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 Question Bank – (Previous Year Solved Question Papers)
Question Paper—June, 2019 (Solved) 1-3
Question Paper—December, 2018 (Solved) 1-3
Question Paper—June, 2018 (Solved) 1-5
Question Paper—December, 2017 (Solved) 1-3
Question Paper—June, 2017 (Solved) 1-4
Question Paper—December, 2016 (Solved) 1-6
Question Paper—June, 2016 (Solved) 1-3
Question Paper—December, 2015 (Solved) 1-3
Question Paper—June, 2015 (Solved) 1-4
Question Paper—December, 2014 (Solved) 1-4
Question Paper—June, 2014 (Solved) 1
Question Paper—December, 2013 (Solved) 1-4
Question Paper—June, 2013 (Solved) 1
Question Paper—December, 2012 (Solved) 1-6
Question Paper—June, 2012 (Solved) 1
Question Paper—June, 2011 (Solved) 1
Question Paper—June, 2010 (Solved) 1

S.No. Chapterwise Reference Book Page

1. International Monetary System and Institutions 1

2. International Financial Markets 12

3. International Banking 21

4. International Transactions and Balance of Payments 29

S.No. Chapter Page

5. Foreign Exchange Markets 36

6. Determination and Forecasting of Exchange Rates 42

7. Currency Risk Management 50

8. Measuring and Managing Transaction Exposure 60

9. Measuring and Managing Translation and Economic Exposure 69

10. Corporate Strategy and Foreign Direct Investment 81

11. International Project Appraisal 95

12. Cost of Capital for Foreign Investments 104

13. Political Risk and Tax Aspects 110

14. Desiging Global Capital Structure 118

15. International Cash Management 133

16. Foreign Trade Financing 147

17. Project Export Financing 156

 ( Solved )
Time: 3 Hours ]
Note: (i) Answer any five questions.
(ii) All questions carry equal marks.
Q. 1. Discuss the respective roles of IMF and
World Bank bringing out the differences clearly.
Ans. Ref.: See Chapter-1, Page No. 4, Q. No. 3.
Also Add: Bretton Woods established both the
IMF and the World-Bank. The IMF was given powers
to force even its largest and the most influential
members to observe the stabilisation/adjustment rules.
The IMF dealt with short-term aspects of economic
activity ranking the financial measures to facilitate
high levels of employment and income. It did not
address itself to the problem of long-term
development of the international economy. The World
Bank was created, therefore, to perform this function.
Its task was to assist and supplement private
international investment. It was an international
development finance institution. It served countries
at different levels of development and with different
political systems. It lent out of the funds placed at its
disposal by the member countries. The charters of
these two institutions tried to create the basic
framework of national institutions required to manage
the economic and financial behaviour of a large
number of countries who were economically
interdependent.
Q. 2. What is the foreign exchange risk? How
do the companies identify and manage such risks?
Select any one kind and state the method available
to manage it.
Ans. Foreign exchange risk refers to the
losses that an international financial transaction may
incur due to currency fluctuations. Also known as
currency risk, FX risk and exchange-rate risk, it
describes the possibility that an investment’s value
[ Maximum Marks: 100
may decrease due to changes in the relative value of
the involved currencies.
Foreign exchange risk arises when a company
engages in financial transactions denominated in a
currency other than the currency where that company
is based. Any appreciation/depreciation of the base
currency or the depreciation/appreciation of the
denominated currency will affect the cash flows
emanating from that transaction. Foreign exchange
risk can also affect investors, who trade in
international markets, and businesses engaged in the
import/export of products or services to multiple
countries.
Foreign currency exposure is the extent to which
the future cash flows of an enterprise, arising from
domestic and foreign currency denominated
transactions involving assets and liabilities, and
generating revenues and expenses are susceptible to
variations in foreign currency exchange rates. Foreign
currency risk is also the net potential gains or losses
which can arise from exchange rate changes to the
foreign currency exposures of an enterprise. It is a
subjective concept and concerns anticipated or
forecasted rate fluctuations together with the
assessment of the vulnerability of an enterprise to such
fluctuations.
It is important to manage currency risk to reduce
its impact as this may threaten the very viability of a
company. Hence, currency risk is required to be
controlled to reduce the fear of an adverse price, for
locking in cost and revenues and also for forecasting
the cash flows well in advance. Currency risk is well
managed with the application of derivatives.
 2 / NEERAJ : INTERNATIONAL BUSINESS FINANCE (JUNE-2019)
Derivatives are financial instruments whose value
changes in response to the changes in underlying
variables, and hence the name. The main use of
derivatives is to reduce risk for one party. The diverse
range of potential underlying assets and pay-off
alternatives leads to a huge range of derivatives
contracts available to be traded in the market.
The action of managing the risk is referred to as
hedging. Hedging is a strategy designed to minimize
exposure to an unwanted business risk, while still
allowing the business to profit from an investment
activity.
Also Ref.: See Chapter-7, Page No. 55,
Q. No. 1 and Chapter-8, Page No. 63, Q. No. 1.
Q. 3. (a) Discuss the variables which are
required for international project appraisal.
Ans. Appraisal of international projects involve
quite a few more complexities than domestic
projects. The variables that are unique to
international project appraisal are as follows:
Cash flows from foreign projects may be
subject to various restrictions that are
imposed by the host country.
Initial investment in the host country may
benefit from a partial or total release of
blocked funds.
Cash flows from foreign projects must be
converted into the currency of the parent
firm.
Cash flows generated from foreign projects
may replace revenue producing exports to
the host country.
Profits generated from projects undertaken
in other countries are subject to two taxing
jurisdiction: the host country and the parent
country.
Profitability of foreign projects may be
enhanced from concessionary financing
arrangements and other benefits provided by
the host country.
Foreign investment may contribute to the
corporate overall strategy of growth and
gaining foothold in markets to prompt
competitors.
Foreign investment may produce diversifi-
cation benefits to shareholders of the parent
firm. Terminal value is more difficult to
estimate than in the case of domestic projects.
Such value to the parent company may differ
from the valuation put on the facilities by
potential buyers in the host country or from
third countries.
It may be mentioned that NPV technique of
project appraisal is as much applicable in cash of
international project appraisal as it is in case of
domestic project appraisal. However, in view of the
unique complexities as indicated above. Adjusted
Present Value International Project Appraisal (APV)
technique is found more suitable for appraising
international projects.
(b) List out important difference between
domestic and international projects.
Ans. Ref.: See Chapter-11, Page No. 99,
Q. No. 2.
Q. 4. Under each of the following scenarios,
whether the value of Indian rupee relative to
Japanese Yen will appreciate, depreciated or
remain the same? Assume that exchange rates are
free to vary:
(a) Inflation is higher in India than in Japan.
Ans. Ref.: See Chapter-6, Page No. 46,
Q. No. 3(b).
(b) Prices in Japan and India are rising at the
same rate.
Ans. Ref.: See Chapter-6, Page No. 46,
Q. No. 3(c).
(c) Indian wages rise relative to Japanese
wages which means that Indian productivity falls
behind Japanese productivity.
Ans. Ref.: See Chapter-6, Page No. 46,
Q. No. 3(f).
(d) Real interest rates are higher in India than
in Japan
Ans. Ref.: See Chapter-6, Page No. 46,
Q. No. 3(d).
(e) India imposes new restrictions on their
ability to buy companies and invest in real estate
abroad.
Give a very brief explanation to each to your
answers.
Ans. Ref.: See Chapter-6, Page No. 46,
Q. No. 3(e).
 SOLVED QUESTION PAPER (JUNE-2019) / 3
Q. 5. Critically examine the role of govern-
ment of India towards FDI inflows in recent years.
Is this policy adequate keeping in view the urgent
need to attract FDI inflows? Discuss.
Ans. Ref.: See Chapter-10, Page No. 93,
Q. No. 10.
Q. 6. A major concern of the multinational
companies in investing abroad is management of
political risks. How do the companies assess and
manage such risks? Explain
Ans. Ref.: See Chapter-13, Page No. 112,
Q. No. 1.
Q. 7. What is involved in tax planning by
multinational companies? What special
consideration have to be kept unview while
planning? Discuss.
Ans. International tax planning is the art of
arranging cross-border transactions with the
knowledge of international tax principles to achieve
a tax effective and lawful routing of business activities
and capital flows. The planning process follows the
money flows in cross-border transactions, as they pass
from the host country where they arise to the home
country where they eventually end. International tax
planning has been defined as a tax-driven proactive
arrangement of a person’s affairs to minimize his tax
