NARSEE MONJEE INSTITUTE OF MANAGEMENT STUDIES (NMIMS)

GLOBAL ACCESS SCHOOL FOR CONTINUING EDUCATION

(NGA-SCE)

INTERNAL ASSIGNMENT

COURSE: INTERNATIONAL FINANCE

APPLICABLE FOR DECEMBER 2022 EXAMINATION
NMIMS GLOBAL ACCESS SCHOOL FOR CONTINUING EDUCATION (NGA-
SCE)
COURSE: INTERNATIONAL FINANCE
INTERNAL ASSIGNMENT APPLICABLE FOR DECEMBER 2022
EXAMINATION

QUES 1.) An Indian company is in the process to acquire land oversees for setting a
manufacturing plant in Europe. This helps in the reduction of company’s production cost
by 30%. For this, company needs an investment of USD 50 million. Company has
approached an ABV Bank to suggest a plan for capital borrowing at least for the time
frame for five to six years. Assume yourself in a role of senior manager of ABV Bank.
Suggest the mix of different international sources from where company can raise the
capital. Make the necessary assumptions, if required.
(10 Marks)
ANSW 1.) VARIOUS SOURCES FROM WHERE A COMPANY CAN RAISE
FINANCE
There are various sources from where a company can raise the capital which are
enumerated under various headings as follows-
a) ISSUE OF SHARES
Involve the public issue of equity and preference shares in the stock exchange.
Issuing shares is the most common method of raising long-term capital because there
are various many investors who are ready to invest in the capital market. Therefore,
shares are used to finance projects having long gestation period. The issue of shares is
the procedure in which enterprises allocate new shares to the shareholders.
Shareholders can be either corporates or individuals. The enterprise follows the rules
stipulated by Companies Act 2013 while circulating the shares. The Issue of
Prospectus, Receiving Applications, Allocation of Shares are 3 key fundamental steps
of the process of issuing the shares.

b) ISSUE OF DEBENTURES
Involve the collection of funds by issuing debentures in the stock exchange. When an
organization issues debentures, it needs to pay a fixed rate of interest to debenture
holders. The issue of Debentures seems to be much alike to the issue of shares by an
enterprise. Here, the money can be accumulated either in lump sum or in instalments.
The accounting treatment of the 2 is quite alike. Now, the debentures can be either
issued for some other considerations or cash. Often issue or circulation of debentures
is done as collateral security.

c) TERM LOANS
Refers to the funds that are raised from financial institutions for financing long-term
projects. The rate of interest on term loans is higher than the rate of interest on
debentures. A term loan provides borrowers with a lump sum of cash upfront in
 exchange for specific borrowing terms. Term loans are normally meant for
established small businesses with sound financial statements. In exchange for a
specified amount of cash, the borrower agrees to a certain repayment schedule with a
fixed or floating interest rate. Term loans may require substantial down payments to
reduce the payment amounts and the total cost of the loan.

d) FUND FROM OPERATIONS

Refers to the fund raised by the organization’s own operations. It is the accumulated
profit of an organization; therefore, can be used to finance various short-term and
long term projects. Funds from operations refers to the figure used by real estate
investment trusts (REITs) to define the cash flow from their operations. Real estate
companies use FFO as a measurement of operating performance.
FFO is calculated by adding depreciation, amortization and losses on sales of assets to
earnings and then subtracting any gains on sales of assets and any interest income. It
is sometimes quoted on a per-share basis. The FFO per share ratio should be used in
lieu of earnings per share (EPS) when evaluating REITs and other similar investment
trusts.

e) SALE OF FIXED ASSETS

Helps in generating funds by selling fixed assets, such as land, buildings, plants, and
machineries to finance short-term and long term projects. However, the usage of this
method may hamper the goodwill and creditworthiness of the organization. When a
fixed asset or plant asset is sold, there are several things that must take place: The
fixed asset's depreciation expense must be recorded up to the date of the sale. The
fixed asset's cost and the updated accumulated depreciation must be removed. The
cash received must be recorded.

f) SALE OF CURRENT ASSETS

Involves selling assets, such as bills receivables and stocks. These assets are generally
sold by an organization to meet short-term fund requirements. The sale to current
assets ratio is a ratio of the net sales that are being made to the current assets of a
business. It is used to determine how much a business is using its assets to generate
funds. The formula for the sales to current assets ratio requires two major variables:
current assets and net sales.

