BACHELOR IN BUSINESS ADMINISTRATION

BBCF4073 INTERNATIONAL FINANCE

ASSIGNMENT 1

PERSONAL PHOTO

PREPARED FOR
WAN MD AFNAN
PREPARED BY
[ JEGADESWARAAN A/L SARAVANAMUTTU-
20230501339 ]
SUBMISSION DATE
1st MARCH 2024
 Individual Assignment
[20%]

BBCF4073 – International Finance

INSTRUCTIONS:
1. Do ALL accordingly.
2. Your assignment should be typed neat on an A4 white paper using 1.5 spacing
between lines.
3. Font size is 11 and font face is Arial.
4. Paper margin (top, bottom, left and right) should be an inch.
5. Submission due date: 1ST MARCH 2024

QUESTION 1 (25 marks)

a) Define international finance

The study of monetary interactions between two or more countries is known as

international finance, commonly known as international macroeconomics. It focuses on
topics like foreign direct investment and currency exchange rates. International finance
is fundamentally the cross-border flow of capital, goods, services, and currencies. The
foreign exchange market is a crucial element of international finance, as it facilitates the
buying and selling of currencies. With daily transactions totalling trillions of dollars, this
market acts as the foundation for international trade and investment. For instance, to
complete a transaction involving the import of products from China, a US-based
corporation must use the foreign currency market to convert US dollars into Chinese
yuan.
 b) Briefly discuss the international financial environment with diagram.

As based on the diagram above, international finance refers to the financial interactions that
occur between countries, including cross-border trade, investment, and monetary transactions.
It encompasses a wide range of activities, from foreign exchange trading and international
banking to multinational corporate finance and sovereign borrowing.

The components and definitions within the realm of international finance:

1. Foreign Exchange Market (Forex):

 The forex market is where currencies are bought and sold, facilitating
international trade and investment.

 Exchange rates represent the value of one currency relative to another and are
determined by supply and demand dynamics, influenced by factors such as
interest rates, inflation, and geopolitical events.

2. International Trade:

 International trade involves the exchange of goods and services between

countries.

 Trade finance mechanisms, such as letters of credit and trade finance

instruments, facilitate transactions and mitigate risks for exporters and importers.
3. Foreign Direct Investment (FDI):

 FDI occurs when a company or individual invests in business operations or

assets in another country.

 FDI can take the form of greenfield investments (building new facilities), mergers
and acquisitions, or joint ventures.

4. International Capital Markets:

 International capital markets provide a platform for raising capital and investing
across borders.

 This includes stock markets, bond markets, and derivatives markets where
investors and issuers from different countries participate.

5. Multinational Corporate Finance:

 Multinational corporations (MNCs) engage in financial activities across multiple

countries, including managing foreign exchange risk, optimizing capital structure,
and accessing international funding sources.

 MNCs must navigate regulatory differences, tax considerations, and cultural

nuances in their financial operations.

6. Sovereign Finance:

 Sovereign finance pertains to the borrowing and lending activities of national

governments.

 Governments issue sovereign bonds to raise funds for infrastructure projects,

budget deficits, or other financing needs, often in international capital markets.

7. International Financial Institutions:

 International financial institutions, such as the International Monetary Fund (IMF),

World Bank, and regional development banks, provide financial assistance,
policy advice, and technical support to member countries.

 They play crucial roles in stabilizing economies, promoting development, and

addressing global financial challenges.
 8. Cross-Border Risk Management:

 International finance involves managing various risks inherent in cross-border

transactions, including currency risk, political risk, sovereign risk, and legal risk.

 Hedging strategies, diversification, and risk assessment frameworks are

employed to mitigate these risks.

c. Explain International Business Methods.

i. International Trade

International trade encompasses the transfer of goods and services between different
nations, constituting a longstanding and uncomplicated approach to conducting
international business. Corporations participate in international trade to capitalize on
their comparative advantages, gain access to new markets, and diversify their sources
of revenue. International trade enables companies to exploit their expertise in
manufacturing specific products or providing particular services, and in return, acquire
goods that may not be readily accessible or cost-efficient within their domestic market.
For instance, a clothing retailer situated in the United States may import textiles from
China due to lower production expenses, while simultaneously exporting American-
made apparel to European markets. For example, the multinational electronics
companies, like Samsung, partake in international trade by exporting smartphones
manufactured in South Korea to numerous countries worldwide. By employing strategic
distribution channels and establishing trade agreements, Samsung successfully
infiltrates global markets and competes with both local and international competitors.
 ii. Licensing
A business arrangement known as licensing occurs when a firm (the licensor) gives
permission to another organization (the licensee) to utilize its intellectual property,
including technology, trademarks, and patents, in exchange for royalties or other
payments. It enables businesses to maximize the profits from their intellectual
property while lowering the risks and expenses of global expansion. By utilizing the
resources and connections of local partners, licensing provides businesses with a
low-risk way to enter international markets. By gaining access to well-known brands,
cutting-edge technologies, or successful business strategies, licensees can quickly
enter new markets and take advantage of customer demand. For example, Apple
granting individual computer users a license allowing them to use the Mac operating
system and, Spotify granting subscribers a license to listen to music on the Spotify
network.

