International Financial Management Question Paper

International Financial Management

Course:Bachelor Of Commerce

Institution: Kenyatta University question papers

Exam Year:2009

KENYATTA UNIVERSITY
UNIVERSITY EXAMINATIONS 2009/2010
FIRST SEMESTER EXAMINATION FOR THE DEGREE OF BACHELOR OF
COMMERCE

BAC 406:
INTERNATIONAL FINANCIAL MANAGEMENT

=================================================================
DATE:
TUESDAY 22ND DECEMBER 2009
TIME: 2.00 P.M. – 4.00 P.M.

INSTRUCTIONS
Answer ALL Questions

Question 1
a)
The theory of comparative advantage is the backbone of international financial
management.

Explain. (5
marks)

b)
Rupia Bank of East Africa expects that Thai Baht will depreciate against the Kenya

shillings form its sport 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
Kenya
shillings 7.0%
7.2%
Thai
Baht
22.0%
24.0%

The Bank considers borrowing 10 million thai Baht in the inter-bank market and

investing the funds in Kenya shillings for 60 days.
Required
Page 1 of 2

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

Question 2
a)
Explain why firms may consider issuing stock in foreign markets.
(10 marks)
b)
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)

Question 3
a)
Hedging is ordinarily expected to be more costly than not hedging, why then would a
firm
even
consider
hedging?
(7
marks)
b)
Explain how the cash flows of purely domestic firms are exposed to exchange rate

fluctuations?

(8 marks)

Question 4
a)
Discuss the additional factors which deserve consideration in multinational capital

budgeting that are not normally relevant for a purely domestic projects. (8 marks)
b)
Compare and contrast the forward contract and future contracts and state why

currencies with high inflation rates tend to have forward discounts.
(7 marks)

Page 2 of 2

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