INSTITUTE OF MANAGEMENT, CHRIST UNIVERSITY

KEY TO MBA 403 INTERNATIONAL FINANCIAL MANAGEMENT

END TRIMESTER AUG 2016 QUESTION PAPER

Section A
1. Indias current account deficit (CAD) narrowed sharply to USD 0.3
billion, or 0.1 per cent of GDP, in the fourth quarter of 2015-16 from
USD 7.1 billion, or 1.3 %. So, as CAD narrows down Indias deficit as
far as Trade is concerned is reducing.

2. A) Current A/c- tourist spending

B) Current A/c- export of software
C) Capital A/c- borrowing for capacity expansion
D) Current A/c- share trading

3. The most popular and crudest measure is the bid-ask spread; this is
also called width. A low or narrow bid-ask spread is said to be "tight" and
tends to reflect a more liquid market. Depth refers to the ability of the
market to absorb the sale (exit) of a position.

4. Types of contracts for forward OTC foreign exchange market are as

follows:
Name Purpose
Forward contract: To hedge the position in the Future
market
Swap Contracts To hedge one position in one assets by
taking position in other assets
Derivatives: To hedge the risk against rate by
investing in nearby rates.
Currency Futures To hedge the currency Exchange Rate
Risk
5. Inter Bank Quote is: GBP/USD
Citi Bank: 1.3232/36
Stan Chart Bank: 1.3235/40
even if you buy from CITI @1.3236 you have to sell @1.3235 to
SCB, so Arbitrage is not present here.

6. MNC work across the globe, so it needs to deal in various currencies.

Domestic firm work in single currency, therefore currency exposure is
less. Tax rates, accounting methods, interest rate are different for MNC
while Domestic firm Tax rates, accounting methods, interest rate are
same.

7. Items of annual report are as follows:

Export Sales
Foreign Exchange earnings and Out Go
Shareholding Pattern (focus on FIIs number of share)
Foreign trade risk and its hedging mechanism
Foreign currency forward contracts

8. Calculation of rate of inward remittance:

Spot rate: USD/INR 67.35 added one month premium of 0.32 = 67.67
Margin (0.025%): 0.0169
Spot rate (USD/INR): 67.67 - 0.0169 = 67. 6531

9. APV method is better as compared to NPV for evaluating any foreign

Project. APV takes into consideration of adjusted rate taking into
consideration of fluctuation in exchange rate.

10. Broad Players are:

1. Investor
2. Hedger
3. Arbitrageur
4. Speculator (take Advantage of fluctuation in exchange rate)
5. Central Bank (keeps the watch on foreign exchange rate)
11. Cash: T (12, August, 2016)
Tom: T+1 (16, August, 2016)
Spot: T+2 (17, August, 2016)

12. Two examples

If you are going to owe foreign currency in the future, agree to
buy the foreign currency now by entering into long position in a
forward contract.
If you are going to receive foreign currency in the future, agree
to sell the foreign currency now by entering into short position
in a forward contract.
Section B

13. FII flows, Brexit, Negative yields in many countries, general bearish
outlook of the global economy contributed to somewhat roller coaster
ride for INR. With US waiting to raise the interest rates and FCNR flows
likely to happen in the near future, the rupee possibly could see a
depreciation of about 3 to 4% from the current levels till March 2017.

14. Forwards, Futures, Options and Swaps (with example for each
product)

15. UCP 600 - Article 7 - Issuing Bank Undertaking

An issuing bank undertakes to reimburse a nominated bank that has

honoured or negotiated a complying presentation and forwarded the
documents to the issuing bank. Reimbursement for the amount of a
complying presentation under a credit available by acceptance or deferred
payment is due at maturity, whether or not the nominated bank prepaid or
purchased before maturity. An issuing bank's undertaking to reimburse a
nominated bank is independent of the issuing bank's undertaking to the
beneficiary.

16. Interest rates prevailing in India is higher when compared to the

parent home countries rates in many cases, for the corporate debt ranging
from a minimum of 9% to 15% p.a depending upon the rating of the
corporates. Further many of the MNCs have access to global resources of
funds and hence can keep the cost of capital low.

17. While countrys security markets have become more integrated in

recent years, there is still a tremendous amount of segmentation that
brings about the benefit to be derived from international diversification of
financial assets. Monetary and fiscal policies differ among countries
because of different economic circumstances. The economic policies of a
country directly affect the securities traded in the country, and they will
behave differently than securities traded in another country with other
economic policies being implemented. Hence, it is not surprising that
domestic factors are found to be more important than international factors
in affecting security returns. Similarly, industrial activity within a country
is also affected by the economic policies of the country; thus firms in the
same industry group, but from different countries, will not necessarily
behave the same in all countries, nor should we expect the securities
issued by these firms to behave alike.

