IB0010 & INTERNATIONAL FINANCIAL MANAGEMENT

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ASSIGNMENT

 

 

 

Note: Answer all questions. Kindly note that answers for 10 marks questions should be approximately of 400 words. Each question is followed by evaluation scheme.

 

1 Give the meaning forward markets. Explain its features, arbitrage in forward markets, forward markets hedging and speculation in forward markets.

 

Answer : Meaning of forward markets:

                                                                           

Market dealing in commodities, currencies, and securities for future (forward) delivery at prices agreed-upon today (date of making the contract). In commodity and currency markets, forward trading is used as a means of hedging against sharp fluctuations in their prices. An over-the-counter marketplace that sets the price of a financial instrument or asset for future delivery. Contracts entered into in the forward market are binding on the parties involved. Forward markets are used for trading a range of instruments including currencies and interest rates, as well as assets such as commodities and securities

 

 

 

2 Explain the interest rate parity theory and purchasing power parity with examples.

 

Answer : Interest rate parity theory

Interest Rate Parity (IPR) theory is used to analyze the relationship between at the spot rate and a corresponding forward (future) rate of currencies.

 

The IPR theory states interest rate differentials between two different currencies will be reflected in the premium or discount for the forward

 

 

 

3 Explain the cash concentration strategies and cash management structures.

 

Answer : Cash concentration strategies

Cash concentration is a service offered by some banks to customers with multiple accounts where excess is taken from the individual accounts and pooled in a single common account. There are a number of reasons for consumers to take advantage of this service, ranging from the safety of employees at a company with multiple branches to a desire to invest surplus capital more effectively. The customer has a high degree of control over the cash concentration and can tailor the service to meet specific needs.

 

In cash concentration, the customer can link

 

 

4 A particular method is used depending upon the circumstances and the legal accounting procedures adopted in a particular country. Explain all the translation methods.

 

Answer : TRANSLATION METHODOLOGIES              

 

Accounts of foreign subsidiaries are restated or translated into the parent company’s currency primarily for reporting consolidated financial statements. The translation involves two key issues:

 

• The exchange rates at which various accounts are translated
• The subsequent treatment of gains or losses.

 

 

 

 

5 International credit markets are the forum where companies and governments can obtain credit. Bring out your understanding on international credit markets and explain the two very important aspects of international credit market. Refer and give one example.

 

Answer : The credit markets dwarf the equity markets in terms of dollar value. As such, the current state of the credit markets tells us the relative health of a large portion of the financial community if we examine the prevailing interest rates and look at investor demand for various grades of credit – from “riskless” (as in Treasury Bonds) to junk bonds that carry high default risks. More demand from investors will prompt companies and lenders to issue more bonds, the effects of which will spill over into the equity markets.

 

 

 

 

 

6 Explain the principles of taxation and double taxation. Give some important points on tax havens and its types.

 

Answer : A tax (from the Latin taxo; “rate”) is a financial charge or other levy imposed upon a taxpayer (an individual or legal entity) by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many administrative divisions. Taxes consist of direct or indirect taxes and may be paid in money or as its labour equivalent.

 

Double taxation is the levying of tax by two or more jurisdictions on the same declared income (in the case of income taxes), asset (in the case of capital taxes), or financial transaction (in the case of sales taxes). This double liability is often mitigated by tax treaties between countries.

Principles of taxation :

(1) Adequacy: taxes should be just-enough to generate revenue required for provision of essential public services.

(2) Broad Basing: taxes should be spread over as

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