International Finance Question Paper

International Finance

Institution: Kca University question papers

Exam Year:2010

UNIVERSITY EXAMINATIONS: 2009/2010
SECOND YEAR EXAMINATION FOR THE DEGREE OF BACHELOR OF
COMMERCE
CFM 204-F INTERNATIONAL FINANCE (SATURDAY)
DATE: AUGUST 2010 TIME: 2 HOURS
INSTRUCTIONS: Answer question ONE and any other TWO questions
QUESTION ONE
a) The cost of capital for MNCs may differ from that of domestic firms. Discuss five
characteristics that differentiate MNCs cost of capital from that of domestic firms. (10 Marks)
b) Discuss three theories that explain the motives of international business (6 Marks)
c) Explain the three types of exposure that result from exchange rate fluctuations. (6 Marks)
d) What factors affect currency call option premiums? (4 Marks)
e) The one year interest rate for Kenya Shilling is 18% while the US dollar rate is 10%. Calculate
the forward premium/discount and the expected forward rate if the Interest Rate Parity (IRP)
theory holds. Assume the spot rate is

$1 = Ksh. 65. (4 Marks) QUESTION TWO a) Explain three types of arbitrage that can occur internationally as applied to foreign exchange and international money markets. (6 Marks) b) What measure can a Multinational firm take to minimise economic exposure resulting from exchange rate fluctuations? (8 Marks) c) Discuss the three key components of the current account of a balance of payments statement. (6 Marks) 2 QUESTION THREE a) What factors influence the fluctuation of exchange rates within an economy? (10 Marks) b) What are the implications of a single currency system? Discuss with reference to the European Monetary System. (5 Marks) c) Smart Banking Co. can borrow$ 5 million at 6% annualised. It can use the proceeds to invest
in £ at 9% annualised over a six day period. The British Pound is worth

$0.95 and is expected to be worth 40.94 in six days. Based on this information, should smart Banking Co. borrow US dollars to invest in British pounds/ what would be the gain or loss in US Dollars? (5 Marks) QUESTION FOUR a) Differentiate between a forward contract and a futures contract. (8 Marks) b) Briefly explain four types of exchange rate systems. (8 Marks) c) What factors affect the bid ask spread on currency quotations? (4 Marks) QUESTION FIVE a) As an employee of the foreign exchange department for a large company, you have been given the following information Beginning of the year Spot rate$ = Ksh. 70
Spot rate £ = Ksh. 120
Cross exchange rate

$= £0.58331 One year forward rate of$ = 74
One year forward rate of £ = 126
One year US interest rate = 8%
One year British interest rate = 9%
One year Kes interest rate = 15%
Determine whether triangular arbitrage is feasible. If so, how it should be conducted to make a
profit (5 Marks)
b) Using the information in question 1, determine whether covered interest arbitrage is feasible
and, if so, how it should be conducted to make a profit (5 Marks)
3
c) Based on the information in question 1 for the beginning of the year, use the International
Fisher Effect theory to forecast the annual percentage change in the British pound’s value over
the year. (5 Marks)
d) Assume that at the beginning of the year, the pound’s value is in equilibrium. Assume that the
British inflation rate is 6%, while the US inflation rate is 4%. Assume that any change in the
pounds value due to inflation differential has occurred by end of the year. (5 Marks)

International Finance Question Paper

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