results. It would normally be optimized when the
after-tax profit is maximized. International tax
planning examines the interrelationship of two or
more tax systems, the impact of juridical and
economic double taxation, and the tax compliance
rules in more than one country. It also involves
additional considerations, such as tax incentives and
exemptions for foreign income, availability of
foreign tax credits, use of tax treaties and anti-
avoidance measures.
Generally, cross-border activities suffer a higher
tax liability on a worldwide basis than just domestic
or single-country transactions. They are subject to
tax in more than one tax jurisdiction. Moreover, the
taxpayer may have to cope with inconsistent tax
laws, erratic tax authorities and high taxes in various
jurisdictions. Proper tax planning is, therefore,
essential in an international business to reduce the
distortions that arise due to the lack of harmonization
in domestic tax systems. Without tax planning, it
would suffer from excess tax payments and
additional tax compliance costs.
Also Ref.: See Chapter-13, Page No. 113,
Q. No. 2.
Q. 8. Write short notes on the following:
(a) Transfer Pricing
Ans. Ref.: See Chapter-10, Page No. 90,
Q. No. 7.
(b) Letter of credit
Ans. Ref.: See Chapter-16, Page No. 151,
Q. No. 1.
(c) Special Drawing Rights
Ans. Ref.: See Chapter-1, Page No. 4,
Q. No. 5.
(d) Spot and forward exchange rates.
Ans. Ref.: See Chapter-5, Page No. 39,
Q. No. 2 (a) and Page No. 38, Q. No. 2 (c).
 ( Solved )
Time: 3 Hours ]
Note: (i) Answer any five questions.
(ii) All questions carry equal marks.
Q. 1. What are the salient features of the
present day International Monetary System?
Explain and discuss the present exchange rate
system.
Ans. International Monetary System is a set of
rules, arrangements, practices and procedures on the
basis of which different national currency transactions
are made worldwide. Such a system is essential to
describe a universal standard of value for the world's
currencies. Important features of this system includes
(i) To provide financial support to countries that
faces serious financial and economic complexities
using funds deposited with the IMF by institution’s
member countries;
(ii) To limit irregularities in balances of expenses
and in the exchange rate systems of member countries
which may weaken the development of trade and the
flow of capital worldwide.
The International Monetary System adopted
before 1914-18 world war was termed as gold
standard. This system followed the exchange of gold
and sterling in return of an international debt. During
this system, the Central Bank of a country could
exchange gold with its currency when presented to it.
This system offered stability in settlements and
automatic adjustment mechanism, which encouraged
economic development and peace.
In the year 1944, Bretton Wood’s system of
monetary management established IMF and World
Bank. This encouraged commercial and financial
relations among the world’s major industrial states.
The Bretton Woods system was the first example of a
completely negotiated monetary order formed to
[ Maximum Marks: 100
govern monetary relations among independent nation
states. Under the Bretton Woods system each country
had an obligation to adopt a monetary policy that
maintained the exchange rate of its currency at a fixed
rate (plus or minus one per cent) in terms of gold.
Also, under this agreement, US dollar became the
standard measurement for new monetary system.
However, this system didn’t last for long. In the year
1973, to increase uncertainty and misalignment in
foreign exchange rate system, the world switched to
floating rates.
The IMF created a new international reserve
asset known as Special Drawing Right SDR; in 1969
to support the Bretton Woods fixed exchange rate
system. The SDR was defined as a basket of 5
currencies; including Deutsch mark, French franc,
Japanese yen, pound sterling, and U.S. dollar. Its
value is based on a basket of key international
currencies.
Also Add: Exchange rates are determined by
demand and supply. But governments can influence
those exchange rates in various ways. The extent and
nature of government involvement in currency
markets define alternative systems of exchange rates.
There are three broad categories of exchange rate
systems.
Free-Floating Systems: In a free-floating
exchange rate system, governments and central banks
do not participate in the market for foreign exchange.
The relationship between governments and central
banks on the one hand and currency markets on the
other is much the same as the typical relationship
between these institutions and stock markets.
 2 / NEERAJ : INTERNATIONAL BUSINESS FINANCE (DECEMBER-2018)
Governments may regulate stock markets to prevent
fraud, but stock values themselves are left to float
in the market. The concept of a completely free-
floating exchange rate system is a theoretical one.
In practice, all governments or central banks
intervene in currency markets in an effort to
influence exchange rates.
Managed Float Systems: Governments and
central banks often seek to increase or decrease their
exchange rates by buying or selling their own
currencies. Exchange rates are still free to float, but
governments try to influence their values.
Government or central bank participation in a
floating exchange rate system is called a managed
float. Countries that have a floating exchange rate
system intervene from time to time in the currency
market in an effort to raise or lower the price of
their own currency. Typically, the purpose of such
intervention is to prevent sudden large swings in the
value of a nation’s currency.
Fixed Exchange Rates: In a fixed exchange
rate system, the exchange rate between two
currencies is set by government policy. There are
several mechanisms through which fixed exchange
rates may be maintained. Whatever the system for
maintaining these rates, however, all fixed exchange
rate systems share some important features.
Q. 2. Define yield curve. How is it
constructed? What is its utility? How does the
interest rate risk influence the yield curve?
Ans. Ref.: See Chapter-3, Page No. 27, Q. No. 5.
Q. 3. What are the foreign exchange markets?
What is their most important function ? How is
this function performed?
Ans. Ref.: See Chapter-5, Page No. 39, Q. No. 1.
Q. 4. (a) An Indian company manufacturing
commercial vehicles sells nearly 75% of its output
abroad. It has a subsidiary in Germany
manufacturing components. About 80% of
German output is imported in India to be used in
commercial vehicles.
Does the company face foreign exchange
risks? If so, what kinds? And how? Explain.
Ans. Yes, the company face foreign exchange
risks in form of currency risks.
Also Ref.: See Chapter-7, Page No. 55,
Q. No. 1.
(b) Discuss the future contracts with
examples.
Ans. A futures contract is an agreement to buy
or sell an agreed upon quantity of an underlying asset,
at a specified date, for a stated price. Futures contracts
can be bought and sold on practically any commodity
or financial asset. Futures contracts give the buyer
an obligation to purchase an asset (and the seller
an obligation to sell an asset) at a set price at a future
point in time. Futures contracts are standardized,
meaning that they specify the underlying commodity’s
quality, quantity and delivery so that the
prices mean the same thing to everyone in the market.
For example, each kind of crude oil (light sweet crude,
for example) must meet the same quality
specifications so that light sweet crude from one
producer is no different from another and the buyer
of light sweet crude futures knows exactly what he’s
getting. The ability to trade futures contracts relies
on clearing members, which manage the payments
between buyer and seller. They are usually large banks
and financial services companies. Clearing
members guarantee each trade and thus require
traders to make good-faith deposits(called margins)
in order to ensure that the trader has sufficient funds to
handle potential losses and will not default on the
trade. The risk borne by clearing members lends
further support to the strict quality, quantity and
delivery specifications of futures contracts.
Q. 5. What are the motivations of companies
investing abroad? What are the risks they face and
how do they manage them?
Ans. Ref.: See Chapter-13, Page No. 115,
Q. No. 4 and Page No. 112, Q. No. 1.
Q. 6. What are the main DCF and non-DCF
techniques of project appraisal ? Discuss their
respective merits and demerits.
Ans. Ref.: See Chapter-11, Page No. 99, Q. No. 3.
Q. 7. Discuss the significance and need of
proper cash management in MNCs. What are the
objectives? A centralised or decentralised cash
management which is most appropriate for MNCs.
Ans. Ref.: See Chapter-15, Page No. 140,
Q. No. 1,
Also Add.: Hence centralised cash management
is most appropriate.
Q. 8. Write short notes on the following:
(a) Nostro and Vostro Account
Ans. “Nostro” and “Vostro” are two different
terms used to describe the same bank account. The
 SOLVED QUESTION PAPER (DECEMBER-2018) / 3
terms are used when one bank has another bank’s
money on deposit, typically in relation to
international trading or other financial transactions.
A Nostro account is a reference used by Bank A
to refer to “our” account held by Bank B. Nostro, is
a shorthand way of talking about “our money that is
on deposit at your bank.” The Nostro account is the
record of the bank that has money on deposit at
another bank. These accounts are often used to
