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International Financial Mangement-Open Learning Question Paper

International Financial Mangement-Open Learning

Course:Bachelor Of Commerce

Institution: Kenyatta University question papers

Exam Year:2011

INSTITUTE OF OPEN LEARNING
EXAMINATION FOR THE DEGREE OF BACHELOR OF COMMERCE
BAC 406: INTERNATIONAL FINANCIAL MANAGEMENT
DATE: MONDAY, 15
TH
FEBRUARY 2010 TIME: 8.00 A.M. - 10.00 A.M.

INSTRUCTIONS: Answer ALL questions.

Question 1
a) Explain why firms may consider issuing stock in foreign markets. (10 marks)
b) The theory of comparative advantage is the backbone of international financial
management. Explain. (5 marks)

Question 2
a) Assume a speculator in the United States of America purchased a put option on British
pounds for $0.04 per unit. The strike price was $1.8 and the spot rate at the time was the
pound was exercised was $1.59. Assume there are 31,250 units in a British pound
option. What was the net profit on the option? (10 marks)
b) Explain how the cash flows of purely domestic firms are exposed to exchange rate
fluctuations? (8 marks)

Question 3
a) Royal Bank of Kenya expects that Thai Baht will depreciate against the Kenya shillings
from its spot rate of Ksh.0.43 to 0.42 in 60 days. The following inter-bank lending and
borrowing rates exist;

Currency rate Lending rate Borrowing rate
Kenya shillings 7.0% 7.2%
Thai Baht 22.0% 24.0%

Page 2 of 2

The Bank considers borrowing 10 million Thai Baht in the inter-bank market and
investing the funds in Kenya shillings for 60 days.

Required
Estimate the profits (or losses) that could be earned from the strategy. Should
Royal Bank pursue the strategy? (15 marks)

b) Compare and contrast the forward contract and future contracts and
state why currencies with high inflation rates tend to have forward
discounts. (5 marks)

Question 4

a) Hedging is ordinarily expected to be more costly than not hedging, why then
would a firm even consider hedging? (9 marks)
b) Discuss the additional factors which deserve consideration in multinational
capital budgeting that are not normally relevant for a purely domestic projects.
(8 marks)

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International Financial Mangement-Open Learning Question Paper

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