Hbc2221:International Finance Question Paper

Hbc2221:International Finance

Institution: Meru University Of Science And Technology question papers

Exam Year:2014

QUESITON ONE – (30 MARKS)
(a) How is international financial management different from domestic financial management? (5 Marks) (b) Discuss the following three types of markets at work in the global economic systems; (i) Factor market (3 Marks) (ii) Product market (3 Marks) (iii) Financial markets (5 Marks) (c) Discuss the role of international monetary fund in international trade and financial transactions. (7 Marks) (d) Discus the advantages of Direct foreign investments to the host country. (7 Marks)
QUESTION TWO – (20 MARKS)
(a) A French tourist arrived in Kenya with Euros 45000 in travelers cheques. He changed his travelers cheques into Kshs. At the spot rate of 78.140/1 Euro. The bank charged him 1%. He spent Ksh.300,000 and left for France. He converted the outstanding amount into Euros at the sport rate of Ksh.80/1 Euro. How much money did he take home? (5 Marks) (b) Explain the following types of foreign currency risk exposure: (i) Transaction exposure (3 Marks)
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(ii) Translation exposure (3 Marks)
(c) Explain the two broad ways in which a firm can hedge against a currency transaction exposure. (8 Marks)
QUESTION THREE – (20 MARKS)
(a) Distinguish between direct currency quote and indirect currency quote. (6 Marks) (b) Assume the following information: Sport rate of pound =

$1.70 180 day forward rate of pound =$ 1.75 180 day British interest rate = 5% (absolute) 180 day USA interest rate =4% (absolute)
Based on the above information does covered interest arbitrage (hedged interest arbitrage) hold? Assume that there are no transaction costs and that you start with

$1,000,000. (7 Marks) (c) Assume the following information; Sport rate of French Francs =$ 0.100 180 day forward rate of French Francs =

$0.12 180 day French interest rate =6% (absolute) 180 day USA interes rate = 5% (absolute) You have also learnt the transaction costs of the US investor is$ 100. Assume that the USA investor has

$500,000 to invest. Does Hedged interest arbitrage exist? (7 Marks) QUESTION FOUR – (20 MARKS) (a) Discuss the theories that encourage MNCs to expand their business internationally. (10 Marks) (b) Briefly explain any three methods that a firm can use to hedge against transaction exposure risk. (10 Marks) QUESTION FIVE – (20 MARKS) (a) Compute the forward discount or premium for the British pound whose 90-day forward rate is$ 1.75 and the sport rate is $1.78. State whether your answer is a premium or a
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discount comment on the significance of you answer with respect to the British pound. (5 Marks) (b) Explain the following terms of forecasting exchange rates; (i) Purchasing power parity (5 Marks) (ii) Interest rate parity (5 Marks) (iii) International fisher effect (5 Marks)

Hbc2221:International Finance Question Paper

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