simplify settlements of trade and foreign exchange
transactions. Nostro accounts differ from standard
demand deposit bank accounts in that they are usually
held by financial institutions, and they are
denominated in foreign currencies.
Vostro is the term used by Bank B, where bank
A’s money is on deposit. Vostro is a reference to
“yours” and refers to “your money that is on deposit
at our bank.” A Vostro account is like any other
account held by a bank. The account is a record of
money owed to or maintained by a third party,
typically another bank, but it can be either a company
or an individual.
For both Nostro and Vostro accounts, the
domestic bank, i.e., the bank that is holding the
account, acts as caretaker for the account and is
sometimes referred to as the “facilitator” bank.
(b) Currency options
Ans. A currency option is a contract that gives the
buyer the right, but not the obligation, to buy or sell
a certain currency at a specified exchange rate on or
before a specified date. For this right, a premium is
paid to the seller, the amount of which varies
depending on the number of contracts if the option
is bought on an exchange, or on the nominal amount
of the option if it is done on the over-the-counter
market. Currency options are one of the most
common ways for corporations, individuals or
financial institutions to hedge against adverse
movements in exchange rates. Investors can hedge
against foreign currency risk by purchasing a
currency put or call. There are two main types of
options, calls and puts.
Also Ref.: See Chapter-8, Page No. 63,
Q. No. 3.
(c) Forfeiting
Ans. Ref.: See Chapter-16, Page No. 150,
Q. No. 5.
(d) Capital Asset Pricing Model (CAPM)
Ans. Ref.: See Chapter-12, Page No. 106,
Q. No. 2.
 ( Solved )
Time: 3 Hours
Note: (i) Answer any five questions.
(ii) All questions carry equal marks.
Q. 1. Give a detailed account of finance and
treasury functions in a company fully involved in
international business. Is it different from that of a
company engaged in domestic business only? Explain.
Ans. Finance is the most significant function in
virtually every business activity. The success of
business activity depends upon the success of its
finance function. From academic point of view, finance
is the subject which is considered to one of the most
technical ones, having a very wide scope and having
constantly changing rules and regulations. Therefore
one should get acquainted with the basics of finance,
despite the hardships involved in the process.
Funds brought outside the company through a
bond or equity offering. This asset class plays a
significant role in number investors’ portfolios, and
the basic concepts are important for every investor to
know. In addition to foreign bonds, loans and equity,
MNCs do raise funds from other sources also.
These other sources include Euro-dollar markets,
regional and international financial institutions like
World Bank, Asian Development Bank, African
Development Bank, and subsidies from host country
government. A financial market is a mechanism that
allows people to easily buy and sell (trade) financial
securities (such as stocks and bonds), commodities
(such as precious metals or agricultural goods), and
other fungible items of value at low transaction costs
and at prices that reflect the hypothesis. Financial
markets have evolved significantly over several
hundred years and are undergoing constant
innovation to improve liquidity.
[ Maximum Marks:100
[Weightage: 70%
After considering the various sources in which
the long-term requirements of the funds can be met,
the next question which arises is that what should be
the proportion in which the various sources of long-
term finance should be used in order to raise the
required amount of capital. Capital structure refers to
the mix of sources from which the long-term funds
required by a business are raised, i.e. what should be
the proportion of equity share capital, preference share
capital, internal sources, debentures and other sources
of funds in the total amount of capital which an
undertaking may raise for establishing its business.
An important issue facing multinational
enterprises involves establishing appropriate capital
structure levels for their foreign operations. An
important goal of this exploratory study is to identify
some of the major determinants of capital structure
among U.S. foreign subsidiaries. This study takes a
unique approach to this issue by using questionnaires
to collect data on the capital structure decision of
foreign subsidiary managers. Several estimator models
were used to identify the factors that influenced the
capital structure decision of the foreign subsidiary
managers.
The results of this study found that age of
subsidiary and financial risk were important factors in
determining a foreign subsidiary’s capital structure.
These findings were also true when all relevant
variables were considered in the logarithm form and
when an alternative risk variable was considered. In
addition, it was learned that total asset turnover and
ownership structure were important factors in
determining subsidiaries debt ratios.
Also Ref.: See Chapter-14, Page No. 128, Q. No. 3.
 2 / NEERAJ : INTERNATIONAL BUSINESS FINANCE (JUNE-2018)
Q. 2. Explain the salient features and present
day working of International Monetary System. What
are its major weaknesses? Discuss.
Ans. Ref.: See Chapter-1, Page No. 2, Q. No. 1.
Also Add:. Ref:. The first modern international
monetary system was the gold standard. The gold
standard provided for the free circulation between
nations of gold coins of standard specification. Under
the system, gold was the only standard of value. The
groundwork of the gold standard is that a currency’s
cost is supported by some weight in gold. Under the
gold standard system and based on its gold value, all
participating currencies were convertible. Because
currencies were convertible in gold, then nations
could ship gold among them to adjust their “Balance
of Payments.”
Also Add: Ref.: See Chapter-1, Page No. 7,
Q. No. 4.
Q. 3. Distinguish between cyclical and structural
disequilibrium in balance of payments. What are
methods available to restore equilibrium? Discuss.
Ans. Cyclical Disequilibrium: When
disequilibrium is caused due to the changes in trade
cycles, it is termed as cyclical disequilibrium. It is
possible that different phases of trade cycles like
depression, prosperity, boom, recession, etc, may
disturb terms of trade and cause disequilibrium in
balance of payments. For instance, during boom
period, imports may increase considerably due to
increase in demand for imported goods. During
recession and depression, imports may be reduced
due to fall in demand on account of reduced income.
During recession exports may increase due to fall in
price. During boom period, a country may face deficit
in its Balance of Payments (BOP) position on account
increase in imports. However, during recession its
export may increase, and as such balance of payments
position may show surplus. Also, the importing
countries may face cyclical changes. For instance,
there may be recession in the importing countries,
which in turn would reduce demand for imports.
Therefore, the demand for exports will decline and
the exporting country may face a trade deficit, which
in turn may affect BOP positions.
Structural Disequilibrium: It takes place due to
structural changes in the economy affecting demand
and supply relations in commodity and factor market.
Structural disequilibrium in balance of payments
persists for relatively longer periods; as it is not easy
to remove structural imbalance in the economy.
Some of the important causes of structural
disequilibrium are as follows:
1. If the foreign demand for a country’s products
decline due to the discovery of cheaper
substitutes abroad, then the country’s export
will decline causing a deficit.
2. If the supply position of a country is affected
due factors like crop failure, shortage of raw-
materials, strikes, political instability, etc, then
there would be the deficit in the balance of
payments.
3. A shift in demand due to the changes in tastes,
fashions, income, etc, would increase or
decrease the demand for imported goods
causing a disequilibrium in the balance of
payments.
4. Changes in the rate of international capital
movements may also cause structural
disequilibrium.
5. A war also results in structural changes which
may affect not only goods but also factor of
production causing a disequilibrium in balance
of payments.
Let us discuss few methods to restore equilibrium:
“Net transfers” determines the country’s balance of
indebtness which may have a positive or negative
value. The instant impact on BPO is considered to be
favourable, if the inflow of international debt is greater
than the outflow including payment of interest or
repayment of debt. However, the BOP is referred as
trained if the outflow value exceeds the inflow, but the
total quantum of indebtness would be reduced. Also,
in both the case, the most crucial factor is that the
external assistance is completely and appropriately
utilized.
Various adjustment policies are adopted for
controlling the situations where the country is faced
with a massive or persistent unfavourable balance on
current account or capital account or balance of
indebtness. These adjustments may be unilateral,
bilateral, regional and multilayer adjustments. These
may further include inter alias, fiscal policies, monetary
 SOLVED QUESTION PAPER (JUNE-2018) / 3

