question paper unsolved -international finance

International FinanceApril – 2002

60 Marks

Note:(1) Section I is compulsory.(2) Attempt any three questions from Section IL(3) Both the sections be tied together.(4) Use of simple calculators permitted.(5) Figures to the right indicate full marks

Section — I

(1) Explain the following concepts

(a) Gold specie standard.(b) Overall balance.(c) American quotes.(d) Yankee bonds.(e) ADR(f) Arbitrage.(g) Crawling peg.

(2) Following are some of the imaginary transactions which would enable you to form a B.O.P. statement of India. Organize a BOP statement and provide sufficient information for the related issues.

(All figures are in Rs. and in mns.)

(Conversion rate of INR/DEM = 12, INR/$ 43)

(All transactions are pertaining toa particular year only).

(a) An Indian company of XYZ corporation sells a part of its production to France for Rs.1,000 million.

(b) Government .of India makes a gift of Rs. 100 million to a neighboring country and subsequently that country buys medicines, food etc. for the full amount from India.

(c) Few Indian Companies buy machines for Rs.1,500 million and in the payment agreement 60 per cent is asked to be paid immediately and the remaining in three years.

(d) Foreign tourists during the period in question bought handicrafts worth Rs.50million to carry with them.

(e) The value of transportation and insurance is given as 5% and 25% respectively of the imports.

(f) An individual exporter exports goods worth Rs.50 million to his US counterpart. The payment will be effected by crediting the bank account which the Indian exports holds in a US bank.

(g) A bank in India purchases securities issued by the Government of France valued at 200 million US $ and pays to them by drawing an account it has with its correspondent bank in France.

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(h) A German charity sends a cheque for DEM 50,000 to Red Cross India as a

TY BMS – Sem VI Page 1 of 3 International Finance

donation.


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(i) An America tour operator arranges a tour of group of Americans to India and sends a cheque of US $ 2,50,000.

(j) A Foreign branch of an Indian company remitted its profit worth Rs.50 mn and five Indian companies have to pay interest and dividend to the tune of Rs. 75 mn.

(k) Indian Government received funds worth Rs.125 mn for the maintenance of foreign embassies consulates etc.

(l) Government of India carried out a temporary sale of gold from RBI to the bank of England to the tune of Rs.150 mn.

(m) Domestically mined gold is sold to RBI to the tune of Rs.120 mm

(n) Retirement of SDRs firm a total allocation of Rs. 100 mn subjected to the rules of withdrawal.

(o) Cash remittances by Indian nationals abroad to the tune of Rs.100 mn.

(p) Consultancy and other services acquired from abroad for Rs. 150mn and the same services extended by India for Rs.75mn.

(q) IBM sets up a subsidiary in Bangalore worth Rs. 800 mn. and TATA’s set up a production unit in Nigeria for Rs.70 mn.

(r) Commercial borrowings and commercial lendings, both long term, are Rs. 300mn. and Rs.100 mn respectively.

(s) On the basis of the above data illustrate the ‘basic balance’ and the current account balance.

(t) How is the accounting balance maintained?



60 Marks

Section — II

(3) Discuss the ‘exposure’ and ‘risk’ occurring due to changes in:(a) Interest rates(b) Exchange rates.

(4) Examine the different instruments available with a corporate body in India to raise funds abroad.

(5)(a) Examine various aspects of EMU?(b) The following quotes are obtained in New York:

$/£ 1.5275/85 SFr/$ 1.5530/35(i) What do you expect for SFr/ £ spot in London.(ii) If a London Bank quotes 2.3730/40, can you make arbitrage profits? If so, how?

(6)(a) Briefly discuss the evolution of Euro markets.(b) The following quotes are available in Amsterdam:

$/DG Spot : 0.5875/85 1—month : 12/18 2—month : 15/25 3—month : 20/30

(i) Calculate the outright forwards.(ii) Indicate their spreads.

(7)(a) Write a note on MICA.

(b) Exchange rates: Can $ 0.665 per DM (spot) Can $ 0.670 per DM (3 months)

Interest rates: DM 7 per cent per annumCan $9 per cent per annum

Calculate the arbitrage gain possible from the above data.

