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PES INSTITUTE OF TECHNOLOGY – BANGALORE SOUTH CAMPUS
Hosur Road (1Km before Electronic City), Bangalore -560100
INTERNAL TEST # 1
International Financial Management– 12MBAFM426
Scheme and solution
Course: MBA Semester IV (FINANCE)
Faculty: Mr.Kannadas .S
Date: 11/02/2014
Time Allowed: 90 Minutes
Max. Marks: 50 (Fifty Marks)
Time: 08.30 AM – 10 AM
Note:
Answer all the Questions.
1 (a) What is spread? Illustrate with a numerical calculation.
(3 marks)
Answer: Spread is the difference between the ask rate and bid rate
(Ask rate-bid rate)/ask rate x 100
(b) What is cross exchange rate? A French trader imports goods from London. (7 marks)
The following market rate prevail: €/$ = 1.25/1.35 ; £/$ =0.75/ 0.80. Find the
value of €/£
Answer: when two currencies cannot be exchanged directly, a common
currency value is applied and direct exchange rate is found out.
€1.35/$ x $/ £0.75 =€1.8/ £
(c)
(3+7=10)m
1) Explain the various methods of international business methods.
arks)
Answer: IMPORT , EXPORT, LISCENSING, FRANCHISING, JOINT VENTURE
AND FDI
Answer:
Particulars
FDI account Dr
To investment account
Foreign exchange account Dr
To export account
Dividend account Dr
To unilateral transfer account
Foreign exchange assets account Dr
To services account
Amt in Rs. Amt in Rs.
300000
300000
3000
3000
5000
5000
5000
5000
Foreign exchange assets account Dr
100000
To Export account
100000
Foreign exchange assets account Dr
200000
To short term liability account
200000
Imports account Dr
100000
To foreign exchange assets account
60000
To long term liability account
40000
Investment account Dr
50000
To FDI account
50000
2 (a) What is an arbitrage? When will the arbitrage be NIL.
Answer: Purchasing the currency in one market where the price is less and
selling it simultaneously in another market where the value is more and
making profit out of it is known as “arbitrage”
ARBITRAGE WILL BE NIL WHEN IRD=FRD
(b) What do you understand by spot rate and forward rate? How the premium
and discount of a currency with respect to a foreign currency is
calculated? Illustrate with a numerical example.
Answer: The spot price or spot rate of a commodity, a security or a currency
is the price that is quoted for immediate (spot) settlement (payment and
delivery).
The forward price or forward rate is the agreed upon price of an asset in a
forward contract. Using the rational pricing assumption, we can express the
forward price in terms of the spot price and any dividends etc., so that
there is no possibility for arbitrage.
(c) 1)What do you mean by BOP? Explain its components with examples.
Answer: The balance of payments of a country is a systematic record of all
economic transactions between the residents of the reporting country and
the residents of foreign countries during a given period of
time. Components
of
Balance
of
Payments
Balance of Payments is generally grouped under the following heads
i) Current Account
ii) Capital Account
iii) Unilateral Payments Account
iv) Official Settlement Account.
Current Account
“The Current Account includes all transactions which give rise
to
or
use
up
national
income.”
The Current Account consists of two major items, namely:
i)
Merchandise
exports
and
imports,
and
ii)
Invisible
exports
and
imports.
Merchandise exports, i.e., the sale of goods abroad, are credit entries
because all transactions giving rise to monetary claims on foreigners
represent credits. On the other hand, merchandise imports , i.e., purchase
of goods from abroad, are debit entries because all transactions giving rise
to foreign money claims on the home country represent debits.
Merchandise imports and exports form the most important international
transaction of most of the countries .Invisible exports, i.e., sales of services,
are credit entries and invisible imports, i.e. purchases of services, are debit
entries. Important invisible exports include the sale abroad of such services
as transport, insurance, etc., foreign tourist expenditure abroad and income
paid on loans and investments (by foreigners)in the home country form the
important
invisible
entries
on
the
debit
side.
(3 marks)
(7 marks)
(4+6=10
marks)
Capital
Account
The Capital Account consists of short- terms and long-term capital
transactions A capital outflow represents a debit and a capital inflow
represents a credit. For instance, if an American firm invests Rs.100 million in
India, this transaction will be represented as a debit in the US balance of
payments and a credit in the balance of payments of India. The payment
of interest on loans and dividend payments are recorded in the Current
Account, since they are really payment s for the services of capital. As has
already been mentioned above, the interest paid on loans given by
foreigners of dividend on foreign investments in the home country are
debits for the home country, while, on the other hand, the interest received
on loans given abroad and dividends on investments abroad are credits.
Unilateral Transfers Account
Unilateral transfers is another terms for gifts. These unilateral transfers include
private remittances, government grants ,disaster relief, etc. Unilateral
payments received from abroad are credits and those made abroad are
debits.
Official Settlements Accounts
Official reserves represent the holdings by the government or official
agencies of the means of payment that are generally accepted for the
settlement of international claims
2)Calculate the possibilities of arbitrage in the following situation.
Spot rate (direct quote) Rs.40/US $, 6 Months forward rate Rs.39.50/ US $
Annualized interest rate in india 12%, Annualized interest rate in USA 10%
Amount to be invested is Rs.4000000 or US $ 100000
3
Answer: Arbitrage is possible
Borrowing in india and investing in US
Arbitrage profit is 2.34%
Case Study - (Compulsory)
An MNC has the following information to opt for. Suggest the best solution
for the importer who is owed to make the payment in USD.
Total export worth - $1000
spot market – Rs. 40/$, 90 days forward market - Rs.39.50/$
Interest rate on borrowing in india and USA is 6% p.a
Interest rate on deposit rate/ investment in india @ USA is 5% p.a
Importer is in india and the exporter is in USA
Answer: As the forward rate is lesser than the spot rate, as a payer he need
not to borrow and invest at all. The payer can just forcast the future spot
rate with appropriate technical tools and proceed accordingly to make
the settlement.
(10 marks)