B170219B BBFN3323 Internationalfinance

SOUTHERN UNIVERSITY COLLEGE
SEMESTER C
YEAR 2020 / 2021
FINAL EXAMINATION
BBFN3323 INTERNATIONAL FINANCE
DATE: 20 JANUARY, 2021 DURATION: 2 ½ HOURS
BBA(HONOURS) IN FINANCE AND INVESTMENT

BACHELOR IN ACCOUNTING (HONOURS)
YEAR THREE
Student’s ID: B170219B
Batch No.: BAC17C1
Instruction to Candidates:
1. The question paper consists of 4 pages and 4 Questions.

2. Answer ALL questions.
Standard format: Times New Roman (12pt) or Arial (11pt), 1.5 spacing, 1” margin, A4,
Microsoft Word document.
For the submission of your answers, you are required to use this page as your cover page.
Name the document with the following file name: <student’s ID>_<subject code>_
INTERNATIONAL FINANCE, for example, B100000A_BBFN3323_INTERNATIONAL
FINANCE.
Submit only your typed word file, other file format (including Pdf format) will not
be accepted.
Submission date: By 22 January 2021, 5:00 pm through SUCCM e-learning portal.
Deadline for submission of this paper is to be strictly adhered to. Late submission will NOT
be accepted and be awarded ZERO (0) mark for the paper.
Any students caught plagiarising or letting part or whole of their work to be plagiarised will
be penalised, with all the students involved be awarded ZERO (0) mark for the paper.
This question paper consists of 4 questions on 4 printed pages.

2
Q1. (a) If Asian countries experience a decline in economic growth (and experience a decline
in inflation and interest rates as a result), how will their currency values (relative to the
U.S. dollar) be affected? (5 marks)
Answer:
The decline in economic growth will cause in Asian countries will cause the value of
Asian currencies relative to U.S. dollar to increase as it created upward pressure on the
currencies. This means the purchasing power of U.S. dollar had decrease as the prices of the
products and services increase causing the demand for the product and services of Asian
countries to decrease as well.
Decline in interest rates offer the investors lower return compared to other
currencies. Therefore, the investors or the Asian corporations that have extra cash will turn to
invest in other countries which will lead to increase of demand for U.S. dollar. The lower
demand for Asian currencies will then decrease the value and create downward pressure of
value of Asian currencies. Lower interest rates tend to reduce the value of currencies.
When Asian countries experienced decline in inflation, the currencies value will then
increase compare to U.S. dollar. The purchasing power of Asian currencies increase and the
purchasing power of U.S. dollar decrease. This will cause the demand for Asian products and
services to decrease. The investors will then be attracted to foreign product and services and
increase the demand for U.S. dollar.

