MID-TERM EXAMINATION

EXAMINATION DETAILS:
Module code: BIB3064
Course name/s: International Financial Management
Date of exam: Tuesday 4th January 2022
Time of exam: 4.30pm- 6.30pm
Duration of exam: 2 hours

ALLOWABLE MATERIALS AND INSTRUCTIONS TO CANDIDATES:

1. This examination paper contains 4 Questions. Answer ALL (4) questions.
2. Dictionaries, including electronic dictionaries, are permitted provided that they do not
contain additional text or handwriting.
3. This exam accounts for 20% of the total marks for the module.
4. This exam totals 60 marks.

Name : Keertan a/l subramaniam

Id Number : 1202191009
Name of Lecturer : Wan mohd afnan
QUESTION 1: (20 Marks)
a) Discuss the TWO (2) typical reasons why MNCs expand internationally.
(10 marks)

In general, businesses go worldwide to grow or expand their activities. Generating

more revenue, competing for new sales, investment opportunities, diversifying,
cutting expenses, and hiring fresh talent are all advantages of entering overseas
markets. One of the most prominent motives for entering international markets is to
increase profit margins. When domestic growth tactics run out, the next logical step
is to look for growth on a global scale. Expanding the product distribution to other
nations expands the client base. Revenue grows and strengthens as a result of
providing engaging solutions and building loyalty across international marketplaces.

In a couple of significant ways, foreign expansion allows a corporation to diversify its

operations. To begin with, by spreading the risk of demand slowing across different
countries. If one market's interest in the offerings never grows or fades, the
organisation can fill up the slack with success in other countries. Organizations can
also link with suppliers in overseas marketplaces, allowing them to access raw
materials and resources not available in domestic markets. When a company
operates in various nations, it is also more likely to increase innovation and develop
more varieties of its offerings. Product variety also protects a company from the risk
of losing interest in a single item.

b) Explain the TWO (2) risks faced by MNCs that expand internationally.
(10 marks)

Institutional failures, crime, political instability and violence, as well as volatility in

currency exchange rates, all pose hazards to a multinational corporation expanding
worldwide. Diverse countries' business cultures, particularly between the East and
the West, can be highly different.Firstly , Political Risk is a risk that faced by many
MNCs taht expand internationally. Each country has its own government and
business laws. Multinational firms must ensure that their policies comply with local
laws, which typically entails developing a separate set of operating procedures for
each country in which they do business.If the controlling government decides to
nationalise particular industries or prohibit the manufacture of certain items,
changes in the law or political system might put a firm in peril. Import and export
taxes may be raised as a result of political disputes between countries. A
multinational firm may suffer as a result of this.

The second risk that multinational corporations confront when expanding abroad is
currency risk. Wages and taxes must be paid in the local currency of each country
in which a multinational firm operates. Currency valuations are always changing,
which implies that if the currency in a company's home nation loses value, its costs
abroad would climb dramatically. Currency fluctuations have a particularly negative
influence on businesses that import and export goods, as importing commodities
from a particular country might become prohibitively expensive if its currency
appreciates in value. Multinational firms attempt to forecast how future currency
fluctuations will affect their costs. Mistakes can be quite costly.
QUESTION 2: (20 Marks)
a) Companies choose to invest in foreign markets for a number of reasons, often
the same reasons for expanding their operations within their home country.
Explain TWO (2) reasons why MNC may invest funds in a financial market
outside its own country.
(10 marks)

One of the key reasons is that they want to expand their product markets not only
in the country where they are investing, but also in adjacent countries or
countries with which they have trade relations. Embraer, for example, has sales
offices in the United States and Portugal, respectively, to take advantage of
NAFTA trade favours and the EU single market. An export platform is a sort of
investment that enables businesses to overcome trade barriers such as tariffs
and physically reach closer to their target market, lowering logistics and
transportation costs.This can happen in the service industry as well. Companies
based in the United States, for example, may choose to outsource their customer
service operations and establish call centres or administrative offices in Central
America or the Caribbean to save money and provide a service that is culturally
compatible with their clients while remaining within US time zones.

The second motivation to invest in another country is to boost efficiency.

Companies invest in several areas so that each product can be made at the
lowest cost possible. Vertical investment is the term for this method.
Volkswagen's headquarters are in Germany, but the company makes and
assembles cars all around the world to save money. Its assembly plants in the
Mexican states of Puebla and Tlaxcala, for example, have access to the whole
North American market via NAFTA. According to the Mexican Automotive
Industry Association, Volkswagen exports 55 percent of the cars it makes in
Mexico to Canada or the United States, with 17 percent going to the Mexican
market. This investment is part of a hybrid approach that blends the idea of an
export platform with a desire to improve efficiency.
b) Briefly explain TWO (2) reasons why some financial institutions prefer to provide
credit in financial markets outside their own country.
(10 marks)

There are numerous reasons for financial institutions to extend credit in financial
markets outside of their own nation. High interest rates in foreign nations are one
of the reasons. This is because some countries may have a shortage of cash that
may be extended as credit, resulting in market interest rates that are relatively
high, even after factoring in the risk of default.

Another rationale for giving loans to international financial markets is because of

exchange rate assumptions. Financial institutions may contemplate lending
money to foreign countries whose currencies are expected to grow in value
against the mother country's. Whether the credit is in the form of bonds or a
simple loan, the crediting financial institution will benefit if the foreign country's
currency appreciates against the creditor's native country's currency. The other
motivation is to diversify internationally. Creditors stand a good chance of
benefiting from worldwide diversification, which would considerably lower the
risks of multiple borrowers filing for bankruptcy at the same time.
QUESTION 3: (20 Marks)
You are bearish on the USD and decide to LONG PUT position with exercise price
rate CHF0.98 and premium rate at CHF0.03

a) Calculate the payoff for the range of spot price. Complete the table below.

Position Exercise Future Action Payoff ITM/ATM/

price spot taken OTM
price
Long CALL CHF 0.98 CHF0.94 Exercise 0.01 ITM
Long CALL CHF 0.98 CHF0.98 Not -0.03 OTM
exercise
Long CALL CHF 0.98 CHF0.99 Not -0.04 OTM
exercise
Long CALL CHF 0.98 CHF0.97 Exercise -0.02 OTM
Long CALL CHF 0.98 CHF0.95 Exercise 0 ATM
Long CALL CHF 0.98 CHF0.90 Exercise 0.05 ITM
Long CALL CHF 0.98 CHF0.88 Exercise 0.07 ITM

(15 marks)

b) Show the diagram/graph of LONG PUT to support your answer in (a).

(5 marks)