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Assignment – I International Finance PGDM(FC) Term – V

th
Submit by 13 December 2010

Group - I 1. Describe the primary functions of the foreign exchange market. How do
global companies use the foreign exchange market to hedge against foreign
exchange risks?
1, 11, 21,
2. Briefly describe portfolio investments and foreign direct investment (FDI)
31, 41, 51,
How do they differ? What is international trade? Why does it occur?
18, 19, 20
3. Compare and contrast interest rate parity, purchasing power parity (PPP),
and the international Fisher effect (IFE).
4. Discuss the determinants of operating exposure. Explain the implications of
purchasing power parity for operating exposure.

Group - II 1. How are foreign exchange transactions between international banks


settled?
2. Explain the theory of purchasing power parity (PPP). Based on this theory,
2, 12, 22,
what is a general forecast of the values of currencies in countries with high
32, 42, 52,
inflation?
28, 29, 30
3. Discuss the advantages and disadvantages of maintaining multiple
manufacturing sites as a hedge against exchange rate exposure

4. Briefly define each of the major types of international bond market


instruments, noting their distinguishing characteristics. Also discuss why
Eurobonds make up the lion’s share of the international bond market
Group - III 1. What are the types of foreign exchange risk companies face when they
deal internationally? It would be great if you could explain in detail with
examples if possible.
3, 13, 23,
2. Assume U.S. interest rates are generally above foreign interest rates. What
33, 43, 53,
does this suggest about the future strength or weakness of the dollar based
38, 39, 40
on the IFE? Should U.S. investors invest in foreign securities if they believe
in the IFE? Should foreign investors invest in U.S. securities if they believe in
the IFE?
3. Explain the rationale of the PPP theory. Explain how you could determine
whether PPP exists. Describe a limitation in testing whether PPP holds.

4. The exchange rate uncertainty may not necessarily mean that firms face
exchange risk exposure. Explain why this may be the case
Group - IV 1. How are translation gains and losses handled differently according to the
current rate method in comparison to the other three methods, that is, the
current/noncurrent method, the monetary/nonmonetary method, and the
4, 14, 24, temporal method?
34, 44, 54,
2. Explain the rationale of the PPP theory. Explain how you could determine
48, 49
whether PPP exists. Describe a limitation in testing whether PPP holds.
3. What is the intuition behind the NPV capital budgeting framework? What
makes the APV capital budgeting framework useful for analyzing foreign
capital expenditures?
4. Discuss and compare hedging transaction exposure using the forward contract vs.
money market instruments. When do the alternative hedging approaches produce the
same result?
Group - V 1. Explain the international Fisher effect (IFE). What is the rationale for the
existence of the IFE? What are the implications of the IFE for firms with
excess cash that consistently invest in foreign Treasury bills? Explain why the
IFE may not hold.
5, 15, 25,
2. Briefly define each of the major types of international bond market
35, 45, 55,
58, 59 instruments, noting their distinguishing characteristics. Also discuss why
Eurobonds make up the lion’s share of the international bond market.
3. Discuss the determinants of operating exposure. Explain the implications of
purchasing power parity for operating exposure.
4. How would you incorporate political risk into the capital budgeting process
of foreign investment projects?

Group - VI 1. How are foreign exchange transactions between international banks


settled?
6, 16, 26,
36, 46, 2. Inflation differentials between the U.S. and other industrialized countries
56, , 09, have typically been a few percentage points in any given year. Yet, in many
10, years annual exchange rates between the corresponding currencies have
changed by 10 percent or more. What does this information suggest about
PPP?
3. How would you define transaction exposure? How is it different from
economic exposure?
4. What should a borrower consider before issuing dual-currency bonds?
What should an investor consider before investing in dual-currency bonds?
Group - VII 1. What are the types of foreign exchange risk companies face when they
deal internationally? It would be great if you could explain in detail with
examples if possible.
7, 17, 27,
2. What are the purposes of the foreign exchange market? Also, how is the
37, 47, 57,
FOREX used to raise capital by international businesses?
50, 60
3. Compare and contrast interest rate parity, purchasing power parity (PPP),
and the international Fisher effect (IFE).

4. Why is capital budgeting analysis so important to the firm? What problems


can enter into the capital budgeting analysis if project debt is evaluated
instead of the borrowing capacity created by the project?