International Finance - NMIMS SOLVED ASSIGNMENTS June 2026

 

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International Finance

Jun 2026 Examination

 

 

Q1. During a global financial crisis, a group of emerging economies experiences severe foreign exchange shortages, and declining investor confidence. The IMF offers a large-scale SDR (Special Drawing Rights) allocation and recommends the use of SDRs to bolster reserves and stabilize the currency. Finance ministers in these countries, however, are uncertain about how to deploy SDRs within the limits of domestic law and IMF guidelines to support fiscal budgets without triggering further economic imbalances. Using your understanding of SDR mechanisms, how should finance leaders in emerging economies strategically apply their SDR allocations to promote macroeconomic sustainability as Paper Gold? (10 Marks)

Ans 1.

Introduction

Special Drawing Rights are international reserve assets created and allocated by the International Monetary Fund to supplement member countries' existing official reserves. The term Paper Gold reflects the SDR's function as a reserve medium that, while not backed by a physical commodity, carries the convertibility and credibility of a basket of major global currencies including the US Dollar, Euro, Chinese Yuan, Japanese Yen, and British Pound. For emerging economies facing foreign exchange shortages and declining investor confidence during a global financial crisis, the SDR allocation offers a lifeline. However, deploying SDRs strategically requires understanding both the mechanics of the SDR system and the macroeconomic conditions that determine when and how they should

 

 

Q2 (A). Mr. Rajiv Mehta, a seasoned treasury manager at a Mumbai-based multinational corporation, was closely monitoring global interest rate movements in early 2025. He observed that the Reserve Bank of India (RBI) had maintained lending rates at 9% per annum, reflecting the domestic monetary tightening cycle, while the US Federal Reserve had significantly eased its stance, bringing rates down to a mere 3% per annum. The prevailing spot exchange rate in the forex market stood at Rs.94 per US Dollar (USD). Sensing a classic interest rate differential play, Rajiv proposed to his CFO that the company could exploit this gap by borrowing USD 1,00,000 from the US money market at the cheaper rate of 3% per annum and simultaneously deploying those funds in Indian money markets at the higher yield of 9% per annum. The borrowed dollars would be converted at the current spot rate before being invested in India. From International Finance Perspective, kindly compute the resulting gain arising purely from the Interest Rate Parity Principle. (5 Marks)

Ans 2(A).

Introduction

Interest Rate Parity is a fundamental principle in international finance stating that the interest rate differential between two countries will be exactly offset by the expected change in the exchange rate, leaving no arbitrage profit. Rajiv's proposed strategy attempts to exploit the 6 percent interest rate differential between India and the US. Under IRP, this differential should be neutralized by the forward rate adjustment.

Concept and Application

The IRP formula states: Forward Rate = Spot Rate x (1 + domestic rate) / (1 + foreign rate). Any apparent gain from interest rate arbitrage will be eliminated through the forward exchange rate differential when funds are

 

Q2 (B). It would be worthwhile to explore and elaborate upon the concept of Debit Entries as recorded within the Balance of Payments (BoP) framework, with particular attention to how such entries are systematically accounted for across the various components of the BoP structure. It may also be examined as to what the underlying paradigm and genesis of Debit Entries w.r.t. Current Account? (5 Marks)

Ans 2(B).

Introduction

The Balance of Payments is a systematic statistical record of all economic transactions between residents of one country and the rest of the world over a specified period. Every transaction in the BoP framework is recorded using the double-entry bookkeeping principle, where each entry has a corresponding credit and debit. Understanding debit entries is essential for interpreting a country's external sector position and the sustainability of its international economic relationships.

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