SHANTI BUSINESS SCHOOL

PGDM TRIMESTER- III END TERM EXAMINATION

JULY - 2015
INTERNATIONAL FINANCE & TRADE (IFT)
TIME: 3 HRS. Max. Marks: 100
Instructions:
1. The answers to Part A (MCQ) questions are to be written only in OMR sheet provided to you.
2. Only 30 minutes will be given to answer the MCQ. After that it will be collected . Use only
blue/black pen to darken the circle of OMR sheet.
3. Answers should be written neatly, briefly and to the point.
4. Main and sub question numbers should be clearly specified in the answer book.
5. Answer to sub questions of main question should be written in continuous sequence.

PART A
Total Marks: 25
1) _________ is used as cash pool to facilitate funds mobilization and reduce the chance of
misallocated funds.
a) Central Depository
b) Transfer Pricing
c) Hedging
d) Arbitrage strategies
2) Managed float is
a) Where market forces determine value of the currency.
b) Where currency is pegged to another currency.
c) Where government intervention is done along with market forces to determine value of the
currency.
d) None of the above
3) Mr. Jasen is importer based at Mexico and he is suppose to pay £2,00,000 after 3-months. Rates
are S(Peso/£) = 30.45 and F3 (Peso/£)= 31.5245. What will he do if he wants to hedge this
transaction?
a) Buy £2,00,000, means buy @ forward rate 31.5245
b) Buy £2,00,000, means sell @ forward rate 31.5245
c) Buy Peso 2, 00,000, means buy @ forward rate 31.5245
d) Buy Peso 2, 00,000, means sell @ forward rate 31.5245
4) A statement of exports & imports of goods and services only is termed as
a) Balance of payments
b) Capital account
c) Official reserves account
d) Balance of Trade
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5) If you are citizen of Sweden having home currency as Swedish Krona, the spot rate S(Krona/$) =
2.5 is termed as ______ for you.
a) Indirect Quote
b) Direct quote
c) American Quote
d) None of the above
6) If S(€/£) = 2.7585 and 180 days Forward F180 (€/£) = 2.0155 then forward discount is
a) - 26.93%
b) - 53.86%
c) - 36.86%
d) - 73.72%
7) If one can borrow at one interest rate & simultaneously lend at another interest rate in another
country with exchange rate fully covered through forward hedging is called
a) Triangular arbitrage
b) Exposure Netting
c) Purchasing Power parity
d) Covered interest arbitrage
8) One of the biggest benefits of the futures contract as compared to forward contract is
a) No counter party default risk
b) Agreement can be customized
c) No requirement of Initial margin
d) No requirement of Maintenance margin
9) The process of adjusting margin account as per daily settlement price is called
a) Maintenance margin
b) Initial margin
c) Marked to Market
d) None of the above
10) If RIL is importing from USA and wants to hedge through currency options, given option rate is
quote as ($/INR), then RIL should
a) Buy Put option
b) Buy Call option
c) Sell put option
d) None of the above
11) If you are Exporter from India & receivables are in $, what will be favorable for you.
a) Depreciation of $ value against INR
b) Appreciation of $ value against INR
c) No impact
d) None of the above

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12) Europe based company is going to pay BRL 8,55,750 after 1 year. Prevailing interest rate in Brazil
is 5.5%. If company wants to construct money market hedge, what is the cash out flow in Euro (€)
for company today? Spot rate S(€/BRL) = 0.52, F360(€/BRL) = 0.85
a) € 4,21,791
b) €7,27,387
c) €4,44,990
d) € 4,50,000
13) If company wants to use derivative which can have unlimited profit potential & limited loss it can
go for
a) Forward
b) Futures
c) Options
d) FRA
14) If you are importer from India & payables in euro (€) , you believe that euro (€) will keep on
appreciating against INR, they you should
a) Make payment as late as possible – lagging the payment
b) Make payment as early as possible – leading the payment
c) Make payment as late as possible – leading the payment
d) Make payment as early as possible – lagging the payment
15) Future Group has some receivable in USD, but company feels it does not require hedging action,
the company is projecting
a) Risk Neutral attitude
b) Risk Aversion attitude
c) Risk Seeking attitude
d) None of the above
16) “This is long term risk to the business from adverse economic development in the country in
which it is based, resulting in exchange rate movement that benefits foreign competitors” can be
terms as
a) Direct Economic Exposure
b) Indirect Economic exposure
c) Translation exposure
d) None of the above
17) All below are methods of translation except
a) Current rate Method
b) Current/ Non-current method
c) Temporal Method
d) Fixed rate Method

