Faculty of Business and Law Academic Year: 2020/2021 Assessment Period or Date: 2

Module Leader: Bouchra Benzennou

Module Code UMAD5T-15-3

Module Title: International Financial Management

Examination Duration: 24-hour window

ONLINE EXAM

Instructions to Students:

The exam has 2 sections:

• Section A contains 5 short questions.
• Students must answer ALL questions in Section A.
• Section A carries 40 marks.
• Section B contains 4 questions. Each question could contain numerical questions, essay-type questions, or both.
• Students must answer THREE questions in Section B.
• Each question in Section B carries 20 marks.

Formatting

Please submit your answers in a Word document. We cannot ensure that other formats are compatible with markers’ software and cannot guarantee to mark incorrect formats.

Please include the module name and number and your student number (not your name).

Please indicate clearly which questions you are answering.

Instructions for submission

You must submit your assignment before the stated deadline by electronic submission through Blackboard.

• It is your responsibility to submit exam in a format stipulated above

Your marks may be affected if your tutor cannot open or properly view your submission.

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There is no late submission permitted on this timed assessment.

Instructions to Students:

Students must answer ALL questions from Section A AND THREE questions from Section B.

SECTION A

1. You have the following extract of the consolidated balance-of-payment of Norway in millions of dollars:

	2015	2016	2017	2018
Goods and services	-17,485.5	-21,920.3	-23,202.9	-33,562.3
Credit	76,346.3	75,984.8	80,573.5	88,324.0
Debit	93,831.8	97,905.1	103,776.4	121,886.3

Based on the Norwegian balance of trade, how is the supply of the Norwegian krone changing compared to demand? What does this indicate about the value of the krone? Justify your answer. (8 marks)

1. You have the following currency pairs quotes:

	Bid	Ask
USDMXN	19.5195	19.5205
AUDCAD	0.8720	0.8724
CHFJPY	112.67	112.75

Which currency pair is the most liquid? Justify your answer. (8 marks)

1. You have the following information:

	Spot	Inflation	Nominal Interest Rate
GBP	1	2.48%	1.04%
CNY	8.8878	1.51%	2.15%

Using the Relative Purchasing Power Parity, Calculate the expected exchange rate in a year’s time. Justify your answer. (8 marks)

1. The CHFUSD spot rate is 1.04. You know that the annual nominal interest rates are 2.10% and 1.15% in the US and Switzerland, respectively. In equilibrium, what should be the 3-month forward rate? Justify your answer. (8 marks)
2. Consider the following currency quotes

Pair	Midpoint
EURMYR	4.82
GBPEUR	1.15
GBPMYR	5.4

With 10,000 currency units, what is the value of a triangular arbitrage profit? (8 marks)

SECTION B

1. BP is one of the largest international companies in the oil & gas industry. The company has transactions denominated in several currencies. Being a British company, the domestic currency used for valuation is the British pound.

In 3 months, BP is due to receive a 41.5m ZAR reimbursement from a major subsidiary in South Africa.

You have the following information:

Table 1: Bank’s spot and forward rates (in points)

	Bid	Ask
GBPZAR	19.6971	19.7183
GBPZAR 3M FWD	3104.8000	3139.0000

Table 2: CME Currency Futures

	Settlement	Contract Units
GBPZAR 3M	19.8911	125,000

Table 3: OTC Currency Options

	Strike	Call (in £)	Put (in £)
GBPZAR	19.8925	0.031	0.025

The spot exchange rate in 3 months is expected to be either 19.7762 or 20.1556.

• 1. Calculate the outcome of hedging using forwards. (3 marks)
  2. Calculate the outcome of hedging using futures. (5 marks)
  3. Calculate the outcome of hedging using options. (5 marks)
  4. Recommend a strategy to BP under the two scenarios briefly discussing the differences between each strategy. (7 marks)

(Total 20 marks)

1. Alibaba is a Chinese multinational technology company specializing in e-commerce. It has a large international supply chain and deals with customers and suppliers from different parts of the world. Being a Chinese company, the domestic currency used for valuation is the Chinese yuan.