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60 Marks

Note:(1) Section 1 is compulsory.(2) Attempt any three questions from Section II.(3) Figures to the right indicate full marks to questions/sub-questions.(4) Use of simple calculators permitted.(5) Both the sections be tied together.

Section — I


(a) Translation Exposure.(b) Dirty Float(c) Put Option.(d) Foreign Aid.(e) Samurai Bond.(f) Direct Quote.(g) Balance of Visible Trade.

(2) Case Study:How much is enough and is economic growth being sacrificed for the

“comfort” of accumulating foreign exchange reserves? A sharply defined debate on

these two questions facing the forex managers was kicked off here on Friday by

Reserve Bank of India Deputy Governor Shri. Yaga Venugopal Reddy, with opinion

divided among economists on whether the central bank should continue to

accumulate reserves or use them to stimulate growth.

Defining “comfort” in a variety of ways, Dr. Reddy zeroed in on “the stability of

financial markets” and the assurance of external confidence as the driving

elements defining the country’s forex management. In a world of liberal flows and

globalization of financial markets, it is no longer import cover that defines forex

adequacy but the insurance against risk, the assurance of stability, the management

of “lumpiness” in the demand and supply of currency, geopolitical and strategic

factors and so on which define the “adequacy” of reserves, he asserted.

Several economists who participated in the debate argued that the

government and RBI should worry less about accumulating reserves and utilize

them to generate higher growth. Chairing the meeting, former finance minister Shri

P. Chidambaram said RBI had initiated an important debate which must be joined

by experts and policymakers.

When the level of forex reserves crossed the $50 billion mark earlier this

year, several economists criticized the RBI for continuing to stock forex and not

casing up fast enough on capital account and trade liberalization. Use the money to

stimulate growth said Professor Deepak Lal, estimating that India may have lost

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60 Marksanything between 3 to 5 percentage points of growth during the second half of the

1990s with the policy of reserve build up.

In the face of such damning numbers, Dr. Reddy was not at all defensive.

Yes, he conceded, there are political and institutional factors at play which prevent

the RBI from being more pro-active in letting reserves be drawn down. After all, the

RBI does not any longer look at only the import cover that reserves afford. More

importantly, forex reserves are not maintained for the sake of the cash alone,

though there is a precautionary motive in maintaining adequate reserves. Nor are

they maintained to earn revenues, though there is some income that accrues from

such reserves. But they are also maintained, and increasingly so, to impart stability

to markets and boost investor confidence as well as general confidence in the

sovereign.

Given the fact that Brazil saw its whopping $80 bn reserve dwindle down in

days and several other countries have had to fight rearguard battles to defend their

currencies and reserves, an economy like India, with its political, institutional

and infrastructural rigidities, can ill-afford to run the risk of letting reserves be

whittled down by the play of speculative market forces in the forex market. Hence,

a bit of considered management is a good option and Dr. Reddy seemed to

receive the endorsement of most of his New Delhi audience as well as the many

experienced policy makers who turned up to hear him.

Giving his view, the ex-Finance Minister, P. Chidambaram, said, ‘There is

no reason to believe that these flows will reverse themselves’. As long as we adopt

sensible and forward-looking economic policies, there is no reason to believe that

our reserves will decline or will not be sufficient to meet normal demands. Those

who think otherwise must be congenital pessimists or believe that a particularly

cruel hand of fate lies over India.

All indications are that India will continue to liberalize the trade sector. We

will continue to export more goods and services. True, we will also import more, but

the exchange rate mechanism (and tariffs) will act as a restraining factor. All

indicators point to a more liberal regime for foreign direct investment. So long as the

rate of inflation is under control and there is an interest differential, private

remittances will continue to flow into the country. Our corporate have shown a

remarkable capacity to access foreign capital. It is a sign of their

growing competitiveness and efficiency, and there is reason to believe that more

companies will be able to raise both debt and equity abroad. That leaves tourism.

Even with muddled policies and meddling governments, 2.3 million tourists arrive

in India. If we can get our act together, this number can be easily raised to, first, 5

million and then to 10 million. Given these objective conditions, I believe that

India’s foreign



exchange reserves will continue to grow.60 Marks

A debate has started on the adequacy of our foreign exchange reserves. I

recall a seminar on July 5, 1991 when economists of every shade urged Dr.

