the buyer acts within a set

period of time. Such negotiations can be used to offset risks and arrange a salesprice and delivery date in advance. Examples are forward contracts, futures

contracts, and swap transactions.

30. Strike price (S); Spot price (X) for a currency option. Please fill in the blanks

S-X = +; a call option is in-the-money

S-X = 0; a call option is at-the-money

S-X = -; a call option is out-of-the-money

Answer:

S-X = +; a put option is out-of-the-money

S-X = 0; a put option is at-the-money

S-X = -; a put option is in-the-money

31. Differentiate an option to buy (call) and an option to sell (put).

Answer:

Option to buy is a call to give the buyer of the option contract the right to buy a

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specified number of units of an underlying asset at a specified price, called the

exercise price or strike price, on or before a specified date, called the expiration

date or strike date.

Option to sell is a put to give the buyer of the option contract the right to sell a

specified number of units of an underlying asset at a specified price on or before

a specified date.

32. The time value of an option is a function of the relationship between the strike of

the option and the current market forward rate and WHAT ELSE.

Answer:

The influence of each theses variables on call and put options can be described

as follows:

1. Volatility the value of a call or put increases with the volatility of the

underlying asset because options are perfectly protected against downside

risk. For example, the buyer can never lose more than the premium paid.

Yet, simultaneously, the buyer may potentially realize large gains on the

upside. The more volatile the asset, the larger the expected gain on the

option and, hence, the larger its premium.

2. Interest rate the value of a call (put) is an increasing (decreasing)

function of the domestic interest rate. Buying a call enables an investor to

lay claim to an asset, although making a much smaller capital investment

than required to buy the asset outright. In the case of a currency option,

buying a call rather than the currency itself deprives the buyer of the

foreign interest rate paid on the foreign currency. Hence, the value of a

currency call is a decreasing function of the foreign interest rate. The

reverse is true for a currency put.

3. Time to expiration the value of an option is an increasing function of thetime to expiration. Take the example of a call. The opportunity for the

underlying asset price to far exceed the strike price increases with time to

expiration.

33. What is the additional risk associated with currency options valuation?

Answer:

Additional risk:

1. Price sources (OTC trade)

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2. Model risk

3. Close out risk (not standardized)

4. Name confusion

34. Discuss the reasons to use swaps.

Answer:

As usual in finance, the major motivations for using swaps are return and risk.

Companies use swaps to reduce their financing costs (return motivation). They

also use swaps to manage their long-term exposure to currency and interest rate

risks, especially when they are faced with risks to existing assets and liabilities.

The usual argument for the use of swaps in new borrowing is cost savings. The

main motivation in the early stage of the market was to take advantage of

borrowing cost differentials between two markets to raise funds cheaply. The

idea is to use financing on a specific market in which a borrower has a

comparative advantage and to transfer that advantage to another market or

currency by making a swap at prevailing market conditions. The swap helps

only as a bridge across markets. However, these cost savings based on the

comparative advantage of some companies in some market segments are a form

of market inefficiency. Financial arbitrage, such as a swap, exploits these market

inefficiencies.

Another motive, as mentioned above, is to reduce or eliminate the exposure to

rises in interest rates. Over the short run, futures, options and FRAs could be

used to hedge interest rate exposure. However, for longer-term loans, swaps are

usually more suitable because they can run for the entire lifetime of the loan. So

if a treasurer of a company with a large floating-rate loan forecasts that interest

rates will rise over the next four years, he/she could arrange a swap interestpayments with a fixed-rate interest payer for those four years.

35. Fill in the blank:

BBB AACost of funds after swap

- Pay fixed 9.5%

- Receivable LIBOR flat

Cost of funds after swap

- Pay 9.00% fixed

- Receive 9.50% fixed

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- Pay LIBOR + 25 b.p. - Pay 6-month LIBOR flat

Net cost: 9.75 fixed Net cost: 6 month LIBOR 50Compared to 10% Compared to LIBOR flat

Net savings: 25 b.p. Net savings: 50 b.p.

36. List types of exposures.

Answer:

Transaction risk is the risk of an exchange rate changing between the

transaction date and the subsequent settlement date, i.e. it is the gain or loss

arising on conversion. It arises primarily on import and exports.

Economic risk is the variation in the value of the business (i.e. the presentvalue of future cash flows) due to unexpected changes in exchange rates. It is

the long-term version of transaction risk.