g) DECREASE IN WORKING CAPITAL

Refers to the reduction in the working capital either by decreasing current liabilities
or increasing current assets. The increase in current assets or decrease in current
liabilities provides funds for financing short-term projects. If a company's working
capital ratio falls below one, it has a negative cash flow, meaning its current assets are
less than its liabilities. The company cannot cover its debts with its current working
capital. In this situation, a company is likely to have difficulty paying back its creditor

h) RECEIPT OF INTEREST, DIVIDEND, AND REFUND OF TAX

Helps in financing short term projects or meeting the working capital needs. This type
of funds does not create any liability, as these are income of the organizations. Capital
 budgeting is performed by using various techniques. These techniques help in
measuring the actual cost and returns generated from a project and comparing
multiple projects with respect to their profitability. However, the actual cost and
returns of a project cannot be forecasted without understanding the concept of TVM.
Interest Receipt means any amounts other than Principal Receipts or Extraordinary
Interest Amounts that are actually received or recovered by or on behalf of the Issuer
in respect of the payments made pursuant to the Repackaged Loan Agreement on a
Loan Interest Payment Date. Dividend refers to a reward, cash or otherwise, that a
company gives to its shareholders. Dividends can be issued in various forms, such as
cash payment, stocks or any other form. A company's dividend is decided by its board
of directors and it requires the shareholders' approval. A tax refund is a
reimbursement to a taxpayer for any excess amount paid to the federal government or
a state government. While taxpayers tend to look at a refund as a bonus or a stroke of
luck, it often represents what is essentially an interest-free loan that the taxpayer
made to the government.

QUES 2.) A forex trader from Mumbai collects the below information regarding the
exchange rate between INR and EURO:
Bid Price: INR / EURO = 80.8300
Ask Price: INR / EURO = 80.8400
You are required to help him with the below questions he has:
(a) What is the direct exchange rate of INR-EURO for the trader?
(b) What is the indirect exchange rate of INR-EURO for the trader?
(c) What is a cross rate? If the bid and ask rate for EUR-USD are available as EUR
1.0200-1.0300/USD, what would be the bid-ask rates for INR/USD, using the cross- rate
method. :
(10 Marks)

ANSW 2.) (a) DIRECT EXCHANGE RATE

A direct quote is a foreign exchange rate quoted in fixed units of foreign currency in
variable amounts of the domestic currency. In other words, a direct currency quote asks
what amount of domestic currency is needed to buy one unit of the foreign currency—
most commonly the U.S. dollar (USD) in forex markets. In a direct quote, the foreign
currency is the base currency, while the domestic currency is the counter currency or
quote currency.
 A direct quote is a currency pair quote where the foreign currency is expressed in per-unit
terms of the domestic currency.
 A direct quote gives you the quantity of local currency needed to purchase one unit of
foreign currency.
 Because the U.S. dollar is the most traded currency in the world, the USD generally
serves as the base currency in most direct quotes. Some major exceptions to this rule
include the British pound and the euro. A direct quote can be compared to an indirect
quote as its inverse, or by the following expression:

DQ = 1/IQ
Where:

DQ = Direct Quote

IQ = Indirect Quote

In the given case of this question as we know that bid which means selling rate is given
and buy which means purchasing rate is given, so, direct exchange rate for the same is
80.8400 of INR / EURO for the trader. This will be the rate at which the units of the
domestic currency which is INR will be utilized to buy 1 unit of the foreign currency.

(b) INDIRECT EXCHANGE RATE

An indirect quote in the foreign exchange markets expresses the amount of foreign
currency required to buy or sell one unit of the domestic currency. An indirect quote is
also known as a “quantity quotation,” since it expresses the quantity of foreign currency
required to buy a unit of the domestic currency.
An indirect quote is also known as a “quantity quotation,” since it expresses the quantity
of foreign currency required to buy units of the domestic currency. In other words, the
domestic currency is the base currency in an indirect quote, while the foreign currency is
the counter currency.

