DFM04
International Finance
Assignment – I
Assignment Code: 2015DFM04B1 Last Date of Submission: 15th November 2015
Maximum Marks: 100
Attempt all the questions. All the questions are compulsory and carry equal marks.
Section-A (50 marks)
Q1.(a) Explain how inflation & nationalism make it impossible for a single global currency to exist.
(b) Is devaluation good for exports & imports? Why is the impact of devaluation usually not immediate?
Q2.(a) Does a derivative market redistribute the risk between the market participants? In this context discuss the important functions performed by the derivative markets.
(b) “Options cannot be used for hedging purposes; they are only tools for speculation”. Do you agree? Explain.
Section-B (50 Marks)
(Case Study)
DC Corp is a US based software consulting firm, specialising in financial software for several Fortune 500 clients. It has offices in India, the UK, Europe & Australia. In 2012, DC required £ 100,000 in 180 days & had four options before it:
- A forward hedge
- A money market hedge
- An option hedge
- No hedge
Its analysts developed the following information which was used to assess the alternative solutions:
- Current spot rate of pound = $ 1.50
- 180-day forward rate of pounds as of today = $ 1.48
Interest rates were as follows:
UK
US
180-day deposit rate
4.5%
4.5%
180-day borrowing rate
5.1%
5.1%
The company also had the following information available to it:
A call option on Pound that expires in 180 days has an exercise price of $ 1.49 & a premium of $ 0.03
A put option on Pound that expires in 180 days has an exercise price of $ 1.50 & a premium of $ 0.02
The future spot rates in 180 days were forecasted as follows:
Possible Outcome
Probability
$ 1.44
20%
$ 1.46
60%
$ 1.53
20%
Ques1. Make an analysis for DC Corp. under all the four options i.e.
- A forward hedge
- A money market hedge
- An option hedge
- No hedge
Ques2. Assuming that the inflation rate in UK rises to 12% in a year and the corresponding inflation rate in US would be 7% then what would be the forward exchange rate in a year between French £- US $?
Ques3. Assuming that the interest rate in UK rises to 10% in a year and the corresponding interest rate in US would be 7% then what would be the forward exchange rate in a year between French £- US $?
DFM04
International Finance
Assignment – II
Assignment Code: 2015DFM04B2 Last Date of Submission: 15th November 2015
Maximum Marks: 100
Attempt all the questions. All the questions are compulsory and carry equal marks.
Section-A (50 marks)
Q1.(a) Discuss the key indicators that MNCs should assess in calculating the degree of political risk they face in a country.
(b) How can exposure to political risk be reduced by a MNC in the long-run? In this context explain why political risk analysis is not always accurate.
Q2.(a) What is netting & how can it improve a MNC’s performance?
(b) What do you understand by the term,’ International Cash Management’? Elucidate its objectives. How can a centralised cash management system be beneficial to a MNC?
Section-B (50 Marks)
(Case Study)
Barret Corp. Presently has no existing business in France but is considering the establishment of a subsidiary there. The following information is given to assess this project:
- The initial investment required is FF 60 million. The existing spot rate is $0.20, the initial investment in dollars is $ 12 million. In addition to the FF 60 million initial investments on plant & equipment, FF 10 million is needed for working capital & will be borrowed by the subsidiary from a French bank. The French subsidiary of Barret will pay interest only on the loan each year at an interest rate of 10%.
The loan principal is to be paid in 10 years.
- The project will be terminated at the end of year 3, when the subsidiary will be sold.
- The price, demand, & variable cost of the product in France are as follows:
Year
Price
Demand
Variable Cost
1
FF 600
40,000 units
FF 25
2
FF 650
50,000 units
FF 30
3
FF 700
60,000 units
FF 40
- The fixed costs are estimated to be FF 5 million per year.
- The exchange rate of the French franc is expected to be 0.22 at the end of year 1, $o.25 at the end of year 2, & $0.28 at the end of year 3.
- The French govt will impose a withholding tax of 10% on earnings remitted by the subsidiary. The US govt will allow a tax credit on remitted earnings & will not impose any additional taxes.
- All cash flows received by the subsidiary are to be sent to the parent at the end of each year. The subsidiary will use its working capital to support ongoing operations.
- The plant & equipment are depreciated over 10 years, using straight line depreciation method. Since the plant & equipment are initially valued at FF 60 million, the annual depreciation expense is FF 6 million.
- In three years the subsidiary is to be sold. Barret plans to let the acquiring firm assume the existing French loan. The working capital will not be liquidated, but will be used by the acquiring firm.
- The required rate of return on this project is 15%.
Q1. Determine the net present value of this project. Should Barret accept this project?
Q2. Assume that Barret Co. provides the additional funds for working capital so that the loan from French govt is not necessary.
Q3. Would the NPV of this project from the parent’s perspective be more sensitive to exchange rate movements if the subsidiary used French financing to cover the working capital?
Q4. Assume Barret Co. uses the original proposed financing arrangement & that funds are blocked until the subsidiary is sold. The funds to be remitted are received at a rate of 8% (after taxes) until the end of year 3. How is the project’s NPV affected?
Q5. Assume that Barret Co. decided to implement the project, using the original proposed financing arrangement. Also assume that after one year, a French firm offers Barret Co. a price of $ 30 million after taxes for the subsidiary, & that Barret Co. original forecasts for Years 2 & 3 have not changed. Should Barret Co. divest the subsidiary? Explain.
University: OTHERS UNIVERSITY Year: 2015