Translation risk is the risk that the organization will make exchange losses

when the accounting results of its foreign branches or subsidiaries are translated

into the home currency. Translation losses can result, for example, from

restating the book value of a foreign subsidiarys assets at the exchange rate on

the statement of financial position date.

37. Interest Rate Exposure Management associated with

A. Forward Rate Agreements (FRAs)

B. Interest Rate Futures

C. Interest Rate Swaps (IRSs)

D. Interest Rate Options

E. Bank deposit

F. (A D)

Answer:

F. (A D)

38. Show how A Ltd in HK use currency option to hedge its exposure to short term

currency movement by assuming the HK$/USD exchange rate moves in four

months time to 7.85 to 7.80. Considering the A Ltd is awarded the USD

contract and not awarded the USD contract.

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Answer:

Here, it assumes that A Ltd will receive USD in four months time, so A Ltd will

concern on the downside risk of USD. In order to eliminate the exchange rate

risk, A Ltd can arrange an option with a bank to fix the exchange rate at

HK$7.85/USD to sell USD in four months time when A Ltd receive the USD

amount. If the USD really depreciates to HK$7.80/USD after four months, A

Ltd should exercise the option to sell USD at HK$7.8/USD. If not, A Ltd can

give up the option and the maximum loss is the option premium.

39. Design a hedging strategy in hedging foreign currency flow exposure.

Answer:

When currency risk is significant for a company, it should do something to

either eliminate it or reduce it. Taking measures to eliminate or reduce the risk is

called hedging the risk or hedging the exposure.

1. Deal in home currency insist all customers pay in your own home

currency and pay for all imports in home currency. This method transfers

risk to the other party.

2. Matching when a company has receipts and payments in the same

foreign currency due at the same time, it can simply match them against

each other. It is then only necessary to deal on the foreign exchange (forex)

markets for the unmatched portion of the total transactions.

3. Forward contract it is where a company can buy and sell a currency, at a

fixed future date for a predetermined rate.

For example, it is now 1 January and X Co will receive $10 million on 30

April. The company enters into a forward contract to sell this amount on

the forward date at a rate of $1.60/. On 30 April the company isguaranteed 6.25 million. The risk has been completely removed.

4. Money market hedge It involves borrowing in one currency, converting

the money borrowed into another currency and putting the money on

deposit until the time the transaction is completed, hoping to take

advantage of favorable interest rate movements.

5. Currency futures they are standardized contracts for the sale or purchase

at a set future date of a set quantity of currency. Futures contracts are

exchange-based instruments traded on a regulated exchange. The buyer

and seller of a contract do not transact with each other directly.

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6. Currency option it is a right of an option holder to buy (call) or sell (put)

foreign currency at a specific exchange rate at a future date.

40. You are an Australian based exporter with a USD 1,000,000 receipt due in three

months time. At that time you will need to purchase AUD. The current three

month forward rate for AUD/USD is USD 0.6500 (spot rate is also USD

0.6500).

Market Outlook

You are unsure about the future direction of the AUD against the USD. You

wish to protect yourself against an AUD appreciation but would like to gain

from any favourable rate movement.

What is your Suggested Solution?

Answer:

First, I will buy an AUD call option with a strike price of USD 0.6500/AUD

with paying option premium, for example, if the premium is 1.5% of the face

value of the contract, the premium will be USD15,000.

After three months, if the USD appreciates, I will exercise the option at USD

0.6500/AUD. However, if the USD depreciates, I will let the option gone and

purchase AUD in the spot market.

41. A company could use currency options to hedge its exposure in lieu of forward

contracts. It is reasonable to match the instrument to specific situation. What are

the rules in choosing between currency options and forward contracts for

hedging purposes?

Answer:

In general, if the quantity of cash flow can be known, we should use the forwardcontracts for hedging. For example, if the cash outflow is known, the company

should buy the currency forward and vice versa.

However, if the quantity of cash flow is uncertain, using option contract may be

more suitable.

42. Define economic exposure to a firm facing exchange risk.

Answer:

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Economic exposure is the variation in the value of the business (i.e. the present

value of future cash flows) due to unexpected changes in exchange rates. It can

be sub-divided into transaction exposure and operating exposure.

43. Ask three questions to identify company facing exchange risks.

Answer:

1. Where is the company selling?

2. Where is the company producing?

3. Where are the materials brought in?

44. If Danish krone has devalued by 5% during the year. And Danish and USA

inflation rates are 5% and 4%, the beginning exchange rate for dollar value of

the krone is [Eo], what is the year end rate?

