International Financial Management MODEL QP

Duration : 2 ½ Hours No. of questions: 8 Marks : 60

Section A – 1 x 10 = 10
1. Answer the following sub-questions, each sub-question carries one mark.
a. What is the frequency of preparing BOP in India?
b. Cross quote helps to know the …………….
c. Currency options are useful for hedging the foreign exchange risk. (T/F)
d. ………Home currency and ………… Foreign Currency for hedging payables
in Foreign Currency through money market hedge.
e. ………… exchange rate determination theory is based on Law of One Price.
f. ……… and ………… are the two components of interest rate.
g. Appreciation of home currency is a threat for importer. Yes / No
h. Find IRD if interest rate in home is 8 % and 6% in foreign.
i. An Indian company can issue ADRs. Yes/No
j. Under current rate method non-monetary assets are translated at…….
exchange rate

Section B. Answer any two questions, each question carries 5 marks (2 x 5 = 10)
1. Explain how the exchange rates were fixed during the Gold Standard. How the system
collapsed.
2. What is Forward Rate Agreement and explain how it works to manage interest rate
risk.
3. Work out the interest rate swap possibility from the following particulars and find the
net interest cost to each company. The swap dealer charges 20 per cent of the benefit
and remaining benefit is shared equally by the companies involved in swap. Assume
that loan amount and tenure of the loan is same for both the companies.

Particulars ABC Ltd.. XYZ Ltd.

Credit Rating Very good Average
Fixed Rate 10 % p. a. 12 %
Floating Rate MIBOR + 1% MIBOR + 2 %
Preference Floating Fixed

Section C. Answer any two questions, each question carries 10 marks (2x 10 = 20)
4. What is covered interest arbitrage? Explain the covered interest rate arbitrage process
with a hypothetical example.
5. Describe the various instruments for sourcing long-term finance from international
markets.
6. Translate the following Balance Sheet of MHT Ltd. a Indian subsidiary in US under
current rate method and temporal method.

Balance Sheet as on March 31, 2019.

Liabilities USD Assets USD
Capital stock 25,000 Plant & Equipment 15,000
Retained earnings 5,000 Furniture & Fixture 8,000
Secured loan 10,000 Motor Vehicles 7,000
Term Loan 5,000 Inventory 5,000
Current liabilities 10,000 Accounts receivables 6,000
Short-term investments 4,000
Bank 8,000
Cash 2,000
55,000 55,000
Additional information:
Current exchange rate: Rs. 69 per $; and, Historic exchange rate: Rs. 65 per $
Section D. Answer the following question, it carries 20 marks (1x 20 = 20)
Case study (Compulsory question)
7. We Prove Ltd. an Indian MNE is having payables of GBP 20,000 in six months. It has
collected the following data from forex market and money market:
a. Spot exchange rate INR 90 / GBP.
b. 6 months forward rate INR 92.5/ GBP.
c. Interest rate in UK money market 5 % p. a. on investment and 8 % for
borrowing.
d. Interest rate in Indian money market 8 % p. a. on investment and 12 % for
borrowing.
e. Call option on GBP at a strike price of INR 93 per GBP at a premium of Re.
0.5 per GBP
f. Put option on GBP at a strike price of INR 93 per GBP at a premium of Re.
0.3 per GBP
g. Forecasted spot exchange rate after six months is as under:
Exchange Rate Probability
INR 89 / GBP 0.1
INR 90 / GBP 0.1
INR 91 / GBP 0.2
INR 92 / GBP 0.1
INR 93 / GBP 0.2
INR 94 / GBP 0.3
It is contemplating the following strategies.
a. No hedge
b. Money market hedge
c. Forward hedge
d. Options hedge
You are requested to suggest suitable method of hedging.
 International Financial Management MODEL QP
Duration : 2 ½ Hours No. of questions: 8 Marks : 60
Section A – 1 x 10 = 10
1. Answer the following sub-questions, each sub-question carries one mark.
a. What were the rules of the game under gold standard?
b. What is cross quote?
c. What is convertibility with respect to BOP?
d. Give any one reason for recent depreciation of Indian Rupee.
e. In an inverse quote forward rate is greater than spot rate. It indicates that the
forward is trading at ………(premium / discount).
f. Currency derivatives are useful for hedging foreign exchange risk? (Y/N)
g. Give any two examples for transaction exposure.
h. Under current rate method fixed assets are translated at _____ exchange rate.
i. Money market hedge avoids dependence on future spot exchange rate. T/F
j. The intensity of interest rate risk is greater than exchange rate risk. T/F
Section B. Answer any two questions, each question carries 5 marks (2 x 5 = 10)
2. Write a short note on foreign exchange market.
3. What is translation exposure? Explain the procedure of translation of Balance Sheet
from foreign currency to home currency.
4. Find out the possibility of CIA and write the steps with example if there is a
possibility.
a. Spot Exchange Rate INR 90/GBP
b. 90 Day Forward rate INR 92/GBP
c. Interest rate in India - 10 % p.a.
d. Interest rate in UK – 6 % p.a..

Section C. Answer any two questions, each question carries 10 marks (2x 10 = 20)
5. Briefly discuss the exchange rate determination theories.
6. What is operating exposure? Explain various approaches for managing operating
exposure.
7. Xport Ltd. has receivables of EURO 8,000 in six months. Advise the company to
hedge it risk from the following details.
a. Interest rate in Euro money market - Deposit 5 %, Lending 8%
b. Interest rate in Rupee money market - Deposit 7 %, Lending 12%
c. Spot exchange rate INR 78 / EURO
d. Six months futures INR 81/ EURO
e. Call option on EURO at strike price of INR 82 / EURO and
premium is INR 1/EURO
f. Put option on EURO at strike price of INR 82 / EURO and
premium is INR 1.2 /EURO
Section D. Answer the following question it carries 20 marks (1x 20 = 20)
 Case study (Compulsory question)
8. Dr. Ready Ltd. is planning to set up its manufacturing plant in US. The following
information is furnished:
a. Cash outflows
At the beginning of year: USD
1 1,00,000
2 20,000

b. CFAT
Year 1 2 3 4 5
USD 15,000 25,000 35,000 30,000 40,000
c. Required rupee rate of return is 12 per cent
d. Risk free rate in India 8 per cent p.a.
e. Risk free rate in US 6 per cent
f. Spot Exchange Rate INR 70 / USD
You are requested to find the NPV under Home currency approach and Foreign
currency approach and advise the company.