SCHEME OF VALUATION;

IV SEMESTER M.COM DEGREE(C.B.SS- REG/SUPPLI( INCLUDING MERCY

CHANCE ) /IMP) EXAMINATION, APRIL 2021
(2014 ADMISSION ONWARDS
ELECTIVE-A FINANCE
COM 4 E02; INTERNATIONAL FINANCIAL MANAGEMENT
TIME; 3. HRS MAX MARKS: 60

SECTION- A
ANSWER ANY FOUR QUESTIONS:
1. a) Cross Rates
Cross rate is the price of any currency other than the home currency. It is the direct
relationship between two non-home currencies in a foreign exchange market used in
transactions in a country to which none of the currencies belongs.
b) Forward Premium= forward rate- spot rate/ spot rate
=47.91-47.13/47.13=0.016*100=1.65%
c) Methods of Forecasting Exchange Rates
 Technical Approach
 Fundamental Approach
 Market based Approach
 Mixed forecasting Approach
 BOP Approach
 Monetary Approach
2. a) Balance of Payment
The balance of payment of a country is a systematic accounting record of all
economic transactions during a given period of time between the residents of the country
and resident s of foreign countries.
b) Deficit in BOP
If the total debts are more than total credits in the current account and capital accounts,
including errors and omissions, the net debit balance is the deficit in the BOP of a country.
Tis deficit can be settled with an equal amount of net credit balance in the official settlement
account.
Surplus in BOP
If the total credits are more than the debit balance in the current and capital account,
including errors and omissions the net credit balance is the surplus in the BOP of a country.
This surplus can be settled with an equal amount of net debit balance in the official settlement
account.
c) Structure of BOP/Components
 Current Account
 Visible trade/ merchandise trade
 Invisible trade/service trade
 Factor income
 Unilateral transfers
 Capital Account
 Direct investment
 Portfolio investment
 Other investment
  International loans
 Errors and Omissions
 Official Reserve Account

3. a) Special Drawing Rights (SDR)

SDRs are a form of international reserves created by the IMF in 1969 to solve the
problem of international liquidity.
b) Various Exchange Rate System
 Fixed Exchange Rate
 Floating Exchange Ratess
 Alternate exchange rate regimes:
 Managed floating system
 Adjustable peg system
 Crawling peg system
 Joint float system
 Multiple exchange rate system
 Exchange rate band
 Snake in the tunnel
c) Functions of IBRD
 Reconstruction and Development of Countries
 Promotion of Private Foreign Investment
 Promotion of International Trade
 Arrangement of Loans
4. a) Foreign Portfolio Investment
Purchase of securities and other financial assets by investors from another
country.
b) Difference between FDI & FII
FDI FII
Long term investment Short term investment
Investment in physical asset Investment in financial asset
Entry and exit is relatively difficult Entry and exit is relatively easy
Aims to increase enterprise capacity or Aim is to increase capital availability
productivity or change management
control
Eligible for profit of the company Eligible for capital gain
Flows into the primary market Flows into the secondary market
Does not tend to be speculative Tends to be speculative

c)
5. a) International Fisher Effect
The fisher effect states that an increase in the expected inflation rate in a country
will cause a proportionate increase (or decrease) in interest rate in the country. The
relationship between the percentage change in the spot exchange rate over the time and the
differential between interest rates in different countries is known as the international fisher
effect.
b) Convertibility of Indian Rupee
convertibility of rupee means that, it can be freely converted into any other currencies
without prior permission of monetary authority. The ease with which country’s currency can
be converted in to gold/another currency through global exchange.
2 types
 Current account convertibility
 Capital account convertibility
Advantages
 Encourage exports
 Gives real value of rupee
 Helps in international diversification
Disadvantages
 Speculative activities
 Full convertibility causes rupee appreciation that causes bop deficit.
c) Portfolio Balance Model
The portfolio approach is an extension of the monetary exchange rate models focusing on
the impact of bonds. According to this approach, any change in the economic condition of a
country will have a direct impact on the demand and supply for domestic and foreign bonds.
This shift in the demand / supply of bonds will in turn influence the exchange rate between
the domestic and foreign economies.

