Fnmg 548:International Finance Question Paper

Fnmg 548:International Finance

Course:Masters In Business Administration

Institution: Kenya Methodist University question papers

Exam Year:2013

KENYA METHODIST UNIVERSITY

SCHOOL OF BUSINESS AND MANAGEMENT

END OF SEMESTER EXAMINATION FOR MASTER OF SCIENCE IN ACCOUNTING, INVESTMENT AND FINANCE AUGUST, 2013
UNIT CODE : MSFI 517/FNMG 548
UNIT TITLE : INTERNATIONAL FINANCIAL MANAGEMENT

TIME: 3 HOURS

Instructions:

This paper contains six questions. Answer all questions in section A and any three question in section B.

SECTION A:

Question One

Describe briefly three major theories which explain international trade.

(5mks)

You have been retained by the management of an international group to advise on the management of its foreign exchange exposure.

Required

Explain briefly the main types of foreign exchange exposure. (5mks)

Advice on policies which the corporate treasure could consider to provide valid and relevant methods of reducing exposure to foreign exchange risk.

(3mks)

Question Two

"Like the traffic lights in the city, the international monetary system is trake for granted until it begins to malfunction and to disrupt people’s daily lives" Robert Salom

Required
Explain the relevance of the quotation and use of fundamental exchange rate relationship to demonstrate the working of international financial markets. (6mks)

Assume the following exchange rate quotes on British pounds.

Bid ASK
Ali bank

$1.46$ 1.47
Lumber bank

$1.48$ 1.49

Required
Explain how the locational arbitrage would occur (show calculations). Also explain how this arbitrage will re-align the exchange rates. (6mks)

SECTION B:

Question Three

As the treasurer of Ali’s corporation, you must decide how to hedge (if at all) future payables of DM 150,000 60- days from now. Current spot rate is

$0.42/DM. You must decide whether to use options, forwards or money market hedge your position or no hedge at all, put options are available for purchase for a premium of$ 0.02 per unit and an exercise price of

$0.48 per mark call options are available our purchase for a premium of$ 0.04 per unit and an exercise price of

$0.51. Forward contracts are available at$ 0.54 per DM. the forecasted spot rates of the DM in 60 days are given as follows:
Future spot rate probability

$0.49 30%$ 0.52 40%

$0.58 30% Money market hedge US Germany One-year deposit rate 5% 6% One-year borrowing rate 9% 80% Required Specifically calculate and compare your payable in$ if you hedge with options, forward, money market hedges with no hedge situation. What alternative would you choose? (25mks)

Question Four

Two countries, the United States and England, produce only one good, wheat. Suppose the price of wheat is

$325 in the United States and is £1.35 in England. Required According to the law of one price, what should$ : £ spot exchange rate be?

(3mks)

Suppose the price of wheat over the next year is expected to rise to

$3.50 in the United States and to £ 1.60 in England. What should the one year$ :£ forward rate be.

(3mks)

If the US government levies a tariff of $0.50 per bushed on what imported from England, what is the maximum possible change in the spot exchange rate that could occur.

(8mks)

Outline the reasons why government may intervene in the foreign exchange market.

(11mks)

Question Five

The six month interest rate (annualized) in Italy and France are 11 percent and II percent respectively. The current exchange rate isUra296.10/FF and are six month forward rate is 326.50/FF.

Required

Where should French investor invest? (Show your calculations).

(6mks)

Where should he borrow form? Justify your answer.

(3mks)

Is there any arbitrage opportunities for this investment.

(6mks)

What economic benefit might countries gain from forming a common market.

(10mks)

Question Six

It has been said that "What gets managed, and what we do not measure tends to be ignored" In addition to the familiar financial measures of performance, what are the other dimensions that should be included in a comprehensive evaluation of the performance of international financial institutions?

(5mks)

First international company ltd, a Kenyan based international company is evaluating an investment in Germany, first international company is thinking of opening a plant in Germany. The project will cost DM 4 million and is expected to produce cashflow of DM 4 million in year 1, and DM 3 million in years 2 and 3. Assume that the current spot rate is sh. 50/DMI and the current risk free rate in Kenya is 11.% compared to that in Germany of 6%. The appropriate discount rate is estimated to be 15% which is Kenyan cost of capital for the Germany project.

Required
Should first international company ltd undertake the project? Explain. (20mks)

Fnmg 548:International Finance Question Paper

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