3marks

1. What is transfer pricing?

2. What are depository receipts?
3. What do you mean by free float and dirty float?
4. What is euro currency?
5. What is currency call and put call?
6. What is swap option?
7. What do you mean by SDR?
8. What is leads and lags?
9. What do you mean by foreign portfolio investment?
10. What is the difference between ADR and GDR?

7MARKS

1. What are the advantages of depository receipts?

2. What are the importance of FDI?
3. Why do firms become multinational? Explain various reason why firms invest
abroad?
4. Company AKR wishes to borrow USD at fixed rate. Company RAK wishes to
borrow Japanese yen at a fixed rate. The amount required by these two companies
is same at the current exchange rate. The companies are quoted the following
rates on interest.

YEN USD
AKR 4% 8.6%
RAK 5.5% 9.0%
Design a swap that will net a bank, acting as intermediary 50 basis points p.a. make
the swap equally attractive to both the companies. The foreign exchange risk is
assumed by the bank.

5. Yes corporation expects to receive cash dividend from a French joint venture over
the coming 3 years. The first dividend is expected to be paid on 31/12/02 and is
expected to be euro 720000 the dividend is then expected to grow 10% per year
over the following 2 years; the current exchange rate is $0.9180/euro. The
weighted average cost of capital for yes corporation is 12%

a) What is present value of expected euro dividend stream if the euro is

expected to appreciate 4% per annum against dollar?
b) What is the present value of expected euro dividend stream if the euro
were to depreciate at the rate of 3% per annum against dollar?
 6. in march multinational industry incorporation assesses the September spot rate for
sterling at the following rates.

$ 1.30/pound with probability 0.15

$ 1.35/pound with probability 0.20
$ 1.40/pound with probability 0.25
$ 1.45/pound with probability 0.20
$ 1.50/pound with probability 0.20
a) What is the expected spot rate for September?
b) If 6-month forward rate is $ 1.40 should the firm sell forward its pound
500000 receivable.
c) During receivable what factor are likely to affect multinational industry
hedging decision.

7. Distinguish between forward and future contracts?

8. Explain the factors responsible for growing importance of international financial
management?

10 marks

1. Explain the equity and debt instruments in international market.

2. explain the terms
a) letter of credit
b) draft
c) open account
d) cash in advance
e) consignment

3. What are the various factors or techniques to assess country risk? Briefly
elaborate.

4. Pepsi Company would like to hedge its CAN $ 40 million payable to ‘A’ limited,
a Canadian aluminum producer which is due in 90 days suppose it faces the
following exchange and interest rates.

Spot rate $ 0.7307/12 per CAN $

Forward rate (90 days) $ 0.7320/41 per CAN $
CAN $ 90 day interest rate (annualized) 4.71% - 4.64%
US $ 90 day interest rate ( annualized) 5.50% - 5.35%
 5. DC corporation is a US based software consultant specialized in financial
software for several fortune 500 it has an office in India, uk, Europe and
Australia. In 2002 DC Corporation required ₤100000 in 180 days and had 4
options before it.
1. forward market hedge
2. no hedge
3. money market hedge
4. option edge

Its analyst developed the following information which was used to assess the
alternative solution
Current spot rate of £ is $1.5 and 180-day forward rate of £ is $ 1.48.
Interest rate was as follows:

Particulars UK US
180day deposit rate 4.5% 4.5%
180 day barrowing rate 5.1% 5.1%

The company also had following information available to it.

A call option on £ that expires in 180days has an exercise price of 1.5 and premium of
$0.02. The future spot rate in 180days are forecasted as follows

Possible outcome Probability

$1.44 20%
$1.46 60%
$1.53 20%
An analysis of hedging technique should be made and advice. DC corporation on the best
alternative for hedging.