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Bac 406: International Finance Management  Question Paper

Exam Name: Bac 406: International Finance Management  

Course: Bachelor Of Commerce

Category: 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.
---------------------------------------------------------------------------------------------------------------
INSTRUCTIONS:
Answer ALL questions

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

advantages and disadvantages of such a policy?


[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 $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

affecting international trade.




[4 Marks]

Page 1 of 3

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

to pay after 3 months. On the day of the contract, the rates are
Sport KSh75.482/$
3 months forward KSh78.2052/$
(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/$.

[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)
Purchasing power parity theory.



[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




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