Seat No.: ________ Enrolment No.

___________

GUJARAT TECHNOLOGICAL UNIVERSITY

MBA – SEMESTER - IV – EXAMINATION – WINTER 2021
Subject Code: 4549221 Date: 23/12/2021
Subject Name: International Finance
Time:10:30 AM TO 01:30 PM Total Marks: 70
Instructions:
1. Attempt all questions.
2. Make suitable assumptions wherever necessary.
3. Figures to the right indicate full marks.
Q. No. Explain following terms. Marks
Q.1 1. World Trade Organization 14
2. Balance of Payment
3. Rollover of forward contract
4. Interbank Deals
5. Offshore Banking Centers
6. Dual Currency Bond
7. Cross Hedging
Q.2 (a) Explain its major trends and recent developments of globalization. 07
(b) Explain the global financial crisis which had negative impact on various countries in the 07
world.
OR
(b) If the treasurer of XYZ Ltd. has an extra cash reserve of $100,000,000 to invest for six 07
months. The six-month interest rate is 8% per annum in the U.S. and 7% per annum in
Germany. Currently, the spot exchange rate is €1.01 per dollar and the six-month forward
exchange rate is €0.99 per dollar. The treasurer of XYZ Ltd. does not wish to bear any
exchange risk. Where should he/she invest to maximize the return?

Q.3 (a) What is forward exchange market and also explain features of it in detail. 07
(b) Can customer cancel forward contract on due date? If yes, then explain how customer 07
cancel contract on due date with suitable example.
OR
Q.3 (a) Write short on execution of forward exchange contract in currency market. 07
(b) Banks find it necessary to accommodate their clients’ needs to buy or sell FX forward, in 07
many instances for hedging purposes. How can the bank eliminate the currency exposure
it has created for itself by accommodating a client’s forward transaction?

Q.4 (a) Explain different types of international banking offices available in the world for smooth 07
transactions.
(b) As an investor, what factors would you consider before investing in the emerging stock 07
market of a developing country?
OR
Q.4 (a) Describe the key factors contributing to effective cash management within a firm. Why is 07
the cash management process more difficult in an MNC?
(b) Cray Research sold a super computer to the Max Planck Institute in Germany on credit 07
and invoiced €10 million payable in six months. Currently, the six-month forward
exchange rate is $1.10/€ and the foreign exchange advisor for Cray Research predicts that
the spot rate is likely to be $1.05/€ in six months. Solve following problems
A). What is the expected gain/loss from the forward hedging?
B). If you were the financial manager of Cray Research, would you recommend hedging
this euro receivable? Why or why not?

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Q.5 ASSESSMENT OF PURCHANSING POWER PARITY

Blades, the U.S.-based roller blades manufacturer, is currently both exporting to and importing
from Thailand. The company has chosen Thailand as an export target for its primary product,
“Speedos,” because of Thailand’s growth prospects and the lack of competition from both Thai
and U.S. roller blade manufacturers in Thailand. Under an existing arrangement, Blades sells
180,000 pairs of Speedos annually to Entertainment Products, Inc., a Thai retailer. The
arrangement involves a fixed, baht-denominated price and will last for 3 years. Blades generates
approximately 10 percent of its revenue in Thailand.
Blades has also decided to import certain rubber and plastic components needed to manufacture
Speedos because of cost and quality considerations. Specifically, the weak economic conditions
in Thailand resulting from recent events have allowed Blades to import components from the
country at a relatively low cost. However, Blades did not enter into a long-term arrangement to
import these components and pays market prices (in baht) prevailing in Thailand at the time of
purchase. Currently, Blades incurs about 4 percent of its cost of goods sold in Thailand.
Although Blades has no immediate plans for expansion in Thailand, it may establish a subsidiary
there in the future. Moreover, even if Blades does not establish a subsidiary in Thailand, it will
continue exporting to and importing from the country for several years. Due to these
considerations, Blades’ management is very concerned about recent events in Thailand and
neighboring countries, as they may affect both Blades’ current performance and its future plans.
Ben Holt, Blades’ CFO, is particularly concerned about the level of inflation in Thailand.
Blades’ export arrangement with Entertainment Products, while allowing for a minimum level of
revenue to be generated in Thailand in a given year, prevents Blades from adjusting prices
according to the level of inflation in Thailand. In retrospect, Holt is wondering whether Blades
should have entered into the export arrangement at all. Because Thailand’s economy was
growing very fast when Blades agreed to the arrangement, strong consumer spending there
resulted in a high level of inflation and high interest rates. Naturally, Blades would have
preferred an agreement whereby the price per pair of Speedos would be adjusted for the Thai
level of inflation. However, to take advantage of the growth opportunities in Thailand, Blades
accepted the arrangement when Entertainment Products insisted on a fixed price level. Currently,
however, the baht is freely floating, and Holt is wondering how a relatively high level of Thai
inflation may affect the baht-dollar exchange rate and, consequently, Blades’ revenue generated
in Thailand.
Ben Holt is also concerned about Blades’ cost of goods sold incurred in Thailand. Since no
fixed-price arrangement exists and the components are invoiced in Thai baht, Blades has been
subject to increases in the prices of rubber and plastic. Holt is wondering how a potentially high
level of inflation will impact the baht dollar exchange rate and the cost of goods sold incurred in
Thailand now that the baht is freely floating.
When Holt started thinking about future economic conditions in Thailand and the resulting
impact on Blades, he found that he needed your help. In particular, Holt is vaguely familiar with
the concept of purchasing power parity (PPP) and is wondering about this theory’s implications,
if any, for Blades. Furthermore, Holt also remembers that relatively high interest rates in
Thailand will attract capital flows and put upward pressure on the baht.
Because of these concerns, and to gain some insight into the impact of inflation on Blades, Ben
Holt has asked you to provide him with answers to the following questions:

(a) What are some of the factors that prevent PPP from occurring in the short run? Would you expect 07
PPP to hold better if countries negotiate trade arrangements under which they commit themselves
to the purchase or sale of a fixed number of goods over a specified time period? Why or why not?
(b) How do you reconcile the high level of interest rates in Thailand with the expected change of the 07
baht-dollar exchange rate according to PPP?
OR
Q.5 (a) Given Blades’ future plans in Thailand, should the company be concerned with PPP? Why or why 07
not?
(b) PPP may hold better for some countries than for others. The Thai baht has been freely 07
floating for more than a decade. How do you think Blades can gain insight into whether
PPP holds for Thailand? Offer some logic to explain why the PPP relationship may not
hold here.
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