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ASSIGNMENT
| DRIVE | FALL 2014 |
| PROGRAM | MBADS – (SEM 4/SEM 6) / MBAN2 / MBAFLEX – (SEM 4) /
PGDFMN – (SEM 2) |
| SUBJECT CODE & NAME | IB0010- INTERNATIONAL FINANCIAL MANAGEMENT |
| SEMESTER | 4 |
| BK ID | B1759 |
| CREDITS | 4 |
| MARKS | 60 |
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 Write short notes on:
- a) Measuring exchange rate movements
Answer : Measuring the exchange rate
Exchange rates are expressed in various ways:
Spot Exchange Rate – the spot rate is the rate for a currency at today’s market prices
Forward Exchange Rate – a forward rate involves the delivery of currency at a specified time in the future at an agreed rate. Companies wanting to reduce risks from exchange rate volatility can buy their currency ‘forward’ on the market
- b) Factors that influence exchange rates
Answer : Determinants of Exchange Rates
Numerous factors determine exchange rates, and all are related to the trading relationship between two countries. Remember, exchange rates are relative, and are expressed as a comparison of the currencies of two countries. The following are some of the principal determinants of the exchange rate between two countries. Note that these factors are in no particular order; like many aspects of economics, the relative importance of these factors is subject to much debate.
- Differentials in Inflation
2 The key component of the financial system is the money market that acts as a fulcrum of monetary operations.
Write down the important points under each category mentioned below.
- a) Functions performed by money market
Answer : There are two types of financial markets viz., the money market and the capital market. The money market in that part of a financial market which deals in the borrowing and lending of short term loans generally for a period of less than or equal to 365 days. It is a mechanism to clear short term monetary transactions in an economy.
Money market is an important part of the economy. It plays very significant functions. As mentioned above it is basically a market for short term monetary transactions. Thus it has to provide facility for adjusting liquidity to the banks, business corporations, non-banking financial institutions (NBFs) and other financial institutions along with investors.
The major functions of money market are given below:-
- b) International interest rates
Answer : In many industrial countries the domestic impact of interest rate developments abroad has become an increasingly sensitive question. Outside the United States the issue has centred on the possible influence of high or rising interest rates on a still fragile economic recovery. When inflation expectations are unknown, interest rate levels are, of course, difficult to interpret, and partly for this reason interest rates have come to play a smaller role as explicit objectives of monetary policy. In some – though not all – countries nominal interest rates are nevertheless felt to be uncomfortably high in relation to rates of inflation.
- c) Standardized Global Market regulations.
Answer : The financial crisis of 2007 revealed fundamental weaknesses in the structure of financial regulation. In response, policymakers and regulators have embarked on an ambitious regulatory reform agenda that aims to achieve as much global co-ordination and consistency between regional reform efforts as possible.
How successful attempts at international co-ordination and consistency have been deserves further examination. Despite most of the regulatory changes taking place under the auspices of the G20, variations in the approaches taken on both sides of the Atlantic and in Asia can be observed and are increasingly significant. The general objectives might be consistent, but the different regulatory paradigms in the US, Europe and Asia have become increasingly visible and the resulting changes are, many fear, becoming less co-ordinated
3 Thousands of years back the concept of bartering between parties was prevalent, when the concept of money had not evolved. Explain counter trade with examples
Answer : Trading between nations has been happening since time began. In ancient time nations traded silk, spices, cloth and animals of all kinds. Today nation trade food items, defense equipment, metals, electronics etc. The products might have changed but the basic concept is still the same as the underlining need which brings together two nations in a trade relationship still exists.
One such method of trading between nations is called counter trade. Counter trade is an import / export relationship between nations or large companies in which good and/or services are exchanged for goods and services instead of money. In some cases monetary evaluations are made for accounting purposes.
Types of counter trade
Barter: It is the exchange of goods and services for goods and services without any use of money. Like the trade relationship between China and
4 There are different techniques of exposure management. One is the Managing Transaction Exposure and the other one is the managing operating exposure So you have to explain on both Managing Transaction Exposure and Managing Operating Exposure.
Answer : ‘Transaction Exposure’ is a risk which is faced by the organizations which are involved in international trade especially when they enter into the financial obligations. The risk which is faced by the companies is about the changes occurring in the currency exchange rates after they have entered into trade obligations in the international market. Many companies which face such a situation adopt hedging strategy which allows them to get locked in an exchange rate by using forward rates to evade the exposure of companies to risk. ‘Transaction Exposure’ is also called ‘Contractual Exposure’ which is about the
5 Every firm is going on concern, whether domestic or MNC. Explain the techniques of capital budgeting and the steps to determine cash flows.
Answer : Capital investments are long-term investments in which the assets involved have useful lives of multiple years. For example, constructing a new production facility and investing in machinery and equipment are capital investments. Capital budgeting is a method of estimating the financial viability of a capital investment over the life of the investment.
A Explanation of techniques of capital budgeting:
There are several capital budgeting analysis methods that can be used to determine the economic feasibility of a capital investment. They include the Payback Period, Discounted Payment Period, Net Present Value, Profitability Index, Internal Rate of Return, and Modified Internal Rate of Return.
6 Write short note on:
American Depository Receipts(ADR)
Answer : An American Depository Receipt, or ADR, is a security issued by a U.S. depository bank to domestic buyers as a substitute for direct ownership of stock in foreign companies. An ADR can represent one or more shares, or a fraction of a share, of a non-U.S. company. Individual shares of a foreign corporation represented by an ADR are called American Depositary Shares (ADSs).
An ADR is a convenient way for companies whose stock is listed on a foreign exchange to cross-list their stock in the United States and make their stock available for purchase by U.S. investors, as these receipts can be traded on U.S. exchanges.
Global Depository Receipts(GDR)
Answer : Global Depositary Receipts (GDRs) are negotiable certificates issued by depositary banks which represent ownership of a given number of a company’s shares which can be listed and traded independently from the underlying shares. These instruments are typically used by companies from emerging markets and marketed to professional investors only.
GDRs can be listed on either the Main Market via a Standard Listing or on the Professional Securities Market. A GDR will be used to access two or more markets, usually London and the US. They are often launched for capital raising purposes, so
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