BDU, College of Business & Economics

Department of Accounting and Finance

MSc in Accounting and Finance
International Business Finance- Assignment (30%)

1. There are several methods by which firms can conduct international

business. Mention and describe at least four methods. Describe also
direct foreign investment (DFI) by relating to those methods.
A. International trade is relative constructive approaching
Involving exporting and Importing.
 Minimal risks because capital is not placed at risk
B. Licensing allows a firm to provide its technology (copyright,
patents, trademarks or trade names in exchange for fees or some
other benefits
 Licensing allows firms to use their technology in foreign
markets with outa major investment of foreign countries
and without the transportation costs that results from
exporting
C. Franchising obligates a firm to provide a specialized sales or
service strategy , support assistance and possible an initial
investment in the franchise in exchange for periodic fees
 It is the practice of using another firms successful business
model
 Like licensing franchising allows to penetrate foreign
markets without a major investment in foreign countries

2. Several factors affect International Trade Flows. These factors include:

i) Inflation, ii) National income, iii) Tariff, iV) Subsidies for exporters,
iV)
Depreciation of currency. Show how each of the above factors impact
(increase or decrease or no impact) on imports, exports and current
account.
3. There are several factors that affect Direct Foreign Investment (DFI).
Mention at least three factors and describe how each factor influence
DFI.
4. Exchange rate systems are classified into five categories according to the
degree by which government controls them. Mention and describe at
least four exchange rate systems? Which exchange rate system does
Ethiopia follow currently?
 5. The strength of currency is a measure of the level of economic
development of a country. Do you agree? Explain by providing both
theoretical and practical arguments.
6. Why are firms motivated to expand their business internationally? We
have three theories explaining this. Please mention and describe these
theories.
7. Mr. Daniel resides in the United States of America and currently he is
contemplating in which country bank to deposit his wealth of $100,000.
For this purpose, he is considering three alternative countries-Ethiopia,
Great Britain, and U.S.A. The current spot rate is as follows: U.S.D.
1=Br.20 and £1=U.S.D.1.5. Banks in Ethiopia are expected to pay an
interest rate of 5% per annum, British banks pay 3% per annum and U.S.
banks pay 2% per annum. The inflation rate per annum for Ethiopia,
Britain and United States is expected to be 10%, 7% and 6%
respectively. Assume interest rates and inflation rates will be constant
every year throughout the next five years. Use purchasing power parity
(PPP) to forecast exchange rates five years from now. Assume further
that there is no tax on interest for all the three countries. Mr. Daniel has a
five year investment horizon.
Required:
A. During the five year investment horizon, how much U.S. dollar will Mr.
Daniel obtain if he deposits in Ethiopia? Great Britain? United
States?
B. Which country do you recommend for Mr. Daniel to deposit his
money?
8. Assume that the United States inflation rate is expected to be 1% over
the next year, while Ethiopian inflation rate is expected to be 6% over
the next year. Assume the spot rate is as follows: 1 U.S.D= 20 Birr
Required:
A. Assuming PPP, determine the percentage change in the value of
Birr?
B. What is the forecasted value of Birr at the end of one year?

9. Assume that a bank has quoted the British pound (£) at $1.50, the
Newzland dollar (NZ$) at $ 0.50 and the cross exchange rate at 1£=NZ$
2.95.
Required:
A. Determine the correct cross exchange rate.
B. If you have $ 10,000, how many U.S. dollars will you end up with in
one round trip triangular arbitrage?
C. How much is the gain from triangular arbitrage?
10. Blue Demon Bank expects that the Chinese currency (the yuan) will
depreciate against the dollar from its spot rate of $0.15 to $0.14 in 30
days. The following interbank lending and borrowing rates exist:
 Lending Rate Borrowing Rate
U.S. dollar 8.0% 8.3%
Chinese Yuan 8.5% 8.7%
Assume that Blue Demon Bank has a borrowing capacity of either $10 million or 70
million Yuan in the interbank market, depending on which currency it wants to
borrow.
A. How could Blue Demon Bank attempt to capitalize on its expectations without
using deposited funds? Estimate the profits that could be generated from this
strategy.
B. Assume all the preceding information, with this exception: Blue Demon Bank
expects the Yuan to appreciate from its present spot rate of $0.15 to $0.17 in 30
days. How could it attempt to capitalize on its expectations without using
deposited funds? Estimate the profits that could be generated from this strategy.
11. Dragon Inc., of Moorhead purchased a Korean company that produces
plastic nuts and bolts for auto manufacturers. The purchase price was
Won 7,030 million. Won 1,000 million has already been paid and the
remaining Won 6,030 million is due in six months. The current spot rate
is Won1,200/$, and the 6-month forward rate is Won1,260/$ Additional
data:
a. Six-month Korean interest rate: 16.00% p.a.
b. Six-month US interest rate: 4.00% p.a.
c. Six-month call option on Korean Won at 1,260 with a premium of
Won 33.33/$
d. Six-month put option on Korean Won at 1200 with a premium of
Won 41.67/$
e. Dragon can invest at the rates given above or borrow at 2% p.a. above those
rates. Dragon’s cost of capital is 25%.
f. Assume any new proceeds are invested in T-bills (not used to replace
borrowings nor invested in the firm’s tangible assets)
g. Any new funds can be raised at the borrowing rate. Option premium is also
financed using borrowings.

Compare hedging alternatives and make a recommendation.