International Financial Management

 

SUBJECT GROUP OF ACCOUNTING AND FINANCIAL MANGEMENT

 

 

International Financial Management – U21081

 

 

EXAMINATION PAPER

 

 

DATE: Sample Exam 

 

TIME:  1 1/2 hours

Including reading time

 

Attempt 4 Questions from 6 (each question 25 marks)

 

PV tables provided

 

 

The examination paper may not be removed from the examination room

 

 

Calculators that are capable of holding text [those with an alpha-numeric keypad, i.e. a-z letters] are NOT permitted in examinations.

 

Specialist dictionaries are not allowed in the exam. International students for whom English is a second language are allowed to take into the exam one bilingual paper based dictionary with no added notes. 

 

A CANDIDATE WHO BRINGS INTO THE EXAMINATION ANY OTHIS AIDS COMMITS AN

ASSESSMENT OFFENCE. THIS INCLUDES MOBILE PHONES AND ANY OTHIS ELECTRONIC

DEVICE CAPABLE OF HOLDING TEXT.

 

Otherwise the normal University of Portsmouth Examination Regulations will apply. 

   

 

 

Question 1 Transaction Exposure

 

Coombes is a U.S.-based IT company. In September Coombes delivers a large shipment of computer equipment to a major distributor in Seville. The receivable, €10 million, is due in 90 days, standard terms for the IT industry in Europe. Note that the sale is large relative to Coombes’s other business and that he currently has no other foreign customers.

 

Coombes’s treasury team has collected the following currency and market quotes. The company’s foreign exchange advisors believe the euro will be at about $1.4200/€ in 90 days. Coombes’s management does not use currency options in currency risk management activities.

                                       

Current spot rate ($/€)   $1.4158
Credit Suisse 90-day forward rate ($/€)   $1.4172
Barclays 90-day forward rate ($/€)   $1.4195
Coombes WACC ($)   9.600%
90-day euro interest rate   3.885%
90-day euro borrowing rate   5.000%
     
Assumptions   Values
90-day A/R (€)   € 10,000,000.00
Current spot rate ($/€)   $1.4158
Credit Suisse 90-day forward rate ($/€)   $1.4172
Barclays 90-day forward rate ($/€)   $1.4195
Expected spot rate in 90 days ($/€)   $1.4200
90-day euro interest rate   3.885%
90-day euro borrowing rate   5.000%
Coombes weighted average cost of capital ($)   9.600%
     

                                       

Required:

 

  1. Evaluate all possible hedging alternatives and advise Coombes on which hedging alternative is preferable. Show all detailed workings. (15 marks)
  2. Outline the arguments for and against hedging and conclude whether hedging should be recommended for Coombes. (10 Marks)

 

 

                                       

 

Total 25 marks

 

 

 

 

 

 

   

Question 2 Interest Rate Exposure

 

McGregor is a rapidly growing whisky distillery based in Ireland. The company has decided to borrow €10,000,000 via a euro-euro floating rate loan for four years. McGregor must decide between two competing loan offerings from two of its banks.

 

Barclays has offered the four-year debt at Euro-LIBOR + 2.00% with an up-front initiation fee of 1.8%.

HSBC has offered Euro-LIBOR + 2.5%, a higher spread, but with no loan initiation fees up-front, for the same term and principal.

 

Both banks reset the interest rate at the end of each year.

 

Euro-LIBOR is currently 2.00%.

 

Barclays forecasts that LIBOR will rise by 0.5 percentage points each year.  HSBC forecasts Euro-LIBOR to begin trending upward at the rate of 0.25 percentage points per year.

 

McGregor’s cost of capital is 5%.

 

Required:

 

  1. Calculate the all in cost (AIC) for each loan and recommend which is the preferred loan for McGregor? Work to 4 d.p. Show all detailed workings.  (18 marks)
  2. Define AIC and explain its use. (3 marks)
  3. From the point of view of a borrowing corporation, what is credit risk and repricing risk? (4 marks)

 

 

(Total 25 marks)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

 

Question 3 Futures

 

 

Robert, a currency trader for New York based US Capital Investments, uses the following futures quotes on the British pound to speculate on the value of the British pound.

 

British Pound Futures                              US$/£              Contract = £62,500

 

 

Maturity Open High Low Settle Change High Open

Interest

June 1.4246 1.4268 1.4214 1.4268 0.0000 1.4700 1,123
September 1.4164 1.4188 1.4146 1.4146 0.0000 1.4550 25,400

 

Required:                    

 

  • If Robert buys 2 September pound futures, and the spot rate at maturity is $1.3980/£,

what is the value of his position? (3 marks)

 

  • If Robert sells 4 June pound futures, and the spot rate at maturity is $1.4560/£, what is

the value of his position? (3 marks)

 

  • If Robert buys 6 June pound futures, and the spot rate at maturity is $1.4560/£, what is

the value of his position? (3 marks)

 

  • If Robert sells 8 September pound futures, and the spot rate at maturity is $1.3980/£, what is the value of his position? (3 marks)

 

All workings must be shown.