policies, and commercial policies. This also includes In spot market, currencies are traded for settlement
exchange rate adjustments. Devaluation acts as a after two business days. However, in forward market
double- edge weapon and is widely used as a remedy. contracts are made to buy or sell currencies for future
Only in the case if the price elasticity of demand is delivery. Unlike a stock market, where all participants
greater than the value for a country's export abroad have access to the same prices, the forex market is
and for its import at home, it may deliver the goods. In divided into levels of access. These participants are
other cases, the position of BOP/BOT may further commercial banks, brokers, customers, MNCs and
worsen. central banks.
Introduction of the common currency or the It is important to manage currency risk to reduce
creation of the Rupee Area is considered as the best its impact as this may threaten the very viability of a
regional solution. Also, free multilateral convertibility company. Hence, currency risk is required to be
of all currencies for the whole world is considered to controlled to reduce the fear of an adverse price, for
be an effective solution for BOP difficulties. locking in cost and revenues and also for forecasting
the cash flows well in advance. Currency risk is well
Q. 4. How do the changes in the exchange rate
managed with the application of derivatives.
affect export-import business of a company? What
Derivatives are financial instruments whose value
measures do these companies adopt to deal with the
changes in response to the changes in underlying
changes? Explain.
variables, and hence the name. The main use of
Ans. The price at which one currency is traded in
derivatives is to reduce risk for one party. The diverse
exchange for another in the forex market is known as
range of potential underlying assets and pay-off
the exchange rate between the two currencies. In the
alternatives leads to a huge range of derivatives
free market these prices move up or down according
contracts available to be traded in the market.
to demand and supply, whereas in regulated markets
The action of managing the risk is referred to as
exchange rates are regulated or controlled. Forex
hedging. Hedging is a strategy designed to minimize
markets are indeed at least partially regulated as each
exposure to an unwanted business risk, while still
government tries to stabilize the exchange rate for their
allowing the business to profit from an investment
domestic currency against other major currencies.
activity.
A foreign exchange transaction is a contract to
Derivatives can be based on different types of
buy or sell a quantity of one currency in exchange for
assets such as commodities, equities (stocks), bonds,
another at a specified time for delivery and settlement
interest rates, exchange rates, or indexes (such as a
and at a specified price (exchange rate). These
stock market index, Consumer Price Index (CPI), or
transactions take place in foreign exchange markets.
even an index of weather conditions, or other
In terms of counter parties and settlement dates, the
derivatives. Their performance can determine both the
forex transactions are classified in many categories as
amount and the timing of the pay-offs. There are
trade transactions, interbank transactions, spot
various derivative instruments like forward contracts
transactions, and forward transactions.
and forward rate agreements, future contracts,
Various foreign exchange quotations play an
currency option, currency swaps and interest rate
important role in the foreign exchange market. These
swaps.
are direct, indirect or cross rates. And can be expressed
Futures contracts are special types of contracts
in European terms or American Terms. Direct quotation
that obligate the seller to deliver the commodity on a
is the price of one unit of a foreign currency quoted in
specific date in the future. For this reason, many people
terms of the home country’s currency. Indirect
confuse future contracts with forward contracts. While
quotation is just the reverse. It is the price of one unit
the basic concepts are similar, there are actually many
of the home country currency quoted in terms of
differences between future contracts and forward
foreign currency. The exchange rate for any non-dollar
contracts.
currencies is then calculated from their respective
One of the primary differences between a futures
dollar exchange rates, to derive a cross rate.
contract and a forward contract is the fact that
Foreign exchange market also has two segments.
forwards can only transact when they are purchased
One is spot market and the other one is forward market.
 4 / NEERAJ : INTERNATIONAL BUSINESS FINANCE (JUNE-2018)
and on the settlement date. When it comes to futures,
however, the can actually rebalance every day. Since
forwards cannot rebalance, it is possible for a large
differential to develop between the delivery price and
the settlement price. This is particularly true if the
price of the underlying asset changes drastically. As a
result, investment in a forward contract is far riskier
than forwards.
Since futures are rebalanced on a daily basis, the
credit risk of this type of investment is virtually
eliminated. This is because the person holding the
futures contract must update the price to be equivalent
to how much a forward would be purchased for on the
same day. As a result, the amount of additional money
that is due on the settlement day is usually very small.
Furthermore, the futures-settlement failure risk is
actually carried by the exchange rather than by the
individual.
A currency swap is a form of swap. It is most
easily understood by relationship with an interest rate
swap. An interest rate swap is a contract to exchange
cash flow streams that might be associated with some
fixed income obligations-say swapping the cash flows
of a fixed rate loan for those of a floating rate loan. A
currency swap is exactly the same thing except, with
an interest rate swap, the cash flow streams are in the
same currency. With a currency swap, they are in
different currencies.
That difference has a practical significance. With
an interest rate swap, cash flows stirring on concurrent
dates are netted. With a currency swap, the cash flows
are in different currencies, so they can’t net. Full
principal and interest payments are exchanged without
any form of netting.
With the globalization of trade and relatively free
movement of financial assets, risk management
through derivatives products has become a necessity
in India also, like in other developed and developing
countries.
Q. 5. Why has it become important for the
companies to engage in international cash
management? What are the major issues involved?
Give a detailed account.
Ans. Ref.: See Chapter-15, Page No. 140, Q. No. 1.
Q. 6. How do the governments assist their
exporters in financing exports? Discuss the
institutional framework and the schemes.
Ans. Ref.: See Chapter-17, Page No. 163, Q. No. 1
and Page No. 164, Q. No. 2.
Q. 7. Explain the various Non-DCF (Discounted
Cash Flow) and DCF techniques of Project Appraisal.
Which of the technique is considered to be the best
in your view? Discuss.
Ans. Ref.: See Chapter-11, Page No. 99, Q. No. 3.
Q. 8. What factors influence the design of world
wide corporate capital structure? Briefly describe.
Ans. Ref.: See Chapter-14, Page No. 128, Q. No. 4.
Q. 9. Write short notes on the following:
(a) Regional Development Banks
Ans. During seventies and eighties a tendency
was noticed among countries to concentrate on
regional cooperation. During this period many
development banks were set up at, regional level.
Asian Development Bank: Multinational
development finance institution was founded in 1966
by 31 members to promote the social and economic