3
(b) Why do you think most crises in countries (such as the Asian crisis) cause the local
currency to weaken abruptly? Is it because of trade or capital flows?
(5 marks)
Answer:
Trade flows and capital flows is totally different concept.
The trade flows is defined as the purchase and selling of goods and services between
different countries. Trade flows is used by government to measure the balance of trade that
uses the amount of goods that one country sells deduct the amount of goods that a country
buys. The country that have net export means they export goods more than they import. The
country that have net import means they import goods more than they export. The net
exporter run a trade surplus, whereas the net importer run a trade a deficit.
Capital flows means the capital or money from overseas in order to make investment
in foreign markets. Capital flow is used by Bank Negara to measure the net amount of the
currency that is sold and purchased for capital investment. If a country has positive capital
flow balance, that means the amount of investment from foreign countries is more than the
investments that are leaving the country. A negative capital flow balance means that the
investment that leave the country for foreign sources is more than the investment coming into
the country.
To answer this question, I think capital flow has the bigger influence in the local
currency when crises happen.
Generally, the crises tend to lead the investors to expect that there will be lesser
investment in the country at future. The existing investments are also be expected by the
investors to generate poor returns due to defaults on loans or decreased valuations of stocks.
Therefore, negative capital flow will happen. The volatile markets and lack of faith in
economy will cause immediate and drastic devaluation in currency of a country. When
negative capital flow happens, there will be lesser demand for the currency of a country.
Lesser demand will cause the currency to lose its value. This is because the investor needs to
sell of the currencies they hold to buy the currency where he is depositing his money.
The investors will liquidate their investments and take action to convert the local
currency into the other currencies. Downward pressure will then be placed on local currency.
4
(c) Assume that there are substantial capital flows among Canada, the U.S., and Japan. If
interest rates in Canada decline to a level below the U.S. interest rate, and inflationary
expectations remain unchanged, how could this affect the value of the Canadian dollar
against the U.S. dollar? How might this decline in Canada’s interest rates possibly
affect the value of the Canadian dollar against the Japanese yen?
(8 marks)
Answer:
We need to know that investment is a process that the investors will invest their
money with the expectation to earn more money and get high returns. For example, we can
invest through purchasing financial securities or real securities. When we deposit certain
amount of money in banks, we will get interest as return. The investors always try to find a
way to earn more interest on invested amount and pay less interest on the borrowed amount.
This behavior applies to this question either.
Since the inflation rate remains at same level in both U.S. and Canada, but the interest
rate of Canada is declining to a level below the U.S. The borrowing of the funds in Canada
will increase as the interest rate charged on the fund is lower. The cost of borrowing become
cheaper due to lower interest rate.
It will be relatively less attractive to save money and invest in Canada compared to
U.S. which has higher interest rate. In this scenario. the investors will prefer to invest in U.S.
instead of Canada. The investors will withdraw their investment in Canada and invest in U.S.
which offers higher return. The investment in U.S. will then increase.
The investors will then choose to sell off the Canadian dollar, and convert their money
into U.S. dollar. When the supply of Canadian dollar increase, the value of Canadian dollar
will then decrease or depreciates. The increment in demand of U.S. dollar will leads to
appreciation in the value of U.S. dollar.
Therefore, the Canadian dollar will depreciate against U.S. dollar when the interest
rates in Canada declines below the level of U.S. interest rates.

5
Similarly, Japanese investors also interested in the investment that will bring higher
return. They will be more interested and prefer in investing in U.S. compared with Canada.
Japanese investors will withdraw their investment from Canada and invest in U.S. The
demand of U.S. dollar among Japanese investors will increase and the demand of Canadian
dollar will decrease.
Therefore, the Canadian dollar will depreciate against Japanese yen due to decrease in
interest rates in Canada below the level of US interest rates.
As a conclusion, the Canadian dollar will depreciate against Japanese Yen and US
dollar as Canadian dollar will have less demand and more supply in international market.

6
(d) The country of Luta has large capital flows with the U.S. It has no trade with the U.S,
and will not have trade with the U.S. in the future. Its interest rate is 6%, the same as
the U.S. interest rate. Its rate of inflation is 5%, the same as the U.S. inflation rate .
You expect that the inflation rate in Luta will rise to 8% this coming year, while the
U.S. inflation rate will remain at 5%. You expect that Luta’s interest rate will rise to
9% during the next year. You expect that the U.S. interest rate will remain at 6% this
year. Do you think Luta’s currency will appreciate, depreciate, or remain unchanged
against the dollar? Briefly explain. (7 marks)
[Total: 25 marks]
Answer:
The inflation rate and interest rate will influence the exchange rate or the value of
currency. Currently, U.S. and Luta has the same interest rate at 6% and same rate of inflation
at 5%, at the same time they do not have any international trade flows. In the time, the
demand and supply of U.S. Dollar and currency for Luta will be almost the same. Therefore,
the value of U.S. Dollar and currency for Luta will remain unchanged.
During next year, the interest rate will rise to 9% and interest rate for U.S. will remain
at 6%. The huge difference in the interest rate between both countries will cause demand and
supply for both countries to change. Since the interest rate in Luta is higher than U.S., the
investors will expect higher return if invest in Luta.
The expectation for higher return from investment will increase the demand for Luta
currency in the international market. The investors will try to increase the amount of Luta
currency to invest in that country. The increment demand for Luta currency will put upward
pressure on Luta currency. The Luta currency will appreciate against the dollar.
For U.S., since the interest rate will remain at 6% and relatively lower than Luta.
Investors will withdraw their investment in U.S. since the return expected to be lower than
Luta. The supply of U.S. dollar will increase since there will be more people want to sell off
their U.S. dollar they hold and convert to Luta currency. The increment of supply of U.S.
dollar will put downward pressure on dollar.

