Get fully solved SMU MBA Assignments
August/Fall 2012
Master of Business Administration - MBA Semester 4
Subject Code – MF0015
Subject Name – International Financial Management
4 Credits
(Book ID: B1316)
Assignment Set- 1 (60 Marks)
Note: Each question
carries 10 Marks. Answer all the questions.
Q.1 What is meant by
BOP? How are capital account convertibility and current account convertibility
different? What is the current scenario in India?
Answer : The
balance of payments(or BOP) of a country is a record of international
transactions between residents of one country and the rest of the world over a
specified period, usually a year. Thus, India’s balance of payments accounts
record transactions between Indian residents and the rest of the world.
International transactions include exchanges of goods, services or assets. The
term “residents” means businesses, individuals and government agencies and
includes citizens temporarily living abroad but excludes local subsidiaries of
foreign corporations. The balance of payments is a sources-and-uses-of-funds
statement. Transactions such as exports of goods and services that earn foreign
exchange are recorded as credit, plus, or cash inflows (sources). Transactions
such as imports of goods and services that expend foreign exchange are recorded
as debit, minus, or cash outflows (uses).The Balance of Payments for a country
is the sum of the Current Account, the Capital Account and the change in
Official Reserves.
The current account is that balance of payments account in
which all short-term flows of payments are listed. It is the sum of net sales
from trade in goods and services, net investment income (interest and
dividend), and net unilateral transfers (private transfer payments and
government transfers) from abroad. Investment income for a country is the
payment made to its residents who are holders of foreign financial assets
(includes interest on bonds and loans, dividends and other claims on profits)
and payments made to its citizens who are temporary workers abroad. Unilateral
transfers are official government grants-in-aid to foreign governments,
charitable giving (e.g., famine relief) and migrant workers’ transfers to
families in their home countries. Net investment income and net transfers are
small relative to imports and exports. Therefore a current account surplus
indicates positive net exports or a trade surplus and a current account deficit
indicates negative net exports or a trade deficit. The capital(or financial)
account is that balance of payments account in which all cross-border transactions
involving financial assets are listed. All purchases or sales of assets,
including direct investment (FDI) securities (portfolio investment) and bank
claims and liabilities are listed in the capital account. When Indian citizens
buy foreign securities or when foreigners buy Indian securities, they are
listed here as outflows and inflows, respectively. When domestic residents
purchase more financial assets in foreign economies than what foreigners
purchase of domestic assets, there is a net capital outflow.
If foreigners purchase more Indian financial assets than
domestic residents spend on foreign financial assets, then there will be a net
capital inflow.
A capital account
surplus indicates net capital inflows or negative net foreign investment. A
capital account deficit indicates net capital outflows or positive net foreign
investment.
Current scenario in
India
The official reserves account (ORA)records the total
reserves held by the official monetary authorities (central banks) within the
country. These reserves are normally composed of the major currencies used in
international trade and financial transactions. The reserves consist of “hard”
currencies (such as US dollar, British Pound, Euro, Yen), official gold reserve
and IMFSpecial Drawing Rights (SDR). The reserves are held by central banks to
cushion against instability in international markets. The level of reserves
changes because of the central bank’s intervention in the foreign exchange
markets. Countries that try to control the price of their currency (set the
exchange rate) have large net changes in their Official Reserve Accounts. In
general, a net decrease in the Official Reserve Account indicates that a
country is buying its currency in exchange for foreign exchange reserves, to
try to keep the value of the domestic currency high with respect to foreign
currencies. Countries with net increases in the Official Reserve Account are
usually attempting to keep the price of the domestic currency cheap relative to
foreign currencies, by selling their currencies and buying the foreign exchange
reserves. When central bank sells its reserves (foreign currencies) for the
domestic currency in the foreign exchange market, it is a credit item in the
balance of payment accounts as it makes available foreign currencies.
Similarly, when a central bank buys reserves (foreign currency), it is a debit
item in the balance of payment accounts. The Balance of Payments identity
states that:
Current Account + Capital
Account = Change in Official Reserve Account.
If a country runs a current account deficit and it does not
run down its official reserve to cover this deficit (there is no change in
official reserve), then the current account deficit must be balanced by a
capital account surplus. Typically, in countries with floating exchange rate
system, the change in official reserves in a given year is small relative tithe
Current Account and the Capital Account. Therefore, it can be approximated by
zero. Thus, such a country can only consume more than it produces (or imports
are greater than exports; current account deficit) only if it has a capital
account surplus (foreign residents are willing to invest in the country). Even
in a fixed exchange rate system, the size of the official reserve account is
small compared to the transactions in the current and capital account. Thus the
residents of a country cannot have a current account deficit (imports exceeding
exports) unless the foreigners are willing to invest in that country (capital
account surplus).
