Dfi 304: International Finance Question Paper

Dfi 304: International Finance

Institution: University Of Nairobi question papers

Exam Year:2013

INSTRUCTIONS:
1. Attempt ALL Questions.
2. Be CLEAR and CONCISE
3. Show ALL the necessary workings.

QUESTION ONE
(a) (i) Define the term forfeiting as used in trade finance. (1 mark)
(ii) Explain the role of a forfeiter. (2 marks)
(iii) State the five parties to a forfeiting transaction. (5 marks)
(iv) Explain the seven steps in a typical forfeiting transaction. (7 marks)

(b) A foreign subsidiary of a U.S Corporation earns

$10,800 before local taxes. The U.S corporate income tax rate is 35%. The foreign tax rate is 30%. Calculate the net remittance to U.S parent, after tax income from a subsidiary, total tax paid on remitted income and effective tax rate under the following cases: (i) Foreign subsidiary with 100% payout {no withholding tax}. (2.5 marks) (ii) Foreign subsidiary with 100% payout {10% withholding tax}. (2.5 marks) (iii) Foreign subsidiary with 50% payout {10% withholding tax}. (2.5 marks) (iv) Foreign subsidiary with 50% payout {10% withholding tax} and the U.S parent earns only 40% of the foreign corporation. (2.5 marks) QUESTION TWO Discuss the Asset Market Approach to spot exchange rate forecasting. (25 marks) QUESTION THREE (a) Assume a market trader has US$ 1,000,000. He observes the following rates quoted by three banks:
Citibank quotes U.S dollar per Euro: US

$1.2223/€ Barclays Bank quotes U.S dollars per Sterling Pound: US$ 1.8410/£
Dresdner Bank quotes Euros per Sterling Pound: €1.5100/£

(i) Does an arbitrage opportunity exist? Explain. [1 mark]
(ii) Indicate the steps that the trader will use in the arbitrage process and determine the arbitrage profit. [6 marks]
(iii) Carry out a sensitivity analysis using Dresdner Bank rates. [8 marks]

(b) A French exporter, Robin, has exported his product to UK for an amount of £500,000. He is to receive payment after three months. He wants to cover his receivables.

The following data is available. Indicate what Robin should do.
Spot rate: Euro 1.400/£
Put option strike price: Euro 1.400/£
Premium: 2.80 per cent
Option maturity: 3 months

Assume the £ depreciates to €1.37/£ or appreciates to €1.47/£. [10 marks]

QUESTION FOUR
Discuss the three principal approaches to determining the financial structure of subsidiaries. (25 marks)

Dfi 304: International Finance Question Paper

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