UNIVERSITY OF GUJRAT

Department of Management Sciences

Mid-Term Examination (Online) Spring-2020
Course Title: Topics in International Finance Course Code: FIN-618 Instructor: Mr. Imran Shauqat
Programme: M. Phil (2nd Semester)
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Total Marks: 25 Time Allowed: 180minutes

Note: Attempt all the questions. (02.5*10=25marks)

Birm Co. based in Alabama U.S is considering several international opportunities in Europe that could
affect the value of its firm. The valuation of its firm is dependent on four factors: (1) expected cash flows
in dollars, (2) expected cash flows in euros that are ultimately converted into dollars, (3) the rate at which
it can convert euros to dollars, and (4) Birm’s weighted average cost of capital. For each of the following
opportunities, identify the factors that would be affected. (question 1 and question 2 relate to this case)
Question No:1 Birm plans a licensing deal in which it will sell technology to a firm in Germany for $3
million; the payment is invoiced in dollars, and this project has the same risk level as its existing businesses.
Question No: 2 Birm plans to export a small amount of materials to Ireland that are denominated in euros.

Question No: 3 Would the U.S. balance-of-trade deficit be larger or smaller if the dollar depreciates against
all currencies, versus depreciating against some currencies but appreciating against others? Explain.
Question No: 4 Explain how the appreciation of the Australian dollar against the U.S. dollar would affect
the return to a U.S. firm that invested in an Australian money market security.
Question No: 5 Assume that the U.S. inflation rate becomes high relative to Canadian inflation. Other
things being equal, how should this affect the (a) U.S. demand for Canadian dollars, (b) supply of Canadian
dollars for sale, and (c) equilibrium value of the Canadian dollar?
Question No: 6 Blue Demon Bank expects that the Mexican peso will depreciate against the dollar from
its spot rate of $.15 to $.14 in 10 days. The following interbank lending and borrowing rates exist:
Lending Rates Borrowing Rates
Assume that Blue Demon Bank has a borrowing
U. S Dollar 8% 8.3% capacity of either $10 million or 70 million
pesos in the interbank market, depending on
Mexican Peso 8.5% 8.7% which currency it wants to borrow.
How could Blue Demon Bank attempt to
capitalize on its expectations without using deposited funds? Estimate the profits that could be generated
from this strategy.
Question No: 7 UOG Corp. is a Pakistani exporter to US. It expects US dollar to depreciate in the future,
should it hedge its exports with a forward contract? Explain briefly.
Question No: 8 Pakistan has free trade agreement with China. But Pakistan import more goods from China
and has very little to offer in terms of potential exports. In addition Pakistan’s inflation rate higher than
China. Briefly explain the type of pressure these factors may place on Pakistani Rupee.
Question No: 9 National Public Limited Company is a US-based company that regularly trades with
companies in Europe. Several large transactions are due in 4 months’ time as shown below.
Spot Exchange Rate: 1€ = 1.13$

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 Exports to: Imports from:
(millions) (millions)

ABC Co. €180 €490

XYZ Co. $890 -

PQR Co. $750 $150

Annual interest rates available to National PLC:

Lending Borrowing

Euro 3.5% 5.2%

Dollar 2.2% 4%

Discuss how the company will hedge its currency risk exposure using money market hedging mechanism.
Also find out the effective exchange rate after hedging.

Question No: 10 Smithson PLC is a UK based company that regularly trades with companies in the USA.
Several large transactions are due in seven months’ time as shown below. The transactions are in ‘000’
units of the currencies shown. Assume that it is now 1st August.

Exports to: Imports from:

ABC Co. $790 £150

XYZ Co. - £890

PQR Co. £150 $450

Exchange Rates are given as follows:

$/£

Spot 1.3126 – 1.3256

3 months forward 1.3245 – 1.3397

1 year forward 1.3331 – 1.3426

Discuss how the company will hedge its currency risk exposure using forward contracts hedging
mechanism.

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