Manmohan Singh to concentrate on building reserves. It is most gratifying that 11

years later some economists are asking the questions “When is enough, enough?”

Our reserves are “adequate” if they give us the confidence to leverage that

strength. Our reserves will be useless if we continue to treat them as hoard and

believe they will always be inadequate.

Answer the following questions:

(a) What are the sources of forex reserves in India?

(b) What are the motives behind holding ‘adequate’ forex reserves?

(c) What according to you can RBI do, with such large forex reserves?

(d) What is full convertibility of Rupee? Can we go for it now?

Section — II

(3) Give a detailed outline of the Balance of Payment Statement?

(4) Explain various channels through which Capital flows from rich to poor countries?

(5)(a) “Is it possible to hedge the foreign exchange risk fully?” Discuss.(b) Consider the following quotes

Spot (Euro/Pound) = 1.6543/ 1.6557Spot (Pound /NZ$) = 0.2786/0.2800

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(i) Calculate the % spread on the Euro/Pound Rate.(ii) Calculate the % spread on the Pound/NZ$ Rate.(iii) The maximum possible % spread on the cross rate between the Euro and the

NZ$.

(5)(a) How far SDR have been able to solve the problem of International Liquidity?(b) The following quotes are available:

Spot ($/Euro) 0.8385/0.83913 months forward 20/30Spot ($/Pound) 1.4548/1.45543-months forward 35/25

Find the 3 month (Euro/Pound) outright forward rates.

(7) Write Short Notes:(a) IBRD.(b) Portfolio Investment.

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60 Marks

Note:(1) Section 1 is compulsory.(2) Attempt any three questions from Section II.(3) Figures to the right indicate marks.(4) Both the sections be tied together.(5) Use of simple calculators permitted.

Section — I


(a) Vehicle currency.(b) Inflation Risk.(c) Bill of Lading.(d) Bulls and bears in foreign exchange market.(e) Fiat money(f) Devaluation and Revaluation of currency.(g) Treatment of goodwill in BOP

(2) Various types of TRANSACTIONS between US and UK residents are shown below.

Show how each TRANSACTION is recorded in each of the two countries’ balance

of payments. Name the type of TRANSACTION. The exchange rate for all the

transaction is assumed to be $ 1.60/£1

(a) The US makes a gift of £1 million of goods to a UK charitable organization

(b) The US pays interest, profit, and dividends to UK investors of $80 million by

debiting US bank accounts, which are then credited to UK residents bank

account held in US.

(c) A US investor decides to buy £ 500 of UK Treasury bills and to pay for them by

debiting his US bank account and crediting to the account of the UK treasury held

in New York.

(d) The US exports $ 1000 of goods to the UK in exchange for

$ 1000 for services.

Section — II

(3) (a) Differentiate between ADR and GDR.(b) Differentiate between Translation and transaction exposure.

(4) Examine the Transformation of European Union from a political and economic union to a monetary union.

(5) (a) Explain in detail LERMS.

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60 Marks

(5) (b) Your import customer asked you to retire an import bill for US $ 100,000

received on collection basis and debits the cost to his account, assuming US

dollars were quoted in the inter bank markets:

SPOT US $ 1 = Rs. 39.7200 - 39.7650One month forward Rs.0.1050 - 0.1150.(i) You require an exchange margin of 0.150%(ii) Your corresponding bank charges US $50.00.

Calculate exchange rate applicable for retirement of the bill and rupee amount recoverable from the customer.

N.B. (a) Exchange rate quoted to the customer four decimal places with last two digits in multiple of 25. (b) Rupee equivalent should be nearest to whole rupee.

(6) (a) Explain in detail purchasing power parity

(b) From the following data calculate the possibilities of a gain/ loss in arbitrage.

Spots rate FFR 6.00 = US $ 1.6 months forward rate FFR 6.0020 = $1. Annualized interest rate on 6 months US $ = 5%. Annualized interest rate 6 months Fr = 8%

(7) A foreign exchange trader gives the following quotes for the Belgian Franc Spot,

one month, three months, and six months to US based treasurer.