progress of Asian and pacific region. The Bank gives
special attention to the needs of the smaller or less-
development countries and priority to regional, sub-
regional and national projects and programmes. The
African Development Bank ADB is a regional
multilateral development and bank, engaged in
promoting the economic development and social
progress of its Regional Member Countries (RMCs)
in Africa. The Bank was established in 1964.
The European Investment Bank (EIB) offers
funds for certain public and private projects in
European and other nations associated with the
common market. It emphasizes loans to lesser
developed regions in Europe and to associated
members in Africa. The Inter-American Development
Bank (IADB) the oldest and largest regional
multilateral development institution was established
in December 1959 to help accelerate economic and
social development in Latin America and the
Caribbean. Atlantic Development Group for Latin
America is an international private investment
company dedicated to the development in Latin
America.
The AFESD is an Arab regional financial
institution, having an independent juridsdiction. Its
objectives are to assist member countries in eliminating
development constraints, increasing absorptive
capacity and achieving higher rates of growth; and
to foster economic integration and cooperation
among member countries. EBRD was established in
 SOLVED QUESTION PAPER (JUNE-2018) / 5
1991. It exists to foster the transition towards open
market oriented economies and to promote private
arid entrepreneurial initiative in the countries of
central and Eastern Europe.
(b) International Tax Planning
Ans. International tax planning is the art of
arranging cross-border transactions with the
knowledge of international tax principles to achieve
a tax effective and lawful routing of business activities
and capital flows. The planning process follows the
money flows in cross-border transactions, as they
pass from the host country where they arise to the
home country where they eventually end.
International tax planning has been defined as a tax-
driven proactive arrangement of a person’s affairs to
minimize his tax results. It would normally be
optimized when the after-tax profit is maximized.
International tax planning examines the
interrelationship of two or more tax systems, the
impact of juridical and economic double taxation, and
the tax compliance rules in more than one country. It
also involves additional considerations, such as tax
incentives and exemptions for foreign income,
availability of foreign tax credits, use of tax treaties
and anti-avoidance measures.
Generally, cross-border activities suffer a higher
tax liability on a worldwide basis than just domestic
or single-country transactions. They are subject to
tax in more than one tax jurisdiction. Moreover, the
taxpayer may have to cope with inconsistent tax laws,
erratic tax authorities and high taxes in various
jurisdictions. Proper tax planning is, therefore,
essential in an international business to reduce the
distortions that arise due to the lack of harmonization
in domestic tax systems. Without tax planning, it
would suffer from excess tax payments and additional
tax compliance costs.
(c) Foreign Exchange Regulations in India
Ans. The first foreign exchange regulation Act in
India was enacted as a temporary measure in 1947,
but was placed on statutory book in 1957. In the light
of the experience gained the entry of foreign capital in
the form of branches and concerns with substantial
non-resident interest in them and the employment of
foreigners in India the Foreign Exchange Regulation
Act (FERA), 1973 was enacted on the recom-
mendation of 47th report of Law Commission. The
proceedings under FERA are quasi-criminal.
The FERA 1973, was reviewed in 1993 and a new
Act called Foreign Exchange Management Act
(FEMA), 1999 (enforced w.e.f. 1.6.2000) was enacted.
The objective of the Act was to facilitate external trade
and payment and to promote the orderly development
and maintenance of foreign exchange market in India.
FERA was an Act to consolidate and amend the law
regulating certain payments, dealings in foreign
exchange and securities, transactions indirectly
affecting foreign exchange and the import and export
of currency, for the conservation of the foreign
exchange resources of the country and the proper
utilization thereof in the interest of the economic
development of the country.
(d) Capital Asset Pricing Model
Ans. Ref.: See Chapter-12, Page No. 106, Q. No. 2.
 ( Solved )
Time: 3 Hours
Note: (i) Answer any five questions.
(ii) All questions carry equal marks.
Q. 1. Distinguish between balance of payments
and balance of trade, giving specific illustration. What
are the methods available to a Government to correct
adverse balance of payments? Is devaluation a viable
option? Discuss.
Ans. Ref.: See Chapter-4, Page No. 33, Q. No. 1.
Also Add : Various adjustment policies are
adopted for controlling the situations where the
country is faced with a massive or persistent
unfavourable balance on current account or capital
account or balance of indebtness. These adjustments
may be unilateral, bilateral, regional and multilayer
adjustments. These may further include inter alias,
fiscal policies, monetary policies, and commercial
policies. This also includes exchange rate adjustments.
Devaluation acts as a double edge weapon and is
widely used as a remedy. Only in the case if the price
elasticity of demand is greater than the value for a
country’s export abroad and for its import at home, it
may deliver the goods. In other cases, the position of
BOP/BOT may further worsen.
Introduction of the common currency or the
creation of the Rupee Area is considered as the best
regional solution. Also, free multilateral convertibility
of all currencies for the whole world is considered to
be an effective solution for BOP difficulties. The IMF
and other multilateral agencies have strived towards
this end since 1945. Following the appearance of
GATT, the quarter century can be looked upon as the
golden age of global trade. On the other hand, the
WTO accord which was operational in the year 1995
is considered to have shifted the focus from trade to
investment. This also includes, intellectual property
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rights, social clauses like child labour and human rights
and adjudication of complaints and disputes over 100
in number during the first three years 1995, 1996 and
1997.
Also Ref .: Chapter-4, Page No. 35, Q. No. 4.
Q. 2. What were the major weaknesses of
Bretton Woods System which led to its breakdown
in 1971? Has subsequent amendments in IMF
articles succeeded in removing these weaknesses ?
Discuss.
Ans. Ref.: See Chapter-1, Page No. 7, Q. No. 4.
Also Add : The IMF created a new international
reserve asset known as Special Drawing Right SDR;
in 1969 to support the Bretton Woods fixed exchange
rate system. The SDR was defined as a basket of 5
currencies; including Deutsch mark, French franc,
Japanese yen, pound sterling, and U.S. dollar. Its value
is based on a basket of key international currencies.
After the failure of the Bretton Woods system in
1971, most of its member countries formed an
agreement in 1972 to establish stable exchange rates
by preventing exchange fluctuations. Thus, European
Monetary System (EMS) formed by EU countries
defined European Currency Unit (ECU). Resultant
from a basket of variable amounts of the currencies
of the EU nations, the ECU formed the unit of
accounting used to determine exchange rates among
the national currencies. The most important part of
EMS was the Exchange Rate Mechanism (ERM). This
meant that the exchange rate of any member nation
could not fluctuate more than 2.25 per cent from a
