KOLEJ UNIVERSITI TUNKU ABDUL RAHMAN

FACULTY OF ACCOUNTANCY, FINANCE AND BUSINESS

ACADEMIC YEAR 2021/2022

JUNE EXAMINATION

BBMF3123 INTERNATIONAL FINANCE

TUESDAY, 28 JUNE 2022 TIME: 2.00 PM – 5.00 PM

(3 HOURS)

BACHELOR OF BUSINESS ADMINISTRATION (HONOURS)

BACHELOR OF BUSINESS (HONOURS) IN INTERNATIONAL BUSINESS

BACHELOR OF BUSINESS (HONOURS) INTERNATIONAL BUSINESS MANAGEMENT

Instructions to Candidates:

This paper is divided into two sections and you are required to answer ALL FOUR (4) questions as
follows:

Section A: This ONE (1) question is compulsory and must be attempted. (40 marks)

Section B: Answer ALL THREE (3) questions. (60 marks)

All workings that support the answers must be shown.

Marks will be awarded for clarity in presentations and logical arguments.

You are required to continue with a fresh page when answering new questions or parts of the
questions.

This question paper consists of 4 questions on 5 printed pages.

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BBMF3123 INTERNATIONAL FINANCE

SECTION A (40 marks)

This ONE (1) question is compulsory and must be attempted.

Question 1

Title: Higher commodity prices a boon to Malaysia's current account balance

KUALA LUMPUR (April 5): Higher commodity prices caused by the Russia and Ukraine crisis will
provide a boost to Malaysia's current account balance, according to Fitch Solution Country Risk &
Industry Research.

In a statement on Tuesday (April 5), the international rating agency said it forecasts Malaysia's
current account balance to come in at 1.9% of gross domestic product (GDP) in 2022, wider than the
1.6% recorded in the previous year. It added, Malaysia is one of the two markets in Asia to have
revised their 2022 real GDP growth forecasts on the back of higher commodity prices due to the
geopolitical tension.

"The goods trade balance will likely improve in light of elevated prices, in particular, palm oil and
petroleum, as well as their related products. The key reason behind our relatively strong current
account balance forecast is the likely boost Malaysia's exports will receive from the high commodity
prices that have resulted from the Russia-Ukraine crisis.

In particular, crude palm oil and crude oil prices have seen a stellar run of price growth, averaging
59.1% year-on-year (y-o-y) and 69.1% y-o-y, respectively, between January 2021 and January 2022,"
it said. Fitch highlighted these two categories, as well as related products, make up more than 16% of
total exports.

On the financial account, the rating agency said portfolio and other investments are likely to be
subdued by an increasingly hawkish US Federal Reserve, which is likely to hike rates by five more
times in 2022, making emerging-market assets, including Malaysia's, less attractive by comparison.

"This should see foreign direct investment (FDI) growth continue to accelerate. FDI amounted to
2.1% of GDP in 2021, growing from just 0.2% of GDP in 2020," it said.

(Source: The Edge Malaysia; April 5, 2022)

Required:

(a) Explain what is “Balance of Payment” (BOP) and discuss in detail the entries that are listed
under its two components, namely the current account and financial account. (10 marks)

(b) Explain why the current account is always offset by the capital and financial account.
(5 marks)

(c) Discuss why higher commodity prices caused by the Russia and Ukraine crisis would affect
Malaysia's current account balance. (6 marks)

(d) Assuming that other things remain unchanged, discuss how the increase in US interest rate
would affect the value of the U.S. dollar (USD) against the Malaysian ringgit (MYR).
Support your answer with a relevant diagram. (8 marks)

This question paper consists of 4 questions on 5 printed pages.

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BBMF3123 INTERNATIONAL FINANCE

Question 1 (Continued)

(e) The U.S. and its top allies are imposing various economic sanctions on Russia including
assets freeze, currency convertibility, ban on new investments and ban on imports of Russian
oil and gas due to the Ukraine invasion.

Discuss the impact of the above sanctions on Russia’s economy and the country risk faced by
multinational corporations that are operating in Russia. (8 marks)

(f) On 18 February 2022, the value of Russian Ruble was USD0.013 and was worth USD0.0072
on 7 March 2022.

Calculate the percentage change in the value of Ruble against USD. (3 marks)
[Total: 40 marks]

This question paper consists of 4 questions on 5 printed pages.

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BBMF3123 INTERNATIONAL FINANCE

SECTION B (60 marks)

Answer ALL THREE (3) questions.

Question 2

(a) Jacy is a foreign exchange dealer in a bank in London. She has £1,000,000 (GBP) for a short-
term money market investment and is contemplating whether she should invest in British
pounds (GBP) or make a covered interest arbitrage investment in U.S. dollars (USD). Below
are the prevailing rates:

Current value of USD : GBP0.7815

6-month forward rate of USD : GBP0.7620
US interest rate : 3% per annum
British interest rate : 2% per annum

Required:

Assuming that no transaction costs or taxes exist, which currency would you recommend
Jacy to invest in? Support your answer with relevant calculations, including the arbitrage
profit/loss in British pound. (12 marks)

(b) “If interest rate parity (IRP) exists, then covered interest arbitrage (CIA) is not feasible.”

Do you agree with the statement above? Justify your answer. (6 marks)

(c) Explain the use of currency forward contracts in covered interest arbitrage. (2 marks)
[Total: 20 marks]

Question 3

FinGlove Bhd. is a medical gloves manufacturer located in Kuala Lumpur. It imports rubber from
Thailand and needs to pay THB2,000,000. The following quotations are provided by MBMB Bank in
Malaysia:

Value of U.S. dollar in Malaysian ringgit (USD/MYR) : 4.1520 - 1650

Value of Thai baht in Malaysian ringgit (THB/MYR) : 0.1400 - 1450

Required:

(a) Given the information above, compute the amount in Malaysian Ringgit that FinGlove Bhd.
needs to pay for the above purchase. (4 marks)

(b) Discuss TWO (2) types of risks faced by FinGlove when it imports rubber from Thailand.
(4 marks)

(c) Based on the above quotations provided by MBMB Bank, if FinGlove Bhd. has entered into a
Thai baht call option contract at an exercise price of MYR0.150, should the company
exercise the option contract or let it expire? Explain. (4 marks)

(d) Compute the bid and ask quotations for the value of U.S. dollar in Thai baht (USD/THB).
(8 marks)
[Total: 20 marks]
This question paper consists of 4 questions on 5 printed pages.
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BBMF3123 INTERNATIONAL FINANCE

Question 4

(a) Translation exposure is a risk that may cause a change in value in terms of a company’s
equities, assets, liabilities or income as a result of exchange rate changes.

Differentiate between the FOUR (4) translation methods to translate financial statements
from a host currency to the home currency. (12 marks)

(b) Illustrate how Malaysian Ringgit can be weakened through sterilised intervention. (8 marks)
[Total: 20 marks]

This question paper consists of 4 questions on 5 printed pages.