Tribhuvan University: Questions

TRIBHUVAN UNIVERSITY Full Marks: 50
SCHOOL OF MANAGEMENT Pass Marks: 30

Mid Term Examination - 2021 Time: 2 Hrs
MBA GLM /Third Semester/ International Finance
Candidates are required to answer all the questions in their own words as far as practicable. Figures
in brackets indicate full marks.
Group A: Case Analysis

1. Read out the following case carefully and answer the questions at the end. 3X 10=30
Shrewsbury Herbal Products, located in central England close to the Welsh border, is an old-line
producer of herbal teas, seasonings, and medicines. Its products are marketed all over the United
Kingdom and in many parts of continental Europe as well.
Shrewsbury Herbal generally invoices in British pound sterling when it sells to foreign customers
in order to guard against adverse exchange rate changes. Nevertheless, it has just received an order
from a large wholesaler in central France for £320,000 of its products, conditional upon delivery
being made in three months’ time and the order invoiced in euros.
Shrewsbury’s controller, Elton Peters, is concerned with whether the pound will appreciate versus
the euro over the next three months, thus eliminating all or most of the profit when the euro
receivable is paid. He thinks this an unlikely possibility, but he decides to contact the firm’s banker
for suggestions about hedging the exchange rate exposure.
Mr. Peters learns from the banker that the current spot exchange rate in €/£ is €1.4537; thus the
invoice amount should be €465,184. Mr. Peters also learns that the three-month forward rates for
the pound and the euro versus the U.S. dollar are $1.8990/£1.00 and $1.3154/€1.00, respectively.
The banker offers to set up a forward hedge for selling the euro receivable for pound sterling based
on the €/£ forward cross-exchange rate implicit in the forward rates against the dollar.
Questions
a) Discuss some of the ways Mr. Peters can employ to hedge the exposure?
b) What would be the €/£ forward cross-exchange rate?
c) What would you do if you were Mr. Peters?
Group B “Critical Analysis Questions”
Attempt any two questions [2 X 10]

2. a) Doug Bernard specializes in cross-rate arbitrage. He notices the following quotes:
Swiss franc/dollar = SFr1.5971/$
Australian dollar/U.S. dollar = A$1.8215/$
Australian dollar/Swiss franc = A$1.1440/SFr
Ignoring transaction costs, does Doug Bernard have an arbitrage opportunity based on
these quotes? If there is an arbitrage opportunity, what steps would he take to make an
arbitrage profit, and how much would he profit if he has $1,000,000 available for this
purpose?
b) If the 30-day yen interest rate is 3% p.a., and the 30-day euro interest rate is 5% p.a., is
there a forward premium or discount on the euro in terms of the yen? What is the
magnitude of the forward premium or discount? What theory is implied in your
calculation?
3. a) Currently, the spot exchange rate is $1.50/£ and the three-month forward exchange rate is
$1.52/£. The three-month interest rate is 8.0 percent per annum in the U.S. and 5.8 percent
per annum in the U.K. Assume that you can borrow as much as $1,500,000 or £1,000,000.
Determine whether interest rate parity is currently holding. If IRP is not holding, how would
you carry out covered interest arbitrage?
b) IBM purchased computer chips from NEC, a Japanese electronics concern, and was billed
¥250 million payable in three months. Currently, the spot exchange rate is ¥105/$ and the
three-month forward rate is ¥100/$. The three-month money market interest rate is 8 percent
per annum in the United States and 7 percent per annum in Japan. The management of IBM
decided to use a money market hedge to deal with this yen account payable. Explain the
process of a money market hedge and compute the dollar cost of meeting the yen obligation.
4. What are the major accounts of the balance of payments, and what transactions are recorded
on each account? Why is it important for an international manager to understand the balance
of payments?

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TRIBHUVAN UNIVERSITY Full Marks: 50

SCHOOL OF MANAGEMENT Pass Marks: 30

MBA GLM /Third Semester/ International Finance

Group A: Case Analysis

Attempt any two questions [2 X 10]

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