7
Inflation rates also closely related with the changes in exchange rate between two
currencies. Inflation is measured by consumer price index and affects the purchasing power
parity. Purchasing power parity is used to compare purchasing power between different
countries. If the inflation rate is the same in both countries, the exchange rate will not change.
But then if the inflation rate changes, the exchange rate will be affected as well.
In this case, Luta’s inflation rate will increase to 8% in the next year whereas the
inflation rate of U.S. remain the same. This means the cost of living in Luta will increase and
the general price level in the country will increase as well whereas for U.S. remain the same.
Since the inflation rate in Luta is higher than U.S., therefore more money will be needed if
people wants to live in Luta. Therefore, the currency in Luta which has higher inflation rate
will then lose their value and depreciates, while the value of U.S. dollar with lower inflation
rate will appreciates. The foreign capital will flows out of Luta and flows to U.S. as well.
However, we need to consider the real interest rate which we need to calculate the
difference between nominal interest rate and inflation rate. By calculating real interest rate,
we will able to find our the real rate because inflation rate is taken into account as well.
For U.S.,
interest rate = 6%, inflation rate = 5%
Real Interest rate = 6% - 5% = 1%
For Luta,
Interest rate = 9%, inflation rate = 8%
Real interest rate = 9% - 8% = 1%
From above calculation, we can see that the real interest rate for both countries are the
same at 1%. Since, there will be no trade relationship with each other, the Luta currency will
remain unchanged against dollar at future.

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Q2. (a) Today, the stock price of Genevo Company (based in Switzerland) is priced at SF80
per share. The spot rate of the Swiss franc (SF) is $.70. During the next year, you
expect that the stock price of Genevo Company will decline by 3%. You also expect
that the Swiss franc will depreciate against the U.S. dollar by 8% during the next year.
You own American depository receipts (ADRs) that represent Genevo stock. Each
share that you own represents one share of the stock traded on the Swiss stock
exchange. What is the estimated value of the ADR per share in one year? (5 marks)
Answer:
The current stock price for Genevo Company = SF80
The current exchange rate = $0.70/SF
Current value of stock in dollar ($) = SF80 x $0.70 = $56
The current value of stock is $56. Since each share of American depository receipts
(ADR) represent one share of SDR. Therefore, the current value of ADR for one share will be
$56.
During the next year, the stock price is expected to reduce by 3%, the stock is calculated
as following:-
Stock Price = SF80 x (1 – 3%) = SF77.60
During next year, SF will also depreciates against dollar by 8%. Therefore, the value of
SF is as below:-
Exchange rate = $0.70 / SF x (1 - 8%) = $0.644
The exchange rate during the next year will be $0.644
During this moment, the value of stock will be

SF77.60 x 0.644 = $49.9744
As a conclusion, the stock value during the next year will be $49.97.
The estimated value of ADR per share during the next year will be $49.97 as well.

9
(b) Brian Tull sold a put option on Canadian dollars for $.03 per unit. The strike price
was $.75, and the spot rate at the time the option was exercised was $.72. Assume
Brian immediately sold off the Canadian dollars received when the option was
exercised. Also assume that there are 50,000 units in a Canadian dollar option. What
was Brian’s net profit on the put option? (5 marks)
Answer:
Put option is a contract that give the owner or the buyer of the option the right, but not
the obligation, to sell-or sell short- a specified amount of an underlying security. Put option
allows the owner sell securities at a pre-agreed price on or before the date stated in the
contract during the moment when entering the contract.
In this case, the put option was sold to Brian Tull for $0.03 Canadian dollar per unit
with the strike price at $0.75 with the spot rate at $0.72.
In this case, Brian immediately sold off the Canadian dollars received when the option
was exercised and at expiration of the option.
First of all, we need to calculate the expected profit on selling the option.
Expected Profit/Loss on selling option = Spot Rate – Strike Price

