Bac 406: International Financial Management Question Paper

Exam Name: Bac 406: International Financial Management 

Course: Bachelor Of Commerce

Category: Kenyatta University question papers

Exam Year:2011

KENYATTA UNIVERSITY
UNIVERSITY EXAMINATIONS 2010/2011
INSTITUTE OF OPEN, DISTANCE AND E-LEARNING
SECOND SEMESTER EXAMINATION FOR THE DEGREE OF BACHELOR OF
COMMERCE
BAC 406: INTERNATIONAL FINANCIAL MANAGEMENT

DATE: Thursday 7th July, 2011
TIME: 11.00 a.m. – 1.00 p.m.
_____________________________________________________________________________
INSTRUCTIONS
Answer ALL questions.
Question 1
a)
Discuss the additional factors which deserve consideration in multinational capital budgeting that
are not normally relevant for a purely domestic project?



[10 marks]
b)
Compare and contrast the forward contract and future contracts and stage why currencies with
high inflation rates tend to have forward discounts.



[5 marks]
c)
Hedging is ordinarily expected to be more costly than not hedging, explain why firms hedge.












[5 marks]
Question 2
a)
Assume a U.S speculator 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 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?












[8 marks]
b)
Explain how the cash flows of purely domestic firms are exposed to exchange rate fluctuations.












[7 marks]
Question 3
a)
Explain how the theory of comparative advantage relates to the need for international business
and finance. Why do currencies with high inflation rates tend to have forward discounts?
[8 marks]
b)
The cash flows of purely domestic firms are also exposed to exchange rate fluctuations. Discuss
how.









[7 marks]
Question 4
a)
Your company has a payment of 200 million French Francs due one year from now, how will
you hedge the foreign exchange risk in this payment with FF 125000 future contract?












[7 marks]
b)
Explain why firms may consider issuing stock in foreign markets.

[7 marks]
c)
A country is always worse off when its currency is weak, comment on the statement.












[6 marks]


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