KATHMANDU UNIVERSITY SCHOOL OF MANAGEMENT

Bachelor of Business Administration (Honours/Emphasis)

End Semester Examination
Fall Semester (August – December 2020)

SUBJECT: MFIN 445– Global Finance TIME: 3hrs

YEAR: III, SEMESTER: II FULL MARK: 50
Answer in your own words as far as possible, and try to be direct and specific with your answers. Manage your
time thoughtfully so that you are able to complete the paper within the set timeframe. The figures in parenthe-
sis indicate the full marks for the respective questions.

Attempt All questions: [10x5 = 50]

1. Currently, the spot exchange rate is $1.50/£ and the three-month forward exchange rate is $1.52/£. The
three-month interest rate is 8.0% per annum in the U.S. and 5.8% per annum in the U.K. Assume that you
can borrow as much as $1,500,000 or £1,000,000.

a. Determine whether the interest rate parity is currently holding. If the IRP is not holding, how would
you carry out covered interest arbitrage? Show all the steps and determine the arbitrage profit. [3 Marks]

b. Explain how the IRP will be restored as a result of covered arbitrage activities by analysing the impact
of the arbitrage on each variable (interest rates in both countries, spot rate and forward rate) given in the
question. [7 marks]

2. You are a Forex Trade Expert at the treasury of Citizens Bank International Limited. Your supervisor
reviewed a survey known as Triennial Foreign Exchange Survey conducted by Bank for international set-
tlements (BIS). The most recent one was conducted in 2019. The next review will be done in 2022. As per
the survey following generalisation was made by your supervisor:
a. Forex market is the largest financial market on earth , 2 months’ average trading on the NY stock
exchange = 1 day of trading in foreign exchange.
b. The forex market is branded as the most speculative market.
c. The foreign exchange market never sleeps.
d. UK is the number one market, rather than USA, the biggest economy in the world.
e. The US economy constitutes only 25% of the world economy. Even then, the share of the US dol-
lar in the turnover is 87%.
As an expert you are required to analyse and comment on each of the generalisations made by your
supervisor. Present the logic and reasoning to support each of the generalisations made by your
supervisor. [10 Marks]

3. As per IMF classification , Nepal is in the block labeled as following Conventional Peg System of ex-
change rate management. Do you see any logic/justifications given by Nepalese authorities for following
this arrangement? Why do you think one country pegs its currency with other currency? Do you think the
peg with the Indian currency is a good choice considering our economy? What do you think might happen
if we floated our currency? [10 Marks]

4. East Asia was a booming part of the world. With high rates of saving and investment; rapidly improving
educational levels among the work force; and if not free trade, at least a high degree of openness to and
integration with world markets. However East-Asia suffered a crisis in 1997. What is the nature of this
 crisis? Why did the crisis happen? Did this crisis violated any international financial theories? What are
the lessons learnt from this crisis? [10 Marks]

5. Nepal’s Balance of Payment (BoP) surplus reached Rs 282 billion in the last fiscal year due to the decline
in imports while the remittance did not decrease as estimated. Following conclusion can be drawn from
the report published by the Nepal Rastra Bank which sheds light on the economic situation of the country
in the last fiscal year. [10 Marks]
a. Contraction of trade deficit
b. Improvement on foreign exchange reserve
c. remittance income has decreased by much less than it was estimated due to coronavirus.
d. increased inflation
e. surplus on balance of services
Comment on each of the conclusion drawn above as the conclusions are related to the components of
balance of payment accounts. Are they beneficial or detrimental to the economy? While answering please
consider both context of “COVID economy” and “no COVID economy”.

COVID economy : if there were COVID.

no COVID economy : if there were no COVID.
2 marks each for analysing each conclusion.

All the best!!!