# Bac 406: International Finance Management  Question Paper

Bac 406: International Finance Management

Course:Bachelor Of Commerce

Institution: Kenyatta University question papers

Exam Year:2011

KENYATTA UNIVERSITY
UNIVERSITY EXAMINATIONS 2011/2012
INSTITUTE OF OPEN LEARNING – (IOL)
EXAMINATION FOR THE DEGREE OF BACHELOR OF COMMERCE

BAC 406: INTERNATIONAL FINANCE MANAGEMENT

DATE:
Friday, 16th December 2011
TIME: 11.00 a.m. – 1.00 p.m.
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INSTRUCTIONS:

1.
(a)
Kenya in 1990’s adopted a floating exchange rate regime. What are the

[6 Marks]
(b)
Write short notes on the following as used in International Finance

(i)
Currency future contracts.

[1 Mark]

(ii)
Forward contracts.

[4 Marks]

(iii)
Translation Vs transaction exposure.

[1 Mark]
(c)
The US inflation rate is expected to average 5 percent annually while the Kenya

rate inflation is expected to average about 16 percent annually. If the current spot

rate for the shilling is USD 0.0145 what is the expected spot rate in 2 years. [4 Marks]
(d)
Each time the Kenya shilling strengthens beyond certain limits against other

major hard currencies the Central Bank of Kenya intervenes. Do you agree with

this statement?

[4 Marks]
(e)
International trade is important to a country always. Comment on factors

[4 Marks]

Page 1 of 3

2.
(a)
Garisa Co. Ltd. A Kenyan company imports computers worth USD 4.0 million and is

to pay after 3 months. On the day of the contract, the rates are
Sport KSh75.482/USD
3 months forward KSh78.2052/USD
(i)
There is an anticipation of a further fall of the Kenya Shilling. What can

Garisa Ltd. Do.

[3 Marks]
(ii)
What should Garisa Ltd. do if it knows these is a high probability that in 3

months, the dollar will settle at KSh.76.1410/USD.

[3 Marks]
(b)
(i)
Define Devaluation of currency. When should a country embark on

devaluation of its currency?

[8 Marks]

(ii)
Discuss the various internal Hedging techniques.

[6 Marks]

[20 Marks]

3.
(a)
(i)
Let us assume that the Kenyan shilling, exhibit a six-month interest rate of

14 percent, while the US dollar exhibit a six month interest rate of 5

percent. From a US investor’s perspective, the U.S,. dollar is the home

currency. According to IRP, determine the forward rate premium of the

shilling with respect to U.S. dollar.

[6 Marks]
(b)
Two countries a and B produce only one commodity (Tea). Suppose the price of

tea in the country A is XA 4.5 and the country B YB 8.6

(i)
According to the purchasing power parity what should XA:YB spot

exchange rate be?

[3 Marks]

(ii)
Suppose the price of tea over the next year is expected to rise to XA 5.4

and YB 10.4 in countries A and B respectively. What should be the

XA:YB spot exchange rate.

[3 Marks]
(c)
Examine separately the effect of the following

(i)
A decrease in domestic income.

[3 Marks]

(ii)
A rise in the value of hard currencies against the local currency. [3 Marks]

(iii)
A Revaluation of local currency by the World Bank.
[2 Marks]

[20 Marks]

Page 2 of 3

4.
(a)
Write short notes on
(i)
Commodity arbitragers.

[3 Marks]
(ii)
Open fisher theory.

[3 Marks]
(iii)

[3 Marks]
(b)
In January 2009 a Kenyan importer contracted to purchase a machine from a U.K.

manufacturer at sterling pounds 45,000 payable in 3 equal installments in March,

June and September 2009.

During the year the following adjustment took place
(i)
February 2009, the Kenyan shilling was devalued by 10%.
(ii)
In May 2009, the Kenyan currency was adjusted upward by 10% because
of the strong performance of the economy.
(iii)
In August 2009, the sterling pound was devalued by 21/2%. How much
money in Kenyan shillings did the importer pay the contract.

Note: The rate of exchange as at 31st January 2009 was one sterling

Pound for 109.50 Kenya shillings.

[11 Marks]

[20 Marks]

Page 3 of 3