In 1 month, Alibaba is due to make 37.2m TWD payment to its Taiwanese dollar supplier. Due to the limited liquidity of the CNYTWD pair, the company has limited access to financial hedging techniques and can use either the Money Market or OTC options.

You have the following information:

Table 1: Bank’s spot and forward rates

	Bid	Ask
CNYTWD	4.2972	4.3015

Table 2: Money Market rates (source: Moody’s Analytics)

	CNY	TWD
Money Market Rates (%)	0.28	0.55

• 1. Build a Money Market hedge for Alibaba short-term transactions in TWD showing the effective exchange rate of the strategy. (5 marks)

Alibaba wants to set up a new distribution chain in Europe and estimate this project will cost 2.5m €. Alibaba is considering financing this project using debt. Amazon Europe is also considering expanding in the Chinese market and wants to hire a local marketing company to study the feasibility of the project. The market study costs CNY19.40m. The amounts required by the two companies are roughly the same at the current exchange rate. Both companies are quoted the following borrowing costs by their respective banks.

Table 3: Alibaba and Amazon Europe borrowing costs

	CNY	EUR
Alibaba	2.60%	4.25%
Amazon Europe	3.30%	4.50%

• 1. Design a swap where HSBC, acting as a dealer, charges each company 0.025% per annum as a fee and offers attractive borrowing costs to Alibaba and Amazon Europe. (8 marks)
  2. Evaluate the different risks facing HSBC from arranging this swap. (7 marks)

(Total 20 marks)

1. Nike is an is an American multinational corporation that is engaged in the design, development, manufacturing, and worldwide marketing and sales of footwear, apparel, equipment, accessories, and services. 26% percentage of Nike’s operating income are generated in Europe and only 4% of its raw materials are sourced in Europe. Being an American company, the domestic currency used for valuation is the U.S. dollar.

The company wants to assess its economic exposure to changes in the EURUSD exchange rate and has forecasted the possible operating income and costs in three economic states as follows:

Table 1: Economic States – Exchange rates and European operations (in millions)

Scenario	Bust	Average	Boom
Probability	25%	50%	25%
EURUSD	1.3581	1.1264	1.0034
Operating Income in EUR	32,781.12	38,197.41	42,558.85
Operating Costs in EUR	1,113.46	2,836.41	4,725.59

• 1. Estimate the sensitivity of Nike’s net dollar cash flows to changes in the EURUSD. (8 marks)
  2. Discuss the different operating hedging strategies that Nike could use to reduce its economic exposure to the euro. (7 marks)

The company wants to diversify its currency exposure by expanding to other non-EU countries. It is considering Russia and initial analysis of Russia, Nike has identified the following key political and financial risk factors that may influence its expansion decision.

Table 2: Country Risk – Political, financial, and economic risks ratings and weights

Risk Factors	Assigned Rating	Assigned Weight
Political Risk
Corruption	3	30%
Bureaucracy	2	70%
Financial Risk
Interest Rate	3	30%
Credit Risk	5	30%
Exchange rate	2	40%
Economic Risk
Inflation	3	40%
Growth	3	60%

Nike has assigned an overall rating of 50% to political risk, 25% to financial risk, and 25% to economic risk. It is not willing to consider Russia for investment if the country risk rating is below 3.5.

• 1. Based on the country risk analysis, assess whether Nike would consider expanding to Russia. (5 marks)

(Total 20 marks)

1. Pleco Co. is contemplating establishing a wholly owned subsidiary operation in the South East Asia. Two countries under consideration are Malaysia and The Philippines. Pleco Co. intends to repatriate all after-tax foreign-source income to the United Kingdom. In the UK., corporate income is taxed at 19 percent. In Malaysia, the marginal corporate tax rate is 25 percent. In the Philippines, corporate income is taxed at 17 percent. Malaysia withholds tax on dividend income paid to the United Kingdom at a rate 10 percent. The Philippines does not withhold tax on dividend income paid to the United Kingdom.
   1. Using the information above, determine where to locate the new subsidiary. Justify your answer. (10 marks)
   2. Explain how the global tax environment have changed with the implementation of the OECD Base Erosion and Profit Shifting (BEPS) project. (10 marks)

(Total 20 marks)

END OF EXAM PAPER