International Finance (Elective P1: Finance)

1. JOSEPH’S COLLEGE OF COMMERCE (AUTONOMOUS)

END SEMESTER EXAMINATION – OCTOBER 2014

B.COM. – V SEMESTER

 INTERNATIONAL FINANCE (ELECTIVE P1: FINANCE)

Duration: 3 Hours                                                                                               Max. Marks: 100

SECTION – A

 

1. Answer ALL the questions. Each carries 2 marks.                                                 (10 x2 =20)                

 

1. Discuss the difference between Domestic and Foreign currency.
2. What is risk free rate of return?
3. What is current account deficit?
4. Explain the relationship between RBI, SEBI, FEMA and FII’s
5. Explain Sovereign wealth funds
6. What is risk of non payment
7. What are blocked funds
8. Explain the difference between domestic capital budgeting and international capital budgeting
9. Differentiate between American terms and European terms
10. What are interest rate swaps?

 

SECTION – B

 

1. Answer any FOUR Each carries 5 marks.                                        (4×5=20)

 

11. Preethi an average salaried employee has been saving Rs. 12000 in her bank account every month for the past 4 months. Today’s gold rate being Rs. 2700/gram, she decides to purchase jewellery from Krishnaiah Chetty after saving for another 2 months, but has been advised by her jeweller that the price of gold may appreciate to Rs.3500/gram as it would be festival season during the time of purchase. But Ms. Preethi being a regular customer has been offered a scheme, where if she pays 2 % of one month’s saving now she will be able to purchase the gold at Rs. 2700/gram or the lower rate prevailing that day. After two months the price of gold is Rs.3125/gram. What type of a contract is this? And what is the gain/loss that Ms. Preethi would make.

 

12. Find

• The cross rate for GBP/EUR:-

5.86 – 5.92 EUR/USD

7.35 – 8.02 GBP/USD

(b) The bid ask differential for the cross rate GBP/EUR as calculated above

 

13. Find

• The 2 month forward rate of 1 JPY, if the spot rate is 0.64 INR and the premium is 20%
• The 3 months spot rate of 1 USD, if the forward rate is 0.016 INR and the discount is 15 %

 

14. Explain the mechanism of depositary receipts.

 

15. What are the advantages and disadvantages of FDI

 

16. Explain the factors affecting exchange rate fluctuations.

 

 

SECTION – C

 

III)      Answer any THREE questions.    Each carries 15 marks.                    (3×15=45)

 

17. Answer the following

• Explain the various options strategies
• Show the pay offs of call options and put options with an example.
• An Indian exporter, exporting goods to Egypt fears depreciation in Egyptian pound. The Egyptian options are available at a strike price of INR 9.693/1 EGP with a premium of 0.33. The spot rate on maturity falls to INR 9.003/1 EGP. How will he compensate his loss?

 

18. Amid the talk of ‘bottoming out’ and ‘the worst is over’, here is an interesting piece of data on foreign institutional investor (FII) flows. Every episode of rupee depreciation in the past two years has been followed by a surge in FII flows. This happened in 2011 and again in 2012. While the macro situation is different this time, evidence in September so far shows that FIIs have started showing interest in the market again.

The emerging markets saw inflows worth $2.6 billion last week, their first positive weekly flows in five weeks, after global money managers said the tapering of asset purchasing program by the US Federal Reserve will be slower than expected.
One of the reasons for FII flows following significant rupee depreciation in the preceding period could be availability of large quality stocks at multi-year valuation lows. FIIs in the past, too, have shown a knack for acquiring Indian shares available at sharply cheaper prices because of the rupee’s slide.

With respect to the above explain:-

1. Explain who can get registered as FIIs
2. What FIIs can invest in?
3. The difference between FII and FDI

 

19. (a) Explain incremental cash flows and its computation.

• What is foreign exchange risk management
• Reddy has exported equipment from Germany and has approached a bank for booking a EUR 50,000 forward Euro contract. The payment is expected for 6 months.

Spot rate INR/EUR Rs. 52.30 – 52.58

Forward rate INR/EUR Rs. 52.58 – 52.78

Calculate the premium/discount on the rupee and the expected rupee receipt of Dr. Reddy

 

20. (a) The following rates appear on the stock market

 

	Spot rate	3months Forward rate
INR/USD	Rs. 45.80 – 46.05	Rs. 46.50 – 47.00

 

• How many dollars should the firm sell to get Rs. 500,00,000 in 3 months
• How many rupees should the firm pay after 3 months to get $ 2,00,000 in the spot market
• Assume that the firm has USD 50,000 how many INR can this be exchanged for immediately.

 

(b) A US shoe company sells to a wholesaler in Germany. The purchase price of a shipment is 50,000 DM with a term of 90 days. Upon payment, the shoe company will convert the DM to Dollars. The present spot rate of DM/Dollar is 1.71 and the 90 days forward rate of DM/Dollar is 1.70. Calculate and explain,

• If the shoe company were to hedge its foreign exchange risk, what would it do? What transactions are necessary?
• Is the Dollar at a forward premium/discount?

 

21.Write a detail note on the Triple P and IRP theories.

 

 

SECTION – D

 

1. IV) Case study- Compulsory questions.                  (15 marks)
2. Skates and Wheels corporation currently has no existing business in New Zealand but is considering establishing a subsidiary there. The following information has been gathered to assess this project:

• The initial investment required is 50 million New Zealand dollars (NZ$). Given the existing spot rate of 0.50USD per NZ$.
• The project will be terminated at the end of year 3 when the subsidiary will be sold
• The fixed costs such as overheads are estimated to be NZ$ 6 million per year.
• The exchange rate of the NZ$ is expected to be $0.52 for year 1, $0.54 for year 2 and $0.56 for year 3
• The New Zealand government will impose an income tax of 30% on income. In addition it will impose a withholding tax of 10% on earnings remitted by the subsidiary. The US government will allow a tax credit on the remitted earnings and will not impose any additional taxes.
• All cash flows by the subsidiary are to be sent to the parent at the end of each year. The subsidiary will use its working capital to support ongoing operations.
• The price, demand and variable cost of the product in New Zealand are as follows

Year	Price	Demand	Variable cost
1	NZ$ 500	40,000 units	NZ$ 30
2	NZ$ 511	50,000 units	NZ$ 35
3	NZ$ 530	60,000 units	NZ$ 40

• The plant and equipment are depreciated over 10 years using straight line method. Since the plant and equipment are initially valued at NZ$ 50 million, the annual depreciation expense is NZ$ 5 million.
• In three years the subsidiary is sold for NZ$ 52 million. Assume that this is not subject to tax.
• Skates and wheels requires a 20% rate of return on the project

 

Determine the NPV of this project. Should Skates and Wheels accept this project?