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International Finance Question Paper
International Finance
Course:Bachelor Of Commerce
Institution: Kca University question papers
Exam Year:2010
UNIVERSITY EXAMINATIONS: 2009/2010
SECOND YEAR STAGE 3 EXAMINATION FOR THE DEGREE OF
BACHELOR OF COMMERCE
CFM 204-F INTERNATIONAL FINANCE
DATE: APRIL 2010 TIME: 2 HOURS
INSTRUCTIONS: Answer Question ONE and Any other TWO Questions
QUESTION ONE
a) Discuss a free floating exchange rate system, may be good for developing countries (5 Marks)
b) Explain how a currency board can be beneficial to a country (6 Marks)
c) Compare and contrast a futures contract and a forward rate contract ( 9 Marks)
d) discuss the basic translation hedging strategy that a firm may put in place to hedge against translation exposure ( 5 Marks)
e) During the past two decades there has been more internalization of capital Markets around the
world. Discuss the factors that have led to this phenomena (5 Marks)
QUESTION TWO
a) X Ltd. an exporting firm expects to receive substantial payments in sterling pounds and US dollars,Based on 2 days spot rates the KSh. Value of funds to be received is estimated at Ksh.600,000 for sterling and Ksh.400,000 for USD. Based on the data for the last 20 months it is estimated that the standard deviation of monthly percentage changes is 7% for sterling pound and 8% for USD and correlation coefficient of 0.5 between sterling pound and USD. What is the standard deviation of portfolio. (7 Marks)
b) What is the price of a European call option on the USD with an exercise price of Sh.60 and has a life of 6 months to maturity if the treasury bill rate is 5% and d on the USD exchange rate in the last 6 months is 10%. The spot e exchange rate is USD = KSh.65. (7 Marks)
c) Discuss the reasons why a government may decide to intervene in favour of the home currency
( 6 Marks)
QUESTION THREE
a) Consider a Danish based company that exports consumer goods to several countries. The company has contracted to supply 10 million USD worth of goods to the US and expect to receive payment in three months' time in US dollars. The global Financial risk manager working in this company believes that the dollar will appreciate against the Danish Krona over this three-month period. The company considers three alternative strategies; leave the future cash flow unhedged, enter into a forward contract or an option contract. Contrast these three possibilities and possible results.
( 10 Marks)
b) Tom Wanyonyi is the financial analyst for Spec Inc , which is a canadian subsidiary based in the Philiphines. The company has a number of subsidiaries spread across South East Asia. Discuss the inputs that Tom requires for a successful capital budgeting for the multinational company that he works for. ( 10 Marks)
QUESTION FOUR
a) Discuss translation exposure, transaction exposure, and economic exposure and show
distinctions between them ( 9 Marks)
b) Many multinational companies have been active in the international financial Markets.
Discuss the motives for investing in foreign Markets (6 Marks).
c) Two managers of marshall inc assessed a proposed project in Jamaice. Each manager used
exactly the same estimates of the earnings to be generated by the project , as this estimates were provided by the other employees. The managers agree on the portion of funds to be remitted each year , the life of the project, and the discount rate to be applied. Both managers also assessed the project from the US parent’s perspective. Neverthless , one manager determined that the project had a large net present value , while the other manager determined that the project had a negative net present value. Explain the possible reasons for such difference
(7 Marks)
QUESTION FIVE
a) How could an MNC use leading and lagging to hedge its soft-currency receivables and its softcurrency
payables? (6 Marks)
b) Discuss the constraints interfering with goals of multinational corporations (4 Marks)
c) Aedro Inc is Swiss Multinational company with head office in Geneva . It has 23 subsidiaries
spread across Europe Asia and the middle East. The firms fiancial analys is in the process of conducting capital budgeting for some of the subsidiaries and is at a loss as to whether to conduce the capital budgeting from the parent company perspective or from the subsidiary perspective. Provide advice on when capital budgeting for a subsidiary may be conducted from any of the two perspectives. (10 Marks)
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