Prof. Dr.

Ursula Walther
Winter 2023/24

International Corporate Finance

Examples of Examination Questions

1. Introduction – International Corporate Finance

 Why is corporate governance relevant for corporate finance? Which are core aspects (see
e.g. OECD pinciples)
 Name several motives for international activities of companies.
 Explain the theory of comparative advantage. What are key limitations?
 Given an example like on overheads 26/27 (or the first exercise), explain why there is an
advantage for both countries.
 Example and questions like the Zoom-Exercises on Comparative Advantage
 Given an exercise (with solution) like “Indian investment returns”, “Americo”, “Pacific
Precisions”, or “Peng Plasma Pricing”, explain the role and relevance of exchange rate
changes.
Note: exercise “Fashion Acquisitions” is not exam relevant.

2. Global Financial Environment and Foreign Exchange Theory

Balance of Payment
 Provided a country’s BOP, interpret the main accounts (CA, FA, FXB, Errors) with
respect to supply and demand of the country’s currency. Which development of the
exchange rate would you expect based on this information?
 When and why is a current account deficit problematic for a country?
Note: Booking or classifying transactions is not exam relevant

 Explain “the J-Curve Adjustment Path” (either based on overhead 61/62 or on data as in
the respective exercise).

International Monetary System

 What is a country’s monetary base M0?
 Explain how commercial banks influence the money supply and the role of the money
multiplier.
 How can central banks control the money supply?
 Zoom-Exercises “Money and Money Supply”
 Shortly explain (one of) the following exchange rate regimes: hard peg, currency board,
crawling peg, free float.
 Why/When is defending a fixed exchange rate difficult (or impossible) for a country?
 How are defending a fixed exchange rate and money supply related?
 Explain the attributes of an ideal currency and the “impossible trinity”.

International Parity Conditions

 Explain the concept of absolute Purchasing Power Parity. What are arguments against it?
 What is different in relative PPP compared to absolute PPP?

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 Given the current exchange rate and inflation rates, determine the PPP implied exchange
rate in one year (see Zoom exercises).
 Explain the role of exchange rate pass-through for relative PPP.
 Explain interest rate parity (IRP) based on an example like on overhead 115.
 Given the current exchange rate and interest rates, determine the IRP implied exchange
rate in one year (see Zoom exercises).
 What does it mean that the forward rate is an “unbiased predictor of the future spot rate”?
(you may use the figure on overhead 119)
 Explain Covered Interest Rate Arbitrage based on an example like on overhead 121 or in
exercise “Akira Numata” or “Statoil of Norway”.
 Differentiate covered and uncovered interest rate arbitrage.
 Explain Uncovered Interest Rate Arbitrage based on an example like on overhead 123 or
in exercise “Akira Numata”.
 Explain the role of parity conditions in the case study “Groupe Ariel S.A.”. (When) is it
relevant which currency to use in the project evaluation.
 What is the Fisher effect and the international Fisher Effect?

3. Foreign Exchange Exposure, Instruments, and Hedging

 Differentiate transaction exposure, translation exposure, and operating exposure.

 Remember the case studies “Baker Adhesives” and “Groupe Ariel S.A.”. Which type of
foreign exchange rate exposure is relevant in these cases?
 Name and shortly explain some basic variants to manage transaction exposure.
 Name and shortly explain some basic variants to manage operating exposure.

Note: Section 3.2 “The Foreign Exchange Market” is not exam relevant.

 Explain a Currency Forward based on an example like on overheads 21, 22, and 23.
 Given an exercise similar to the case study Baker Adhesives,
o explain how to determine the PV of the three possibilities no hedge, forward
hedge, money market hedge.
o when provided the solution: explain.
o comment on the hedging cost
o Is the exchange rate risk completely eliminated?
o Which further possibilities may a company use to manage the exchange rate risk?
 Given the necessary data of an existing forward contract, explain how to determine the
current value (or: explain a provided calculation)
 When provided an exercise like “Gnome Capital” (with solution): explain.

Note: exercises: “Kona Macadamia”, “Hindustan Lever”, “Seattle Scientific”, and “Chronos
Time Pieces”, “Risk Sharing at Harley Davidson” are not exam relevant.

 Given the relevant data (as in exercise “Currency Swap – Delphi”): describe the swap’s
cash flows
 How can we find fair conditions for a currency swap?
 Given the data of an existing swap and the necessary market data, explain how to find the
swap’s fair value (alternatively: when provided the calculation: explain)

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 Given the situation of a company with an existing exposure (inflows or outflows): specify
the swap agreement the company could use for hedging the exposure. Describe the swap’s
cash flows.
 Given a situation like in the “MedStat” example: Specify the swap agreements for hedging
interest risk, currency risk, or both.
 Provided an example like in “Currency Swap – NZA”. Explain the solution.

 Explain a currency option (Call or Put, Long or Short) based on the respective P&L
profile (see overhead 52)
 Explain the figure on overhead 53 “Price of a call option”. Explain the most important
influences on the time value.
 Provided one of the examples on overheads 59, 60. 61, and 62:
o Explain how to hedge the exposure using an option.
o Explain a provided Profit&Loss figure
 Given the exercise “Currency Options (2)” with a Profit&Loss figure. Explain the
different positions.
 Given an exercise like “Micca Metals”:
o explain how to compare the hedging alternatives.
o provided the calculations: explain.

Note: The exercise “Risk Sharing at Harley Davidson” is not exam relevant

4. International Investment and Financing

 Why do we have to differentiate between a domestic and an international CAPM (and

WACC)? How do you determine which one to use?
 Remember the case study “AES”. Why was reflecting the project risks appropriately
important for the new capital budgeting system?
 What is market segmentation and what are possible causes of it?
Hint: Remember the mini case “Novo Industries”
 Given the example “Semen Project”:
o Explain the calculations in the project view.
o Explain the calculations in the parent’s view.
 Given the exercise “Philadelphia composite” (or a very similar example, with solution):
explain the solution.
 Given the exercise “Tostadas de Baja” (or a very similar example, with solution): explain
the solution.

Note: exercises Cost of Capital (Tata, Interpretation, Cargill, Stevenson Kwo) are not exam
relevant.

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