DFM 04
INTERNATIONAL
FINANCE
Assignment – I
Assignment
Code: 2016DFM04A1 Last
Date of Submission: 26th May 2016
Maximum Marks: 100
Section-A
Each
question carries 25 Marks.
Q1. (a) 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)
(b) 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)
Q2. (a) 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)
(b) 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$205 million in three
months. The company wishes to hedge its NT$ payable. The current spot rate is
NT$1 = U.S. $0.03987, and the three- month
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? (15 marks)
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)
DFM 04
INTERNATIONAL
FINANCE
Assignment – II
Assignment
Code: 2016DFM04A2 Last
Date of Submission: 26th May 2016
Maximum Marks: 100
Section-A
Each question carries 25 Marks.
Q1. (a) ‘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)
(b) 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)
Q2. (a) “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)
(b) 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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