International Financial ManagementSolution.pdf
Learning Outcomes to be assessed (from module spec.)
1. To examine the impact of such factors as exchange rates, inflation rates and interest rates on the performance of firms and to assess their significance in decision making in an international market/global context 2. To critically evaluate principles and practices guiding financial
management of the multinational enterprise 3. To explore factors that differentiate multinational from domestic financial
management 4. To devise a risk management strategy to measure and hedge against variation in global financial market prices including financial crises 5. To prepare students for the high risk high return environment of
international finance Details of the task
Level 7 Outstanding 90-100% Excellent 80-89% Very good 70-79% Good 60-69% Satisfactory 50-59% Unsatisfactory 40-49% Inadequate 30-39% Poor 20-29% Very poor 10-19% Extremely poor 0-9%
International Financial Management
• t most play a minor part in your answers. • The word limit is 3000, marks awarded for each section are an approximate
indication of the number of words appropriate for the requirement (e.g. 10 marks 300 words or 30 words per mark).
• Make sure that you provide FULL ANSWERS to the question that CLEARLY
EXPLAIN your answer to the question. A Your answers are marked in accordance with the University’s grade descriptors as
distributed during the course taking into account that your answers are under assignment conditions.
• Pay particular attention to the regulations on plagiarism.
• We are assessing your ability to develop your own explanations and evaluations.
Referencing should answers without an adequate explanation will receive a fail mark.
Answers that make unreasonable assumptions will be penalized
Part A Please answer ALL questions in this section
Note that this paper uses the standard notation for exchange rates, for example EURUSD 1.1 means “$1.1 for 1 euro”
1. a. Calculate to 4 decimal places the new exchange rate after a 2% increase in
the value of the dollar given a current exchange rate of EURUSD 1.1
(6 marks) b. Given the following exchange rates calculate the GBPEUR rate to 4 decimal
EURUSD 1.1043 GBPUSD 1.2970
(6 marks) c. Explain the relationship between your answer to part b of this question and
triangular arbitrage. (6 marks)
2. Consider the following data:
Date Exchange rate January 2017 EURUSD 1.100 December 2017 EURUSD 1.144 Take the US dollar as the home currency
a. According to Purchasing Power Parity which currency area should have had the
higher rate of inflation in 2017 and by how much?
(6 marks) b. If inflation in the US were 3% higher than in the euro area, calculate the change
in the real value of the dollar. What are the implications of this change?
(6 marks) c. What are the implications of a change in the real exchange rate of a currency?
(6 marks) d. Explain why you would expect interest rates in the US to be higher than in the
(6 marks) e. Explain why you would expect there to be no difference in the interest rates of
government bonds of any two countries in the euro area and also explain why in practice there are differences.
Part B please answer TWO questions only from this section
3. Compare and contrast country risk analysis with exchange rate volatility.
(25 marks) 4. MNCs promote globalization. Is this a force for good or bad? Discuss.
(25 marks) 5. XYZ plc has been offered the following quotes for options on the dollar given a
current market price of 60 pence:
Strike price of dollar in pence Call premium Put premium 1 year 1 year 62 6.9 3.0 64 5.9 3.8 66 4.8 4.5 67 4.5 5.1 a. Calculate the net payout from a purchased call option at a strike price of
67 pence for the following possible maturity prices 55p, 60p,65p,70p,75p. (6 marks) b. Calculate the net payout for a written put option at 66p for the following possible
maturity prices: 55p, 60p,65p,70p,75p.
(6 marks) a. Calculate the total cost of the dollar if the MNC were to implement part a and part
b of this question for the following maturity prices: 55p, 60p,65p,70p,75p .
(6 marks) b. Outline the advantages and disadvantages of purchasing a call at 67p and
writing a put at 66p for a MNC importing from the US.
6. Pico plc has borrowed heavily in euros and is worried about increasing interest rates in the eurozone. The Finance Director suggests that Pico plc should sell futures on French bonds (known as OATs or Obligations Assimilables du Trésor).
a. Explain why selling a futures contract on French bonds would
reduce the effect of an increase in euro interest rates.
b. Pico sells a futures contract on bonds for €1,010 calculate the daily
payments and receipts on the futures contract given the following bond prices:
Day 1 Day 2 Day 3 Day 4 Day 5
€1,010 €1,005 €1,001 €1,006 €1,009
c. Explain why the market insists on daily settlement. (3 marks)
The Finance Director also offers two alternatives:
d. One alternative is to engage in an interest rate swap. Explain how
this might work.
e. The other alternative is to purchase a PUT contract on euro
Calculate the net profit or loss per unit on a put option contract with a strike price of €1,008 with a premium of €4.00 for the following maturity prices:
€985, €1,000, €1,015 and €1,020
f. Explain how the option contract in part e protects against interest
rate rises and how this form of protection differs from the futures contract.
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