standard point. This was intended to assist stable trade
without the fear that sudden fluctuations in the values
 2 / NEERAJ : INTERNATIONAL BUSINESS FINANCE (DECEMBER-2017)
of currencies would diminish trade and promote the
development of trading barriers between member
nations. In 1990, due to reunification of east and West
Germany, economic disturbances affected EMS.
At the beginning of 1999, a single currency
“Euro” was adopted by the same EU members for
foreign exchange and electronic payments. With the
advent of the euro, the ERM was revised and common
economic policy was created amongst the member
nations. Lately, in the year 1997, Asian financial crisis
had hit the world economy. The crisis started in
Thailand. This country had fixed exchange rate
against Dollar. This crisis is also referred as IMF
crisis.
Q. 3. How do you measure and manage
transaction risk? How is the transaction risk
different from translation risk? Explain giving
suitable illustrations.
Ans. Ref.: See Chapter-7, Page No. 55, (a)
‘Transaction Risk’ and (b) ‘Translation Risk’.
Q. 4. Discuss the nature and genesis of Global
Financial Markets. What purposes do they serve?
Also discuss some of the major financial
instruments used in the markets.
Ans. Ref.: See Chapter-2, Page No. 12,
‘Introduction’ and Page No. 15, Q. No. 5.
Q. 5. What is the most important rationale of
Foreign Direct Investment (FDI)? What are the
dangers of FDI ? Discuss.
Ans. Ref.: See Chapter-10, Page No. 91, Q. No. 8.
Q. 6. Discuss Euro Markets and explain in
brief various instruments of Euro Markets.
Ans. Ref.: See Chapter-2, Page No. 17, Q. No. 1.
Also Add : Euro markets operate independently
and can offer higher profits. They have two modes
of calculating the interest rates: (i) 365 day year is
used for British pound sterling, Kuwaiti diner,
Belgium franc and Irish pound, (ii) 360 day year for
all other currencies. Euro market operates at two rates
for a given period as LIBID and LIBOUR. Euro
market also has follows some principles as:
The first day of the period is included rather
than the last day for calculating the interest.
If the interest payment falls on a non-
banking day, it will shift to the next business
day.
Interest period can be lightened or shortened
depending upon whether the last day is a
holiday.
If the payment date happens to fall in a new
month, while the last day upon the interest
is calculated is the previous month then the
interest payment date will be the immediate
preceding business date.
The borrowers issue international debt
instruments in the form of Promissory Notes, Bonds
and Papers. The borrowers depending upon the
different needs require funds. These needs are
classified on the basis of the length or period for which
the borrowings are needed, amount of currency
required and the currency in which the borrowings
are raised. One of such instruments is Euro Notes.
The main reason behind issuance of Euro notes is to
structure debt instrument and place it in the market
with short-term maturities. For e.g. 3 to 9 months. In
such cases, if the short-term market is unable to offer
the required liquidity to the issuer, it becomes the
responsibility of the underwriting bank to support the
liquidity for the agreed period of the facility.
Euro commercial paper is a kind of short-term
investment loan issued by a bank in the international
money market, denominated in a currency that differs
from the corporation’s domestic currency. A Eurobond
is international bonds that are denominated in a
currency not native to the country where they are
issued. Mid- term notes serve as an alternative to short-
term investments in commercial paper market and
long-term borrowings in Bond market. Hence they
are termed as MTN or Medium-Term Notes. Whereas,
Floating Rate Notes (FRN) are those instruments
whose rate of interest varies with prevailing market
rates. This term stands for intermediate to long-term
security whose rate of interest is pegged to a short-
term rate and then adjusted accordingly.
Q. 7. Define cost of equity. If risk perceptions
change what happens to cost of equity? How equity
cost of capital for foreign project is arrived at?
Ans. Ref.: See Chapter-12, Page No. 107, Q. No. 1
and Page No. 108, Q. No. 4.
Q. 8. Explain the various ways of assessing and
managing political risk by multinational corporations.
Ans. Ref.: See Chapter-13, Page No. 112, Q. No. 1.
Q. 9. Write short notes on the following:
(a) Multilateral Investment Guarantee Agency
(MIGA)
Ans. Ref.: See Chapter-13, Page No. 117, Q. No. 3.
 SOLVED QUESTION PAPER (DECEMBER-2017) / 3
(b) Transfer Pricing
Ans. Transfer pricing is essentially an outcome
of globalization. A distinctive part of International
taxation, it has come to mark the legal responses to
business’ profit maximizing tendencies. To give a
prelude to Transfer pricing, International taxation is
to be understood. This is one specific branch of
taxation which taxes the profits arising from Inbound
Investment (i.e. taxation of income earned by a foreign
company in a host country) and Outbound Investment
(i.e. taxation of income earned by a domestic country
abroad). The purpose of international taxation is to
ensure that the earnings of a company from a foreign
company neither go tax free nor are doubly taxed.
To illustrate, let us suppose a premises that an
Indian company has a branch in Singapore and that it
earns a hefty business income from that branch. Now
since the income earned in respect to that branch has
been sourced or earned from Singapore the natural
tendency of Singapore government will be to impose
a tax on that portion of income of the Indian company
which is attributable to business in Singapore. This
levy by Singapore is called as ‘Source Taxation’ for it
seeks to levy tax only on the portion of income which
is sourced from/in Singapore.
Now once the income has been subject to tax in
Singapore, it comes in the hands of the Indian company
in India as the profits earned by its branch are
technically and legally a part of the profits earned by
the Indian company. Since the Indian company is
legally and factually situated in India, the Government
of India will be inclined to tax the profits of the Indian
company fully and exclusively (this is called the
‘Residence Taxation’ principle wherein the country
in which the company or individual is resident applies
tax on all income earned by the company/individual).
This would lead to a double taxation in the hands
of the company in so much of the profits earned in
one country are being subjected to taxation in two
countries. In order to mitigate this wasteful costs
(because ultimately taxes are costs of doing business),
countries are obliged to enter into double taxation
avoidance agreements (DTAAs, also called DTCs or
Double Tax Conventions) wherein under one of the
countries forgoes its right to tax and therefore tax is
effectively levied only in one jurisdiction, which
would be determined under the DTAA.
Now why this leads to transfer pricing is obvious.
Under the DTAA, generally one only country can tax.
However what is not determined here is the rate at
which the country would tax. Therefore, despite the
DTAA, countries remain free to charge the rate of tax
which they generally would be charging in other than
international tax situations. For illustration, the rate
of tax in India is higher than that imposed under UAE.
Here, since the objective of the business is to reduce
the costs (and tax being a cost to the business), the
transactions sought to be done between the two would
sought to be done in a manner which brings out the
minimum possible tax implication thereon. It is in this
context that Transfer Pricing gains solid ground.
(c) Regulatory and Institutional Framework
for Financing Project Exports in India
Ans. Ref.: See Chapter-17, Page No. 159, Q. No. 3.