1$ =0.02478/80 4/6, 9/8, 14/11

(a) Calculate the outright quotes for one, three six months forward.

(b) If the treasurer wished to buy Belgian Franc three months forward, how much

would he pay in US Dollars?

(c) If he wished to purchase US Dollars one month forward, how much he has to

pay in Belgian Francs?

(d) Assuming that Belgian francs are being bought, what is the premium or

discount, for the one, three and six month forward rates in annual percentage

terms?

(e) What do the above quotations imply in respect of the term structure of interest

rates in the USA and the Belgium?

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International FinanceApril – 2005 60 Marks

Note:(1) Section 1 is compulsory.(2) Attempt any three questions from Section II.(3) Figures to the right indicate marks.(4) Both the sections be tied together.(5) Use of simple calculators permitted.

Section — I


(a) Bond with option.(b) Crawling Peg.(c) Transactions above the line in BOP.(d) RBl intervention.(e) European Option.(f) Un-sponsored Depository Receipts.(g) Euro — as currency of EU.

(2) Analyze the following case study & answer the questions below:

The boardroom of Delcoa, an European company, is busy discussing about

their Indian operations, future expansion plans and offshore business. Directors also are

keen to strengthen their treasury department to grab timely arbitrage opportunities in

Forex markets. Stan Chart has quoted Rupees 55.82/56.00 (per Euro) whereas

Francais Bank has quoted Rupees 56.20/56.60 (per Euro). Ill-manned desk of Delcoa

couldn’t spot the opportunity on time.

Indian operations have sent Income statement to HO, for the closing year.

Board members are observing the same with parent statement.

India (Rs.) Europe (Euros)

Sales 11,000 300

Cost of goods sold and Operating Expenses 5,500 260

PBIT 5,500 40

Interest 2,750 92

Profit before Tax 2,750 -52

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The accounts department will add Indian Statement to European and present

consolidated Statement in Euros.

Rupee to Euro exchange rate is volatile in the range of Rs. 50/- to Rs.55/-per

Euro. Delcoa is exploring an idea of setting up a project i.e. a power plant in East Timer.

However, project funding is a concern as Stan Chart is rather unwilling to fund a project

in East Timor. Directors are also worried about political risk cover. They are in talks with

multilateral agencies, presently working on poverty reduction programme there.



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(a) Workout arbitrage opportunities between Stan Chart and Francais Bank, if any.

(b) Prepare consolidated income statement if exchange rate is Rupees 50 per Euro.

(c) Prepare consolidated income statement if exchange rate is Rupees 55 per Euro.

(d) State the type of exposure, examining (b) and (c) above.

(e) State the type of exposure of Delcoa, in East Tinmor.

(f) Which multilateral institution can help Delcoa in funding its proposed power

plant? How?

(g) Which institution can cover political risk of project? How?

(h) Which multinational agency is working on poverty reduction?

In what way?

Section — II

(3) (a) Bring out the arguments in favour of and against hedging.(b) Discuss the concepts of Reserve Tranche and Credit Tranche with reference to

IMF.

(4) What is meant by Capital Account Convertibility? Discuss the extent to which CAChas been attained in India.

(5) (a) Differentiate between Foreign Capital and Foreign Aid.

(5) (b) The following Balance of Payments data are available for an economy.

Increase in Forex Reserves 500Short Term Capital Outflow (Net) 1,000Merchandise Exports 1,900Merchandise Imports 1,700Export of Services 3,100Import of Services 1,500

Determine long term Capital Account. (Amounts are in Currency units of that economy).

(6) (a) Three different Traders are quoting as follows:

Trader A 1.2040 CAD per USDTrader B 0.9450 CHF per CADTrader C 1.1398 CHF per USD

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Workout arbitrage possibilities.

(6) (b) Spot Rate 1.8528 USD per Pound.6 months Forward 1.8538 USD per Pound. Interest Rates: USA 4% pa Britain 3% pa. Workout arbitrage possibilities.

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(7) Mid rate for Citibank is Rs. 43.5050 per dollar. Desired Spread is Rs.0.0200 (per

one dollar Transaction). Forward premium/ discount for 1 month is 100/80 and for 2

months it is 150/120. Italian Bank quotes 1.4402/1.4490 Euros per Pound. StanChart

quotes 2.4751/2.4792 Australian Dollars per pound.