 An indirect quote in the foreign exchange markets expresses the amount of foreign
currency required to buy or sell one unit of the domestic currency.
 An indirect quote is also known as a “quantity quotation,” since it expresses the quantity
of foreign currency required to buy a unit of the domestic currency.
 The opposite of an indirect quote is a direct quote which expresses the price of one unit
of a foreign currency in terms of variable number of units of the domestic currency.

The indirect exchange rate refers to the rate at which the units of foreign currency will be
utilized to buy 1 unit of foreign currency which is 80.8300. Therefore this is the indirect
rate of INR / USD.
 (c) CROSS RATE
A cross rate is a foreign currency exchange transaction between two currencies that are
both valued against a third currency. In the foreign currency exchange markets, the U.S.
dollar is the currency that is usually used to establish the values of the pair being
exchanged.

 A cross rate by definition may be any exchange of any two currencies that are not the
official currency of the country in which the quote is published.
 In practice, any currency exchange in which neither of the currencies is the U.S. dollar is
considered a cross rate.
 One of the most common cross currency pairs is the euro and the Japanese yen.

Bid-Ask Spread = Ask – Bid * 100

Ask

= 80.8400 – 80.8300 * 100

80.8400

= 0.0100 *100
80.8400

= 0.0123%

CROSS RATE

In the given case, the cross rate is to be computed with bid and ask as both bid rates and
ask rates are given. Therefore so calculate the same following process is followed-

INR / EUR 80.8300/80.8400

EUR / USD 1.0200 / 1.0300

Assign names as a,b,c,d to various values as follows

a b
INR / EUR 80.8300/80.8400
c d
EUR / USD 1.0200 / 1.0300

INR / USD ac / bd

INR / USD 80.8300*1.0200 / 80.8400*1.0300

Therefore,

Cross rate = INR * EUR

EUR USD

= INR * EUR
EUR USD

= INR
USD

So, after solving the same we get –

INR / EUR 80.8300/80.8400

EUR / USD 1.0200 / 1.0300

INR / USD 80.8300*1.0200 / 80.8400*1.0300

INR / USD = 82.4466 / 83.2652

QUES 3.) A US company has exported goods worth Eur 100 million, receivable after 3
months, to a Germany based company. The forward rates are expressed as: EUR-USD
Spot 1.0973 – 1.0974 Three months Forward 75.5 – 76.0
a. Is the EUR quoting at discount or premium to the USD? What is the forward rate
applicable at which the US company will enter into a forward contract?
(5 Marks)
b. Suppose USD is depreciating. Should the US exporter go for hedging the risk? If he
hedges the risk with a forward contract and the actual spot rate after 3 months turns out to
be the same as the currency spot rate, what is his notional profit/ loss?
(5 Marks)
Answ 3.) EUR 100 Million receivable 3 months to Germany based Company.
a) As per the details given in the question, it is the case of
Both spot and forward rate determined by the demand and supply forces.

If F(A/B) > S(A/B) = B is at forward premium &

A is at forward discount

If F(A/B) < S(A/B) = B is at forward discount &

A is at forward premium

Therefore, as per the given case in the question,

EUR is the Price currency

USD is the base currency

Spot rate is EUR-USD spot 1.0983-1.0974

3 months forward rate 75.5-76.0

F(75.5 / 76.0) > S(1.0983 / 1.0974)

Base currency USD is at forward premium
Price currency EUR is at forward discount

The forward rate is EUR-USD (1.0983-75.5 /100)(1.0974-76.0/100) at which the US

company entered into the forward contract with the Germany based company.

3 months forward rate 1.0908- 1.0898

b) FC receivable (exporter) afraid of

FC (fall)  Hedge yourself by
Selling FC forward i.e. contracting to sell FC at a later date
Notional Profit or Loss is an estimate of earnings primarily used in the building and
construction industry. It is used to smooth out fluctuations in reported revenue due to
contracts that take a long time to complete.
Notional loss USD 100 Million * (1.0983 – 1.0908) = EUR 0.75

However, if the exchange rate has been adversely affected, for example 1.15Million
and the company has not hedged the risk, its export proceeds would have been lesser
by :

Notional profit = 100 Million * (1.15-1.0983) = EUR 5.17

In this case, by hedging the risk, the company would have made a notional profit of
EUR 5.17.

That is the reason why it is always prudent for corporates to hedge their forex
exposure and not speculate on currency movements.