(d) Forfaiting
Ans. Ref.: See Chapter-16, Page No. 154, Q. No. 4.
 ( Solved )
Time: 3 Hours
Note: (i) Answer any five questions.
(ii) All questions carry equal marks.
Q. 1. What do you mean by International
Monetary System? What lessons can be drawn
from the experience of working of the Bretton
Woods System?
Ans. Ref.: See Chapter-1, Page No. 2, Q. No. 1,
Page No. 7, Q. No. 4.
Q. 2. (a) Discuss the risk differences between
Domestic and Foreign Financial Markets?
Ans. Ref.: See Chapter-6, Page No. 44, Q. No. 2.
(b) What do you mean by LIBOR? Why is it
known as most popular rate in foreign exchange
markets?
Ans. Ref.: See Chapter-2, Page No. 14,
Q. No. 3(i).
Q. 3. In a global economy, all firms,
irrespective of the degree of their involvement in
international business get affected by changes in
exchnage rates. Is it true? If so, how? Give your
arguments. Also explain any two important
exposures.
Ans. Currency fluctuations are a natural outcome
of the floating exchange rate system that is the norm
for most major economies. The exchange rate of one
currency versus the other is influenced by numerous
fundamental and technical factors. These include
relative supply and demand of the two currencies,
economic performance, outlook for inflation, interest
rate differentials, capital flows, technical support and
resistance levels and so on. As these factors are
generally in a state of perpetual flux, currency values
fluctuate from one moment to the next. But although
a currency’s level is largely supposed to be determined
by the underlying economy, the tables are often
turned, as huge movements in a currency can dictate
the economy’s fortunes. In this situation, a currency
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[Weightage: 70%
becomes the tail that wags the dog, in a manner of
speaking.
While the impact of a currency’s gyrations on an
economy is far-reaching, most people do not pay
particularly close attention to exchange rates because
most of their business and transactions are conducted
in their domestic currency. For the typical consumer,
exchange rates only come into focus for occasional
activities or transactions such as foreign travel, import
payments or overseas remittances.
A common fallacy that most people harbour is
that a strong domestic currency is a good thing,
because it makes it cheaper to travel to Europe, for
example or to pay for an imported product. In reality,
though, an unduly strong currency can exert a
significant drag on the underlying economy over the
long-term, as entire industries are rendered
uncompetitive and thousands of jobs are lost. And
while consumers may disdain a weaker domestic
currency because it makes cross-border shopping and
overseas travel more expensive, a weak currency can
actually result in more economic benefits.
The value of the domestic currency in the foreign
exchange market is an important instrument in
a central bank’s toolkit, as well as a key consideration
when it sets monetary policy. Directly or indirectly,
therefore, currency levels affect a number of key
economic variables. They may play a role in
the interest rate you pay on your mortgage, the returns
on your investment portfolio, the price of groceries
in your local supermarket and even your job prospects.
 2 / NEERAJ : INTERNATIONAL BUSINESS FINANCE (JUNE - 2017)
The exposure is classified into three types of foreign
currency exposure:
Transaction Exposure:The simplest kind of
foreign currency exposure which anybody can easily
think of is the transaction exposure. As the name
itself suggests, this exposure pertains to the exposure
due to an actual transaction taking place in business
involving foreign currency. In a business, all
monetary transactions are meant for profits as its end
result. There are all the chances of that final objective
getting hampered if it is a foreign currency
transaction and the currency market moves towards
the unfavorable direction.
Translation Exposure: This exposure is also
well known as accounting exposure. It is because the
exposure is due to the translation of books of
accounts into the home currency. Translation activity
is carried out on account of reporting the books to
the shareholders or legal bodies. It makes sense also
as the translated financial statements show the
position of the company as on a date in its home
currency.
Q. 4. What do you mean by “Loan
Syndicate”? Explain its working and significance
in detail.
Ans. Ref.: See Chapter-3, Page No. 25, Q. No. 2.
Q. 5. How do the companies borrow from
abroad? What are various sources of external
funds in financing international operations?
Ans. In fact, most people have to borrow capital
at some point or the other. A well hidden secret is
that you can borrow money at a cheaper interest rate
if you borrow from a foreign lender, usually. At half
the interest as compared to India, sometimes. If you
compare the interest rates in developed countries and
India, it will be obvious to you how profitable can it
be for an Indian business to borrow money from from
Japan, EU or USA as compared to any domestic
lender. One can take commercial loans in the form
of bank loans, buyers’ credit, suppliers’ credit,
securitized instruments (e.g., floating rate notes and
fixed rate bonds, non-convertible, optionally
convertible or partially convertible preference
shares) availed of from non-resident lenders is
referred to as External Commercial Borrowings
(ECB). Financial intermediaries such as banks;
Financial Institutions (FIs); Housing Finance
Companies (HFCs) and Non-Banking Financial
Companies (NBFCs) that are exclusively involved in
financing of infrastructure sector for on-lending to
borrowers up to 50 per cent of their owned funds under
the automatic route cannot borrow under External
Commercial Borrowing (ECB). Apart from that
individuals, trusts and Non- Profit making
organizations are not eligible for grant of money under
ECB Regulations. However, NGOs can borrow
money from overseas organizations and individuals
that are qualified to receive money under External
Commercial Borrowing (ECB) Regulations.
International businesses have the same funding
sources as most organizations, for larger organizations
this primarily revolves around debt and equity. For
small organizations, debt and equity are often
accompanied by venture capital and crowd-sourcing
(particularly in the startup world).
Larger Organizations
From the perspective of larger organizations,
formal analyses of projected cash flows (as discussed
above) coupled with traditional forms of funding is
the most common approach to international business
funding. This includes:
Loans–Bank loans are a form of debt, often
with a relatively low cost of capital. Loans
granted over a given lending period and paid
back in installments. In the case
of bankruptcy, these debts are among the first
repaid upon liquidation of assets (hence the
lower risk and lower cost of capital).
Issuing Bonds–Organizations can also issue
bonds, which are another form of debt.
Bonds debt securities investors can purchase
which will mature over time. The rate of
return and time to maturation can vary. These
are also lower costs of capital as they are
paid out before equity in the case of a
bankruptcy.
Equity (Shares)-Issuing shares is another
funding source, particularly for larger and
publicly traded organizations. By issuing
equity, organizations can essentially sell
small fractions of organizational ownership
as an asset for investors, who are betting on
the success of the organization. These are
riskier, most costly and less reliable sources
of income compared to debt.
 SOLVED QUESTION PAPER (JUNE - 2017) / 3
While smaller organizations have access
to debt as well, they generally have
less collateral available and therefore very
little financial leverage. In these situations,
