THE INSTITUTE OF FINANCE MANAGEMENT

FACULTY OF BUSINESS AND ECONOMICS.

BACHELOR OF ECONOMICS AND FINANCE-YEAR III

SUBJECT NAME: INTERNATIONAL FINANCE

CODE: AFU 08504

STREAM C, GROUP 3

GROUP ASSIGNMENT

STUDENT’S NAME REGISTRATION NUMBER

MAJID.K.ABDILAH IMC/BEF/1913509
OLIVIA M KEFA IMC/BEF/2113692
AMINA KHAMIS SAID IMC/ BEF/2111426
FAITH MBULUMI IMC/BEF/2112408
KAUTHAR MOHHAMED SALUM IMC/BEF/2112412
MUZNE MUHSIN ABDUL_RAHMAN IMC/BEF/2112022
BASHIRI A MALONZO IMC/BEF//2125013
QUESTION 01.

TZS/ £ € /£
Selling Selling
Buying Buying
Spot 2500 2600 2.5 4

Forwar 2650 2690 1.25 2

d

Common Currency £

Reciprocating

Spot £/€ → €/£

1 Year forward £/€ → €/£

Spot (Buying)

€/£ = 1 ∕ £ 0.25/€

= € 4/£

Spot (Selling)

€/£ = 1 / £0.40/£

=€ 2.5/£

1 year Forward

1 year Forward (Buying)

€/£ = 1 ∕ £ 0.50/€

=€ 2/£

1 year Forward (Selling)

€/£ = 1 ∕ £ 0.80/€

=€1. 25/£
1) Required TZS =?

[ TZS / €] Bid = [ TZS /£] Bid

[ €/£] Ask

= TZS 2500/£

€4/£

=TZS 625/€

TZS 625 /€ × €5000

=TZS 3,125,000

2) Required €/TZS?

Crossing

[TZS/€] Bid = [ €/£] Bid

[ €/ £] Ask

TZS 1325 /€

TZS 5,000,000 ÷ TZS 1325 /€

= € 3773.6

3) [ TZS /€]

Spot [TZS/ €] Ask

Spot

[TZS/ €] Ask = [TZS/£] Ask

[€ /£] Bid

= TZS 2600/£

€ 2.5 /£

TZS 1040/€

TZS 1040/€ × € 5000

TZS 5,200,000
4) 1 Year Forward

[ TZS/€] Ask = [ TZS/£] Bid

[€/£] Ask

TZS2 /£

€2650/£

TZS 0.000755/€

TZS 2690£

€ 1.25/£

TZS 2152/€

TZS 5,000,000 ÷ TZS 2152/€

€2323.4

5) Spot

[TZS/€] Ask = [TZS/£] Ask

[€/£] Bid

=TZS 2600/£

€2.5/£

TZS 1040/€

€5000× TZS 1040/€

TZS 5,200,000
6) 1 Year Forward

[TZS/€] Ask = [ TZS /£] Ask

[€/£] Bid

= TZS2690

€1.25/£

TZS 2152/ €

TZS5,000,000 ÷ TZS 2152/ €

€ 2323.4

7) Spot

[ TZS / €] Bid = [TZS /£] Bid

[€/£] Ask

= TZS 2500/£

€4/£

TZS625/€

TZS625/€ × €5000

TZS 3,125,000

8) 1 Year Forward

[ TZS/€] Bid = [TZS/£] Bid

[€ /£] Ask

TZS2650/£

[€2 /£]

TZS 1325/€

TZS 5,000,000÷ TZS 1325/€

€3773.6
9) Use mid-rate € /£

mid-rate = Ask + Bid

Forward Premium /Discount = FR – SR × 12 × 100

SR 12

n = 1 year

spot =?

Forward=?

