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Cfm 204 International Finance Question Paper
Cfm 204 International Finance
Course:Bachelor Of Commerce
Institution: Kca University question papers
Exam Year:2011
UNIVERSITY EXAMINATIONS: 2011/2012
YEAR 2 EXAMINATION FOR THE BACHELOR OF COMMERCE
CFM 204 INTERNATIONAL FINANCE (SATURDAY)
DATE: APRIL 2012 TIME: 2 HOURS
INSTRUCTIONS: Answer Question One and Any other Two Questions
QUESTION ONE
Using the interest rate parity theory, determine the forward rate given the following information:
a) i) 5 year Ksh. Interest rate is 18%. 1 year US$ interest rate is7.5% and the spot rate is$1:Ksh. 85
(5 Marks)
ii) What are the fundamental differences between the theories of purchasing power parity and the
interest rate parity? (8 Marks)
b) Kulgat is a skilled foreign exchange dealer looking out for arbitrage opportunities on the first
Monday of October 2011, he approached the forex display board of Citibank, New York and found
the following quotations:
US$/JPY : 110.5/111.1
US$: AUD: 1.6520/1.6530
At the same time a bank in Queensway is quoting AUD/JPY: 68.30 : 69.00
Kulgat looked at the above and concluded there were no arbitrage opportunities. What advise would
you offer Kulgat if he had US$ 100,000? (7 Marks)
c) Discuss five factors in each case that:
i) Affect capital structure for a multinational corporation (5 Marks)
ii) Need to be considered in capital budgeting by Multinational Corporation (5 Marks)
2
QUESTION TWO
Nevada Plc a United States company will receive sh.10 million tomorrow as a result of providing
consultancy services to a Kenyan firm. It wants to determine the maximum one day loss due the
potential decline in the value of the shilling based on a 95% confidence level (i.e. 1.65). It estimates
the standard deviation of daily percentage changes of the Kenyan shilling to be 1.2% over the last 100
days.
Required;
a) If these daily percentages are normally distributed, what is the maximum percentage one day loss
the company is likely to incur assuming an expected % change of -1% during the next day?
(3 Marks)
b) b)Assume that the spot rate of the shilling is $0.01 what should be the maximum one day loss for
the sh. 10 million receivables in US$? (3 Marks)
c) c) If you were the company’s international treasurer where the company expects a stream of such
receivables abroad, what options would you employ to cut down on the potential losses?
(4 Marks)
d) The international monetary fund (IMF) is charged with policing the world’s financial system. What
do you think the IMF should do to arrest current melt down of the economies of some euro-zone
European countries such as Greece, Portugal, Spain and Italy? (4 Marks)
e) Explain how a country’s forex trade is a function of interest and inflation rates in a country
(6 Marks)
QUESTION THREE
a) Discuss the limitations of hedging economic exposure (6 Marks)
b) The bid/ask spread of different currencies is not uniform. Discuss the factors that affect the spread
at the currency market. (6 Marks)
c) Write brief notes on the following :
i) international fisher effect (4 Marks)
ii) The Gold standard (4 Marks)
3
QUESTION FOUR
Multinational Corporations (MNCs) commonly capitalize on foreign business opportunities by
engaging in direct foreign investment.
a) Elucidate the motives for direct foreign investment (10 Marks)
b) An investor holds 200,000 shares in Megalex Plc and is considering buying some put options to
hedge her investment. The company’s current share price is sh.60. The risk free rate is currently
12% p.a and the recent volatility of the company’s share is 30%. The investor requires
European put option with an exercise price of sh.50 for exercise in 2 year’s time.
Required:
Using the Black Scholes option pricing model determine the amount which the investor is
likely to pay for the 200,000 put options given the investors specifications (10 Marks)
QUESTION FIVE
a) Consider that the UK£ spot rate is Ksh 160 and that the British and Kenyan inflation rates are the
same. However due to some unfavourable economic factors Britain experiences 10% inflation,
while Kenya experiences 6% inflation. Using the theory on purchasing power parity determine the
value of the UK£ after it adjusts to the inflationary changes? (6 Marks)
b) Describe any four economic factors that could have affected the equilibrium exchange rate of the
UK£ value with respect to the Kenyan shilling. (8 Marks)
c) Explain why threats of terrorism due to religious fundamentalism of lawless groups in a
neighboring country could possibly affect your business. (6 Marks)
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