= $0.72 - $0.75
= -$0.03
Since, the strike price is higher than the spot rate, there will be a loss on the option.
Therefore, the put option holder will exercise the option and sell the currency at the strike
price. The spot rate is lower than the strike price, then the option is in the money.
The net profit for Brian Tull on the put option is calculated as follow:-
Premium received per unit = $0.03

Amount per unit received from selling the currency = $0.72
Amount per unit paid for the currency = $0.75
Net Profit = (Selling Price – Purchase Price + Prenium Receive) x 50,000 units
= ($0.72 – $0.75 + $0.03) x 50,000 units
= $0.00

10

As a conclusion, the net profit is $0.
(c) Assume that on November 1, the spot rate of the British pound was $1.58 and the
price on a December futures contract was $1.59. Assume that the pound depreciated
during November so that by November 30 it was worth $1.51.
Q2. (Continued)
(i) What do you think happened to the futures price over the month of
November? Why? (3 marks)
Answer:
Generally, the future price will move towards its spot price as the delivery month of a
future contract approaches and it might match the price.
The future price over the month of November will decrease as the pound depreciated
during November 30 at $1.51. This is because it reflects the expectation of the future spot rate
as of the settlement date.
If the current spot rate is $1.51, the spot rate expected on the December future
settlement will likely around $1.51.
As a conclusion, the future price will be reduced.

11
(ii) If you had known that this would occur, would you have purchased or sold a
December futures contract in pounds on November 1? Explain.
(4 marks)
Answer:
In my opinion, I will choose to sell the futures at the existing future price of $1.59 because
it is higher than $1.51.
After that, when the spot rate of pounds decline, the future price would decline as well, I
could able to close out my futures position by purchasing another future contract at a lower
price.
In other way, I will wait until the date of settlement. As I would like to fulfil the future
obligation by buying the pounds in the spot market at the price of $1.59 per pound.
As a conclusion, I would not purchase a December future contract in pounds because I

knew it could cause me losses. I would choose to sell it.

12
(d) Assume the following information:
Quoted Price
Value of Canadian dollar in U.S. dollars $0.90
Value of New Zealand dollar in U.S. dollars $0.30
Value of Canadian dollar in New Zealand dollarsNZ $3.02
Given this information, is triangular arbitrage possible? If so, explain the steps that
would reflect triangular arbitrage, and compute the profit from this strategy if you had
$1,000,000 to use. What market forces would occur to eliminate any further
possibilities of triangular arbitrage? (8 marks)
[Total: 25
marks]
Answer:
Triangular arbitrage or cross currency arbitrage involves the trade of three or more
different currencies which the currency’s exchange rate did not equals to each other. The
traders could make profit by taking advantage of exchange rate discrepancies quickly and in
large size.
Firstly, we need to know and identify the triangular arbitrage opportunity which
involves these currency pairs.
Canadian Dollar
$0.90/C$
New Zealand Dollar C$3.02/NZ$

$0.30/NZ$
Secondly, we need to identify the cross rate. In this case, cross rate is defined as the
exchange rate between two currencies using the dollar as a reference.
The cross rate is given in this question which is C$3.02/NZ$.

13
Next, we need to know that is there any difference in the rates to see whether there is
an arbitrage opportunity. This is done by converting the currencies into US$ to see is there
any profit. After converting, we need to subtract the initial amount from the final amount
to see whether there is any profit.
CAD/USD = C$1/$S0.90
If I have $1,000,000 in hand, therefore
CS 1
$ 1,000,000× =C $ 1,111,111
$ 0.90
NZ$/CAD = $3.02
NZ$/C$1,111,111 = $3.02
NZ$ = C$1,111,111 × $3.02 = NZ$3,355,556
USD/NZ$ = 0.30
USD = 0.30 × 3,355,556 = $1,006,667
$1,006,667 – $1,000,000 = $6,667
Therefore, triangular arbitrage for these currencies will lead to a profit of $6,667 with
the assumption of no transaction costs or taxes.
From the calculation, we can see that the value of Canadian dollar with respect to the
U.S. dollar will increase whereas the value of Canadian dollar with respect to the New
Zealand dollar will decrease. Therefore, the value of New Zealand dollar with respect to
the U.S. dollar decreases as well.

