MF0015 – International Financial Management - summer/spring 2012

Spring / February 2012

Master of Business Administration- MBA Semester 4

MF0015 – International Financial Management - 4 Credits

(Book ID: B1316)

Assignment Set- 1 (60 Marks)

Note: Each Question carries 10 marks. Answer all the questions.

Q1. You are given the following information:

Spot EUR/USD : 0.7940/0.8007

Spot USD/GBP: 1.8215/1.8240

Three months swap: 25/35

Calculate three month EUR/USD rate.

Ans:-

Forward Points = ((Spot * (1 + (OCR rate * n/360))) / (1 + (BCR rate * n/360))) - Spot

OCR = Other Currency Rate

BCR = Base Currency Rate

Forward points = ((0.07940 * (1 + (0.018215 * 90/360))) / (1 + (0.08007 * 90/360))) – 0.07940

SWAP = -0.00120

Forward rate = 0.07940 - 0.00120 = 0.0782

Customer sells EUR 3 Mio against USD at 0.0782 at 3 month (0.07940 - 0.00120).

Customer wants to Buy EUR 3 Mio against USD 3 months forward.

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Q2. Distinguish between Eurobond and foreign bonds. What are the unique characteristics

of Eurobond markets?

Ans:- A Eurobond is underwritten by an international syndicate of banks and other securities

firms, and is sold exclusively in countries other than the country in whose currency the issue is

denominated. For example, a bond issued by a U.S. corporation, denominated in U.S. dollars, but

sold to investors in Europe and Japan (not to investors in the United States), would be a

Eurobond. Eurobonds are issued by multinational corporations, large domestic corporations,

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Q3. What is sub-prime lending? Explain the drivers of sub-prime lending? Explain briefly

the different exchange rate regime that is prevalent today.

Q4. Explain (a) Parallel Loans (b) Back – to- Back loans

Q5. Explain double taxation avoidance agreement in detail

Q6. What do you mean by optimum capital structure? What factors affect cost of capital

across nations?

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Spring / February 2012

Master of Business Administration- MBA Semester 4

MF0015 – International Financial Management - 4 Credits

(Book ID: B1316)

Assignment Set- 2 (60 Marks)

Note: Each Question carries 10 marks. Answer all the questions.

Q1. “Because of its broad global environment, a number of disciplines (geography, history,

political science, etc.) are useful to help explain the conduct of International Business.”

Elucidate with examples.

International Finance is a distinct field of study and certain features set it apart from other fields.

The important distinguishing features of international finance are discussed below:

· Foreign exchange risk: An understanding of foreign exchange risk is essential for managers

and investors in the modern day environment of unforeseen changes in foreign exchange rates. In

a domestic economy this risk is generally ignored because a single national currency serves as

the main medium of exchange within a country. When different national currencies are

exchanged for each other, there is a definite risk of volatility in foreign exchange rates. The

present International Monetary System set up is characterized by a mix of floating and managed

exchange rate policies adopted by each nation keeping in view its interests. In fact, this

variability of exchange rates is widely regarded as the most serious international financial

problem facing corporate managers and policy makers.

· Political risk: Another risk that firms may encounter in international finance is political risk.

Political risk ranges from the risk of loss (or gain) from unforeseen government actions or other

events of a political character such as acts of terrorism to outright expropriation of assets held by

foreigners. MNCs must assess the political risk not only in countries where it is currently doing

business but also where it expects to establish subsidiaries. The extreme form of political risk is

when the sovereign country changes the “rules of the game” and the affected parties have no

alternatives open to them.

· Expanded opportunity sets: When firms go global, they also tend to benefit from expanded

opportunities which are available now. They can raise funds in capital markets where cost of

capital is the lowest. In addition, firms can also gain from greater economies of scale when they

operate on a global basis.

· Market imperfections: The final feature of international finance that distinguishes it from

domestic finance is that world markets today are highly imperfect. There are profound

differences among nations’ laws, tax systems, business practices and general cultural

environments. Imperfections in the world financial markets tend to restrict the extent to which

investors can diversify their portfolio. Though there are risks and costs in coping with these

market imperfections, they also offer managers of international firm’s abundant opportunities.

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Q2. What is a credit transaction and a debit transaction? Which are the broad categories of

international transactions classified as credits and as debits?

Q3. What is cross rates? Explain the two methods of quotations for exchange rates with

examples.

Q4. Explain covered and uncovered interest rate arbitrage.

Q5. Explain briefly the mechanism of futures trading

Q6. Briefly explain the difference between ‘functional currency’ and ‘reporting currency’.

Identify the factors that help in selecting an appropriate functional currency that can be

used by an organisation.

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Documents

MF0015 – International Financial Management - summer/spring 2012