ST. JOSEPH’S COLLEGE OF COMMERCE (AUTONOMOUS) END SEMESTER EXAMINATION – OCTOBER 2011 B.COM /B.B.M.– V SEMESTER INTERNATIONAL FINANCE (FINANCE ELECTIVE P-I) Time: 3 Hours

Max. Marks: 100 SECTION- A

I) Answer the following questions.

(10x2 =20)

1. Explain the terms American quote and direct quote. 2. Define foreign exchange as per FEMA. 3. If the spot rate is USD/INR 45.50/45.55 and one month swap points are given as 20/30, how is the forward rate calculated and why is this mechanism followed? 4. GBP/USD Spot: 1.5677/1.5685 and GBP/USD 1 month Forward: 1.5575/1.5585. Calculate the forward premium/discount. What does the result indicate? 5. Which entities/funds are eligible to be registered as FIIs? 6. How can tax differentials be one of the factors to decide the feasibility of capital budgeting analysis between the parent company and its subsidiary? 7. What is Transaction Exposure? 8. What is Hedging? 9. How are Forwards & Futures different on the basis of Daily settlement? 10. Which is the largest exchange in the world for trading stock options?

SECTION -B II) Answer any FOUR questions.

(4x5=20)

11. What is the criterion for judging acceptability of investments when BCR and NPV are used? What is BCR when NPV=0? 12. Distinguish between forwards & Futures. 13. Write a note on evaluation of Depository receipts. 14. A bank issued a demand draft on Montreal for Canadian dollar 50,000 at CAD/INR 29.4850. However, after a few days the purchaser of the draft requested the bank to cancel it & repay the rupee equivalent to him. Assuming CAD is quoted in the Singapore Foreign Exchange market as USD/CAD 1.4541/4561 and in the interbank market USD/INR is 42.5275/5350, how much the customer will gain or lose on cancellation of the draft? Exchange margin on TT buying is 0.08%. 15. A trader writes a December put option with a strike price of $30. The price of the option is $4. Under what circumstances does the trader make a gain? What is the difference between entering into a long forward contract when the forward price is $50 and taking a long position in a call option with a strike price of $50? 1   

16. On 17th July USD is quoted in the interbank market as follows: USD/INR Spot

43.6025/6100

Spot/July

500/600

Spot August

1500/1600

In Singapore, Malaysian Ringits are quoted as follows: USD/MYR Spot

3.8012/59

1 Month

24/26

2 Months

48/50

The bank requires exchange margin of 0.10% on TT selling and 0.15% on bill selling. (i) Mr. D’Souza requests for a bank draft for MYR 5000 (ii) M/S Hightech Ltd desires to retire an import bill for MYR 15,000 Calculate the exchange rate to be quoted by the bank in each of the above cases. SECTION -C III) Answer any THREE questions.

(3x15=45)

17. Distinguish between Risk & Exposure. What are the different types of Foreign Exchange Exposures & how are they managed? 18. Should Multinational Capital Budgeting be conducted from the viewpoint of the subsidiary or the parent? Show the process of remitting subsidiary earnings to the parent diagrammatically. 19. (a) Give a note on ADRs and GDRs (b) You would like to speculate on the rise of a certain stock. The current price is INR 40 and a 3 month call with a strike price of INR 45 costs INR 7. You have INR 7000 to invest. Identify two alternative investment strategies, one in the stock and the other in an option on the stock. What are the potential gains or losses from each? 20. (a) What are the quotation conventions adopted by ACI? (b) Assume that the Canadian dollar’s spot rate is $0.85 and that the Canadian & US inflation rates are similar. Then assume that Canada experiences 4% inflation, while the US experiences 3% inflation. According to PPP, what will be the new value of the Canadian dollar after it adjusts to the inflationary changes? 21. Write a note for receiving FDI by an Indian company. Highlight the sectors where FDI is not allowed in India. Also depict diagrammatically registration process for FIIs.

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SECTION -D IV) Case Study – Compulsory question

(1x15=45)

Skates and wheels Corp. currently has no existing business in New Zealand but is considering establishing a subsidiary there. The following information has been gathered to assess this project: •

The initial investment required is $50 M in New Zealand dollars (NZ$). Given the existing spot rate of $0.50 per NZ$, the initial investment in US$ is $25M.

•

The project will be terminated at the end of Year 3 when the subsidiary will be sold.

•

The fixed costs such as overhead expenses are estimated to be NZ$ 6M per year.

•

The exchange rate of the NZ$ is expected to be $0.52 at the end of year 1, $ 0.54 at the end of year 2, and $ 0.56 at the end of year 3.

•

The NZ government will impose an income tax of 30% on income. In addition, it will impose a withholding tax of 10% on earnings remitted by the subsidiary. The US government will allow a tax credit on the remitted earnings and will not impose any additional taxes.

•

All cash flows received by the subsidiary are to be sent to the parent at the end of each year. The subsidiary will use its working capital to support ongoing operations.

•

The price, demand and variable cost of the product in NZ are as follows: Year

Price

Demand

Variable Cost

1

NZ$ 500

40,000 units

NZ$ 30

2

NZ$ 511

50,000 units

NZ$ 35

3

NZ$ 530

60,000 units

NZ$ 40

•

The plant & equipment are depreciated over 10 years using straight line method. Since the plant & equipment are initially valued at NZ$ 50M, the annual depreciation expense is NZ$ 5M.

•

In three years, the subsidiary is to be sold. When it sells the subsidiary, Skates & Wheels expects to receive NZ$ 52M after subtracting capital gains taxes. Assume that this amount is not subject to a withholding tax.

•

Skates & Wheels requires a 20% rate of return on the project. Determine the NPV of this project. Should Skates & Wheels accept this project?

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