Q.2 What is
arbitrage? Explain with the help of suitable example a two-way and a three way
arbitrage.
Q3. You are given the
following information:
Q.4 Explain various
methods of Capital budgeting of MNCs.
Q.5 a. What are
depository receipts?
b. Boeing commercial
Airplane Co. manufactures all its planes in United States and prices them in
dollars, even the 50% of its sales destined for overseas markets. Assess
Boeing’s currency risk. How can it cope with this risk?
Q.6 Distinguish
between Eurobond and foreign bonds? What are the unique characteristics of
Eurobond markets?
August/Fall 2012
Master of Business Administration - MBA Semester 4
Subject Code – MF0015
Subject Name – International Financial Management
4 Credits
(Book ID: B1316)
Assignment Set- 2 (60 Marks)
Note: Each question
carries 10 Marks. Answer all the questions.
Q.1 What do you mean
by optimum capital structure? What factors affect cost of capital across
nations?
Answer : The
objective of capital structure management is to mix the permanent sources of
funds in manner that will maximise the company’s common stock price. This will
also minimise the firm’s composite cost of capital. This proper mix of fund
sources is referred to as the optimal capital structure. Thus, for each firm,
there is a combination of debt, equity and other forms(preferred stock) which
maximises the value of the firm while simultaneously minimising the cost of
capital. The financial manager is continuously trying to achieve an optimal
proportion of debt and equity that will achieve this objective.
Cost of Capital across Countries
Just like technological or resource differences, there exist
differences in the cost of capital across countries. Such differences can be
advantageous to MNCs in the following ways:
1. Increased
competitive advantage results to the MNC as a result of using low cost capital
obtained from international financial markets compared to domestic firms in the
foreign country. This, in turn, results in lower costs that can then be
translated into higher market shares.
2. MNCs have the
ability to adjust international operations to capitalise on cost of capital
differences among countries, something not possible for domestic firms.
3. Country
differences in the use of debt or equity can be understood and capitalised on hymns.
We now examine how the costs of each individual source of
finance can differ across countries.
Country differences
in Cost of Debt
Before tax cost of debt (Kid) = Fro + Risk Premium
This is the prevailing risk free interest rate in the
currency borrowed and the risk premium required by creditors. Thus the cost of
debt in two countries may differ due to difference in the risk free rate or the
risk premium.
(a) Differences in
risk free rate:
Since the risk free rate is a function of supply and demand,
any factors affecting the supply and demand will affect the risk free rate.
These factors include:
•Tax laws:
Incentives to save may influence the supply of savings and
thus the interest rates. The corporate tax laws may also affect interest rates
through effect son corporate demand for funds.
• Demographics:
They affect the supply of savings available and the amount
of loan able funds demanded depending on the culture and values of a given country.
This may affect the interest rates in a country.
• Monetary policy:
It affects interest rates through the supply of loan able funds.
Thus a loose monetary policy results in lower interest rates if a low rate of
inflation is maintained in the country.
• Economic
conditions:
A high expected rate of inflation results in the creditors
expecting a high rate of interest which increases the risk free rate.
(b) Differences in risk premium:
The risk premium on the debt must be large enough to
compensate the creditors for the risk of default by the borrowers. The risk
varies with the following:
• Economic
conditions:
Stable economic conditions result in a low risk of
recession. Thus there is a lower probability of default.
• Relationships
between creditors and corporations:
If the relationships are close and the creditors would
support the firm in case of financial distress, the risk of illiquidity of the
firm is very low. Thus a lower risk premium.
•Government
intervention:
If the government is willing to intervene and rescue affirm,
the risk of bankruptcy and thus, default is very low, resulting in a low risk
premium.
• Degree of financial
leverage:
All other factors being the same, highly leveraged firms
would have to pay a higher risk premium.
Q.2 What is sub-prime
lending? Explain the drivers of sub-prime lending? Explain briefly the
different exchange rate regime that is prevalent today.
Q.3 What is covered
interest rate arbitrage?
Assume spot rate of £
= $ 1.60
180 day forward rate
£ = $ 1.56
180 day interest rate
in U.K. = 4%
180 day U.S interest
rate = 3%
Is covered interest
arbitrage by U.S investor feasible?
Q.4 Explain double
taxation avoidance agreement in detail
Q.5 Explain American
depository receipt sponsored programme and unsponsored programme.
Q.6 Explain (a)
Parallel Loans (b) Back – to- Back loans
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