                                       

 

  • Explain the meaning and probable significance for international business of the following future contract specifications:

 

  • Specific-sized contract; (2 marks)
  • Standard maturity date; (3 marks)
  • Collateral and maintenance margins; (4 marks)
  • (4 marks)

 

                                                                              

Total 25 marks

 

   

 

Question 4 Covered Interest Arbitrage

Mexican Eagle Oil Company is a large, sophisticated and active participant in both the currency and petrochemical markets. Although it is a Mexican company, because it operates within the global oil market, it considers the U.S. dollar as its functional currency, not the Mexican peso. Maria is a currency trader for Eagle Oil and has immediate use of either $5 million (or the Mexican peso equivalent). She is faced with the following market rates and wonders whether she can make some arbitrage profits in the coming 30 days.

Assumptions Value Peso Equivalent
Arbitrage funds available $5,000,000 50,156,000
Spot exchange rate (peso/$) 10.0312  
one-month forward rate (peso/$) 10.0186  
U.S. dollar one-month interest rate 4.000%  
Mexican peso one-month interest rate 3.450%  

 

Required

  1. Is there an arbitrage opportunity for Maria? Show your calculations. (8 marks)
  2. Using a diagram, calculate the covered interest arbitrage profit (12 Marks)
  3. Define the Fisher effect. What would it say about real interest rates if markets are open and efficient? (5 marks)

   

Total 25 marks

 

 

 

 

 

 

 

 

 

 

 

   

 

Question 5 Foreign exchange market and International monetary Environment

 

  1. a) Use the following spot and forward bid-ask rates for the Mexican peso/U.S. dollar (peso/$) exchange rate from October 1, 2019, to answer the following questions:

 

Peso/$ Peso/$

Period                                                             

Bid Rate                                             Ask Rate                                                    

spot                 8.30                 8.32                                               1 month                     8.25                 8.29

  • months             15                8.17
  • months             32                8.34

 

 

 

 

  1. What is the mid-rate for each maturity? (4 marks)
  2. What is the annual forward premium for all maturities? (12 marks)
  • Briefly explain which currency is trading at forwarding

premiums and which currency is trading at a forward discount for

all maturitys? (4 marks)

 

 

  1. b) BMW manufactures most of the vehicles it sells in the United Kingdom in Germany.

The base platform for the BMW X5 line is €65,000. The spot rate of the Euro against the British pound has recently moved from €1.27/£ to €1.15/£. How does this change the price of the BMW to BMW’s British subsidiary in British pounds?     (5 marks)

 

Total 25 marks

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Question 6

 

Deep South Crane & Rigging is a US manufacturer of heavy crane equipment that exports its crane equipment to several Chinese companies. The annual sales volume is 10,000 units at the yuan (CNY) equivalent of $25,000 each.

The Chinese yuan (renminbi) has been trading at CNY8.1/$, but a reliable financial forecasting firm predicts that the value of the renminbi will depreciate by next week to Yuan 8.5/$, after which it will stabilize for a few years.

Deep South Crane & Rigging fully trusts the forecasts of its financial advisory firm and tries to reach a pricing decision in accordance with the expectations of the devaluation. It is left with the following choices:

  • Maintain the same yuan price and accordingly sell for fewer pounds, in which case the

Chinese volume will not change; or

  • Maintain the same dollar price, raise the yuan price in the China to offset the devaluation, and experience a 15% drop in unit volume.

 

Direct costs are 75% of the US sales price.

 

Required:

  1. What would be the short-run (one year) impact of each pricing strategy? Show your detailed workings. (13 marks)
  2. Which choice do you recommend (2 marks)
  3. What are the main barriers to cross-listing abroad? Briefly discuss. (10 marks)

 

 

Total 25 marks

 

 

 

 

 

 

 

 

 

 

Present value of £1 receivable in n years time                                                    Years     Discount rate as a percentage

n 1 2 3 4 5 6 7 8 9 10
1 0.9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091
2 0.9803 0.9612 0.9426 0.9246 0.9070 0.8900 0.8734 0.8573 0.8417 0.8264
3 0.9706 0.9423 0.9151 0.8890 0.8638 0.8396 0.8163 0.7938 0.7722 0.7513
4 0.9610 0.9238 0.8885 0.8548 0.8227 0.7921 0.7629 0.7350 0.7084 0.6830
5 0.9515 0.9057 0.8626 0.8219 0.7835 0.7473 0.7130 0.6806 0.6499 0.6209
6 0.9420 0.8880 0.8375 0.7903 0.7462 0.7050 0.6663 0.6302 0.5963 0.5645
7 0.9327 0.8706 0.8131 0.7599 0.7107 0.6651 0.6227 0.5835 0.5470 0.5132
8 0.9235 0.8535 0.7894 0.7307 0.6768 0.6274 0.5820 0.5403 0.5019 0.4665
9 0.9143 0.8368 0.7664 0.7026 0.6446 0.5919 0.5439 0.5002 0.4604 0.4241
10 0.9053 0.8203 0.7441 0.6756 0.6139 0.5584 0.5083 0.4632 0.4224 0.3855

