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Cfm 204-F International Finance Question Paper

Cfm 204-F International Finance

Course:Bachelor Of Commerce

Institution: Kca University question papers

Exam Year:2009

1
UNIVERSITY EXAMINATIONS: 2008/2009
SECOND YEAR STAGE III EXAMINATION FOR THE DEGREE OF
BACHELOR OF COMMERCE
CFM 204-F INTERNATIONAL FINANCE
DATE: APRIL 2009 TIME: 2 HOURS
INSTRUCTIONS: Answer question ONE and any other TWO questions
QUESTION ONE
a) What are the arguments have been advanced by critics on the irrelevance of exchange rate risk
exposure? (6 Marks)
b) What factors affect currency call option premiums? (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 are the motivations for governments around the world intervening directly in foreign
exchange markets? (6 Marks)
e) What measure can a Multinational firm take to minimise economic exposure resulting from
exchange rate fluctuations? (5 Marks)
f) What is the Bid/ask spread for the following exchange rates? (3 Marks)
(i) $65/69
(ii) €100/105
(iii) What is the cross rate between $ and €? ($ 1/ €?)
2
QUESTION TWO
a) What factors affect the spread on currency quotations? (5 Marks)
b) Identify and explain some of the barriers that prevent international markets from becoming
completely integrated. (6 Marks)
c) Explain the three types of exposure that result from exchange rate fluctuations. (6Marks)
d) 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 THREE
a) Explain three types of arbitrage that can occur internationally as applied to foreign exchange
and international money markets. (6 Marks)
b) How do fixed exchange rate systems make each country more vulnerable to economic
conditions in other countries? (8 Marks)
c) Discuss the three key components of the current account of a balance of payments statement.
(6 Marks)
QUESTION FOUR
a) A currency portfolio has $600 and £400 with a standard deviation of 6.43% that is normally
distributed. The data for the last 20 months shows the standard deviation of monthly
percentage changes in the USD to be 7% and for the UK pound at 8%. Assuming there is no
expected change in the currencies in the portfolio and 95% confidence level (z = 1.65),
Determine the maximum one month loss on using Value at Risk (VAR) for
i) the portfolio (2 Marks)
ii) the USD (2 Marks)
iii) the UK Pound (2 Marks)
b) What are the differences between a currency board and dollarization? (6 Marks)
c) Define and differentiate between a forward contract and a futures contract. (8 Marks)
QUESTION FIVE
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. (10 Marks)

Cfm 204-F International Finance Question Paper

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