€ spot mid-rate= 4+2.5

spot mid-rate= 3.25

Forward = 2+ 1.25

Forward mid-rate= 1.625

=1.625 - 3.25 × 12 ×100

3.25 12

= -0.5 × 100

= - 50

Forward Discount = -50%

10. € / TZS

Cross rate

Spot € / TZS Bid = €/£ Bid

TZS/£ Ask

=4

2500

= 0.0016

Forward [ €/TZS] Bid = € /£ Bid

TZS/£ Ask

= 1.25

2690

[€/TZS] Ask =€/£ Bid

TZS/£ Ask

= 1.25 = 0.000465

2690

[€/TZS] Ask = [ €/£] Ask =2

[ TZS/ £] Bid 2650

€/TZS Buying Selling

Spot 0.000962 0.0016

Forward 0.000465 0.000755

mid-rate = Ask + Bid

= 0.000962 + 0.0016

Spot rate = 0.001281

Forward mid-rate = 0.000755 + 0.000465

Forward mid-rate= 0.00061

Forward Premium /Discount = FR – SR × 12 × 100

SR 12

= 0.00061- 0.001281 × 12 ×100

0.001281

Discount= -52.4
QUESTION 02.

i) Risk and Return.

SOUTH AFRICA.

E(R)= ∑ni=Pi× Ri

= (0.1 × 0.1) + (0.6 × 0.12) + (0.3 × 0.15)

= 0.01 + 0.072 + 0.045

Expected Return E(R) = 0.127

E(R)south Africa= 12.7%

Risk (δ) =

(x- x) (x-x)2 P((x-x)2

0.027 0.000729 0.0000729
- 0.007 0.000049 0.0000294
0.023 0.000529 0.0001587

Risk (δ) South Africa = 0.0114

Risk (δ) South Africa = 1.14%

TANZANIA

Expected Return E(R) Tanzania

E(R)= ∑ni=Pi× Ri

= (0.1 × 0.22) + (0.6 × 0.23) + (0.3 × 0.16)

Expected Return E(R) Tanzania = 0.208

Expected Return E(R) Tanzania = 20.8%

Risk (δ) =

(x- x) (x-x)2 P((x-x)2

0.012 0.000144 0.0000144
0.022 0.000484 0.0002904
- 0.048 0.02304 0.0006912

= 0.000996

δ = √0.000498

δ= 0.0223

δ= 2.23%

Standard deviation = 2.23%

FOR KENYA

Expected Return E(R) Kenya

E(R)= ∑ni=Pi× Ri

= (0.1 × 0.2) + (0.6 × 0.22) + (0.3 × 0.14)

= 0.194

Expected Return E(R) Kenya = 19.4%

Risk for Kenya.

(x- x) (x-x)2 P((x-x)2

0.006 0.000036 0.0000036
0.026 0.000676 0.0004056
-0.54 0.002916 0.0008748
∑= 0.001284

=0.001284

= 0.000642

δ = √ 0.000642

=0.0253

Standard deviation= 2.53%

ii) Expected return and portfolio

𝐸(𝑟)𝑝 = 𝑤T 𝐸(𝑟)T + 𝑤S 𝐸(𝑟)S + 𝑤K𝐸(𝑟)K

= (0.333× 0.208) + (0.333× 0.127) +(0.333×0.194)

= 0.176

17.62%

Risk (δ)=
= (0.333)2 (0.0114)2 + (0.333)2 (0.0223)2 + (0.333)2 (0.0253)2 + 0

Variance = 0.0001405341

√0.0001405341

Standard deviation (δ)= 0.01185

Standard deviation (δ)= 1.19%

Coefficient of variation.

Coefficient of variation = Risk

Expected Return

Coefficient of variation= 0.0119

0.1762

Coefficient of variation= 0.068

Coefficient of variation measure the ratio of standard deviation to the expected return.
iii). Yes, benefits of international portfolio diversification in the form of risk reduction can be
attained. Here's why:

Geographic diversification. By investing in assets across different countries and regions, an

investor can reduce exposure to country-specific risks. Economic, political, and regulatory
factors can vary significantly between countries, and by diversifying globally, investors can
mitigate the impact of adverse events in any particular country.

Sector diversification. Different countries have varying sector concentrations in their

economies. By investing internationally, investors can gain exposure to a broader range of
industries and sectors, reducing the impact of industry-specific risks of downturns in a particular
sector.

Currency diversification. International diversification allows investors to hold assets

denominated in different currencies. This can provide a hedge against currency risk. Fluctuations
in exchange rates can affect investment returns, and by holding a diversified portfolio of
currencies, investors can reduce the impact of adverse currency movements.

Different market cycles. Global markets don't always move in sync. Different countries may go
through different economic cycles at different times. By diversifying internationally, investors
can potentially benefit from investing in countries that are in different stages of their economic
cycles, reducing the overall volatility of the portfolio.