 

  11 12 13 14 15 16 17 18 19 20
1 0.9009 0.8929 0.8850 0.8772 0.8696 0.8621 0.8547 0.8475 0.8403 0.8333
2 0.8116 0.7972 0.7831 0.7695 0.7561 0.7432 0.7305 0.7182 0.7062 0.6944
3 0.7312 0.7118 0.6931 0.6750 0.6575 0.6407 0.6244 0.6086 0.5934 0.5787
4 0.6587 0.6355 0.6133 0.5921 0.5718 0.5523 0.5337 0.5158 0.4987 0.4823
5 0.5935 0.5674 0.5428 0.5194 0.4972 0.4761 0.4561 0.4371 0.4190 0.4019
6 0.5346 0.5066 0.4803 0.4556 0.4323 0.4104 0.3898 0.3704 0.3521 0.3349
7 0.4817 0.4523 0.4251 0.3996 0.3759 0.3538 0.3332 0.3139 0.2959 0.2791
8 0.4339 0.4039 0.3762 0.3506 0.3269 0.3050 0.2848 0.2660 0.2487 0.2326
9 0.3909 0.3606 0.3329 0.3075 0.2843 0.2630 0.2434 0.2255 0.2090 0.1938
10 0.3522 0.3220 0.2946 0.2697 0.2472 0.2267 0.2080 0.1911 0.1756 0.1615

 

Present value of an annuity of £1 payable at the end of each of n years

Years                  Discount rate as a percentage

n 1 2 3 4 5 6 7 8 9 10
1 0.9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091
2 1.9704 1.9416 1.9135 1.8861 1.8594 1.8334 1.8080 1.7833 1.7591 1.7355
3 2.9410 2.8839 2.8286 2.7751 2.7232 2.6730 2.6243 2.5771 2.5313 2.4869
4 3.9020 3.8077 3.7171 3.6299 3.5460 3.4651 3.3872 3.3121 3.2397 3.1699
5 4.8534 4.7135 4.5797 4.4518 4.3295 4.2124 4.1002 3.9927 3.8897 3.7908
6 5.7955 5.6014 5.4172 5.2421 5.0757 4.9173 4.7665 4.6229 4.4859 4.3553
7 6.7282 6.4720 6.2303 6.0021 5.7864 5.5824 5.3893 5.2064 5.0330 4.8684
8 7.6517 7.3255 7.0197 6.7327 6.4632 6.2098 5.9713 5.7466 5.5348 5.3349
9 8.5660 8.1622 7.7861 7.4353 7.1078 6.8017 6.5152 6.2469 5.9952 5.7590
10 9.4713 8.9826 8.5302 8.1109 7.7217 7.3601 7.0236 6.7101 6.4177 6.1446

 

  11 12 13 14 15 16 17 18 19 20
1 0.9009 0.8929 0.8850 0.8772 0.8696 0.8621 0.8547 0.8475 0.8403 0.8333
2 1.7125 1.6901 1.6681 1.6467 1.6257 1.6052 1.5852 1.5656 1.5465 1.5278
3 2.4437 2.4018 2.3612 2.3216 2.2832 2.2459 2.2096 2.1743 2.1399 2.1065
4 3.1024 3.0373 2.9745 2.9137 2.8550 2.7982 2.7432 2.6901 2.6386 2.5887
5 3.6959 3.6048 3.5172 3.4331 3.3522 3.2743 3.1993 3.1272 3.0576 2.9906
6 4.2305 4.1114 3.9975 3.8887 3.7845 3.6847 3.5892 3.4976 3.4098 3.3255
7 4.7122 4.5638 4.4226 4.2883 4.1604 4.0386 3.9224 3.8115 3.7057 3.6046
8 5.1461 4.9676 4.7988 4.6389 4.4873 4.3436 4.2072 4.0776 3.9544 3.8372
9 5.5370 5.3282 5.1317 4.9464 4.7716 4.6065 4.4506 4.3030 4.1633 4.0310
10 5.8892 5.6502 5.4262 5.2161 5.0188 4.8332 4.6586 4.4941 4.3389 4.1925

[End of Examination]