SECOND INTERNALS

International Financial management

Time : 1.30 hrs Note : Answer all the questions Marks : 50

1. A call option in Canadian $ is available with a strike price of $0.60 and is purchased by a

speculator at $0.06/unit. Contract size is 50,000 units. Canadian $ spot rate is $0.65 at the time the option is exercised. What is the net profit to the speculator? What spot rate will the speculator break even will the seller earn a profit? (5marks)
2. i) SPAR Inc. has sold Australian $ put option at a price of $0.01/unit with a strike price of

$0.76/unit. If the following rates prevail determine net profit/loss. $0.72, $0.74, $0.76, $0.79. ii) Assume Australian $ spot rate is $0.85 and Australian and US 1 year interest rates were initially 5%. Then assume Australian 1 year interest rate increased by 2% while US interest remained unchanged. Using this information and international Fisher effect, forecast spot rate 1 year ahead. (5 marks)
3. An Indian customer has imported equipment from Germany and has approached a bank

for booking a forward contract. Delivery expected 6 months from now. The following rates are quoted. (5 marks) $ / Spot = 1.2223 / 1.1445

3 month swap = 5 / 10 6 month swap = 15 / 20 Rs / $ spot = 44.47 / 44.57

3 month swap = 15 / 25 6 month swap = 20 / 30 What rate will bank quote if it needs a margin of 0.5%?
4. Assume the following information:

(5 marks)

Spot rate of = $ 1.60 180-day forward of = $ 1.56 180-day British interest rate = 4%

180-day U.S. interest rate = 3% Based on the information, is covered interest arbitrage by US investors feasible? Explain
5. Suppose that the interest rate in XYZ country is 24% per annum, whereas it is only 8%

per annum in the United States. You are considering investing $10,000 for 180 days in XYZs securities but are concerned about the exchange risk. XYZs currency is crown. You find the following quotations in the news paper in US dollar terms: (10 marks) XYZ country (crown) 30 day forward 90 day forward 180 day forward

$0.1000 0.0980 0.0970 0.0950

Calculate the forward premium (discount) of the crown against the US dollar (based on the 180 day quotation). What is the net gain in US dollars from investing in XYZs securities relative to US securities if it is assumed that the exchange rate in 180 days equals todays spot rate? Suppose the crown depreciates by 10% relative to the dollar in next 180 days; what is your net gain (loss) from an uncovered position relative to investment in the US? What is your net gain (loss) from a cove3red position? (ignore transaction cost) (10 marks)

6. Translate the following balance sheets of the two subsidiaries of ABC Inc (a U.S.MNC)

into US dollars using : a) Monetary non monetary method. b) The current method of transaction. U.K. Subsidiary

French Subsidiary

(Millions of pound sterling) (Missions of French Franc) 31.12.200 0 31.12.2001 31.12.2000 31.12.2001

Cash marketable Securities Accounts receivables Inventories Fixed Assets (Net) Total Assets Bank loans Account payable Long term debt Net worth 120 315 612 1,350 2,397 500 490 650 757 143 407 750 1,300 2,600 450 553 700 897 2,600 2,143 4,020 3,950 7,010 17,123 3,000 4,873 4,250 5,000 17,123 1,915 3,775 3,850 6,850 16,390 2,800 4,658 4,000 4,932 16,390

Total Liabilities & net 2,397 worth

Assume the following exchange notes: 31.12.2001 1.00=US$ 1.40 US$ 1.00 = FF 7.25 31.12.2000 1.00=US$ 1.05 US$ 1.00 = FF 9.00 Show also how the parent company will reflect the exchange gains (losses) in its consolidated statements using the monetary non monetary method as against the current method.

7. Case study:

(10 marks)

XYZ Co. is an Indian firm conducting a financial plan for the next year. It has no foreign subsidies but a significant portion of its sales are from exports. Its foreign cash inflows to be received from exporting and cash outflows to be paid for imported supplies for the next year are given below:

Currency

Total Inflow

Total Outflow

US Dollar ($) German Mark (DM) French Franc (FFr) UK ()

$ 42,000,000 DM 15,000,000 FFr 10,000,000 24,000,000

$ 20,000,000 DM 10,000,000 FFr 80,000,000 15,000,000

The spot rates and one year forward rates, as of today, are Currency US $ DM FFr UK Spot rate Rs.42.50 22.50 6.60 66.90 One year forward rate Rs.43.20 23.25 6.00 67.10

i) ii)
iii)

On the basis of the information given, determine the net exposure of each foreign currency in rupees. Are any of the exposure positions offsetting to some degree? Using todays spot rate as a forecast of the US dollar in 90 days, would you hedge the US dollar position? If the inflow of the UK pound ranges from 20,000,000 to 30,000,000 for the next year, what will be the risk of hedging 25,000,000 in next inflows? How can the company avoid such a risk? Explain in brief the strategy which XYZ Co., should adopt for the four currencies.

iv)

v)

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