International Financial Mangement Question Paper

International Financial Mangement

Course:Bachelor Of Commerce

Institution: Kenyatta University question papers

Exam Year:2010

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

BAC 406: INTERNATIONAL FINANCIAL MANAGEMENT

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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 2 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)

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