Access to diverse investment opportunities. Investing internationally provides access to a

wider range of investment opportunities. Different countries may have unique investment
options, such as emerging markets or industries that are not well-represented in the investor's
home country. By diversifying globally, investors can tap into these opportunities and potentially
benefit from higher returns while spreading their risk.

However, it's important to note that while international portfolio diversification can reduce
risk, it does not eliminate it entirely. There are still risks associated with investing in foreign
markets, such as currency fluctuations, geopolitical events, and regulatory changes. Additionally,
correlations between global markets can increase during periods of financial crises, reducing the
effectiveness of diversification. Therefore, careful analysis, due diligence, and risk management
are crucial when implementing an internationally diversified portfolio.
QUESTION 03.

Assessing and managing political risk is crucial for a parent firm considering investment
opportunities in a foreign country. Political risk refers to the potential for adverse political events
and actions to impact the profitability and viability of investments. These risks can include
changes in government policies, political instability, regulatory changes, nationalization,
expropriation, and civil unrest. In order to effectively assess and manage political risk, several
approaches can be employed:

Country Analysis. Conducting a comprehensive analysis of the foreign country is essential. This
includes examining its political, economic, and legal systems, as well as its history of political
stability, corruption levels, rule of law, and regulatory environment. Country risk assessment
reports, published by various institutions, can provide valuable insights into these factors.

Stakeholder Analysis. Identifying and analyzing key stakeholders such as government officials,
political parties, interest groups, and local communities is important. Understanding their
interests, power dynamics, and potential impact on the investment project can help in
anticipating and managing political risks.

Political Risk Insurance. Purchasing political risk insurance can provide a safety net against
potential losses arising from political events. This insurance typically covers risks such as
expropriation, currency transfer restrictions, political violence, and contract repudiation. It is
important to carefully review policy terms and conditions to ensure adequate coverage.

Joint Ventures and Partnerships. Forming partnerships with local businesses or individuals
can help mitigate political risks. Local partners often possess a better understanding of the
political landscape, have established networks, and can provide valuable insights and support
during challenging times.

Diversification. Spreading investments across multiple countries can reduce the concentration
of political risk in a single foreign market. Diversification allows the parent firm to minimize the
impact of adverse political events in one country by relying on the performance of investments in
other countries.

Legal Framework and Contracts. Understanding and complying with the legal framework of
the foreign country is crucial. Negotiating and drafting robust contracts that address potential
political risks, including dispute resolution mechanisms, can provide a level of protection.

Continuous Monitoring. Political risk is dynamic, and conditions can change rapidly.
Therefore, ongoing monitoring of political developments, regulatory changes, and social trends
in the foreign country is essential. This can be achieved through local contacts, engagement with
industry associations, and consulting with risk analysis firms.
Government Relations. Building and maintaining relationships with government officials and
relevant authorities can help mitigate political risks. Engaging in transparent and constructive
dialogue with policymakers can enhance the parent firm's reputation and potentially influence
policy decisions in its favor.

Hedging and Risk Mitigation Strategies. Employing financial instruments such as currency
hedging, diversifying suppliers and markets, and having contingency plans in place can help
mitigate the potential impact of political risk events.

It is important to note that no approach can completely eliminate political risk, but a
combination of these strategies can enhance the parent firm's ability to assess, manage, and
respond to political risks as they arise. Tailoring the approach to the specific characteristics of
the foreign country and industry sector is crucial for effective risk management.
 REFERENCES.

Shapiro Allan C., (2006) Multinational financial management, 8th Edition, John Wiley and sons,
Australia Ltd.

V.K Khalan S Shiva Ramu (2004) International business finance, 8th revised Edition, Animol
publication PVT ltd

Adrian Buckley (2004) Multinational finance, 3rd Edition, prentice hall India

EITEMAN, D.K., Stonehill, A., I and Moffett, M.H (2001) Multinational business finance, 8th
Edition., Addison Wesley Longman.

Richard Pike, Bill Neak, (2005) Corporate finance investments, 5th Edition, financial
times/prentice Hall.

Feldstein, M. and C. Horioka (1980) “Domestic Saving and International Capital Flows,”
Economic Journal 90