18. Lead, Lag strategies depending upon the strength of the currencies,
strategies for blocked funds, netting,

19. The most obvious argument is that all developed countries are capital
account convertible; hence this is an inevitable destiny of the developing
countries in their path to development.
Free global capital flows bring about better and more efficient allocation
of the global pool of savings to the more productive uses. From the
developing countrys viewpoint, free access to global capital markets
increases available investible resources which augments domestic
savings, reduces marginal cost of capital, accelerates investment and
growth.

According to Stanley Fischer, ....open capital accounts support the

multilateral trading systems by broadening the channels through which
countries can finance trade and investment.

Open capital accounts facilitate portfolio diversification by investors in

developed as well as developing countries.

Because the feasibility of capital account convertibility rests on sound

macroeconomic policy, it creates a sort of commitment for the country
concerned to ensure better macroeconomic management, lest it is
punished by the investors. As Rudiger Dornbusch puts it, The capital
market fulfils an important supervisory function over economic policy

20. Irrevocable LC is a firm undertaking on the part of the issuing bank

and can not be cancelled or amended without the consent of the parties to
Letter of Credit, particularly the Beneficiary.
A Letter of Credit which is not specifically indicated as revocable is
deemed an irrevocable credit.

When the original buyer open an LC (say LC 1) for intermediary party

and the intermediary party open another LC (say LC 2) with near
identical terms in favour of the actual seller, LC 2 would be opened with
the backing or against the security of LC 1. LC 2 is called Back-to-Back
LC.
Section C

21. A multinational firm's indebtedness in a country depends on a

weighted average of national tax rates and differences between national
and foreign tax rates. These differences matter as multinationals have an
incentive to shift debt to high-tax countries.

Multinational affiliates are financed with less external debt in countries

with underdeveloped capital markets or weak creditor rights, reflecting
significantly higher local borrowing costs. Further studies indicates that
greater borrowing from parent companies substitutes for a mjor part of
reduced external borrowing induced by capital market conditions.
Multinational firms appear to employ internal capital markets
opportunistically to overcome imperfections in external capital markets.

23. UCP 600 - Article 5 - Documents v. Goods, Services or Performance

Banks deal with documents and not with goods, services or performance
to which the documents may relate.

UCP 600 - Article 14 - Standard for Examination of Documents

a. A nominated bank acting on its nomination, a confirming bank, if any,
and the issuing bank must examine a presentation to determine, on the
basis of the documents alone, whether or not the documents appear on
their face to constitute a complying presentation.

UCP 600 - Article 16 - Discrepant Documents, Waiver and Notice

When a nominated bank acting on its nomination, a confirming bank, if
any, or the issuing bank determines that a presentation does not comply,
it may refuse to honour or negotiate.

UCP 600 - Article 34 - Disclaimer on Effectiveness of Documents

A bank assumes no liability or responsibility for the form, sufficiency,

accuracy, genuineness, falsification or legal effect of any document, or
for the general or particular conditions stipulated in a document or
superimposed thereon; nor does it assume any liability or responsibility
for the description, quantity, weight, quality, condition, packing, delivery,
value or existence of the goods, services or other performance
represented by any document, or for the good faith or acts or omissions,
solvency, performance or standing of the consignor, the carrier, the
forwarder, the consignee or the insurer of the goods or any other person.

Section D
1. What is your interpretation of the data given above? (5 marks)

2. How would you use the data for managing transaction exposure risk ?
(5 marks)

3. What should be the approximate one year forward premiums for

Currency 1 and 2, if INR interest rate is 7% p.a.? (5 marks)

4. Identify Currency 1 and 2 (5 marks)

Currency 1 has almost constant daily volatility as well as annual volatility

and it has appreciated in the course of this specified time. Such time
series data could be predicted with precision. Currency 2 has similar
pattern, however when in comparison, we observe slightly more
uncertainty in this time series. Both are progressing in the similar
direction , however Currency 1 leads Currency 2.
Currency 1 is GBP against INR and Currency 2 is EURO against INR.
If an importer on 20th May 2015 imports paying 98889 INR against 1000
GBP; on 30th June 2015 imports paying 100121 INR against 1000 GBP.
So, the importer will lose 1232 INR per 1000 GBP assignment. This will
be his transaction loss.
If an exporter exports goods amounting 1000 GBP per assignment, then
his gain will be 1232 INR as on 30th June 2015. This will be his
transaction gain.
(Rf-Rdc) / (1+Rdc) = Parity
If Rf in GBP and EU zone is around 2%, then Parity will be 4.67%
in the negative meaning that the currencies are overvalued against
INR.

Forward Rate = Spot Rate * (1+Int of Overseas)/(1+ Int of domestic)

GBP Forward = 100.121* (1.02)/(1.07)= 95.442 from 30th June 2015, for
1 Year and Local Interest Rate is 2%.
EURO Forward = 71.202 * (1.02)/(1.07)= 67.874
Currency 1 or GBP Forward Premium within that specified one month
(May to June)
[(100.121-98.8893)/98.8893]*12*100= 14.95%
Currency 2 or EURO Forward Premium within that specified one month
(May to June)
[(71.202-70.731)/70.731]*12*100= 7.99%