UNIVERSITI TUNKU ABDUL RAHMAN

ACADEMIC YEAR 2010/2011

APRIL EXAMINATION
UBFF3243 INTERNATIONAL FINANCE
TUESDAY, 3 MAY 2011

TIME: 2.00PM 4.30PM (2.5 HOURS)

BACHELOR OF COMMERCE (HONS) ACCOUNTING

BACHELOR OF BUSINESS ADMINISTRATION (HONS) BANKING AND FINANCE
BACHELOR OF FINANCE (HONS)

Instructions to Candidates:
Section A: [Total: 40 marks]
This section consists of ONE (1) compulsory question that MUST be answered.
Section B: [Total: 60 marks]
This section consists of three (3) optional questions and ONLY TWO (2) questions to be
answered.
Note: For calculation question(s), marks will be awarded for detailed workings.

This question paper consists of 4 questions on 5 printed pages

UBFF3243 INTERNATIONAL FINANCE

Section A
(Answer this ONE compulsory question)
Q1.

(a)

2
[Total: 40 marks]

Kagawa Corporation. a U.S. based processed-food manufacturer, has ordered

raw materials for its domestic production in the U.S. and the final payment of
RM3,750,000 is due to Indra Putra Berhad, its Malaysian exporter, in 90-days
time. The management of Kagawa Corporation is currently short of cash, but
expects to receive US$1,250,000 from its sales revenue in 90-days time.
Kagawa Corporation has a weighted average cost of capital (WACC) of 9%,
and its debt-to-equity ratio is still way below the industry average.
Current rates in the foreign exchange markets and money markets are as
follows:

(b)

Spot (RM/US$)
90-day forward

3.0230 3.0310
50 90 basis points discount for RM

Money Market
Dollar
Ringgit

90-day Borrowing
6.4%
8.5%

90-day Deposit
4.8%
7.0%

(i)

Compute 90-day outright forward rates.

(3 marks)

(ii)

Compute total payment in U.S. dollar if Kagawa Corporation

implements forward market hedge.
(3 marks)

(iii)

Compute total payment in U.S. dollar if Kagawa Corporation

implements money market hedge.
(11 marks)

(iv)

Compute total payment in U.S. dollar if Kagawa Corporation

implements leading hedge.
(4 marks)

(v)

Based on your answers in part (ii) to (iv) above, which is the best
hedging alternative for Kagawa Corporation?
(2 marks)

(vi)

Given that the 90-day call options on U.S. dollar has an exercise price
of RM3.1000/US$ and a premium of 2%, while the 90-day put options
on U.S. dollar has an exercise price of RM3.1000/US$ and a premium
of 3.5%, compute total payment in U.S. dollar if Kagawa Corporation
implements options market hedge.
(9 marks)

(vii)

Over what range of future spot rate will the best hedging alternative
identified in part (v) above be more preferable than options market
hedge?
(4 marks)

Which contractual hedging technique is most appropriate in hedging

contingency exposure: forward contract, money market contract or options
contract? Explain. (Note: You may use an appropriate example to illustrate)
(4 marks)
[Total: 40 marks]

This question paper consists of 4 questions on 5 printed pages

UBFF3243 INTERNATIONAL FINANCE

Section B
(Answer any TWO out of three questions)
Q1.

3
[Total: 60 marks]

(a)

How can financing strategy be used to reduce foreign exchange risk and
political risk?
(9 marks)

(b)

Under floating exchange rate system, why does a country that has current
account deficit (surplus) will usually have capital and financial account
surplus (deficit) at the same time? Why does China encounter double surplus
in recent years?
(6 marks)

(c)

What is currency diversification? When will currency diversification be more

effective for a multinational company?
(5 marks)

(d)

What is long straddle strategy in currency options trading? When will a

currency speculator adopts this strategy?
(5 marks)

(e)