iii. Franchising
Franchising involves a business agreement that includes the license of a trademark
and provides for the overall control over how the underlying franchised business is
operated. The agreement that creates a franchise relationship is the franchise
agreement and the parties to a franchise agreement are the franchisor and the
franchisee. Unlike a license agreement, franchise agreements are intended to
duplicate a brand, its business model, and its on-going operations. Franchise
agreements require uniformity and within a franchise agreement, unlike a license
agreement, the franchisor is granted extensive control over how the underlying
business is operated. For example, restaurants like McDonalds, Starbucks and so
on.
QUESTION 2 (15 marks)
The balance of payments (BoP) records all economic transactions in goods, services, and
assets of the country with the rest of the world for a specified time period, usually a year. In
simple terms, it is a systematic accounting balance sheet of the country and includes both debit
and credit transactions. Based on this statement, define and give TWO (2) examples of:-

a) Balance of payment

A trade surplus occurs when a country's exports of goods and services exceed its
imports. For instance, let's consider Country A. In a given year, Country A exported $500
billion worth of goods and services, while it imported only $400 billion worth of goods
and services. As a result, Country A has a trade surplus of $100 billion. This surplus
contributes to a positive balance of payments, as it represents an inflow of funds into the

country. Another example is, Foreign direct investment refers to when individuals or
companies from one country invest in businesses or assets located in another country.
Let's say that Country B receives $1 billion in FDI from foreign investors during a
particular year. This inflow of foreign capital is recorded as a credit transaction in the
capital account of Country B's balance of payments. It reflects an increase in the
country's assets, contributing to a positive balance of payments.

b) Current Account

When a country exports goods, such as automobiles, electronics, or agricultural products,

the value of these exports contributes to the current account. For instance, Country C
exported $200 billion worth of goods, including cars and electronics, in a given year. This
export value is recorded as a credit transaction in Country C's current account. It represents
an inflow of funds from the rest of the world and contributes to a positive current account
balance. Tourism is an important component of the current account, as it involves the
provision of services to foreign visitors. Let's consider Country D, which attracts a significant
number of tourists. In a particular year, Country D received $50 billion in tourism receipts
from international visitors. These receipts, representing the payments made by tourists for
accommodation, food, transportation, and other services, are recorded as a credit
transaction in Country D's current account. It contributes to a positive current account
balance.
 c) Capital Account

A capital account is used in accounting to record individual ownership rights of the owners of a
company. Foreign portfolio investment refers to investments in financial assets, such as stocks
and bonds, of a country by foreign individuals or institutions. For example, Country E receives 2
billion in foreign portfolio investment during a specified period. This inflow of funds represents a
credit transaction in the capital account of Country E's balance of payments, as it increases the

country's foreign assets. Another example, debt forgiveness, which means sometimes,
countries may receive debt forgiveness from foreign creditors, which means that a portion or the
entirety of their outstanding debts is cancelled or reduced. Let's say Country F had a significant
external debt, and as part of a debt relief program, 1 billion of its debt was forgiven by foreign
creditors. This debt forgiveness is recorded as a credit transaction in Country F's capital
account, reflecting an increase in the country's assets and contributing to a positive balance of
payments in the capital account.
QUESTION 3 (25 Marks)
a) Calculate the one year forward rate if euro spot rate is $1.80 and if one year forward rate
has a forward premium of 4 percent.
(5 Marks)
Spot rate + Forward premium
$1.80 + (1.80 X 4%)
= 1.80 + 0.0720
= 1.870

b) Calculate the one year forward rate if CAD spot rate is $0.80 and if one year forward rate
has a forward premium of 4 percent.
(5 Marks)
Spot rate + Forward premium

= 0.80 + (0.80 X 4%)

= 0.80 + 0.0320
=0.832

c) If the AUD’s one year forward rate is quoted at $0.90 and the AUD’s spot rate is quoted
at $0.85, find the forward premium.
(5 Marks).
(Forward rate-Spot rate/Spot rate)*100

= $0.90 - $0.85 / $0.85) * 100

= 5.88%
 d) Refer the information given below, and find the forward rate with justification whether it’s
premium or discount.

Type of Value Maturity Forward rate premium/discount for euro

exchange rate

Spot rate $1.5500

30-day forward $1.5490 30 days - 0.72%

rate

90-day forward $1.5410 90 days - 2.08%

rate

180-day forward $1.5397 180 days - 0.16%

rate

(Forward rate-Spot rate/Spot rate) *360/30*100

= ($1.5490-$1.5500/$1.5500) *360/30*100
= - 0.0006* 360/30*100
= - 0.72%
Forward discount on 90 day forward rate
= (Forward rate-Spot rate/Spot rate)*360/90*100
= (1.5410 – 1.5490/1.5490)*360/90*100
= - 2.08%
Forward discount on 180-day forward rate
= (Forward rate-Spot rate/Spot rate) *360/180*100
= (1.5397 – 1.5410/1.5410) *360/180 *100
= - 0.16%