IMT-86: INTERNATIONAL FINANCIAL MANAGEMENT

PART - A

Question a: What do you understand by the term PPP? Illustrate with an example.

Question b: What do you understand by the term IRP? Illustrate with an example

Question c: The foreign exchange market may be utilized by the exporters for managing their currency risks. Explain with an example.

Question d: What are two way quotes and cross rates? Illustrate with an example having spread of at least 1% in each currency quotes.

Question e: What do you understand by the term arbitrage? Is it possible in Foreign Exchange Market? If yes, illustrate with an example.

PART - B

Question a: Distinguish between transactional exposure and translational exposure. Illustrate with an example.

Question b: What is the basis of distinction between capital account and current account?

Question c: What is European quote for a set of currencies? What are the other options of such a quote?

Question d: Distinguish between the balance of payment and balance of trade. Illustrate with the last three years figures of these related to India.

Question e: Illustrate the concept of comparative advantage.

PART - C

Question a: What are currency derivatives? Who is supposed to use them and for what purposes?

Question b: What is interest rate swap (IRS)? If a multinational company, involved in the business of exporting oil from Saudi Arabia to Pakistan wants to take advantage of IRS, design the transactions for it.

Question c: Distinguish between European and American options? Which one is having more premium between the two (given that everything else is identical) and why?

Question d: How currency futures are traded? What is mark to market deal?

Question e: Define volatility. If it increases, does the currency option premium change? If yes how? Please illustrate with an example.

CASE STUDY - 1

Blue Dart, an India based company, is considering expanding its operations into a foreign country. The required investment at Time = 0 is Rs. 10 million. The firm forecasts total cash inflows of Rs. 4 million per year for 2 years, Rs. 6 million for the next two years, and then a possible terminal value of Rs. 8 million. In addition, due to political risk factors, Blue Dart believes that there is a 50 percent chance that the gross terminal value will be only Rs. 2 million and that there is a 50 percent chance that it will be Rs. 8 million. However, the government of the host country will block 20 percent of all cash flows. Thus, cash flows that can be repatriated are 80 percent of those projected. Blue Darts’ cost of capital is 15 percent, but it adds one percentage point to all foreign projects to account for exchange rate risk. Under these conditions, what is the project’s NPV?

CASE STUDY-2

Hindustan Construction Corporation arranged a two-year, $1,000,000 loan to fund a foreign project. The loan is denominated in Mexican pesos, carries a 10 percent nominal rate, and requires equal semiannual payments. The exchange rate at the time of the loan was 5.75 pesos per dollar but immediately dropped to 5.10 (pesos per dollars) before the first payment came due. The loan carried no exchange rate protection and was not hedged by Hindustan Construction Corporation in the foreign exchange market. Thus, Hindustan Construction Corporation must convert U.S. funds to Mexican pesos to make its payments. If the exchange rate remains at 5.10 pesos per dollar through the end of the loan period, what effective interest rate will Hindustan Construction Corporation end up paying on the foreign loan?