ABA 419: INTERNATIONAL FINANCE REVISION QUESTIONS

QUESTION ONE
A Kenyan Company has agreed to sell goods to an importer in Zed land at an invoiced price of Z
150,000 (Z is the currency of zed land). Of this amount, Z 60,000 will be payable on shipment, Z
45,000 one month after shipment and Z 45,000 three months after shipment. The quoted foreign
exchange Z per Kshs. At the date of shipment are as follows:
Spot Kshs. 1: 1.690 – 1.692
One Month Kshs. 1: 1.687 – 1.6892
3 Months Kshs. 1: 1.680 – 1.684

The company decides to enter into an appropriate forward hedging contract through a bank in
order to reduce this exposure

Required:
i. State the advantages of hedging in this way
ii. Calculate the amount in Kenya Shillings that the Kenyan Company will receive
iii. Comment with hindsight on the wisdom of hedging in this case, assuming that the spot
rate at the date of receipt of the two Z 45,000 were as follows:

First Instalment 1.69 – 1.69

2nd Instalment 1.700- 1.704

QUESTION TWO
Assume that the Euro’s spot rate is Ksh. 137 and that the French and Kenyan inflation rates are
similar. Then assume that France experiences 4% inflation, while Kenya experiences 3%
inflation. According to the purchasing power parity, what will be the new value of the Euro after
it adjusts to the inflationary changes?

QUESTION THREE
Suppose the current spot exchange rate between the United States and the United Kingdom is
1.4339 USD/GBP. Also suppose the current interest rates are 5 percent in the US and 7 percent
in the UK, what is the expected spot exchange rate 12 months from now according to the
International Fisher effect?

QUESTION FOUR
Wema Ltd has estimated that the standard deviation of its daily net cash flows is Sh.2, 500. The
firm pays Sh.50 in transaction costs to transfer funds into and out of this money market. The rate
of interest in the money market is 7.465% p.a. Wema uses the Miller-Orr Model to set its target
cash balances.
Required:
i. Determine Wema’s target cash balance?
 ii. What are the lower and upper cash limit?
iii. What are the Wema’s decision rules?
iv. Determine Wema’s expected average cash balance.

QUESTION FIVE
Suppose a Kenyan firm is thinking of an investment in Thailand. It is estimated that the initial
project cost will be 10 million Thai baht. The current exchange rate is 1 baht (B) = 0.8160 Kshs.
The project is expected to generate the following net cash flows (in Baht) for the next 8 years.

Years 1 2 3 4 5 6 7 8
NCF(Baht-Millions) 2.5 2.73 2.97 3.24 3.53 3.85 4.19 4.57

The risk-free interest rate in Kenya is 9% and in Thailand 12%. The expected inflation
rate in Kenya is 6%. The Kenyan firm wants a return of 8.25% above the risk-free of
interest in Kenyan shillings from its investment in Thailand.

Required:
Determine whether the project should be undertaken using the Net Present Value in Kenya
Shillings

QUESTION SIX
List and explain with clear examples any FIVE factors that influence foreign exchange rates.