Answer:

Year end rate = 0.95 Eo 1.05/1.04

45. NIF (note issuance facility) is a low-cost substitute for syndicated loan. The

pricing of the euro notes under NIF depends on two conventions selling at a

discount rate or yield. If euro notes has face value of $100,000 and 77 days to

maturity is sold at a discount of $1,500 from face value. Its discount rate is:

Answer:

Discount rate = %013.777

360

000,100

500,1=

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46. Suppose you have a market value of equity equal to $500 million and a market

value of debt = $475 million. What are the capital structure weights?

Answer:

Types Market value ($) %

Equity 500 million 51.28%Debt 475 million 48.72%

975 million 100.00%

47. Give a definition for cost of capital.

Answer:

The cost of capital is the rate of return that a company has to offer finance

providers to induce them to buy and hold a financial security. This rate is

determined by the returns offered on alternative securities with the same risk.

The objective set for management in a value-based organization is the

maximization of long-term shareholder wealth. This means achieving a return

on invested money that is greater than shareholders could obtain elsewhere for

the same level of risk. Shareholders and other finance providers have an

opportunity cost associated with putting money into your firm. They could

withdraw the money placed with you and invest it in a comparable companys

securities. If, for the same risk, the alternative investment offers a higher return

than your firms shares, then as a management team you are destroying

shareholder wealth.

Using the correct cost of capital is important. If it is too high investment will be

constrained, firms will not grow as they should and shareholders will miss out

on value-enhancing opportunities. Also, it is one of the important elements for

common stock valuation, for example, by dividend valuation model.

48. The initial bond price is AUD96, the coupon income is AUD8, the ending bond

price is AUD98, and the local currency appreciates by 5% against the HK$

during the period. Find out the total return.

Answer:

The total return = %94.15105.196

896981 =

++

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49. Calculate expected portfolio return of global investment assuming US investor.

Answer:

The expected return from a two-asset portfolio are as follows.

rwUSp RaaRR )1( +=

PR = Portfolio expected return

USR = Expected US market return

rwR = Expected global return

a = Proportion of funds in US market

1 a = Proportion of funds in global market

50. Becoming a multinational is not a matter of choice but, rather, one of survival.

Kindly explain.

Answer:

Becoming a multinational company, the company can have the following

advantages:

1. Cost reduction the multinational company can search other countries to

have lower labor costs, lower materials costs and so on so that the

production or purchasing costs can be minimized.

2. Economies of scale the company can concentrate the production on one

country, for example, in Vietnam like Mercedes Benz and then distribute

the cars to different countries.

3. Multiple sourcing the company can be easier to obtain suitable resources

for its production or purchasing.

4. Knowledge seeking

5. Keeping domestic customers

51. Explain why overseas production is required for a global company?

Answer:

1. Increase sales

2. Supply stability

3. Control

4. Comprehensive service

52. How to adjust for increased economic and political risk of project?

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Answer:

It can have the following actions:

1. Shortening minimum payback period

2. Raising required rate of return

3. Adjusting cash flows

53. Use 8% to discount the ten year cash flow at $2600 p.a. with initial capital outlay

of $16,000, calculate NPV.

Answer:

NPV = 102 %)81(

600,2...

%)81(

600,2

%)81(

600,2000,16

+

++

+

+

+

+

NPV = 16,000 + 2,600 PVIFA8%, 10 years

NPV = 16,000 + 2,600 6.710

NPV = $1,446

54. What are the purposes of parallel loan?

Answer:

Parallel loan is a process whereby two companies in different countries borrow

each other's currency for a specific period of time, and repay the other's

currency at an agreed maturity for the purpose of reducing foreign exchange

risk. Also referred to as back-to-back loans. It has the following purposes:

1. repatriate blocked funds

2. avoid currency controls

3. reduce currency exposure

55. What are the main types of payment terms?

Answer:

In general, it has the following five principal payment terms:

1. Cash in advance

2. Letter of credit

3. Drafts

4. Consignment

5. Open account

56. List some methods to expedite cash collections.

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Answer:

The methods to expedite cash collections:

1. Cable remittances

2. Establish accounts in clients bank

3. Negotiate with banks obtain value dating

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Assignment Intl Finance Ans