Assumptions
 The purchasing power parity does not hold
 The uncovered interest parity does not hold
 The exchange rate is expected unchanged
 Bonds are not perfect substitutes
 Narrow or lower transaction cost
 High competition in the money market
 There is a perfect capital market
6. a) CHIPS And CHAPS
CHIPS - Clearing House Interbank Payments System: is the primary clearing
house in the US for large banking transactions that links US banks through
computerized networks.
CHAPS – Clearing House Automated Payments System: is a company that
facilitates large money transfers denominated in British Pounds.
b) SWIFT – Society for Worldwide Interbank Financial Telecommunication
transfer between international banks are accomplished through a network of
telephone lines leased by the SWIFT. It replaces paper by electronic fund transfer
Done by secure SWIFT codes, there by reducing transaction costs.
Used a common language for financial transaction and a shared data processing system and
worldwide communication network.
c)
7. a) Difference between foreign exchange exposure & foreign exchange risk
 Foreign exchange exposure is the degree to which a company is affected by
changes in exchange rates.
 Foreign exchange risk is the change of value in one currency relative to
another which will reduce the value of investments denominated in a
foreign currency
 Foreign exchange exposure is difficult to control
Foreign exchange risk can be controlled through the use of hedging
techniques and using a less volatile currency to report results.
b) Interest Rate Exposure
chance that a security’s value will change due to a change in interest rates. It is the
risk of loss due to a change in interest rates.
Types
 Price risk
 Reinvestment risk
c)
8. a) Spread
Difference between buying rate and selling rate in an exchange rate quotation or an
interest quotation.

b) Bid-ask spread = {(ask rate - bid rate)/ask rate} × 100

(65 – 26.45)=38.55

Indirect quote=0.0154-0.378

c)

SECTION B
9. a) International Monetary Fund
IMF is an international organization that oversees the global financial system by observing
exchange rates and BOP and also offers financial and technical assistance. It is the central
institution in the international monetary system.
Objectives of IMF
 To promote international monetary cooperation
 To ensure stability in foreign exchange rates
 To eliminate exchange control
 To establish a system of multilateral trade and payment system
 To help member nations to achieve balanced economic growth
 To eliminate or reduce BOP disequilibrium
 To promote investment in backward and underdeveloped countries
Functions of IMF
 Give advice to member countries
 Created monetary reserve fund
 Stabilizes foreign exchange rates
 Reduces tariffs and other trade restrictions among member countries
 Conduct research studies
 Provide machinery for international consultancy
 Conduct short term training courses
Operations or working of IMF
 Financial resources
Subscription quotas
 Lending
 Other credit facilities
 Buffer Stock Financing Facility
 Extended Fund Facility
 Supplementary Reserve Facility
 Structural Adjustment Facility
 Enhanced Structural Adjustment Facility
 CCFF
 STF
 CCL
 Emergency Assistance
 SBA
 PRGF
 Determination of par values
 Other services
b) value liberally
c) International Liquidity
international liquidity is defined as the aggregate stock of generally acceptable assets held by
the central bank to settle BOP deficit or international obligations. It is the ability of a country
to meet international debt.
Measures to solve the problem of international liquidity
 Reduce BOP deficit by promoting export
 Ban non-essential consumer goods and limit import of specific goods
 Developed countries should reduce their BOP surplus
 IMF should expand international reserve
 Developing countries should follow restrictive monetary and fiscal policy

Role of IMF in International Liquidity

Following are the measures to increase international liquidity
 Special Drawing Rights
 Quotas
 Selling gold
 Borrowings
 Reserve tranche
 Credit tranche
 New credit facilities
 IDA replenishments
10. a) Purchasing Power Parity Theory
 The theory which attempts to quantify the inflation exchange rate relationship
 Developed by Gustar Cassel
Assumptions
 Transportation cost are zero
 Currency conversion cost are zero
  There is no trade barriers or quotas
Forms of PPP Theory
 Absolute form of PPP
Positive version
Theory based on “law of one price”
Domestic price of any good equals to its foreign price quoted in same currency
 Relative Form of PPP
Takes into account the possibility of market imperfections such as transportation
cost, tariffs and quotas
Prices of similar products in different countries will not necessarily be the same
when measured in common currency.
b) International Financial Market
The international financial market is the worldwide marketplace in which buyers and seller
trade financial assets, such as stocks, bonds, currencies, commodities and derivatives, across
national borders.
 Domestic market
Offshore market
Channels for international flow of funds/ Categories of International Financial Market
 International Money Market
 Euro currency market
 Euro commercial paper market
 International Capital Market
 International bond market
 Foreign bond market
 Euro bond market
 International Equity market
International money market instruments
 Euro dollar certificate of deposits
 Euronotes
 Euro commercial paper
International capital market instruments
 International bonds
 Global depository receipts
 International equities
c)