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18) All balance sheet items are translated at current exchange rate other than common stock under
which method?
a) Monetary/Non monetary method
b) Temporal Method
c) Current rate method
d) Current/ Non-current method
19) Interest rate in UK is 6% and in Europe 4%. Current spot rate S(€/£)= 0.7585, 1 year Forward rate
F(€/£)= 0.7885. If interest rate arbitrage is possible then what is gain out of it.(assume you can
borrow £ 1,00,000 OR € 1,00,000)
a) € 6192
b) £ 6192
c) £ 7500
d) € 5252
20) Tesco- a UK based company, is going to receive ¥ 35,37,895 from customer based at Japan after
6-months.Tesco has been provided with quotes F 6(¥/£)= 2.75 and F3($/£) = 2.55, and spot rate is
S(¥/£) = 2.52. If Tesco hedges through forward rate(¥/£), what is £ amount Tesco will receive after
6 month?
a) £ 15,25,000
b) £ 14,03,926
c) £ 12,86,507
d) £ 13,87,409
21) Ri = Rf + AWW Cov(Ri ,RW) is used when
a) Capital markets are fully integrated & world systematic risk is used and firms are having cross-
listing.
b) Domestic systematic risk is used for domestic investor
c) There is domestic firm without any cross - listing
d) None of the above
22) M&M is issuing Japanese yen (¥) denominated bonds in European market for its’ Japanese
subsidiary, is called
a) Samurai bond
b) Euro Bond
c) Global bond
d) Foreign Bond
23) When two international banks maintain deposits with each other is called
a) Correspondent bank
b) Foreign branch bank
c) Affiliate bank
d) Subsidiary bank

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24) The price that is used for accounting purpose, is assigned to goods and services flowing from one
division/subsidiary of a firm to another division/subsidiary is called
a) Arm’s length price
b) Accounting price
c) Transfer Price
d) None of the above
25) Barclays bank : Bid(¥/€) = 0.5785 Ask(¥/€) = 0.5795
RBS bank : Bid(¥/€) =0.5783 Ask (¥/€) = 0.5796
If you want to buy ¥1,00,000 by selling € with you, at best rate what will be your outflow in
euro(€)?
a) € 1,72,920
b) € 172,562
c) € 1,72,532
d) € 1,72,860

PART B
Total Marks:[5x10=50]
Provide answers to any five from below (For calculation part provide detail with complete
solution)
1) Explain five stages of International Monetary system and also describe different types of bonds
issued in International markets.
2) Describe transaction exposure & economic exposure at length with tools/techniques /methods etc.
used for managing these exposure.
3) What is translation exposure? Describe four methods of translation with hypothetical example for
each method.
4) Go through details provided as below:
RBS Bank S($/¥) = 2.5 , ABN Amro bank S(¥/£) = 20.55 and Barclays bank S($/£) = 40.5.
Assume that you have $ 1 lac OR £ 1 lac OR ¥ 1 lac for calculating Triangular Arbitrage.
Calculate what will be arbitrage profit for 1. RBS bank & ABN amro bank combination 2. ABN
amro bank & Barclays bank combination 3. RBS bank & Barclays bank combination. Also
provide what will be trading instruction (which rate you will buy & which rate you will sell) for
each combination.
5) I) HSBC bank has received 9-months euro dollar deposit for $25,35,125. The bank has extended
euro dollar loan against this deposit for 3 months. Bank is interested to hedge through Forward rate
agreement(FRA). Let’s say LIBOR rates turns out to be as below for different time period;
1X7 = Libor rate 4%, 3X6 = Libor rate 5.15% , 3X9 = Libor rate 5.25% , 6X12 = Libor rate
5.50%. Assume agreement rate is 6% and no. of days for 6-months is 184 days and no. of days for
3-months is 91 days.
Calculate what will net receivable OR payable for HSBC bank.