Nike, a U.S.-based company with a globally recognized brand name,

manufactures athletic shoes in such Asian developing countries as China,
Indonesia, and Vietnam using subcontractors, and sells the products in the U.S.
and foreign markets. The company has no production facilities in the United
States. In each of those Asian countries where Nike has production facilities,
the rates of unemployment and underemployment are quite high. The wage
rate is very low in those countries by the U.S. standard; hourly wage rate in
the manufacturing sector is less than one dollar in each of those countries,
which is compared with about $18 in the U.S. In addition, workers in those
countries often are operating in poor and unhealthy environments and their
rights are not well protected. Understandably, Asian host countries are eager
to attract foreign investments like Nikes to develop their economies and raise
the living standards of their citizens. Recently, however, Nike came under a
world-wide criticism for its practice of hiring workers for such a low pay,
next to nothing in the words of critics, and condoning poor working
conditions in host countries.
Evaluate and discuss various ethical as well as economic ramifications of
Nikes decision to invest in those Asian countries.
(5 marks)
[Total: 30 marks]

This question paper consists of 4 questions on 5 printed pages

UBFF3243 INTERNATIONAL FINANCE

Section B (continued)
Q2.

(a)

Henderson Hernandez is a foreign exchange dealer for a bank in Singapore.

He has SGD 2,000,000 (or its AED equivalent) for a short-term money market
investment. He wonders if he should invest in Singapore dollar (SGD) or
make a covered interest arbitrage investment in the United Arab Emirates
dirham (AED). He faces the following rates:
Spot exchange rate
AED2.9880/SGD
3-month forward exchange rate
AED2.9954/SGD
3-month Singapore interest rate
3% p.a.
3-month United Arab Emirates interest rate 6% p.a.
Based on rule of thumb, which countrys money market do you recommend
Hernandez to invest in? Calculate the amount of covered interest arbitrage
profits in SGD. How would market forces realign AED/SGD spot and forward
exchange rates to restore the Interest Rate Parity (IRP)?
(20 marks)

(b)

In an integrated world financial market, a financial crisis in a country can be

quickly transmitted to other countries, causing a global crisis. Propose
THREE (3) measures to prevent the recurrence of a crisis alike the Asian
Financial Crisis.
(6 marks)

(c)

Partial pass-through could contribute to deviations from Purchasing Power

Parity (PPP). Give TWO (2) possible reasons why the degree of pass-through
is low.
(4 marks)
[Total: 30 marks]

This question paper consists of 4 questions on 5 printed pages

UBFF3243 INTERNATIONAL FINANCE

Section B (Continued)
Q3.

(a)

Why the cost of capital of multinational corporations could be lower than that
of domestic firms? Give THREE (3) possible reasons.
(9 marks)

(b)

Assume the following quotes displayed on a traders computer screen:

Credit Agricole Bank quote
$1.6300/
Barclays Bank quote
1.3800/
Credit Lyonnais Bank quote
$1.1900/
Calculate $/ cross rate. Determine whether the euro is overvalued or
undervalued against the dollar at the rate quoted by Credit Lyonnais Bank.
Calculate triangular arbitrage profits per round trip that a market trader with
$5,000,000 can make.
(7 marks)

(c)

Rohidan Berhad, a Malaysian multinational firm that manufactures and sells

rubber gloves and shoes, has wholly-owned foreign subsidiaries, Costa Pte Ltd
located in Rio de Janeiro (Brazil) and Fabio Pte Ltd located in Lisbon
(Portugal). Rohidan Berhad is listed in Consumer Product sector of Bursa
Malaysia and currently has 60 million shares outstanding with a share price of
RM23.66 per share. Profits before tax and tax rates for the parent company
and each of its subsidiaries, and spot exchange rates between currencies, are
given as follows:
Rohidan
Costa
Fabio
Profits before tax
MYR 600 mil
BRL 55 mil EUR 80 mil
Tax rate (%)
25%
10%
40%
Spot exchange rate between Ringgit and Real
Spot exchange rate between Ringgit and Euro

MYR 3.0000/BRL
MYR 4.4800/EUR

(i)

Compute global tax payments in Ringgit, global effective tax rate and
earnings per share of Rohidan Berhad. (Note: Present your
computations in tabular format)
(10 marks)

(ii)

Given that Fabio Pte Ltd has intra-company purchases from Costa Pte
Ltd, what should the Finance Director do in order to minimise global
effective tax rate of Rohidan Berhad? Explain.
(4 marks)
[Total: 30 marks]
_____________________________

This question paper consists of 4 questions on 5 printed pages