(a) Calculate Bid and Ask rate for Citibank.

(b) Write forward quotes of Citibank in outright form.

(c) Calculate percentage Spread (Bid Ask Spread) for Italian Bank.

(d) Calculate Cross rate for Australian Dollar per Euro using Italian and

StanChart banks.

(e) Is Rupee weakening against Dollar? Explain.

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60 Marks

Note:(1) Section 1 is compulsory.(2) Attempt any three questions from Section II.(3) Figures to the right indicate full marks to the question.(4) Both the sections should be tied together.(5) Use of simple calculator is permitted.

Section — I


(a) Strike Price.(b) Hedging.(c) Floating Exchange Rate.(d) Euro as a Currency.(e) Vehicle Currency.(f) Value Date.(g) Hot Money.

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(a) Following are the data for India’s B. O. P. year 2004-2005: (8)

(i) Merchandise

(ii) Invisibles

(iii) Capital Account

(iv) Errors & Omissions

Cr.

Rs. Mn

362,661

347,098

494,918

1878

Dr.

Rs. Mn

533,778

204,477

351,393

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Calculate:

(i) Balance of Trade.

(ii) Current Account Balance.

(iii) Balance of Capital Account

(iv) Overall Balance.

(b) Prime Minister Dr. Manmohan Singh is right in advocating a phased movement

to full convertibility, starting with Special Economic Zones (SEZs). We need to move

along the Convertibility highway, even if slowly. Our Economy is in take off stage

and needs timely infusions of Fixed and Working Capital. Since India is now an

enterprise driven economy like most others, the Rupee needs to become more

convertible to reduce transaction costs. Fears of a Recurrence of the 1991 crisis,

when our reserves were insufficient to finance 3 weeks imports are perhaps

exaggerated. The currency has been ruling at below 47 to a Dollar for the last six

months. Investors and rating agencies are convinced that the India’s growth story is

here to stay. Their views determine flows of FDI and FPI in a big way.

Current



60 MarksAccount transactions no longer influence a country’s BOP profile to the extent they did a couples of decades ago. Despite a ballooning trade deficit, our reserves have steadily increased over the years to 144 Billion Dollars.

(i) “Current Account Transactions no longer influence a Country’s B.O.P.” Discuss.

(ii) What is Capital Account Convertibility?

(iii) What are the Risks in Capital Account Convertibility in Indian Context?

(iv) What is the Present Status of Capital Account Convertibility in India?

Section — II

(3) What was Brettonwoods system? Why did it fail? What were the efforts to retain and defend Brettonwood system?

(4) (a) Compare F.D.I. with F.P.I.

(4) (b) Japanese bank quotes as follows:Spot 143 ¥/€6 Month Forward 141 1/€ Interest Rate in Japan is 1% And in Europe it is 3%.Calculate Arbitrage Gain, if any

(5) (a) A New York bank is quotingUSD/GBP: 1.7540/45 and CMF/USD: 1.5700/05The CMF/GBP quote given by a London Bank is 2.7385/90Can you make arbitrage gains? How?

(5) (b) What rules have been assigned to IFC and IDA respectively?

(6) (a) Explain the theory of Purchasing Power Parity (PPP) with suitable examples.(6) (b) Explain with examples how options are used to cover exchange risk

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60 Marks

(7)

(a) Indian bank’s spot rate is 54.25 Rs. / €. It offers C at 3% annual forward

discount. Calculate its 6 months forward rate.

(b) Barclays Bank offers Canadian Dollar for £0.5005/0.5050 spot.’ Calculate

percentage spread of the bank.

(c) Bank A quotes 2.63 ¥ = Re. 1 Bank B quotes 0.51. Identify the countries in

which these are direct quotes.

(d) Rs. 54.5050/54.5250 spot 3 months forward 75/50. Write forward rate in outright

form.

(e) A customer’s profile was scrutinized for forward cover. It was perceived to be

risky as banker could not establish his confidence in honouring the forward

contract by the customer another corporate customer was also denied a forward

cover by the same bank as the customer was from a country with wear political

stability.

State the types of risks in each cases.

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