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 II) Japanese MNC has capital expenditure plan in UK. Initial cash out flow is £ 105 Mil. Cash
inflows in 1st year, 2nd year, 3rd year are respectively £ 25 Mil, £ 30 Mil, £50.5 Mil. What is Net
present value in ¥ from Japanese MNC’s perspective if inflation rate in Japan is 4.5% and in UK
3.5%. Investors required rate of return for Japanese MNC is 10.5%. Current spot rate (¥/£) = 2.25.
6) I) GE Inc.(USA based) has £ 78,85,345 receivable after 3-months. In the next 3-months company
has payable £ 15,56,000. Given below are the options rates;
Current spot rate ($/£) = 1.45
Call option ($/£) @ strike price = 1.5715, Option premium= $ 0.04 per Pound.
Call option ($/£) @ strike price = 1.5655, option premium = $ 0.06 per Pound.
Put option ($/£) @strike price = 1.4025, option premium = $ 0.05 per Pound.
Put option ($/£) @strike price = 1.3975, option premium = $ 0.04 per Pound.
Calculate net receivable as per applicable options & also mention which will be best option for
company. Assume company does exposure netting. After 3 months spot rate turns out to be S($/£)
= 1.38.
II) Ford( US firm) wants to raise money in £ for its UK subsidiary for amount of £15 Mil. Tesco
(UK firm) also wants to raise money in USD for its US subsidiary for amount of $25.5 Mil.
Current spot rate ($/£) = 1.70.
If Ford tries to raise money from UK market interest rate applicable is 5.5% and if Ford raises
money in its home (US) market the interest rate is 5.25%.
If Tesco tries to raise money from USA market interest rate applicable is 6.25% and if Tesco
raises money in its home (UK) market the interest rate is 5%.
If both companies agree to enter into currency swap for 3 years, what will be payments from
both companies along with locked exchange rate($/£) for interest payments & locked exchange
rate($/£) for last year at the end of the swap?
7) I) Differentiate between Forward contract & futures contract with advantages &
Disadvantages of each.
II) A Japanese company competes with a US company and a UK company, for markets in the
Japan and the US. The cost per unit is ¥ 15 to the Japanese company, $ 12 to the US Company
and £ 18 to the UK Company. The selling price per unit of product is ¥ 23 in Japan and $ 19.50
in the US.
Current exchange rate: ¥ 1 =$ 1.15 , ¥ 1 = £ 2.25 , $ 1= £ 2
Let’s say after 6-months exchange rate turns out to be : ¥ 1 =$ 1.20 , ¥ 1 = £ 2.85, $ 1= £ 2
What is current profit per unit for all three companies in their home currency? What will be
profit per unit as per exchange rate after 6 –months? Why profit has changed? Which company
is in worst condition?

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 PART C
Max Marks: 25
Solve Following CASES:
Case -1: Interest rates swap case. [Marks: 10]
Three companies Ford, Toyota, Fiat has approached bank to reduce their interest cost. Following are
the requirement of those companies & interest rate offered to them in different markets.
Amount & time is same for all the companies, arrange a swap where benefit is to be distributed
equally to all three companies.

Company Requirement Fixed $ Floating $ Fixed Euro

Ford Fixed $ funds 5.25% LIBOR + 5.75%

0.75%

Toyota Floating $ 5% LIBOR + 6.25%

funds 0.6%

Fiat Fixed Euro 6.25% LIBOR 6%

funds +0.50%

Case-2: Case of Hedging through Currency derivatives. [Marks: 15]

Walmart Inc.(USA based) has receivable € 35, 35,565 in next 3- months, also it has payable of €
98,45,125 in same time period(assume exposure netting).
Current spot rate is S(€/$) = 1.55.Assume for Options & futures calculation, after 3 –months spot rate
turns out to be S(€/$) = 1.5875.
 Interest rate in Europe is 3% p.a.
 Forward rate is F3(€/$) = 1.5825
 Call option (€/$) @ strike price = 1.5825, Option premium= $ 0.03 per Euro.
 Call option (€/$) @ strike price = 1.5715, option premium = $ 0.06 per Euro.
 Put option (€/$) @strike price = 1.6095, option premium = $ 0.06 per Euro.
 Put option (€/$) @strike price = 1.5915, option premium = $ 0.04 per Euro.
 Futures: futures are currently quoting (€/$) = 1.5585. Assume Futures quote after 3-months
turns out to be (€/$) = 1.5890. Standard size of the contract is $ 10,00,000.

Calculate money market hedge, hedging through forward, Options & futures and recommend which
is the best choice for the company for hedging.

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