14
Q3. (a) Beth Miller does not believe that the international Fisher effect (IFE) holds. Current
one-year interest rates in Europe are 5 percent, while one-year interest rates in the U.S.
are 3 percent. Beth converts $100,000 to euros and invests them in Germany. One year
later, she converts the euros back to dollars. The current spot rate of the euro is $1.10.
(i) According to the IFE, what should the spot rate of the euro in one year be?
(3
marks)
Answer:
To calculate the spot rate of the euro, we need to use the formula as below:
(1+i h)
ef = −1
(1+i f )
Where,
e f = expected change in the exchange rate
i h = nominal rate in the home country
i f = nominal rate in the foreign country
i h=0.3 , i f =0.5
(1+ 0.3 ) 1.03

ef = −1= −1
(1+ 0.5 ) 1.05
¿ 0.9809−1
¿−0.01904=−1.90 %
As a conclusion, if the international Fisher effect (IFE) holds, the value of euro will
decrease or the euro will depreciates by 1.90% in each year.
In order to calculate the spot rate, the calculation is performed as below:-

$ 1.10×(1−1.90 %)=$ 1.079
The spot rate of the euro in one year will be $1.079.

15
(ii) If the spot rate of the euro in one year is $1.00, what is Beth’s percentage
return from her strategy?
(3
marks)
Answer:
First of all, we need to convert the amount of dollars invested into euros.
Amount of euros invested = $100,000 / 1.10 = 90,909 Euros
The current one-year interest rate = 5%. Therefore, the value of investment is
calculated as below:-
90,909 ×(1+5 %)=95,455 euros
We need to convert back to dollars again if the spot rate of the euro in one year is
$1.00. Therefore,
95,455 ×1.00=$ 95,455
Beth’s percentage return = $95,455 / $100,000 – 1

= 0.95455 – 1
= - 4.55%
(iii) If the spot rate of the euro in one year is $1.08, what is Beth’s percentage
return from her strategy?
(2
marks)
Answer:
If the spot rate of euro in one year is $1.08,
Value of investment = 95,455 euros × $1.08 = $103,091
Beth’s percentage return ¿ $ 103,091 / $ 100,000−1

¿ 0.03091=3.09 %
(iv) What must the spot rate of the euro be in one year for Beth’s strategy to be
successful?
(2
marks)
Answer:

16

In order for Beth’s strategy to be successful, the spot rate must be greater than $1.079
which is greater than the amount of spot rate invested at the beginning to prevent losses.
(b) Walt Disney World built an amusement park in France that opened in 1992. How do
you think this project has affected Disney’s economic exposure to exchange rate
movements? Think carefully before you give your final answer. There is more than
one way in which Disney’s cash flows may be affected. Explain.
(5
marks)
Answer:
Firstly, the economic exposure to exchange rate movements for Walt Disney World
had increase since Walt Disney World had built and investment in foreign country. The
revenue will be generated in francs or Euros that will be converted into the dollars afterward.
Therefore, the company’s economic exposure is influenced by the exchange rate between the
U.S. dollar and French Euros.
The currency volatility of Francs has directly impact on the economic exposure by
Walt Disney. The Economic exposure will increase if the foreign exchange volatility increase
and decrease when it declines. If the French euros is strengthen, the revenue received by Walt
Disney will increase as well. The weakening of French Euros will also result in lesser revenue
converted to US dollars as well.
However, when the value of European currencies decrease against U.S. Dollar, the
tourism by European will be relatively attractive than U.S. The reduce of value of European
currencies will increase the demand for the currency as the products and services will become
cheaper. The business of Walt Disney will decline as well because the tourism industry in
Europeans become stronger.
By having new amusement park in France, Walt Disney can compensate its declining
business in US when the dollar is strong that Europeans may go for the amusement park in
France during the moment.
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Assume that Walt Disney gets about 20% of revenue from French amusement park.
When the dollar become stronger and French euros become weaker, 20% of revenues and
cash flows that the company receive from French will be reduced when converted back into
dollars, this will have negative impact on the profitability and valuation of the company.
Q3. (Continued)
(c) Amazon Inc. is a U.S. e-commerce company that has substantial international business
in Japan and has cash inflows in Japanese yen. The spot rate of the yen today is $.01.
The yen exchange rate was $.008 three months ago, $.0085 two months ago, and
$.009 one month ago. Amazon uses today’s spot rate of the yen as its forecast of the
spot rate in one month. However, it wants to determine the maximum expected
percentage decline in the value of the Japanese yen in one month based on the value at
risk (VAR) method and a 95 percent probability. Use the exchange rate information
provided to derive the maximum expected decline in the yen over the next month.
(5 marks)
Answer:
Spot Rate
Three months ago $0.0080
Two months ago $0.0085
One month ago $0.0090
Today $0.0100
0.0080+0.0085+0.0090+0.0100
Mean= =0.008875
4
Spot Rate Percentage of (% - mean) (%−mean)

