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International Finance (Saturday Question Paper
International Finance (Saturday
Course:Bachelor Of Commerce
Institution: Kca University question papers
Exam Year:2009
1
UNIVERSITY EXAMINATIONS: 2009/2010
SECOND YEAR STAGE 3 EXAMINATION FOR THE DEGREE OF
BACHELOR OF COMMERCE
CFM 204-INTERNATIONAL FINANCE (SATURDAY)
DATE: DECEMBER 2009 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) What are the arguments have been advanced by critics on the irrelevance of exchange rate risk
exposure? (6 Marks)
c) Describe how inflation can be exported from one economy to another elaborating on the
necessary conditions for the occurrence. (5 Marks)
d) What factors does an MNC consider in Capital Budgeting before establishing a subsidiary?
(6 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. (3 Marks)
QUESTION TWO
a) Explain three types of arbitrage that can occur internationally as applied to foreign exchange
and international money markets. (6 Marks)
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b) How do fixed exchange rate systems make each country more vulnerable to economic
conditions in other countries? (8 Marks)
c) A. Discuss the three key components of the current account of a balance of payments
statement. (6 Marks)
QUESTION THREE
a) Discuss three theories that explain the motives of international business (6 Marks)
b) Explain the three types of exposure that result from exchange rate fluctuations. (6 Marks)
c) Briefly explain four types of exchange rate systems. (8 Marks)
QUESTION FOUR
a) Define and differentiate between a forward contract and a futures contract. (8 Marks)
b) How are hedges used to eliminate transaction exposure for Multinational Firms? (4 Marks)
c) What factors affect currency call option premiums? (8 Marks)
QUESTION FIVE
a) Horizon Ltd, from US, has just constructed a manufacturing plant in Kenya worth Sh. 9
million. They intend to operate the plant for 3 years then sell it for Sh. 5 million. During the
three years of operation, cash flows are expected to be 3 million, 3 million and 2 million for
end of year 1, 2 and 3 respectively. The funds will be remitted at end of every year to the parent
company in the US. The required rate of return is 15% and the current rate of exchange is
$=Sh.65 and the shilling is expected to appreciate against the dollar at 5% per year
i. Determine the NPV. Should Horizon build the plant? (5 Marks)
ii. what is the NPV if the rate will remain constant at $= Sh.65? Should they build the
plant? (5 Marks)
b) What are the objectives of the International monetary fund as set out in its charter? (5 Marks)
c) What factors affect the bid ask spread of a currency? (5 Marks)
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