MF0015 – 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.

 

 

 

Q1.Give the meaning forward markets. Explain its features, arbitrage in forward markets, forward markets hedging and speculation in forward markets. (Meaning of forward markets, Features, arbitrage in forward markets, Forward markets hedging, Speculation in forward markets) 2, 4, 2, 2

Answer:

Forward market

In the forward market, contracts are made to buy and sell currencies for future delivery, say, after a fortnight, one month, two months and so on. The rate of exchange for the transaction is agreed upon on the very day the deal is finalized. The rate of exchange for the transaction is agreed upon on the very day the deal is finalized. The forward rates with varying maturity are quoted in the newspapers and those rates form the basis of the contract. Both parties have to abide by the contract at the exchange rate mentioned therein irrespective of whether the spot rate on the maturity date resembles the

 

Q2. Explain the interest rate parity theory and purchasing power parity with examples. (Interest rate parity theory with examples, Purchasing power parity theory with examples) 5, 5

Answer:

Interest rate parity theory with examples

This theory is a link between exchange rates and interest rates.

Proposition 1: The interest rates prevailing in two countries affect the exchange rate between the currencies of those countries. Interest rates in India and in the US, for example, will drive the exchange rate between dollar and rupee.

Proposition 2: In an efficient market, if the interest rates in two countries are different, the exchange rates between the two countries will move in such a way as to bring about parity in interest rates, offsetting the apparent interest rate differentials, thereby denying any arbitrage opportunity.

This implies that high interest rate in one country will be offset by the depreciation of the currency of that country. If, for example, the interest rate in India is higher than that in the US, the rupees will depreciate against the US dollar. In the

 

 

Q3. Explain the cash concentration strategies and cash management structures. (Cash concentration strategies, Cash management structures) 5, 5

Answer:

Cash Concentration Strategies

The parent MNC has cash distributed in all its subsidiaries spread across the globe. Once the payments are received from customers, the firm has to make a decision to ensure that cash is moved efficiently to a central place where it will benefit the parent company the most. The process of collecting funds at a central place is called concentration strategy. This will simplify the work for MNCs which have to calculate short-term borrowings for its various subsidiaries. It can also have the knowledge about the excess cash that can be invested in short-term marketable securities. The parent MNC would have to accelerate the collections from within a home country and across borders, i.e. from the host country. Collecting cash from different subsidiaries without any delay is a key element of international cash management.

 

 

 

Q4. A particular method is used depending upon the circumstances and the legal accounting procedures adopted in a particular country. Explain all the translation methods. (Current rate method, Current /non current method, Monetary method, Temporal method) 2, 2, 3, 3

Answer:

Current rate method

The current rate method is also known as the closing rate method. In this method, all items of the income statement and the balance sheet are translated at current rate or the post-change rate. This method is preferred in case of those host countries where the local currency accounts are periodically adjusted for inflation. The translation exposure in this case is simply the net worth of the affiliate as stated in local currency. The merit of this method is that the relative proportion of individual balance sheet accounts remains the same and the process of translation does not distort the various balance sheet ratios. However, the demerit is that the fixed assets are also translated at current rate and that goes against the principles of accounting. The current rate method is also known as the closing rate method. In this method, all items of the income statement and the balance sheet are translated at current rate or the post-change rate. This method is preferred in case of those host countries where the local currency accounts are periodically adjusted for inflation.

 

Current/non-current method

Under this method, current assets and current liabilities of the subsidiary are translated at current rate or the post-change

 

Q5. 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. (Introduction of international credit market 2 marks; Explanation of syndicated loans with example 4 marks; Explanation of External Commercial Borrowings (ECB) 4 marks) 10 marks 

Answer:

 

International Credit Markets

International credit markets are the forum where companies and governments can obtain credit (loans in various forms) from the creditors/investors. The remarkets are an important part of international capital markets. International capital market is that financial market or world financial centre where shares, bonds, debentures, currencies, mutual funds and other long term securities are purchased and sold. These markets provide the opportunity for international companies and investors to deal in shares and bonds of different companies from various countries. Two very important aspects of international credit market are the syndicated loans and impact of credit crisis on the credit market, which are explained

 

Q6. Explain the principles of taxation and double taxation. Give some important points on tax havens and its types. (Explanation on principles of taxation 4marks; Explanation on double taxation 2marks; Explanation on tax havens and its types 4marks) 10 Marks 

Answer:

 

Principles of Taxation

Two common principles of international taxation are the residence principle and the source principle. The residence principle calculates the tax liabilities by considering the place where the tax payer resides and the source principle law considers the source of income of the tax payer as the basis of assessing tax liabilities.

• Residence principle: Residents of a country are taxed uniformly on their world-wide income, regardless of the source of that income whether it is domestic or of foreign origin. Non-residents who earn in home country are not taxed by the home country on their income originating in that country.

 

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