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International Finance Question Paper
International Finance
Course:Bachelor Of Commerce
Institution: Kca University question papers
Exam Year:2009
UNIVERSITY EXAMINATIONS: 2009/2010
SECOND YEAR STAGE 2 EXAMINATION FOR THE DEGREE OF
BACHELOR OF COMMERCE
CFM 204: INTERNATIONAL FINANCE (DAY CLASS)
DATE: DECEMBER 2009 TIME: 2 HOURS
INSTRUCTIONS: Answer Question ONE and Any other TWO Questions
QUESTION ONE
a) The International monetary fund IMF, is charged with policing the world’s financial system.
Do you think the IMF would have done much more to prevent the current world financial crisis
(5 Marks)
b) Explain how a firm can use cross hedging to reduce transaction exposure (5 Marks)
c) Explain how a US corporation could hedge net receivables in Kenyan shillings with forward
contract ( 5 Marks)
d) In January 1985, the German airline company, Lufthansa, signed a contract with the U.S.
Corporation, Boeing, to purchase 20 Boeing 737 airplanes. Boeing agreed to deliver the
airplanes to Lufthansa in one year later, in January 1986. Lufthansa agreed to make a single payment, of $500 million, when the planes were delivered. The spot exchange rate at the time the contract was signed was DM3.2/$, which corresponded to a deutschMark liability of 1.6 billion.Since 1982, the U.S. dollar had been steadily appreciating against the German Mark. In January 1982, the dollar was trading around 2.3 Marks, and by January 1985, it had risen to 3.2. This represented an appreciation of the dollar of just under 40%. Although many analysts had concluded that the U.S. dollar was overvalued during this period, it continued to show strength. Government intervention to weaken the dollar was not being discussed at this time.
Discuss what kind of exposure was Lufthansa Airline was exposed to and how it could hedge
against the same ( 6 Marks)
e) Discuss the reasons why a currency devaluation may not work (5 Marks)
f) A put option with an strike price of Kshs 28 was exercised at the same price. The spot price at the day it was excersied was kshs 27. Is this an in the money , out of the money or at the money
option ( 3 Marks).
QUESTION TWO
a) Discuss the factors that affect capital structure for a multinational corporation (10 Marks)
b) Discuss the factors to consider in capital budgeting by multinational corporations ( 5 Marks)
c) Discuss the factors that affect option pricing ( 5 Marks)
QUESTION THREE
a) 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)
b) Discuss the features of a future contract ( 7 Marks)
c) Discuss currency devaluation and discuss it merits and demerits ( 6 Marks)
QUESTION FOUR
a) Discuss how a multinational can use forward contracts to hedge against translation exposure
(7 Marks)
b) Discuss limitations of hedging translation exposure ( 7 Marks)
c) Discuss the pitfalls of a fixed exchange rate regime ( 6 Marks)
QUESTION FIVE
a) Discuss the factors that affect the bid / ask spread for a currency ( 6 Marks)
b) The IMF has been advising countries to adopt a flexible exchange rate system. Is there a
danger if a country were to take the advice? ( 6 Marks)
c) Discuss the risks of international banking ( 8 Marks)
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