St. Joseph’s College of Commerce (Autonomous)
End Semester Examination- MARCH / April 2014
MIB – II Semester
INTERNATIONAL FINANCIAL INSTITUTIONS AND MARKETS
Duration: 3 Hours Max. Marks: 100
Section A
- Answer ANY SEVEN Each carries 5 marks. (7×5=35)
- The International Monetary Fund has been the centerpiece of the world monetary order since its creation in 1944, though its supervisory role in exchange rate arrangements has been considerably weakened after the advent of floating rates in 1973. Highlight the role of the IMF in world economic order.
- Write a note on Credit Risk and Settlement Risk in International Banking.
- To facilitate dealings in foreign exchange, a bank in India may maintain accounts with banks abroad. Similarly, some foreign banks may maintain accounts with banks in India. Give a brief description about these accounts.
- On 15th September a bank receives a mail transfer from its New Jersey correspondent for USD 5000 payable to its customer. The bank’s account with the correspondent bank has been credited with the amount of the mail transfer in reimbursement.
Assuming USD/INR is quoted in the local interbank market as under:
| Spot | USD/INR 63.2500/2700 |
| Spot October | 2200/2300 |
Calculate the exchange rate and the Rupee amount payable to the customer bearing in mind that the bank requires an exchange margin of 0.080% to be loaded in the rate.
- Reserve Bank of India Governor Raghuram Rajan raised the key repo rate on January 27th 2014, choosing once again to confound expectations while renewing focus on inflation as also the threat stemming from the weakening of the rupee amid a selloff that has rippled through emerging markets. The Indian currency recovered sharply after the policy announcement. How do such changes in the Repo rates help the economy?
- Bharti Airtel, the world’s fifth-largest mobile phone company by subscribers, in 2013, approached investors in the overseas bond market to raise $1 billion, nearly two years after it first planned to undertake the offering. If the Bharti issue mops up at least $500 million, the company will be the second-largest private sector borrower to tap the global bond market this year after Reliance Industries’ $800-million perpetual bond in late January 2013. Write a note on how International Bonds can help firms raise capital.
- In 2013, Deutsche Bank launched an $8.7 billion CDO in two tranches with payments ranging from 8% to 14.6%, garnering strong interest from investors, according to a January 24 story in Bloomberg News. In the U.S., firms such as Redwood Trust have started selling CDOs backed by commercial real estate for the first time since the credit crunch, Bloomberg reported in a January 14 article. Write a note on CDOs.
- Fannie Mae earned $17.2 billion in 2012, the biggest annual profit in the US mortgage giant’s history. The gain was driven by the housing recovery, which has reduced delinquencies and lifted home prices six years after the bubble burst. Examine Fannie Mae’s role in the mortgage industry.
- The current price of a stock is $ 94, and a 3-month European call option with a strike price of $95 currently sells for $4.70. An investor who feels that the price of the stock will increase is trying to decide between buying 100 shares and buying 2000 call options (=20 contracts). Both strategies involve an investment of $9,400. What advice would you give? How high does the stock price have to rise for the option strategy to be more profitable?
- Explain CRISIL’s rating process.
Section B
- Answer any THREE Each carries 15 marks. (3×15=45)
- (a) On 12th February a bank’s customer has received an import bill for USD 10,000. The customer asks the bank to retire the bill to the debit of his account. Interbank rate for USD is:
| Spot | USD/INR 62.6500/7200 |
| Spot/March | 5000/4500 |
The bank requires an exchange margin of 0.15% for TT sales and 0.20% for bills selling rate. With what amount will the bank debit his account?
(b) What is the difference between entering into a long forward contract when the forward price is $50 and taking a long position in a call option with a strike price of $50?
(c) Explain the terms European quote & Indirect quote.
(5+5+5)
- (a) What are Depository Receipts? Explain the concept and working of ADRs and GDRs.
(b) Euro is quoted in Singapore as under:
| Spot | EUR / USD 1.0125 / 150 |
| 1 month forward | 0.0050 / 0.0075 |
In the interbank market USD is quoted as under:
| Spot | USD/ INR 62.1250/1375 |
| 1 month forward | 6000 / 6100 |
You are required to load an exchange margin of 0.15% in the exchange rate for TT selling and 0.20% for bill selling.
- A shipping company has asked the bank to quote its TT selling rate for a freight remittance of EUR 150,000 to Frankfurt.
- Another customer requires the bank to retire an import bill drawn on him for Euro 12,000.
What rates will the bank quote to the customer? (7+8)
- What is a letter of credit? Explain its working in the light of it being a product offered by international banks.
- What is Securitization? How does it work?
- Explain the concept of Reverse Mortgage.
Section – C
III) Compulsory Case Study. (20 marks)
- At the current time, the Sports Exports Company is willing to receive payments in British pounds for the monthly exports it sends to the United Kingdom. While all of its receivables are denominated in pounds, it has no payables in pounds or in any other foreign currency. Jim Logan, owner of the Sports Exports Company, wants to assess his firm’s exposure to exchange rate risk.
- a) Would you describe the exposure of the Sports Exports Company to exchange rate risk as transaction exposure? Economic Exposure? Translation Exposure?
- b) In the light of the above, distinguish between Risk & Exposure. What are the different types of Foreign Exchange Exposures & how are they managed?
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