2
Change, %e
$0.0080
$0.0085 0.0085−0.0080 0.0626−0.008875 (0.0537)2
0.0080 = 0.0537 = 0.0029
= 0.0626
$0.0090 0.0090−0.0085 0.0588−0.008875 ( 0.0499 )2
0.0085 = 0.0499 = 0.0025
= 0.0588
$0.0100 0.010−0.0090 0.1111−0.008875 (0.1022)2
0.0090 = 0.1022 = 0.0105
= 0.1111
Total 0.0355 0.2325 0.0159
Standard Deviation

18

¿
3−1√
0.0159
=0.089%
In this case, value at risk (VAR) is used to measure the transaction exposure
using the data for past three months and standard deviation calculated is 0.089%
The maximum expected decline in yen is calculated as below:
¿ E(et )−(1.65 ×σ Ye n)=0 %−(1.65 ×0.089 % )=−0.14 %
As a conclusion, the maximum expected decline in the yen at 95% probability over the
next month is 0.14%.
(d) Explain the fundamental technique for forecasting exchange rates. What are some
limitations of using a fundamental technique to forecast exchange rates?
(5 marks)
[Total: 25 marks]
Answer:
The use of fundamental forecasting is used to predict future exchange rates by using
fundamental analysis. Basically, fundamental forecasting believes that there are underlying
relationships exist between one or more variables with the value of a currency.
If there are any changes on one of these variables or more of these variables will influence the
forecast of the currency’s value. These variables include both quantitative and qualitative aspects, for
example macroeconomic data and political factors.
The fundamental forecasting has some limitations as there are some data is hard and nearly
impossible to quantify in a form that applicable to forecasting. This even will cause difficulties to
prove the existence of fundamental relationship between the variables and value of currency. For
example, the political stability. The political stability can have dramatic effect on currency but it
cannot be quantified. The forecaster might miss some data that have direct influence on the exchange
rate.
Other than that, some of the historical relationship might not be useful in predicting future
exchange rates as well. Therefore, there is not guaranteed for those historical relationship will persist
in the future even it is possibly be quantified.

19
Q4. (a) Assume that the dollar is presently weak and is expected to strengthen over time. How
will these expectations affect the tendency of U.S. investors to invest in foreign
securities? (5 marks)
Answer:
The potential of growth for dollar will attract foreign investments to U.S. The expectations of
dollar to be strengthen over time will also discourage U.S. investors from making investment abroad
because it might earns them higher returns.
Since, the dollar is presently weak currently, therefore U.S. investors will need more money to
invest abroad. This is because they need more money to purchase foreign currencies which is
relatively higher in value in order to invest in foreign securities.
If the dollar will get stronger and strengthen over investment horizon, the investors will make
decision to liquidate their investment with the expectation that the dollar to become attractive. The
demand for dollar among the investors will increase.
After that, they will convert the foreign currency they hold into dollars at a rate which is less
favorable than the exchange rate at which they converted dollars into the foreign currency.
However, when the dollar is strong the investors will able to get more shares for the same
amount of dollars. Therefore, the US investors will likely to be investing in US dollar and hence trade
in domestic securities.
As a conclusion, the expectations of dollar to strengthen over time, the tendency of U.S.
investors to invest in foreign securities will be very low.

