International Financial Management

Solution.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        

As  specified   

Assessment  criteria      

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%   

           

RKC      2017_18   

International  Financial Management     

  Notes:     

•  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   

places.     

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   

euro  area.   

(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.   

(8  marks)   

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.   

(7  marks)   

   

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.   

(3  marks)   

   

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   

                              (4  marks)   

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.   

(4  marks)   

   

e.   The other  alternative is  to purchase a PUT  contract on euro   

denominated  bonds.      

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   

                        (8  marks)   

   

   

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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