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DFM 04
INTERNATIONAL FINANCE
Assignment – I
JANUARY 2017 SESSION
Assignment Code: 2017DFM04A1
Maximum Marks: 100
Section-A
Each question carries 25 Marks.
Q1.
(a)
(b)
Q2.
(a)
(b)
Firm can use six different modes to enter foreign markets. Briefly explain the licensing
strategies, Joint ventures and wholly owned subsidiary as modes of entering foreign
markets.
(15 marks)
XYZ Inc., a US company, contemplates an expansion in to same foreign country. What
are the three basic entry decisions should it take before entering in to foreign country.
(10 marks)
Purchasing power parity (PPP) links spot exchange rates to nations free levels” Briefly
explain PPP as one of other theory(s) of Foreign exchange rate determination.
(10 marks)
A very successful innovation in the capital market over the last 20 years has become the
growth of the derivative markets. Hedges, speculations and arbitrages have been
identified as three types of trades in derivative market. Briefly explain the above types
of trades.
(15 marks)
Section-B (50 Marks): Case Study
Magnetic, Inc., a U.S. company, owes its Taiwanese supplier NT$205 million in three months. The
company wishes to hedge it’s NT$ payable. The current spot rate is NT$1 = U.S. $0.03987, and the threemonth forward rate is NT$1 = U.S. $0.04051. Magnetic can also borrow/lend U.S. dollars at an annualized
interest rate of 12 percent and Taiwanese dollars at an annualized interest rate of 8 percent.
Required:
1.
What is the U.S. dollar accounting entry for this payable?
2.
What is the minimum U.S. dollar cost that Magnetronics can lock in for this payable? Describe the
procedure it would use to get this price.
(15 marks)
3.
Briefly explain the Interest rate parity theorem. At what forward rate would interest rate parity
hold given the interest rates?
(20 marks)
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(15 marks)
DFM 04
INTERNATIONAL FINANCE
Assignment – II
JANUARY 2017 SESSION
Assignment Code: 2017DFM04A2
Maximum Marks: 100
Section-A
Each question carries 25 Marks.
Q1.
(a)
(b)
Q2.
(a)
(b)
‘Political risk in 50% of the exercise but inseparable from economic risk’, says Hans
Belesak, president of political risk consultants. Briefly explain common form of political
risk indicators.
(10 marks)
The cost of capital for MNC may differ from that of a fully established domestic firm on
account of the characteristics of MNCs that differentiate from domestic firm. How does
cost of capital for MNCs and domestic firms differ from each other?
(15 marks)
“Despite the liberalisation of foreign portfolio investment around globe since the early
1980s, the home bias phenomenon is still found to exist”. What are the determinants of
International portfolio holding in the context of given statement?
(10 marks)
For the management of working capital of MNCs what are the various ways in which
cash inflows can be optimised?
(15 marks)
Section-B (50 Marks): Case Study
Carbon Company is considering the acquisition of a unit from the French government. Its initial outlay
would be $4 million. It will reinvest all the earnings in the unit. It expects that at the end of 8 years, it
will sell the unit for 12 million euros after capital gains taxes are paid. The spot rate of the euro is $1.20
and is used as the forecast of the euro in the future years. Carbon has no plans to hedge its exposure to
exchange rate risk. The annualized U.S. risk-free interest rate is 5% regardless of the maturity of the
debt, and the annualized risk-free interest rate on euros is 7%, regardless of the maturity of debt.
Assume that interest rate parity exists. Carbon’s cost of capital is 20%. It plans to use cash to make the
acquisition.
Required:
a.
Briefly explain the Net Present Value technique of evaluating Capital Budgeting proposals.
(15 marks)
b.
Determine the NPV under these conditions.
(15 marks)
c.
Rather than use all cash, Carbon could partially finance the acquisition. It could obtain a loan of
3 million euros today that would be used to cover a portion of the acquisition. In this case, it
would have to pay back a lump sum total of 7 million euros at the end of 8 years to repay the
loan. There are no interest payments on this debt. The way, in which this financing deal is
structured, none of the payment is tax-deductible. Determine the NPV if Carbon uses the
forward rate instead of the spot rate to forecast the future spot rate of the euro, and elects to
partially finance the acquisition. [You need to derive the 8-year forward rate for this specific
question.]
(20 marks)
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