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(b) Explain how low U.S. interest rates can affect the tendency of U.S.-based MNCs to
invest abroad. (5
marks)
Answer:
If the U.S. interest rates are low, the U.S.-based MNC’s will feel the dollar relatively
unattractive than foreign currencies. Higher interest rates will offer the investors or lenders of the
funds with higher return compared to other countries. In this case, low interest rates in U.S., will bring
low return for U.S.-based MNCs, therefore this will influence positively the tendency of U.S.-based
MNCs to make investment abroad.
Higher interest rate in foreign countries might also increase the exchange rate of foreign
currencies. This is because higher interest rate will cause the demand for foreign currencies to
increase, the increment of demand will put upward pressure on the value of currency.
The expectation of increasing value of foreign currencies that will bring higher return will
attract more U.S.-based MNCs to invest abroad as the investors will always seek higher returns on
their investment. The international stocks and bonds will outperform those in U.S. Since, there is
higher possibility to earn more in foreign investment than in U.S., therefore the U.S.-based MNCs will
invest abroad.
U.S.-based MNCs also seek to invest abroad for the purpose of diversification of the
investment portfolio across geographies. By making investment in many countries, the economic
exposure can be lowered down. The investors can also reduce portfolio risk through having domestic
and foreign financial assets.

21

As a conclusion, low interest rates will increase the tendency of U.S.-based MNCs to invest
abroad.
(c) Bronco Corp. has decided to establish a subsidiary in Taiwan that will produce stereos
and sell them there. It expects that its cost of producing these stereos will be one-third
the cost of producing them in the United States. Assuming that its production cost
estimates are accurate, is Bronco’s strategy sensible? Explain. (7
marks)
Answer:
In this case, Bronco Corp is going to establish foreign direct investment (FDI or DFI)
in Taiwan area. Foreign Direct Investment is implemented by purchasing assets in other
country in order to establish a long-term economic relationship. In this case, Bronco Corp had
decided to establish subsidiary in Taiwan with the purpose of managing and obtain profits
from them.
In my opinion, Bronco Crop’ strategy is not sensible. The decision of establishing a

subsidiary in Taiwan is made by comparison of production costs only. Even though the
estimation of production costs is accurate, the other factors such as revenue, demand and
supply of the product in Taiwan, political risks and financial risks should be considered as
well.
If the price of the product launched in Taiwan has the same price with local
competitors therefore Bronco Corp will not have any additional competitive advantage.
Bronco Corp will only make profit by selling the production from Taiwan in the US. This is
the strategy of cost minimization.

22

This advantage will bring higher return to Bronco Corp as they have lower production
costs. The products can also be sold by the company to consumers at lower price compared to
other competitors in order to attract larger consumer base.
As a conclusion, by considering only one factor is not a sensible factor by Bronco

Corp.
(d) Assume that Fordham Co. was evaluating a project in Thailand (to be financed with
U.S. dollars). All cash flows generated from the project were to be reinvested in
Thailand for several years. Explain how the Asian crisis would have affected the
expected cash flows of this project and the required rate of return on this project. If
the cash flows were to be remitted to the U.S. parent, explain how the Asian crisis
would have affected the expected cash flows of this project. (8
marks)
[Total: 25 marks]
Answer:
Firstly, Asian Crisis will decrease the demand for products and services in Thailand.
The reduce in the demand for products and services will cause the consumers to reduce the
consumption and spending because their earnings had been reduced as well, thus adversely
affecting the cash flows.
The Asian crisis will also affect required rate of return adversely or in a negative
manner. The return from reinvestment of cash flows will reduce as well due to the crisis in
Asia.