procuring funding for a global venture is
exceptionally difficult. The startup world
is full of interesting options to procure
capital, including:
Venture Capital (VCs)–A popular term in
the Silicon Valley and other technology
hubs, VCs accumulate capital from a
number of speculative investors and seek
strong business opportunities still in the
startup phase. Winning capital from a VC
can be quite lucrative, as the amount of
capital invested can be high (high enough
to justify international operations). VCs
would generally be represented by a board
who would assess the viability of the
business as an investment, and determine
terms (ownership by investors) and returns.
Angel Investors–Angel investors are
similar to VCs, but can actually be quite
varied in format and motivations. Angel
investors are more often individuals with
capital to spare who have taken
an interest in a particular business or
product. They may act as advisers or
objective investors, they may simply love
the product or they may have
investment incentives (most commonly
both).
Crowd-sourcing–Websites like Kick-
starter and Indiegogo are unique and
modern formats, where potential business
ideas can garner capital and support prior
to producing a given product or service.
This interesting model allows a high
number of people to invest a small amount
of capital, which cumulatively may be
enough to ‘kickstart’ a venture
(international or otherwise). Reimburse-
ment in the form of credits, t-shirts, early
access to the product and other incentives
are often used to motivated small
investments.
Q. 6. Explain the role of Foreign Direct
Investment in promoting economic development
in the country. What steps are necessary to ensure
FDI flows in India?
Ans. Ref.: See Chapter-10, Page No. 83,
Q. No. 3 and Page No. 93, Q. No. 10.
Q. 7. Managing political risks in the countries
they operate, is an issue of major concern for
MNCs. How do they manage such risks? Explain.
Ans. Ref.: See Chapter-13, Page No. 112,
Q. No. 1.
Q. 8. (a) What is the importance of project
export to our country?
Ans. Ref.: See Chapter-17, Page No. 163,
Q. No. 1.
(b) What are the different types of risks which
an entrepreneur has to face on the area of project
exports?
Ans. Ref.: See Chapter-7, Page No. 55, Q. No. 1.
Q. 9. Write short notes on the following:
(a) Balance of Payments
Ans. Ref.: See Chapter-4, Page No. 30, Q. No. 1.
(b) Exchange Rate Forecasting
Ans. Ref.: See Chapter-6, Page No. 47, Q. No. 2.
(c) Special Drawing Rights
Ans. Ref.: See Chapter-1, Page No. 4, Q. No. 5.
(d) Global Capital Structure.
Ans. There are different financing patterns used
by various countries. As the 1980s ended there was a
talk of Tokyo, becoming the financial capital of the
world and it was fashionable to ask whether other
countries should be adopting Japan's Industrial policy
and financial systems. It has come to be observed that
debt ratio norms vary among different countries.
It is common to assert Japan's economy must
undergo a 'Globalization'. There has been no
comparable transformation between Europe and
United States.
The impact of the 1986 modify in U.S. interest
allocation policy on the speculation and financing
decisions of American multinationals. An empirical
study is carried out in order to classify the corporate
financial patterns of non-financial firms in seven
Continental European countries for the period 1991-
2001. We test econometrically the thesis of a common
trend toward disintermediation and find that cross-
country differences in the use of short-term bank debt
have been reduced whilst differences in the use of
medium and long-term bank debt have remained
 4 / NEERAJ : INTERNATIONAL BUSINESS FINANCE (JUNE - 2017)
unchanged. In Continental Europe, banks tend to
become more reluctant to finance the day-to-day
business of non-financial firms. These facts suggest
that changes have been pushed by banks rather than
pulled by markets.
Development of financial markets in various
countries brings out significant differences.
Funds brought outside the company through a
bond or equity offering. This asset class plays a
significant role in number investors' portfolios and
the basic concepts are important for every investor to
know. Here, we explain how bonds work, and we
describe the different types of bonds, including
corporate, municipal, treasury, agency, zero-coupon,
and junk bonds. In addition to foreign bonds, loans
and equity, MNCs do raise funds from other sources
also.
These other sources include Euro-dollar markets,
regional and international financial institutions like
World Bank, Asian Development Bank, African
Development Bank, and subsidies from host country
government.a financial market is a mechanism that
allows people to easily buy and sell (trade) financial
securities (such as stocks and bonds), commodities
(such as precious metals or agricultural goods), and
other fungible items of value at low transaction costs
and at prices that reflect the hypothesis. Financial
markets have evolved significantly over several
hundred years and are undergoing constant innovation
to improve liquidity.
After considering the various sources in which
the long-term requirements of the funds can be met,
the next question which arises is that what should be
the proportion in which the various sources of long-
term finance should be used in order to raise the
required amount of capital. Capital structure refers to
the mix of sources from which the long-term funds
required by a business are raised, i.e. what should be
the proportion of equity share capital, preference share
capital, internal sources, debentures and other sources
of funds in the total amount of capital which an
undertaking may raise for establishing its business.
An important issue facing multinational
enterprises involves establishing appropriate capital
structure levels for their foreign operations. An
important goal of this exploratory study is to identify
some of the major determinants of capital structure
among U.S. foreign subsidiaries. This study takes a
unique approach to this issue by using questionnaires
to collect data on the capital structure decision of
foreign subsidiary managers. Several estimator
models were used to identify the factors that
influenced the capital structure decision of the
foreign subsidiary managers.
The results of this study found that age of
subsidiary and financial risk were important factors
in determining a foreign subsidiary’s capital
structure. These findings were also true when all
relevant variables were considered in the logarithm
form and when an alternative risk variable was
considered. In addition, it was learned that total asset
turnover and ownership structure were important
factors in determining subsidiaries debt ratios.
Other topics covered up are the general theory
of capital structure and discussed diverse issues
faced in designing world technical ones, having a
very wide scope and having constant-wide corporate
and foreign subsidiary capital structure. The
minimization of cost of capital approach to global
capital structure is recommended. The unit closes
with a discussion of innovative methods of financing
through interest rates futures, swaps, forwards rate
agreements and interest options and their
implications for designing world wide corporate and
foreign subsidiary capital structure.
Finance is the most significant function in
virtually every business activity. The success of
business activity depends upon the success of its
finance function. From academic point of view,
finance is the subject which is considered to one of
the most technical ones, having a very wide scope
and having constantly changing rules and
regulations. Therefore, one should get acquainted
with the basics of finance, despite the hardships
involved in the process.