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    August 2021 WKD

    Uploaded by

    aronkaruga0987

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    August 2021 WKD

    Uploaded by

    aronkaruga0987
    8 views3 pages

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    August 2021 Wkd

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    Copyright:

    © All Rights Reserved
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    8 views3 pages

    August 2021 WKD

    Uploaded by

    aronkaruga0987

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    of 3

    UNIVERSITY EXAMINATIONS

    COLLEGE OF BUSINESS
    ORDINARY EXAMINATION FOR BACHELOR OF COMMERCE
    FIN 2305: INTERNATIONAL FINANCE (WKD)
    DATE: AUGUST 2021 TIME: 2 HOURS

    INSTRUCTIONS: ANSWER ALL QUESTIONS

    QUESTION ONE (20 MARKS)


    a) Infosys is an importer/exporter of heavy machinery for a variety of industries. It is based
    in the UK but trades extensively with the USA. Assume that you are a newly appointed
    management accountant with Infosys. The company does not have a separate treasury
    function and it is part of your duties to assess and manage currency risks. You are
    concerned about the recent fluctuations in the exchange rate between US$ and sterling
    and are considering various methods of hedging the exchange risk involved. Assume it is
    now the end of March. The following transactions are expected on 30 th June

    Sales Receipts $450,000


    Purchases Payable $250,000
    Economic Data
     The spot rate of exchange is US$1.6540 – 1.6590
     The three-month forward rate that will apply for this contract is $1.6513
     Annual Interest rates for three months borrowing are: USA 6%, 9%
     Annual interest rates for 3 months lending rates are USA 4%, UK%
    Required
    a) Calculate the net sterling receipts that Infosys can expect from its transactions if the
    company hedges the exchange risk using each of the following alternatives;
    i. The forward foreign exchange market
    ii. The money market
    Accompany your calculations with brief explanations of your approach and recommend
    the most financially advantageous alternative for Infosys. Assume transaction costs would be
    0.2% of the US$ transaction value under either method, paid at the beginning of the transaction
    (i.e now)
    (10 Marks)
    b) Explain the factors the company should consider before deciding to hedge the risk using
    the foreign currency markets, and identify any alternative actions available to minimize
    risk (5 Marks)
    c) Discuss the causes of exchange rate fluctuations (5 Marks)

    QUESTION TWO (15 MARKS)


    a) The nature of economic theory dictates that one cannot benefit from the exchange rate
    market. Highlight three instances where it is possible to make gains from the market and
    state the discrepancy in each case (6 marks).
    b) Data relating to call options on two shares, A and B

    Calls
    A B
    Months to expiration 3 9
    Risk-free rate 10% 10%
    Standard deviation of stock returns 40% 40%
    Exercise price Sh.55 Sh.55
    Stock price Sh.50 Sh.50
    Required:
    i. Determine the value of call option A using the Black Scholes model.(4 marks)
    ii. Of the two call options, which one do you expect to have a higher price, why? (5
    marks)

    QUESTION THREE (15 MARKS)


    a) Liberalization and globalization has resulted in the rapid growth in international financial
    activities. The advent of E-commerce has also enabled companies to greatly expand their
    markets. Identify and elaborate THREE factors that complicate financial management in
    multinational firms (6 marks)
    b) You are the Chief Financial Officer of Avitex Ltd. The firm is looking to take advantage
    of arbitrage opportunities in the market and has the following option; Borrow Ksh. 5
    million at an interest rate of 12% annualized and invest the proceeds in Tanzania at an
    interest rate of 15%. The Tanzanian shilling is worth Ksh. 0.06 and is expected to be
    worth Ksh. 0.05 in three months’ time. Based on this information should Avitex Ltd
    borrow to invest in Tanzania? What would be the gain or loss in Kenya shillings (9
    marks)

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