23

The lack of cash flow or capital flow within the country makes the investors lack of
confidence in making investment in that country. Making that the capital to flow out of the
country as the investors will fled out of the country.
The losing of capital will put a downward pressure on the currencies of Thailand. Baht
will become weak, and it needs a lot of them to convert to the same unit of dollar before the
crises. The cash flows remitted back to U.S. will negatively affected due to the depreciation of
the Thailand currency against dollar.
As a conclusion, the cash flows to be remitted to U.S. will get reduced due to Asian
crisis.
__________________________________________

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SOUTHERN UNIVERSITY COLLEGE

YEAR 2020 / 2021

BBFN3323 INTERNATIONAL FINANCE

DATE: 20 JANUARY, 2021 DURATION: 2 ½ HOURS

BBA(HONOURS) IN FINANCE AND INVESTMENT

Student’s ID: B170219B

Batch No.: BAC17C1

1. The question paper consists of 4 pages and 4 Questions.

Submission date: By 22 January 2021, 5:00 pm through SUCCM e-learning portal.

This question paper consists of 4 questions on 4 printed pages.

BBFN3323 INTERNATIONAL FINANCE

This question paper consists of 4 questions on 4 printed pages.

BBFN3323 INTERNATIONAL FINANCE

Trade flows and capital flows is totally different concept.

BBFN3323 INTERNATIONAL FINANCE

This question paper consists of 4 questions on 4 printed pages.

BBFN3323 INTERNATIONAL FINANCE

This question paper consists of 4 questions on 4 printed pages.

BBFN3323 INTERNATIONAL FINANCE

This question paper consists of 4 questions on 4 printed pages.

BBFN3323 INTERNATIONAL FINANCE

This question paper consists of 4 questions on 4 printed pages.

BBFN3323 INTERNATIONAL FINANCE

The current stock price for Genevo Company = SF80

The current exchange rate = $0.70/SF

Current value of stock in dollar ($) = SF80 x $0.70 = $56

During this moment, the value of stock will be

This question paper consists of 4 questions on 4 printed pages.

BBFN3323 INTERNATIONAL FINANCE

Expected Profit/Loss on selling option = Spot Rate – Strike Price

Premium received per unit = $0.03

This question paper consists of 4 questions on 4 printed pages.

BBFN3323 INTERNATIONAL FINANCE

As a conclusion, the future price will be reduced.

This question paper consists of 4 questions on 4 printed pages.

BBFN3323 INTERNATIONAL FINANCE

As a conclusion, I would not purchase a December future contract in pounds because I

This question paper consists of 4 questions on 4 printed pages.

BBFN3323 INTERNATIONAL FINANCE

(d) Assume the following information:

New Zealand Dollar C$3.02/NZ$

The cross rate is given in this question which is C$3.02/NZ$.

This question paper consists of 4 questions on 4 printed pages.

BBFN3323 INTERNATIONAL FINANCE

$1,006,667 – $1,000,000 = $6,667

This question paper consists of 4 questions on 4 printed pages.

BBFN3323 INTERNATIONAL FINANCE

(1+ 0.3 ) 1.03

In order to calculate the spot rate, the calculation is performed as below:-

The spot rate of the euro in one year will be $1.079.

This question paper consists of 4 questions on 4 printed pages.

BBFN3323 INTERNATIONAL FINANCE

Beth’s percentage return = $95,455 / $100,000 – 1

If the spot rate of euro in one year is $1.08,

Value of investment = 95,455 euros × $1.08 = $103,091

Beth’s percentage return ¿ $ 103,091 / $ 100,000−1

This question paper consists of 4 questions on 4 printed pages.

BBFN3323 INTERNATIONAL FINANCE

BBFN3323 INTERNATIONAL FINANCE

Spot Rate Percentage of (% - mean) (%−mean)

This question paper consists of 4 questions on 4 printed pages.

BBFN3323 INTERNATIONAL FINANCE

This question paper consists of 4 questions on 4 printed pages.